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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-25882
VIDEOSERVER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3114212
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
63 THIRD AVENUE, BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices, including Zip Code)
(781) 229-2000
(Registrant's telephone number, including area code)
-----------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 9, 1999 was $144,996,119 (based on the last reported sale
price on the Nasdaq National Market on that date).
The number of shares outstanding of the registrant's Common Stock as of
March 9, 1999 was 13,462,629.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the definitive Proxy Statement to be delivered to Shareholders
in connection with the Annual Meeting of Shareholders to be held May 12,
1999 are incorporated by reference herein.
2. Portions of the 1998 Annual Report to Shareholders are incorporated by
reference herein.
3. Portions of the registrant's Registration Statement on Form S-1
(Registration No. 33-91132) are incorporated by reference herein.
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VIDEOSERVER, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business ...................................................................................... 3
Item 2. Description of Property ..................................................................... 15
Item 3. Legal Proceedings ............................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......................... 16
Item 6. Selected Financial Data ...................................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .................................... 16
Item 8. Financial Statements and Supplementary Data ................................................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......... 16
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................ 17
Item 11. Executive Compensation ....................................................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management ................................ 17
Item 13. Certain Relationships and Related Transactions ................................................ 17
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K .............................. 18
Signatures ............................................................................................... 20
This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including without limitation those discussed in
the Company's 1998 Annual Report to Shareholders in the section titled "Other
factors which may affect future operations" (which section is hereby
incorporated by reference herein). Such forward-looking statements speak only as
of the date on which they are made, and the Company cautions readers not to
place undue reliance on such statements.
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PART I
ITEM 1. BUSINESS
VideoServer, Inc. ("VideoServer" or "the Company") is a leading global
provider of networked conferencing solutions that enable people in multiple
locations to collaborate using any combination of audio, video and data.
VideoServer connects employees, customers, and partners to each other through
reliable, seamless, integrated solutions that are delivered over LANs, WANs, and
IP-based networks. The Company's products offer a wide breadth of functionality
that includes multipoint networked conferencing, gateway services, conference
control, network management and bandwidth management.
VideoServer sells its products worldwide through leading resellers,
integrators, and remarketers of videoconferencing and networking solutions.
VideoServer also sells directly to providers of conferencing services, including
Internet Service Providers (ISPs), telecommunication carriers, Regional Bell
Operating Companies (RBOCs), and global PTTs. The Company believes that it was
the largest supplier in annual shipments of multimedia conference servers for
the past five years.
In April 1997, the Company acquired the network access card business unit
of Promptus Communications, Inc. (Promptus). Network access cards are a critical
component of conferencing systems, and Promptus had been a market leader and a
major supplier to VideoServer of these products.
INDUSTRY BACKGROUND
VIDEOCONFERENCING
The multimedia conferencing market has evolved from videoconferencing. In
the late 1980s, with increasing numbers of conferencing endpoints installed and
customers desiring to connect multiple locations into the same conference,
videoconferencing equipment suppliers introduced multipoint control units (MCUs)
to transfer video and audio signals between all conference participants.
However, because of the proprietary nature of the encoding used, video terminals
and associated multipoint control units from different manufacturers were not
compatible. In December 1990, the International Telecommunications Union (ITU)
introduced the H.320 standards for videoconferencing over switched digital
circuit networks to provide a framework for equipment from different
manufacturers to communicate with each other. Compatibility is particularly
important for communication via these networks, since the advantage of these
services is dial-up communications without regard to the type of equipment being
used at the receiving ends of the transmission.
In recent years, lower-priced, standards-based products emerged that have
expanded the market for videoconferencing systems. Room systems that were once
priced in the $100,000 to $200,000 range are now priced as low as $4,000. In
addition, competition between network carriers, the growth of the Internet, and
the deployment of new network technology including ATM, has led to wider
availability, improved quality and significantly declining costs of network
connectivity.
With the introduction of chip sets incorporating ITU standards, a growing
number of companies have entered the desktop videoconferencing market, either
with stand-alone appliances, PC-based systems or with board sets that plug into
personal computers. Companies shipping H.320 compliant desktop conferencing
products include Intel, Polycom, Tandberg, PictureTel, Sony, VTEL, and VCON. The
costs of such desktop conferencing products have rapidly declined with the
introduction of more powerful chip sets and further miniaturization of
components such as cameras and monitors. Since early 1994, desktop conferencing
subsystems have dropped in price from $6,000 per seat to less than $1,000. As
with the decrease in the price of room systems, this decrease in price has
fueled demand for desktop endpoints.
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In May 1996, an important expansion of conferencing standards was realized
with the introduction of the H.323 standard governing real-time collaboration
over IP (Internet Protocol) networks, including local area networks (LAN's),
corporate intranets, and the Internet. Enabling conferencing over traditional
business networks provides a foundation for the adoption of this application as
a mainstream business tool. The majority of endpoint vendors who market H.320
compliant products have introduced or announced their intention to introduce
H.323 compliant endpoints as well.
Each of these endpoints, whether room systems or desktop systems, require
multipoint processing resources to conduct a multipoint conference. And, with
the extension of conferencing to multiple network platforms, new devices are
needed in the network to provide translations between these networks. A larger
installed base of endpoints and expanding number of network types are expected
to lead to more multipoint conferencing and an increased need for network
services, and therefore to a greater demand for the Company's MCS products.
COLLABORATIVE MULTIMEDIA APPLICATIONS
Concurrent with advances in videoconferencing, significant investments have
been made in software to extend traditional desktop computing applications into
conference enabled real-time information sharing tools. Collaborative data
conferencing applications are emerging that redefine the way groups can work
together. With the ability to see and hear one another over telecommunications
lines and share a common desktop application like a white board, spreadsheet or
word-processing document, participants can share ideas and collaborate in real
time to improve the work product.
In response to the emerging customer demand for multimedia applications, in
February 1996 the ITU extended the T.120 standards for collaborative multimedia
conferencing wherein video, audio and data information can be shared between
endpoints in a multipoint setting. Microsoft has bundled a standards-based
realtime voice, video, and data conferencing package, NetMeeting(TM), into its
Windows operating system, providing an embedded collaborative capability to
millions of PC users. In addition, many companies are offering collaborative
desktop applications with optional audio and video capabilities sold through
retail computer channels. Fundamental to the architecture of some of these
products is the presence of a multimedia conference server to provide the
multipoint link and data distribution mechanism among all the endpoints.
CARRIER-PROVIDED SERVICES
The intense competition among carriers has increased the demand for
technologies that enable carriers to provide additional value-added services.
Multimedia conferencing technology offers such an opportunity, and carriers are
initiating collaborative multimedia conferencing services that provide on-demand
multipoint conferencing capability allowing users to connect their terminals to
multimedia conference servers located in the carriers' central offices.
A NEW CLASS OF NETWORK EQUIPMENT
These trends -- the growth in room systems and desktop videoconferencing,
growth in collaborative desktop conferencing and expansion in services offered
by carriers -- are driving the need for sophisticated, networked multimedia
conference servers.
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THE VIDEOSERVER SOLUTION
VideoServer was founded in 1991 to develop a new generation of networking
equipment architected for the videoconferencing market as well as the emerging
multimedia networked conferencing market. The VideoServer MCS product line is
built on an industry standard hardware and software platform that combines a
powerful set of real-time conferencing applications with management tools and
network connectivity features that address today's customer requirements and are
positioned to meet emerging requirements. These requirements include:
INTEROPERABILITY. VideoServer's Multimedia Conference Servers today provide
transparent interoperability among many different kinds of endpoints such as
room videoconferencing systems, desktop video terminals, and regular telephones
in the same conference, using combinations of voice, video, and data. Similarly,
interoperability must be provided between the many different brands of equipment
and applications. The technology also must be able to accommodate various
encoding algorithms used to compress multimedia information. The Company has
expended substantial effort to make its MCS interoperable with the products of
virtually all suppliers of standards-based videoconferencing terminals. In many
cases this has required subtle accommodations in the MCS for the specific
characteristics of each brand of endpoint due to the manufacturer's
implementation of the ITU standards and product performance. When different
encoding technology is employed in terminals for audio algorithms, the MCS
provides the transcoding needed to combine various audio and video sessions in a
user friendly manner to each endpoint in the proper algorithm for that endpoint.
CONNECTIVITY. Conference servers must be able to provide gateways between
diverse network services and between multiple carriers. Servers traditionally
provided connectivity largely to T-1, ISDN, private digital networks, and analog
voice networks, but connectivity requirements are increasing with the emergence
of endpoints connected to IP (Internet Protocol) and ATM (Asynchronous Transfer
Mode) networks. In addition, as carriers add features to their networks,
conference servers must be able to support them.
FUNCTIONALITY. In addition to video switching and audio mixing, application
features are needed to facilitate ease of operation, perform centralized
processing, interconnect with traditional data network servers and deliver many
new kinds of network information. These network servers will be required to
scale throughout the enterprise, provide redundancy for high reliability and
incorporate network management capabilities.
PRODUCTS
The Company provides technology advances to its customers through products
that incorporate rapid standards deployment, extensive feature content,
scalability, network flexibility and interoperability. The Company believes that
its technology leadership enables its partners, resellers, and direct customers
to rapidly deploy conferencing solutions across a variety of network types. The
Company's relationships with its customers also allows it to anticipate market
requirements critical to its current and future product development efforts.
The Company's products have been designed within a scaleable, modular
architecture to allow the customer to add capacity, processing power and
conferencing features as the customer's network and application requirements
grow. Using a common set of hardware and software building blocks, customers can
choose from a wide range of product configurations that differ in capacity,
price, network connectivity and features, all of which share the same operating
software user interface. The product may be configured for use in customer
premises environments or may be configured with specialized packaging for use in
a telephone carrier's central office setting.
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SERIES 2000 MCS
The Series 2000 MCS product line of servers designed for switched digital
circuit networks include a number of basic platform configurations that are
expanded by the customer's selection of optional processing modules and software
applications. The platforms, configured for the typical end-user, range in list
price from under $20,000 to more than $200,000. Each Series 2000 MCS
configuration is built from a common set of processing modules, network
interfaces, software systems and optional features.
The following table lists the basic chassis configurations offered by the
Company and the typical target market and application in which each is used. In
this table, user capacity is a measure of the number of simultaneous conference
sites that can be connected to the Series 2000 MCS.
MODEL CAPACITY TARGET MARKET/APPLICATION
----- -------- ---------------------------------------------------------
Velocity 8 users Entry level Audio/Video/Data (A/V/D) multipoint for customer
premises equipment (CPE) networks; designed for on-demand
multipoint for workgroups
2007 8 users Mid-range CPE for distributed network environments
2020 48 users Large CPE/central office network with extensive multimedia applications
CO 48 users High availability central office server
Each of these systems may be interconnected to provide support for larger
conferences.
The VideoServer Series 2000 MCS has an extensive number of available
software and hardware features, some of which are listed in the following table.
APPLICATIONS DESCRIPTION
- -------------------------------- --------------------------------------------------
CONFERENCE SERVICE AND
MANAGEMENT
- ----------
Continuous Presence with Continuous viewing of multiple conference sites
CollaboRates ................... running at differing transfer rates
Asynchronous Transfer Mode ..... ATM connected endpoints can connect directly to the
MCS via an ATM network
Multimedia Conferencing ........ Simultaneous audio visual conferencing and data
conferencing
Reservation and Scheduling...... Schedule and manage MCS use
Directory Services.............. Database of potential conference participants and sites
Chairperson Conference Control Management of conference activities by a nominated
conference chairman (eg: lecturer)
Security and Password Control... Conference password and application security controls
Voice Activated Switching....... Dynamic switching of video presentation based on
current speaker
Audio Add-on.................... Conferencing for audio-only conference participants
Operator Attended Conferencing.. Provision for an operator to guide participants through
conference initiation and provide assistance during the
conference
NETWORK SERVICES AND
MANAGEMENT
- ----------
Outbound Dialing......... Automatic MCS dial-out capability
Conference Monitor....... Real-time monitor of conference activities and status
Bandwidth Management..... Bandwidth aggregation using inverse multiplexing
Event Management......... System activity and alarms applications for network
management
Network Diagnostics...... Network loop-back and problem isolation tool kit
Premise Switching........ Integrated ISDN switching functionality
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The Series 2000 MCS can be directly connected to public networks (either
T-1 or ISDN networks, or both) or private networks. The T-1 interface can be
configured as either a full or fractional T-1 (FT-1). If FT-1 service is
selected, multiple FT-1 circuits may be multiplexed and delivered by the network
to the MCS in a single T-1 pipe. ISDN Primary Rate Interface (PRI) support
allows the MCS to cost-effectively support multiple basic rate terminal
connections across a single interface. ISDN Basic Rate Interface (BRI) support
offers a cost effective solution for customer premise applications not requiring
PRI. The MCS supports the various ISDN network protocols used in the United
States, the United Kingdom, France, Germany, Japan, Australia and the
European-wide standard, and thus can be used worldwide. The addition of an ATM
Network Interface Card enables ATM connected endpoints to connect directly to
the MCS via an ATM network. Additionally, the MCS supports network connections
such as V.35 and RS449, to support both private and secure networks.
The Company offers add-on software to its installed base in the form of
either major new software releases or unbundled software options. Customers may
purchase new software releases on an as-needed basis or as part of a maintenance
agreement. Unbundled software options are priced separately and are not part of
maintenance agreements.
ENCOUNTER(TM) FAMILY OF CONFERENCING PRODUCTS
In March 1998, the Company began shipping the first products in its
Encounter family of network servers and gateways, the industry's first
business-quality networked conference offerings in the IP arena. The following
table lists the principal products in the Encounter family, and the typical
target market and application in which each is used.
MODEL CAPACITY TARGET MARKET/APPLICATION
- ----- -------- -------------------------------------------------------------
NetServer 48 users Network server that enables multipoint, multimedia conferencing for
H.323 endpoints and standard telephones
NetServer ADX 1000 48 users Network Server that enables multipoint audio and data conferencing
for Internet telephony based endpoints and standard telephones
NetGate 16 users LAN/WAN gateway that enables point-to-point conferences between
ISDN and LAN based endpoints (H.320 to H.323 interconnections).
Gatekeeper 1,000 Network management software used to control access and bandwidth
utilization by H.323 endpoints, gateways and MCSs
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The Encounter MCS brings to IP networks many of the same multipoint and
conference management capabilities and features of the original Series 2000 MCS.
The Encounter NetGate enables users connected to ISDN networks to conference
with users on IP networks. The Gatekeeper is a network management application
that allows network administrators to manage and control multimedia conferencing
on TCP/IP networks.
NETWORK ACCESS CARDS
In April 1997, the Company acquired the network access card (NAC) business
unit of Promptus Communications, Inc. NACs are an integral component of a
videoconferencing solution, providing the technology by which conferencing
terminals, or endpoints, and servers connect to either public or private ISDN
networks. NAC products are available in two product lines; PC compatible boards
known as the Series 1 and Series 2 families and dedicated non-PC modules based
on the Brick(TM) form factor. These products provide a standardized physical
interface to the host application known as the Multi-Vendor Integration Protocol
(MVIP) and are controlled through a published Application Program Interface
(API).
In addition to providing network access, NAC products provide additional
value added facilities oriented specifically for the videoconference industry.
These facilities are designed to improve network reliability for conference
terminals and to allow access to higher transmission speeds than are available
through a single ISDN line. The ability to connect to multiple ISDN lines for a
videoconference call, referred to as inverse multiplexing, improves the picture
and sound quality experienced during a call. The key elements of the NAC product
line are:
ISA PC BOARD PRODUCTS:
* Single, Triple and Quad BRI ISDN NAC
* Single or Dual T1 and E1 PRI ISDN NAC (24 and 30 Channel)
* Digital Data Interface Card (Dual V.35 and RS366 data and
control interfaces)
PCI PC BOARD PRODUCTS
* Triple BRI ISDN NAC
BRICK(TM) FAMILY PRODUCTS
* Triple BRI ISDN Brick(TM)
All NAC products are compatible with a range of common PC operating systems
and are supported by a full Software Developers Toolkit (SDK).
MARKETS AND CUSTOMERS
VideoServer markets its products primarily through videoconferencing
equipment Original Equipment Manufacturers (OEMs), integrators and remarketers
of networking solutions, and directly to service providers. The Company's
videoconferencing OEMs generally remarket the Company's products in combination
with videoconferencing endpoint products to resellers or directly to end-users.
Integrators and remarketers of networking solutions typically sell the Company's
products with other conferencing or communications products as complete
solutions to companies of all sizes. Service providers, including public and
private telephone carriers, generally offer conferencing services based on the
Company's products.
Videoconferencing equipment suppliers have historically represented the
primary market for delivering conferencing equipment to users. The Company has
relationships with most of the significant videoconferencing suppliers around
the world, including VTEL Corporation, PictureTel Corporation, Tandberg,
FVC.COM, VCON, and the leading Japanese manufacturers, including Sony
Corporation and Fujitsu Business Communications Systems, Inc.
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Telecommunication service providers have sought to differentiate themselves
by offering multimedia conferencing services to customers who desire on-demand
conferencing capability without installing their own conference servers. The
Company markets its products and services directly to public and private
telecommunications service providers, including Interexchange Carriers (IXCs)
such as AT&T, MCI, and Sprint, Regional Bell Operating Companies (RBOCs) such as
BellSouth and Southwestern Bell, a number of private conferencing service
providers in the U.S., international Post Telephone and Telegraph companies
(PTTs) in Europe and Asia, such as British Telecom, Deutsche Telekom, France
Telecom, the Chinese MPT, and NTT and to leading Internet Service Providers
(ISPs) such as UUNET.
As conferencing moves to desktop systems, local area networks (LANs),
virtual private networks, and the Internet, companies providing computer system
and networking equipment, and PBX companies, whose products form the data and
telecommunications backbone of the enterprise, are beginning to incorporate
conferencing technologies into their product lines. The Company believes these
companies view multimedia applications as a strategic technology thrust that
will fuel demand for computing resources and network bandwidth. Since late 1993,
Intel Corporation and VideoServer have participated in joint development and
marketing of products for the conferencing market. Since 1997, Cisco Systems has
incorporated portions of the Company's H.323 software into Cisco's operating
system software, and in 1998 the companies together with Intel began joint
marketing to large enterprise and service provider accounts who are evaluating
the requirements to provision their networks for the deployment of multimedia
conferencing.
The Company's agreements with its customers generally do not include
minimum purchase requirements and are non-exclusive. In 1996, PictureTel and CLI
accounted for 43% and 10% of revenue. In 1997, PictureTel and VTEL (who merged
with CLI in 1997) accounted for 34% and 16% of revenue. In 1998, PictureTel and
VTEL accounted for 35% and 18% of revenue. Revenue from international markets
accounted for 32% of the Company's revenue for the years ended December 31, 1996
and 1997 and 30% of revenue in 1998.
VideoServer conducts its sales and marketing activities from its principal
offices in Burlington, Massachusetts, as well as from six other North American
sales locations, its European headquarters in the United Kingdom, and offices
recently opened in France, Germany, Australia, and China.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its future success depends on its ability to
continue to enhance and expand its existing products and to develop new products
that maintain its technology leadership. VideoServer has invested, and expects
to continue to invest heavily, in the development of products and core
technologies. Extensive product development input is obtained from OEM partners,
from service providers, from end users, and through the Company's active
participation and leadership in industry groups responsible for establishing
technical standards such as the ITU and the IETF.
Since its founding, the Company's research and development effort has been
directed towards the development of standards-based conference server
technology. In concert with the evolution of industry standards, these efforts
currently are focused on extending the breadth of network services supported
beyond switched digital services to include local area networks, corporate
intranets, the Internet, and ATM. This includes the development of multipoint
products for particular network types and gateway products to provide
interoperability between dissimilar network types. Development is also underway
to support emerging data conferencing applications, provide additional
conferencing management capabilities including enhanced user interfaces, and to
add higher capacities to the product family. Also in 1997, the Company
established an international research & development operation in the United
Kingdom. The Company is investing to further develop the network access
technologies acquired from Promptus Communications in April 1997. Development is
focused on the introduction of more cost effective and compact modules for ISDN
connectivity, and the further integration of NAC technology into the Company's
MCS products. The Company extends and accelerates its efforts through
development relationships with its customers. The Company periodically receives
funding under certain of these arrangements which, when earned, is recorded as a
reduction of research and development expense in the Company's financial
statements.
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At December 31, 1998, VideoServer's research and development staff
consisted of 112 employees, including 103 software engineers and 9 hardware
engineers. The Company's net research and development expenditures were $14.9
million, $12.9 million, and $7.8 million in 1998, 1997, and 1996, representing
27%, 24%, and 16% of revenue in those years. Development funding from customers
of $464,000 in 1997 and $1,150,000 in 1996 was recorded as a reduction of
research and development costs in those years. All software development costs
have been expensed as incurred because costs eligible for capitalization have
not been material to date.
CUSTOMER SUPPORT AND SERVICE
The Company provides technical support and services to its resellers and
direct customers. A high level of continuing service and support is critical to
the Company's objective of developing long-term relationships with customers.
The Company's resellers offer a broad range of support including installation,
maintenance and on-site and headquarters-level technical support of products to
their end-user customers. VideoServer provides a comprehensive service program
including problem management, training, diagnostic tools, hardware repair
services, software updates and upgrades, and spare parts programs to facilitate
and supplement the efforts of the Company's resellers.
The Company offers a technical support hotline to its resellers and
customers. Network support engineers answer technical support calls placed by
the support engineers of the Company's resellers and by its direct customers.
The engineers generally provide same-day responses to questions that cannot be
resolved during the initial call. The products are designed with advanced remote
diagnostic capabilities that permit a reseller's or the Company's support
engineers to immediately begin the process of diagnosing any problems in the
field, thereby reducing both response time and cost. When necessary, however,
support engineers are dispatched to the customer's facility.
The Company warrants its software products for 90 days. During this 90-day
warranty period, the Company will investigate all reported problems and will
follow escalation procedures to provide resolution. The Company warrants its
hardware products for 12 months. During this warranty period, the Company will
repair or replace any failed hardware component. The Company also offers
post-warranty support programs ranging from services on a time-and-materials
basis to full-service contracts on a 24-hour, 7-days-a-week basis, and a full
suite of training courses.
MANUFACTURING
The Company's manufacturing operations consist primarily of materials
management, quality control, test engineering, production, and shipping and
logistics. The Company employs an outsourced manufacturing model in which it
designs the significant hardware subassemblies for its products and uses
independent third-party contract assembly companies to perform printed circuit
board assembly and other production activities with internal efforts generally
limited to final product configuration, assembly, and testing. This
manufacturing model offers the capability to quickly fulfill orders with limited
lead times thus providing enhanced customer satisfaction and improved inventory
management. All products are functionally tested utilizing state of the art
equipment designed for "burn-in", diagnostic testing, and stress screen testing
to assure the reliability and quality of the Company's products. The Company
achieved International Standard Organization (ISO) 9002 certification in 1994
and each year since has successfully been re-certified.
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Although the Company generally uses standard parts and components for its
products, certain components, including key digital signal processors are
presently available only from single sources or from limited sources such as
Texas Instruments, Motorola, and 8X8. The Company has no supply commitments from
its vendors, and generally purchases components on a purchase order basis as
opposed to entering into long term procurement agreements with vendors. The
Company has been able to obtain adequate supplies of components in a timely
manner from current vendors, or when necessary to meet production needs, from
alternate vendors. The Company believes that, for digital signal processors in
particular, alternative sources of supply would be difficult to develop over a
short period of time and an interruption in supply or a significant increase in
the price of these components would adversely affect the Company's operating
results and business.
Because of the generally short cycle between order and shipment and because
the majority of the Company's sales in each quarter results from orders booked
in that quarter, the Company does not believe that its backlog as of any
particular date is indicative of future sales levels.
COMPETITION
The market for communications products is highly competitive and is subject
to rapid technological change. The Company expects competition to increase
significantly in the future. Currently, the Company's principal competitors are
Lucent Technologies and Accord Video Telecommunications, Inc. In addition, a
number of other companies have introduced or announced their intention to
introduce products that could be competitive with the Company's products. These
companies include PictureTel, Radvision, and White Pine. Companies competing
with the Company's network access card product line include Aculab and NetAccess
(a division of Brooktrout, Inc.).
Additional competition could adversely affect the Company's sales and
profitability, through price reductions and loss of market share. In particular,
should one or more of the Company's current customers, including
videoconferencing equipment suppliers, telecommunications carriers or
traditional network equipment vendors choose to provide or distribute
competitive products (including their own products) and services, the Company's
business could be materially adversely affected. Many of the Company's current
and potential competitors have substantially greater financial, technical, and
sales and marketing resources than the Company.
The principal competitive factors in the market for multimedia conference
servers are, and are expected to continue to be, breadth of network services
supported, conformance to industry standards and demonstrated interoperability,
price per port, performance, network management capabilities, transcoding
capabilities, reliability and customer support. While the Company believes it
presently competes favorably in all of these areas, there can be no assurance
that it will continue to do so.
PROPRIETARY RIGHTS
The Company holds three U.S. Patents and has several patent applications
pending in the United States and other jurisdictions. In addition, the Company
relies on a combination of contractual rights, trade secrets and copyright laws
to establish and protect its intellectual property rights. The Company believes
that, because of the rapid pace of technological change in the data
communications and telecommunications industries, the intellectual property
protection for its products is only one factor in the Company's success,
complementing the knowledge, abilities, and experience of the Company's
employees, the frequency of its product enhancements, its relationships with its
partners, the effectiveness of its marketing activities, and the timeliness and
quality of its support services.
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The Company is subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights of others. In December
1994, the Company settled patent infringement litigation brought against it by
Datapoint Corporation ("Datapoint") for a cash payment by the Company in the
amount of $500,000. There can be no assurance that additional third parties will
not assert claims against the Company in the future with respect to the
Company's current or future products or that any such claims would not require
the Company to enter into license arrangements or result in protracted and
costly litigation, regardless of the merits of such claims. No assurance can be
given that the Company would prevail with respect to any such claim, or that a
license to third-party rights, if needed, would be available on acceptable
terms.
Patent infringement litigation still exists between Datapoint and two of
the Company's largest customers. In addition, Datapoint has written inquiry
letters to, or attempted to bring legal action against, a significant number of
others in the videoconferencing market, including some customers of the Company.
Datapoint has, in effect, asserted that the Datapoint patents in the
videoconferencing field (the "Datapoint Patents") cover certain aspects of
multipoint videoconferencing operations involving terminals and multipoint
control units, including the Company's MCS's. In April 1998, a jury in the
Federal District Court in Dallas, Texas ruled, in Datapoint's patent
infringement case with PictureTel Corporation, that products sold by PictureTel,
including those manufactured by the Company, do not infringe on any of the
Datapoint Patents and that the patent claims asserted against PictureTel are
invalid. Datapoint has appealed this decision and that appeal is currently
pending. The conferencing market in general, and the Company's sales and
operating results in particular, could be adversely affected as a result of
ongoing uncertainties regarding the Datapoint Patents. Such uncertainty, and any
impact of it, is likely to remain until the validity of the patents is
completely adjudicated.
In November 1998, the Company commenced an action for patent infringement
against Accord Video Telecommunications, Inc. ("Accord"). The complaint alleges
that Accord is infringing and has infringed on certain of the Company's patents
covering technology for transcoding video signals, which enables several
fundamental videoconferencing capabilities. These capabilities include
continuous presence or split screen video, and rate matching, which allow
parties who connect to the network at different network speeds to participate in
the same conference. The suit alleges patent infringement in Accord's MGC
product line. The Company is seeking damages and injunctive relief. Accord has
answered the complaint, alleging that it does not infringe and that the
Company's patents at issue are invalid and unenforceable. This matter is in the
early stages of litigation, and therefore the Company is unable to identify
what, if any, impact the outcome of this litigation will have on the future
operating results of the Company.
EMPLOYEES
At December 31, 1998, the Company employed a total of 270 persons,
including 112 in research and development, 93 in sales, marketing and customer
support, 33 in manufacturing, and 32 in finance and administration. Thirty-four
of the Company's employees were located internationally and the remainder were
located in the United States. None of the Company's employees are represented by
a labor organization and the Company believes that its relations with employees
are good.
The Company's success depends, to a significant degree, upon the continuing
contributions of its key management, sales, marketing, and research and
development personnel, many of whom would be difficult to replace. The Company
does not have employment contracts with most of its key personnel. The Company
believes that its future success will depend in large part upon its ability to
attract and retain such key employees.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
NAME AGE POSITION
Khoa D. Nguyen ....... 45 President, Chief Executive Officer and Director
Dane A. Donaldson .... 51 Vice President of World Wide Customer Service and Support
Richard J. Moulds .... 35 Vice President, Marketing and NAC Business Unit
Stephen J. Nill ...... 47 Vice President of Finance and Chief Financial Officer, Treasurer,
and Secretary
Mark D. Reid ......... 36 Vice President of Engineering
Edward C. Wade ....... 62 Vice President of Manufacturing and Operations
- --------------------
Khoa D. Nguyen has been a Director of the Company since December 1997. Mr.
Nguyen was named President and Chief Executive Officer of the Company effective
April 9, 1998. Previously, he had been Executive Vice President and Chief
Operating Officer of the Company since September 1997. Prior to joining the
company Mr. Nguyen had been employed at PictureTel Corporation, a
videoconferencing company, where he served as Vice President of Engineering
from January 1993 to February 1994, and as Chief Technology Officer and General
Manager of the Group Systems and Networking Products divisions from February
1994 to August 1996. From August 1991 to December 1992, he was Vice President
of Engineering at VTEL Corporation, a videoconferencing company. Previously,
Mr. Nguyen held various research and development positions at IBM Corporation.
Dane A. Donaldson has served as Vice President of Customer Service since
December 1997. Prior to joining the Company, Mr. Donaldson was employed from
January 1993 to December 1997 at PictureTel Corporation, a videoconferencing
company, where he held various positions including Vice President of Worldwide
Customer Maintenance. From December 1987 to January 1993, Mr. Donaldson held
various service management positions at Motorola Codex, a networking equipment
company.
Richard J. Moulds has served as Vice President of Network Access Card
business unit for the Company since April 1997. In January 1999, he was named
Vice President of Marketing and the NAC Business Unit. Prior to joining the
Company, he held various marketing and engineering positions from 1990 to July
1996 at GPT Limited, a manufacturer of telecommunications products including
videoconferencing equipment.
Stephen J. Nill has served as Vice President of Finance and Chief Financial
Officer since June 1994, and as Treasurer and Secretary since June 1995. From
1989 to June 1994, Mr. Nill held various financial positions with Lotus
Development Corporation, a software supplier. Previously, he held financial and
administrative positions at Computervision, Inc., a supplier of
workstation-based software, International Business Machines Corporation and
Arthur Andersen & Co.
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Mark D. Reid joined the Company as Director of Advanced Development in
December 1997. He was named Vice President, Engineering in May 1998. Prior to
joining the company, Mr. Reid was director of engineering at PictureTel where he
managed their H.323 product development. Previously, Mr. Reid held various
engineering positions at CNR Inc. and Raytheon Company.
Edward C. Wade has served as Vice President of Manufacturing and Operations
since October 1997. He served at PictureTel Corporation, a video conferencing
company, as Director of Manufacturing for the Group & Network Systems Divisions
from March 1991 until October 1997. From July 1988 until March 1991, he served
as Vice President of Materials Management for Symbol Technologies, a supplier of
hand held terminals and bar code scanning devices. Previously, Mr. Wade held
various manufacturing and materials management positions for Polaroid
Corporation, a manufacturer of commercial and industrial instant photographic
and digital imaging devices.
Officers are elected on an annual basis to serve at the discretion of the
Board of Directors.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate office and principal research, development, and
manufacturing facility is located in Burlington, Massachusetts, in a 60,000
square foot facility which the Company leases under agreements that expire in
February 2001. The Company also has development facilities in a 12,000 square
foot facility located in Middletown, Rhode Island and a 3,000 square foot
facility located in Marlboro, Massachusetts, both of which are leased on a
short-term basis.
The Company's European headquarters is located in a 4,500 square foot
facility in Bracknell, United Kingdom, which the company leases under a three
year lease expiring in February, 2000 and is utilized principally for sales,
marketing, customer service and development activities. The company also has
sales offices, which are leased on a short-term basis, in Herndon, Virginia, San
Francisco, California, Paris, France, Munich, Germany, Bejing, China and Sydney,
Australia, each of which it leases on a short-term basis.
The Company believes its existing facilities are adequate for its current
needs and that suitable additional or substitute space will be available as
needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that it
believes could have, either individually or in the aggregate, a material adverse
effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item may be found in the section captioned
"Quarterly Financial Information (unaudited)" appearing in the 1998 Annual
Report to Shareholders, and is incorporated herein by reference.(1)
As of March 9, 1999, the Company had approximately 126 shareholders of
record. This does not reflect persons or entities who hold their stock in
nominee or "street" name through various brokerage firms. The Company has not
paid dividends on its Common Stock. The Company anticipates it will continue to
reinvest earnings to finance future growth, and therefore does not intend to pay
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this item may be found in the section captioned
"Financial Highlights" appearing in the 1998 Annual Report to Shareholders, and
is incorporated herein by reference.(1)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Information required by this item may be found in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in the 1998 Annual Report to Shareholders, and is
incorporated herein by reference.(1)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item may be found in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in the 1998 Annual Report to Shareholders, and is
incorporated herein by reference.(1)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to this item may be found in the Financial Section
of the 1998 Annual Report to Shareholders on pages 26 through 36, and is
incorporated herein by reference.(1)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- --------------------------------------------------------------------------------
(1) The Company's 1998 Annual Report to Shareholders is not to be deemed filed
as part of this report except for those parts thereof specifically
incorporated by reference.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to Directors and compliance with Section 16(a) of
the Securities Exchange Act may be found in the sections captioned "Proposal No.
1 - Election of Directors" and "Section 16(a) - Beneficial Ownership Reporting
Compliance" appearing in the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
May 12, 1999. Such information is incorporated herein by reference. Information
with respect to Executive Officers may be found under the section captioned
"Executive Officers of the Registrant" in Part I.
ITEM 11. EXECUTIVE COMPENSATION.
The information required with respect to this item may be found in the
sections captioned "Executive Compensation and Other Information Concerning
Directors and Executive Officers" appearing in the definitive Proxy Statement to
be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held on May 12, 1999. Such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required with respect to this item may be found in the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" appearing in the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
May 12, 1999. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required with respect to this item may be found in the
section captioned "Certain Transactions" appearing in the definitive Proxy
Statement to be delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held on May 12, 1999. Such information is incorporated
herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF FORM 10-K
1. CONSOLIDATED FINANCIAL STATEMENTS.
The following consolidated financial statements and supplementary data are
included in Part II Item 8 filed as part of this report:
* Consolidated Balance Sheets as of December 31, 1997 and 1998
* Consolidated Statements of Operations for the years ended December 31,
1996, 1997, and 1998
* Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998
* Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997, and 1998
* Notes to Consolidated Financial Statements
* Quarterly Financial Information (unaudited)
* Report of Independent Auditors
2. FINANCIAL STATEMENT SCHEDULE.
* Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the
consolidated financial statements or the notes thereto.
3. List of Exhibits.
Exhibit
Number Description of Exhibit
------ ----------------------
3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Amended and Restated By-Laws of the Registrant.
4.1* Specimen Stock Certificate.
10.1* Amended and Restated 1991 Stock Incentive Plan of the Registrant.
10.2* Amended and Restated 1994 Non-Employee Director Option Plan of the Registrant.
10.3* 1995 Employee Stock Purchase Plan of the Registrant.
10.10* Noncompetition Agreement dated February 2, 1992 between the Registrant and
Robert Castle.
10.11* Noncompetition Agreement dated March 28, 1991 between the Registrant and
Rubin Gruber.
10.12* Noncompetition Agreement dated March 28, 1991 between the Registrant and
Derek M. James.
10.15* License Agreement dated January 2, 1995 between the Registrant and Datapoint
Corporation.
10.16* Letter Agreement dated December 31, 1994 between the Registrant and Fleet Bank of
Massachusetts, N.A.
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10.17** Lease for 63 Third Avenue, Burlington, MA dated as of March 1, 1996 between the
Registrant and the Trustees of Building #27 Associates.
10.18*** Asset Purchase Agreement by and between VideoServer, Inc. and subsidiaries, and
Promptus Communications, Inc., dated March 25, 1997.
10.19 Employment Agreement dated January 22, 1999 between the Registrant and
Khoa D. Nguyen.
10.20 Employment Agreement dated January 22, 1999 between the Registrant and
Stephen J. Nill.
13.1 Financial Section of the 1998 Annual Report to Shareholders, pages 26 through 36.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule
(Note: The Company agrees to furnish to the Securities and Exchange Commission
upon request a copy of any instrument with respect to long-term debt of the
Company or any of its subsidiaries which is not filed herewith or listed herein
since it relates to outstanding debt in an amount not greater than 10% of the
total assets of the Company and its subsidiaries on a consolidated basis.)
* Incorporated by reference from the Company's Registration Statement on
Form S-1.
** Incorporated by reference from the Company's Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31,
1995.
*** Incorporated by reference from the Company's Form 8-K filed with the
Securities and Exchange Commission on May 13, 1997.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 1998.
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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.
VIDEOSERVER, INC.
/s/ Khoa D. Nguyen
---------------------------------------
Khoa D. Nguyen
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on its behalf of the registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Khoa D. Nguyen President, Chief Executive Officer, March 27, 1998
- ------------------------ (Principal Executive Officer),
Khoa D. Nguyen and Director
/s/ Stephen J. Nill Vice President and March 27, 1998
- ------------------------ Chief Financial Officer
Stephen J. Nill (Principal Financial
and Accounting Officer)
/s/ Robert L. Castle Chairman of the Board of Directors March 27, 1998
- ------------------------
Robert L. Castle
/s/ Paul J. Ferri
- ------------------------ Director March 27, 1998
Paul J. Ferri
/s/ William E. Foster Director March 27, 1998
- ------------------------
William E. Foster
/s/ Steven C. Walske Director March 27, 1998
- ------------------------
Steven C. Walske
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VIDEOSERVER, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A - Description Column B Column C - Additions Column D Column E
- ---------------------- -------- -------------------- -------- --------
Deductions -
Balance At Charged to Charged to Uncollectible Balance at
Beginning Of Costs and Other Accounts End of
Accounts Receivable Allowances Period Expenses Accounts Written Off Period
- ------------------------------ ------------ ---------- ---------- ------------- -----------
Year Ended December 31, 1998 $1,338,311 $ 5,000 $191,000 $- $1,534,311
Year Ended December 31, 1997 1,077,453 58,939 201,919 - 1,338,311
Year Ended December 31, 1996 650,313 427,140 - - 1,077,453
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