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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
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PAGE
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PART I
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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
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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.
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MODEL CAPACITY TARGET MARKET/APPLICATION
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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
</TABLE>
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.
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APPLICATIONS DESCRIPTION
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CONFERENCE SERVICE AND
MANAGEMENT
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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
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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.
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MODEL CAPACITY TARGET MARKET/APPLICATION
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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.
12
<PAGE> 13
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
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
</TABLE>
- --------------------
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.
13
<PAGE> 14
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.
14
<PAGE> 15
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.
15
<PAGE> 16
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.
16
<PAGE> 17
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.
17
<PAGE> 18
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.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
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.
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
(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.
19
<PAGE> 20
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/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
</TABLE>
20
<PAGE> 21
VIDEOSERVER, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
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
- ------------------------------ ------------ ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
21
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of January 22, 1999, by and between Khoa D. Nguyen (the
"Executive") and VideoServer, Inc., a Delaware corporation (the "Company").
WHEREAS, the Executive is and has been employed by the Company and is currently
the Company's President and Chief Executive Officer; and
WHEREAS, the Company and the Executive desire to enter into this Agreement to
provide additional financial security and benefits to the Executive and to
encourage the Executive to continue his employment with the Company;
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. DUTIES AND SCOPE OF EMPLOYMENT.
1.1 POSITION. The Company shall employ the Executive in the position of
President and Chief Executive Officer, as such position has been defined in
terms of responsibilities and compensation as of the effective date of this
Agreement; provided, however, that the Board shall have the right, at any time
prior to the occurrence of a Change of Control, to revise such responsibilities
and compensation as the Board in its discretion may deem necessary or
appropriate, subject to the other provisions of this Agreement. The Executive
shall comply with and be bound by the Company's operating policies, procedures
and practices from time to time in effect during his employment. During the term
of the Executive's employment with the Company, the Executive shall continue to
devote his full time, skill and attention to his duties and responsibilities,
and shall perform them faithfully, diligently and competently, and the Executive
shall use his best efforts to further the business of the Company and its
affiliated entities. The foregoing shall not prevent the Executive from a
reasonable amount of service on the boards of directors of any entities, subject
to the terms of any noncompetition obligations he may have to the Company from
time to time, nor from engaging in academic, religious, charitable or other
community or non-profit activities that do not impair his ability to fulfill his
duties and responsibilities under this Agreement.
1.2. BASE COMPENSATION. The Company shall pay the Executive as compensation
for his services a base salary at the annualized rate to be established by the
Board of Directors. Such salary shall be paid periodically in accordance with
normal Company payroll practices. The annualized compensation specified in this
Section 1.2, as such compensation may be increased or (subject to the other
provisions of this Agreement) decreased by the Board or the Compensation
Committee of the Board, is referred to in this Agreement as "Base Compensation."
1.3 ANNUAL INCENTIVE. Beginning with the Company's current fiscal year and
for each fiscal year thereafter during the term of this Agreement, the Executive
shall be eligible to receive additional cash compensation under the Company's
annual incentive plan (the "Annual Incentive Bonus") based upon specific
financial and/or other targets approved by the compensation committee of the
Board. The Annual Incentive payable hereunder shall be payable in accordance
with the Company's normal practices and policies.
1.4 EXECUTIVE BENEFITS. The Executive shall be eligible to participate in the
employee benefit plans and executive compensation programs maintained by the
Company applicable to other key executives of the Company, including (without
limitation) retirement plans, savings or profit-sharing plans, stock option,
incentive or other bonus plans, life, disability, health, accident and other
insurance programs, paid vacations, and similar plans or programs, subject in
each case to the generally applicable terms and conditions of the applicable
plan or program in question and to the sole determination of the Board or any
committee administering such plan or program.
<PAGE> 2
1.5 EMPLOYMENT RELATIONSHIP. Except as provided in Section 1.6 and 4.1(b) ,
the Executive's employment is and shall continue to be at-will, as defined under
applicable law, and may be terminated by either party at any time and for any
reason. If the Executive's employment terminates for any reason, the Executive
shall not be entitled to any payments, benefits, damages, awards or compensation
other than (i) payment of amounts earned or accrued as of the date of
termination of employment, (ii) as provided by this Agreement or required by
law, or (iii) as may otherwise be available in accordance with the Company's
established employee plans and policies (including any deferred compensation
plans) at the time of termination.
1.6 TERMINATION NOTICE. The Company may not Terminate (as defined below in
Section 5) the Executive unless (a) it does so for Cause (as defined below in
Section 5) or (b) the Company has delivered to the Executive a written notice of
such Termination (the "Termination Notice") at least twelve (12) months in
advance of the effective date thereof. The duties of the Executive, if any,
during the period from the date of delivery of a Termination Notice until the
termination of his employment shall be as determined by the Board of Directors.
2. TERMINATION OF EMPLOYMENT WITHOUT CAUSE OR CHANGE IN STATUS -- SEVERANCE
BENEFITS.
2.1 SALARY. Except as provided in Section 3, during the period ("Severance
Period") from (a) the earlier of (i) the date of delivery by the Company of a
Termination Notice or (ii) the date of a Change in Status (as defined below in
Section 5 of the Executive until (b) the earlier of (i) the date twelve months
after such event, or (ii) the date the Executive commences substantially
full-time employment with another company or organization the Company shall pay
to the Executive in equal monthly installments a salary (the "Severance Period
Salary") that is equal, on an annualized basis, to the aggregate of (1) the
highest annual salary in effect with respect to the Executive during the
twelve-month period immediately preceding the date of the Termination Notice,
and (2) the Executive's current targeted Annual Incentive Bonus (provided that
if no Annual Incentive Bonus is then in effect with regard to the Executive,
then the highest Annual Incentive Bonus or other aggregate bonus(es) actually
paid to the Executive in any of the three preceding fiscal years of the
Company).
2.2 STOCK OPTIONS AND BENEFITS.
(a) During the Severance Period all Options and Restricted Stock Awards
held by the Executive under the Company's Stock Option Plans (as defined below
in Section 5) shall continue to vest, and the Executive shall continue to be
provided with Company's employee medical insurance as is in effect during such
Period. Following the Severance Period, the Executive shall be entitled to
receive extended medical coverage at the group rate under COBRA by paying the
applicable premium until he secures comparable coverage from another source or
for eighteen months, whichever is less.
(b) During the Severance Period, the Executive (i) shall be covered
under the Company's long term disability and life insurance coverage only to the
extent otherwise allowed under the terms of such coverage (ii) shall not be
entitled to participate in the Company's 401(k) Plan and iii) shall not accrue
any further vacation time.
2.3 RELEASE. All payments due to the Executive under this Agreement shall be
conditioned upon and are in consideration of (a) the execution by the Executive
of a full Release in a form reasonably prescribed by the Company ("Release"),
releasing the Company and its officers, directors, employees and advisors from
any and all liability to and including the date of the Termination Notice or
Change in Status, save only for claims for breach of this Agreement and (b) the
Executive not committing any act of Misconduct (as defined below in Section 5)
during the Severance Period.
3. TERMINATION FOR CAUSE, DEATH OR DISABILITY OR VOLUNTARY RESIGNATION.
If the Executive voluntarily resigns from the Company (other than following a
Change in Status), or if the Company terminates the Executive's employment for
Cause or because of the Executive's Death or
2
<PAGE> 3
Disability, then the Executive shall not be entitled to receive severance or
other benefits except for (a) payment of amounts earned or accrued as of the
date of termination of employment, (b) as required by law, or (c) those (if any)
as may then be established under the Company's then existing severance and
benefits plans and policies (including any deferred compensation plans)at the
time of such resignation or termination.
4. CHANGE OF CONTROL.
4.1 SEVERANCE PAYMENTS; BENEFITS.
(a) If the Company Terminates the Executive other than for Cause either
in anticipation of or as required to accomplish a Change of Control or within
twenty-four months after a Change of Control, the Executive shall be entitled to
receive a severance payment equal to the sum of (i) two times the Executive's
Base Compensation for the Company's fiscal year then in effect or if greater,
two times the Executive's Base Compensation for the Company's fiscal year
immediately preceding the year in which the Termination occurs, plus (ii) two
times the Executive's Annual Target Incentive for the fiscal year then in effect
(or, if no Target Incentive is in effect for such year, then the highest Annual
Incentive Bonus or other aggregate bonus(es) actually paid to the Executive in
any of the three (3) preceding fiscal years); provided, however, that a signed
Release must be received by the Company from the Executive prior to and as a
condition of receiving a severance payment. Any severance payments to which the
Executive is entitled pursuant to this Section 4.1 shall be paid to the
Executive (or to the Executive's estate or beneficiary in the event of the
Executive's death) in a lump sum within fifteen (15) days of the Executive's
Termination Date. The payments provided by this section shall be in lieu of any
payments to which the Executive would otherwise be entitled under Section 2.1.
(b) Notwithstanding anything in the previous paragraph or elsewhere in
this Agreement, if the Company Terminates the Executive other than for Cause
either in anticipation of or as required to accomplish a Change of Control or
within twenty-four months after a Change of Control, the Company shall provide
the Executive with notice of such Termination, and the Termination shall not be
effective until the end of the Notice Period. The Notice Period shall extend
until the later of (A) sixty days after the expiration of any period that the
Executive must hold shares in the Company in order (i) to avoid liability under
Section 16(b) of the Securities Exchange Act of 1934, as amended or (ii) to
comply, at the Company's reasonable request or the Executive's reasonable
initiative, with any other legal or accounting regulations or requirements, or
(B) six months. Provided, however, that in calculating the payments to be made
to the Executive pursuant to Section 4.1(a) above, any compensation paid to the
Executive with respect to his employment during the Notice Period shall be
deducted from the payments due under Section 4.1(a).
(c) Following a Termination described in Section 4.1(a) or 4.1(b), the
Executive shall be entitled to health and welfare benefits and coverage only to
the extent that such benefits or coverage are available to employees after they
cease to be employees of the Company. For example, but not by way of limitation,
the Executive shall be entitle to receive extended medical coverage at the group
rate under COBRA by paying the applicable premium until he secures comparable
coverage from anther source or for eighteen months, whichever is less.
4.2 OPTION ACCELERATION. Effective upon a Change in Control (as defined below
in Section 5) of the Company, all Options and Restricted Stock Awards granted to
the Executive and then outstanding under any Stock Option Plan (as defined below
in Section 5) of the Company shall become exercisable and vested in full, and
all restrictions thereon shall lapse, notwithstanding any vesting schedule or
other provisions to the contrary in the agreements evidencing such options; and
the Company and the Executive hereby agree that such Option agreements and
Restricted Stock Awards are hereby and will be deemed amended to give effect to
this provision.
4.3 TAXES.
3
<PAGE> 4
(a) The Company shall, within 30 days after each date on which the
Executive becomes entitled to receive (whether or not then due) a Contingent
Compensation Payment (as defined below) relating to a Change of Control,
determine and notify the Executive (with reasonable detail regarding the basis
for its determination) (i) which of the payments or benefits due to the
Executive (under this Agreement or otherwise) following such Change of Control
constitute Contingent Compensation Payments, (ii) the amount, if any, of the
excise tax (the "Excise Tax") payable pursuant to Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code") by the Executive with respect to
such Contingent Compensation Payment and (iii) the amount of Gross-Up Payment
(as defined below) due to the Executive with respect to such Contingent
Compensation Payment. Within 30 days after delivery of such notice to the
Executive, the Executive shall deliver a response to the Company (the "Executive
Response") stating either (A) that he agrees with the Company's determination
pursuant to the preceding sentence or (B) that he disagrees with such
determination, in which case he shall indicate which payment and/or benefits
should be characterized as a Contingent Compensation Payment, the amount of the
Excise Tax with respect to such Contingent Compensation Payment and the amount
of the Gross-Up Payment due to the Executive with respect to such Contingent
Compensation Payment. In the event that the Executive fails to deliver an
Executive Response on or before the required date, the Company's initial
determination shall be final. If the Company and the Executive cannot agree on
the proper determination of the foregoing characterizations, amounts or
payments, then the parties shall submit the matter to binding arbitration to be
heard by a single arbitrator, who shall be a Certified Public Accountant and who
shall be agreeable to both parties. Within 90 days after the due date of each
Contingent Compensation Payment to the Executive, the Company shall pay to the
Executive, in cash, the Gross-Up Payment with respect to such Contingent
Compensation Payment, in the amount determined pursuant to this Section 4.3(a).
(b) For purposes of this Section 4.3, the following terms shall have
the following respective meanings:
(i) "Contingent Compensation Payment" shall mean any payment
(or benefit) in the nature of compensation that is made or supplied
(under this Agreement or otherwise) to a "disqualified individual" (as
defined in Section 280G(c) of the Code) and that is contingent (within
the meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change of
Control of the Company.
(ii) "Gross-Up Payment" shall mean an amount equal to the sum
of (i) the amount of the Excise Tax payable with respect to a
Contingent Compensation Payment and (ii) the amount necessary to pay
all additional taxes imposed on (or economically borne by) the
Executive (including the Excise Taxes, state and federal income taxes
and all applicable withholding taxes) attributable to the receipt of
such Gross-Up Payment. For purposes of the preceding sentence, all
taxes attributable to the receipt of the Gross-Up Payment shall be
computed assuming the application of the maximum tax rates provided by
law.
4.4 EXERCISE OF STOCK OPTIONS; PAYMENT OF REQUIRED TAXES. Following a Change
of Control, the Executive may take any or all of the following actions;
Provided, however, that the Executive shall not take any such action if the
Company reasonably requests that he not do so, in order for the company to
comply with or receive favorable treatment under legal or accounting
requirements:
(a) pay any portion of the exercise price of any Options and/or satisfy
any tax withholding with respect to either the exercise of Options or the
vesting of Restricted Stock Awards by:
(i) delivering to the Company outstanding shares of common
stock of the Company, valued at the closing price of a share of such
stock on the last trading day preceding the date of delivery (the
"Market Price") and/or
(ii) authorizing the Company to withhold from issuance
pursuant to the exercise of any such Option or vesting of Restricted
Stock a number of shares of common stock otherwise issuable that, when
multiplied by the Market Price of the common stock, is equal to the
aggregate
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exercise price being paid and/or tax being withheld (and such
withheld shares shall no longer be issuable under the applicable Option
or Restricted Stock Award); and
(b) require the Company to extend to the Executive a loan to cover the
exercise price of any or all of his Options, in which case the Company shall
receive 1) a security interest in the shares issued upon exercise of such
Options and 2) full recourse to the maker, to secure payment of such loan. The
loan shall bear interest at an agreed-upon market rate, and shall be due and
payable in full no later than thirty days after the latest date that the
Executive must hold such shares in order (i) to avoid liability under Section
16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or
(ii) to comply, at the Company's reasonable request, with any other legal or
accounting regulations or requirements.
5. DEFINITION OF TERMS.
5.1 TERMINATE/TERMINATION. "Terminate," "Terminates," and "Termination" shall
mean either (a) the termination of the Executive's employment with the Company
or (b) a Change in Status of the Executive, as defined below.
5.2 CHANGE IN STATUS. A "Change in Status" of the Executive shall mean the
occurrence, without the Executive's written consent, of any of the following
circumstances (unless such circumstances constitute an isolated, insubstantial
and inadvertent action not taken in bad faith and are promptly and fully
remedied by the Company after receipt of notice thereof by the Executive): (a)
any diminution or change in a manner adverse to the Executive of (i) his title,
office or position with the Company, (ii) his salary, bonus, or other benefits,
or (iii) his duties, responsibilities or employment condition, (b) any breach of
this Agreement, including without limitation the failure by the Company to pay
to the Executive any portion of his compensation, (c) the Company's requiring
the Executive to be based at any office or location more than 35 miles from the
company's current main office or the Company's requiring the Executive to travel
on Company business to a substantially greater extent than required immediately
before the date of this Agreement, or (d) any purported termination by the
Company of the Executive's employment otherwise than as expressly permitted by
this Agreement.
5.3 CAUSE. "Cause" shall mean (a) any act of personal dishonesty taken by the
Executive in connection with his responsibilities as an employee and intended to
result in substantial personal enrichment of the Executive, (b) conviction of a
felony that is injurious to the Company, (c) a willful act by the Executive
which constitutes gross misconduct and which is injurious to the Company, and
(d) continued violations by the Executive of the Executive's obligations under
Section 1 of this Agreement that are demonstrably willful and deliberate on the
Executive's part (and not resulting from any condition that constitutes, or with
the passage of time would constitute, a Disability (as defined below)) after
there has been delivered to the Executive a written demand for performance from
the Company which describes the basis for the Company's belief that the
Executive has not substantially performed his duties, in each case as determined
by the Company's Board of Directors.
5.4 CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any
of the following events:
(a) Any transaction or series of transactions, as a result of which any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act
and the rules and regulations thereunder) (other than (i) the Company, (ii) a
person that directly or indirectly controls the Company on the date of this
Agreement, (iii) a person that is controlled by or is under common control with
the Company or (iv) any one or more employee benefit plans or related trusts
established for the benefit of the employees of the Company or any affiliate of
the Company) becomes a "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
fifty percent (50%) or more of the total voting power represented by the
Company's then outstanding voting securities; or
(b) A change in the composition of the Board of Directors of the
Company occurring within a two-year period, as a result of which fewer than a
majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (i) are directors of the Company as of the date
hereof, or (ii) are elected, or nominated for election, to the Board of
Directors of the Company with the affirmative votes of
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at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual not otherwise an Incumbent
Director whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the
Company); or
(c) A merger or consolidation of the Company with any other corporation
or entity, other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least fifty percent (50%) of the total
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
the approval by the stockholders of the Company of an agreement for the sale or
disposition by the Company of all or substantially all the company's assets.
5.5 DISABILITY. "Disability" shall mean that the Executive has been unable to
substantially perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Executive or the Executive's legal representative (such Agreement as to
acceptability not to be unreasonably withheld). Nothing contained herein shall
preclude the Company from appointing or employing any other person to carry out
the duties and responsibilities of the Executive, nor shall any such appointment
or employment give rise to a Change of Status, in the event of the occurrence of
a physical or mental illness or injury likely in the reasonable judgement of the
Company to result eventually in a determination of Disability.
5.6 STOCK OPTION PLAN. A "Stock Option Plan" of the Company shall mean any
stock option or equity compensation plan of the Company in effect at any time,
including without limitation the VideoServer Inc. Amended and Restated 1991
Stock Incentive Plan. The terms "Option" and "Restricted Stock Award" shall have
the meanings ascribed to them in any such Stock Option Plan.
5.7 MISCONDUCT. "Misconduct" shall mean material conduct on the part of the
Executive that is inimical, contrary or harmful to the interests of the Company,
including, but not limited to: (i) conduct related to the Executive's employment
for which criminal or civil penalties against the Executive may be sought, (ii)
willful violation of the Company's written policies, (iii) unauthorized
disclosure of confidential information or trade secrets of the Company, (iv)
engaging (directly or indirectly) in any business activity that is directly
competitive with the Company's business as of the date the Executive's
employment terminated; or (v) disparagement, defamation or slander of the
Company.
6. SUCCESSORS.
6.1 COMPANY'S SUCCESSORS. The Company shall cause any successor to the
Company (whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and assets to assume the obligations under this Agreement and
agree expressly to perform the obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform such
obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any such successor.
6.2 EXECUTIVE'S SUCCESSORS. The terms of this Agreement and all rights of the
Executive hereunder shall inure to the benefit of, and be enforceable by, the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, devisees and legatees.
7. NOTICE.
7.1 GENERAL. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or two business days after being mailed by U.S. registered
or certified mail, return receipt requested and postage prepaid. In the case of
the Executive, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
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7.2 NOTICE OF TERMINATION OR CHANGE IN STATUS. Any Termination by the Company
or any claim by the Executive of a Change in Status shall be communicated by a
notice to the other party hereto given in accordance with Section 7.1 of this
Agreement. Such notice shall indicate the specific provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for Termination or Change of Status under the
provision so indicated, and shall specify the Date on which the Executive shall
be Terminated or on which the Change of Status occurred. The failure by either
party to include in the notice any fact or circumstance which contributes to a
showing of Cause or Change in Status shall not waive any right of the party
hereunder or preclude the party from asserting such fact or circumstance in
enforcing its rights hereunder.
8. MISCELLANEOUS PROVISIONS.
8.1 INDEMNIFICATION. Notwithstanding any change in the Company's
certificate of incorporation or bylaws, the Company shall indemnify the
Executive and hold him harmless, at a minimum in accordance with the provisions
in effect as of the date of this Agreement in the Company's certificate of
incorporation and bylaws, against any losses, claims, damages, liabilities,
costs, expenses (including advancing from time to time his attorney's fees and
expenses in advance of the final disposition of any claim, suit, proceeding or
investigation ), judgments, fines and amounts paid in settlement in connection
with any threatened or actual claim, action, suit, proceeding or investigation ,
whether civil, criminal or administrative, in which the Executive is, or is
threatened to be, made a party by reason of being or having been a director or
office of the Company or serving or having served at the request of the Company
as a director, trustee, officer, employee or agent of another corporation or of
a partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan, whether the basis of such proceeding is
alleged action or failure to act in an official capacity as a director, trustee,
officer employee or agent.
8.2 NO DUTY TO MITIGATE. The Executive shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Executive may receive from any other source,
other than as provided specifically in Section 2.1.
8.3 WAIVER. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Executive and by an authorized officer of the Company (other
than the Executive). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
8.4 WHOLE AGREEMENT. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. The foregoing notwithstanding, this
Agreement is unrelated to, and shall have no effect upon any deferred
compensation agreement or program in effect regarding the Executive.
8.5 CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Massachusetts without giving effect to its conflicts of laws principles.
8.6 SEVERABILITY. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
8.7 NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this Section 8.7 shall be void.
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8.8 EMPLOYMENT TAXES. All payments made pursuant to this Agreement will
be subject to withholding of applicable income and employment taxes.
8.9 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
VideoServer, Inc. Khoa D. Nguyen
By Stephen J. Nill Khoa D. Nguyen
---------------------------- ----------------------------
Title Vice President and CFO
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EXHIBIT 10.20
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of January 22, 1999, by and between Stephen J. Nill (the
"Executive") and VideoServer, Inc., a Delaware corporation (the "Company").
Whereas, the Executive is and has been employed by the Company and is currently
the Company's Vice President, Finance and Chief Financial Officer; and
Whereas, the Company and the Executive desire to enter into this Agreement to
provide additional financial security and benefits to the Executive and to
encourage the Executive to continue his employment with the Company;
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. DUTIES AND SCOPE OF EMPLOYMENT.
1.1 POSITION. The Company shall employ the Executive in the position of Vice
President, Finance and Chief Financial Officer, as such position has been
defined in terms of responsibilities and compensation as of the effective date
of this Agreement; provided, however, that the Board shall have the right, at
any time prior to the occurrence of a Change of Control, to revise such
responsibilities and compensation as the Board in its discretion may deem
necessary or appropriate, subject to the other provisions of this Agreement. The
Executive shall comply with and be bound by the Company's operating policies,
procedures and practices from time to time in effect during his employment.
During the term of the Executive's employment with the Company, the Executive
shall continue to devote his full time, skill and attention to his duties and
responsibilities, and shall perform them faithfully, diligently and competently,
and the Executive shall use his best efforts to further the business of the
Company and its affiliated entities. The foregoing shall not prevent the
Executive from a reasonable amount of service on the boards of directors of any
entities, subject to the terms of any noncompetition obligations he may have to
the Company from time to time, nor from engaging in academic, religious,
charitable or other community or non-profit activities that do not impair his
ability to fulfill his duties and responsibilities under this Agreement.
1.2. BASE COMPENSATION. The Company shall pay the Executive as compensation
for his services a base salary at the annualized rate to be established by the
Chief Executive Officer and the Board of Directors. Such salary shall be paid
periodically in accordance with normal Company payroll practices. The annualized
compensation specified in this Section 1.2, as such compensation may be
increased or (subject to the other provisions of this Agreement) decreased by
the Board or the Compensation Committee of the Board, is referred to in this
Agreement as "Base Compensation."
1.3 ANNUAL INCENTIVE. Beginning with the Company's current fiscal year and
for each fiscal year thereafter during the term of this Agreement, the Executive
shall be eligible to receive additional cash compensation under the Company's
annual incentive plan (the "Annual Incentive Bonus") based upon specific
financial and/or other targets approved by the compensation committee of the
Board. The Annual Incentive payable hereunder shall be payable in accordance
with the Company's normal practices and policies.
1.4 EXECUTIVE BENEFITS. The Executive shall be eligible to participate in the
employee benefit plans and executive compensation programs maintained by the
Company applicable to other key executives of the Company, including (without
limitation) retirement plans, savings or profit-sharing plans, stock option,
incentive or other bonus plans, life, disability, health, accident and other
insurance programs, paid vacations, and similar plans or programs, subject in
each case to the generally applicable terms and conditions of the applicable
plan or program in question and to the sole determination of the Board or any
committee administering such plan or program.
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1.5 EMPLOYMENT RELATIONSHIP. Except as provided in Section 1.6 and 4.1(b) ,
the Executive's employment is and shall continue to be at-will, as defined under
applicable law, and may be terminated by either party at any time and for any
reason. If the Executive's employment terminates for any reason, the Executive
shall not be entitled to any payments, benefits, damages, awards or compensation
other than (i) payment of amounts earned or accrued as of the date of
termination of employment, (ii) as provided by this Agreement or required by
law, or (iii) as may otherwise be available in accordance with the Company's
established employee plans and policies (including any deferred compensation
plans) at the time of termination.
1.6 TERMINATION NOTICE. The Company may not Terminate (as defined below in
Section 5) the Executive unless (a) it does so for Cause (as defined below in
Section 5) or (b) the Company has delivered to the Executive a written notice of
such Termination (the "Termination Notice") at least twelve (12) months in
advance of the effective date thereof. The duties of the Executive, if any,
during the period from the date of delivery of a Termination Notice until the
termination of his employment shall be as determined by the Board of Directors.
2. TERMINATION OF EMPLOYMENT WITHOUT CAUSE OR CHANGE IN STATUS -- SEVERANCE
BENEFITS.
2.1 SALARY. Except as provided in Section 3, during the period ("Severance
Period") from (a) the earlier of (i) the date of delivery by the Company of a
Termination Notice or (ii) the date of a Change in Status (as defined below in
Section 5 of the Executive until (b) the earlier of (i) the date twelve months
after such event, or (ii) the date the Executive commences substantially
full-time employment with another company or organization the Company shall pay
to the Executive in equal monthly installments a salary (the "Severance Period
Salary") that is equal, on an annualized basis, to the aggregate of (1) the
highest annual salary in effect with respect to the Executive during the
twelve-month period immediately preceding the date of the Termination Notice,
and (2) the Executive's current targeted Annual Incentive Bonus (provided that
if no Annual Incentive Bonus is then in effect with regard to the Executive,
then the highest Annual Incentive Bonus or other aggregate bonus(es) actually
paid to the Executive in any of the three preceding fiscal years of the
Company).
2.2 STOCK OPTIONS AND BENEFITS.
(a) During the Severance Period all Options and Restricted Stock Awards
held by the Executive under the Company's Stock Option Plans (as defined below
in Section 5) shall continue to vest, and the Executive shall continue to be
provided with Company's employee medical insurance as is in effect during such
Period. Following the Severance Period, the Executive shall be entitled to
receive extended medical coverage at the group rate under COBRA by paying the
applicable premium until he secures comparable coverage from another source or
for eighteen months, whichever is less.
(b) During the Severance Period, the Executive (i) shall be covered
under the Company's long term disability and life insurance coverage only to the
extent otherwise allowed under the terms of such coverage (ii) shall not be
entitled to participate in the Company's 401(k) Plan and iii) shall not accrue
any further vacation time.
2.3 RELEASE. All payments due to the Executive under this Agreement shall be
conditioned upon and are in consideration of (a) the execution by the Executive
of a full Release in a form reasonably prescribed by the Company ("Release"),
releasing the Company and its officers, directors, employees and advisors from
any and all liability to and including the date of the Termination Notice or
Change in Status, save only for claims for breach of this Agreement and (b) the
Executive not committing any act of Misconduct (as defined below in Section 5)
during the Severance Period.
3. TERMINATION FOR CAUSE, DEATH OR DISABILITY OR VOLUNTARY RESIGNATION.
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If the Executive voluntarily resigns from the Company (other than following a
Change in Status), or if the Company terminates the Executive's employment for
Cause or because of the Executive's Death or Disability, then the Executive
shall not be entitled to receive severance or other benefits except for (a)
payment of amounts earned or accrued as of the date of termination of
employment, (b) as required by law, or (c) those (if any) as may then be
established under the Company's then existing severance and benefits plans and
policies (including any deferred compensation plans) at the time of such
resignation or termination.
4. CHANGE OF CONTROL.
4.1 SEVERANCE PAYMENTS; BENEFITS.
(a) If the Company Terminates the Executive other than for Cause either
in anticipation of or as required to accomplish a Change of Control or within
twenty-four months after a Change of Control, the Executive shall be entitled to
receive a severance payment equal to the sum of (i) two times the Executive's
Base Compensation for the Company's fiscal year then in effect or if greater,
two times the Executive's Base Compensation for the Company's fiscal year
immediately preceding the year in which the Termination occurs, plus (ii) two
times the Executive's Annual Target Incentive for the fiscal year then in effect
(or, if no Target Incentive is in effect for such year, then the highest Annual
Incentive Bonus or other aggregate bonus(es) actually paid to the Executive in
any of the three (3) preceding fiscal years); provided, however, that a signed
Release must be received by the Company from the Executive prior to and as a
condition of receiving a severance payment. Any severance payments to which the
Executive is entitled pursuant to this Section 4.1 shall be paid to the
Executive (or to the Executive's estate or beneficiary in the event of the
Executive's death) in a lump sum within fifteen (15) days of the Executive's
Termination Date. The payments provided by this section shall be in lieu of any
payments to which the Executive would otherwise be entitled under Section 2.1.
(b) Notwithstanding anything in the previous paragraph or elsewhere in
this Agreement, if the Company Terminates the Executive other than for Cause
either in anticipation of or as required to accomplish a Change of Control or
within twenty-four months after a Change of Control, the Company shall provide
the Executive with notice of such Termination, and the Termination shall not be
effective until the end of the Notice Period. The Notice Period shall extend
until the later of (A) sixty days after the expiration of any period that the
Executive must hold shares in the Company in order (i) to avoid liability under
Section 16(b) of the Securities Exchange Act of 1934, as amended or (ii) to
comply, at the Company's reasonable request or the Executive's reasonable
initiative, with any other legal or accounting regulations or requirements, or
(B) six months. Provided, however, that in calculating the payments to be made
to the Executive pursuant to Section 4.1(a) above, any compensation paid to the
Executive with respect to his employment during the Notice Period shall be
deducted from the payments due under Section 4.1(a).
(c) Following a Termination described in Section 4.1(a) or 4.1(b), the
Executive shall be entitled to health and welfare benefits and coverage only to
the extent that such benefits or coverage are available to employees after they
cease to be employees of the Company. For example, but not by way of limitation,
the Executive shall be entitle to receive extended medical coverage at the group
rate under COBRA by paying the applicable premium until he secures comparable
coverage from anther source or for eighteen months, whichever is less.
4.2 OPTION ACCELERATION. Effective upon a Change in Control (as defined below
in Section 5) of the Company, all Options and Restricted Stock Awards granted to
the Executive and then outstanding under any Stock Option Plan (as defined below
in Section 5) of the Company shall become exercisable and vested in full, and
all restrictions thereon shall lapse, notwithstanding any vesting schedule or
other provisions to the contrary in the agreements evidencing such options; and
the Company and the Executive hereby agree that such Option agreements and
Restricted Stock Awards are hereby and will be deemed amended to give effect to
this provision.
4.3 TAXES.
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(a) The Company shall, within 30 days after each date on which the
Executive becomes entitled to receive (whether or not then due) a Contingent
Compensation Payment (as defined below) relating to a Change of Control,
determine and notify the Executive (with reasonable detail regarding the basis
for its determination) (i) which of the payments or benefits due to the
Executive (under this Agreement or otherwise) following such Change of Control
constitute Contingent Compensation Payments, (ii) the amount, if any, of the
excise tax (the "Excise Tax") payable pursuant to Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code") by the Executive with respect to
such Contingent Compensation Payment and (iii) the amount of Gross-Up Payment
(as defined below) due to the Executive with respect to such Contingent
Compensation Payment. Within 30 days after delivery of such notice to the
Executive, the Executive shall deliver a response to the Company (the "Executive
Response") stating either (A) that he agrees with the Company's determination
pursuant to the preceding sentence or (B) that he disagrees with such
determination, in which case he shall indicate which payment and/or benefits
should be characterized as a Contingent Compensation Payment, the amount of the
Excise Tax with respect to such Contingent Compensation Payment and the amount
of the Gross-Up Payment due to the Executive with respect to such Contingent
Compensation Payment. In the event that the Executive fails to deliver an
Executive Response on or before the required date, the Company's initial
determination shall be final. If the Company and the Executive cannot agree on
the proper determination of the foregoing characterizations, amounts or
payments, then the parties shall submit the matter to binding arbitration to be
heard by a single arbitrator, who shall be a Certified Public Accountant and who
shall be agreeable to both parties. Within 90 days after the due date of each
Contingent Compensation Payment to the Executive, the Company shall pay to the
Executive, in cash, the Gross-Up Payment with respect to such Contingent
Compensation Payment, in the amount determined pursuant to this Section 4.3(a).
(b) For purposes of this Section 4.3, the following terms shall have
the following respective meanings:
(i) "Contingent Compensation Payment" shall mean any payment
(or benefit) in the nature of compensation that is made or supplied
(under this Agreement or otherwise) to a "disqualified individual" (as
defined in Section 280G(c) of the Code) and that is contingent (within
the meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change of
Control of the Company.
(ii) "Gross-Up Payment" shall mean an amount equal to the sum
of (i) the amount of the Excise Tax payable with respect to a
Contingent Compensation Payment and (ii) the amount necessary to pay
all additional taxes imposed on (or economically borne by) the
Executive (including the Excise Taxes, state and federal income taxes
and all applicable withholding taxes) attributable to the receipt of
such Gross-Up Payment. For purposes of the preceding sentence, all
taxes attributable to the receipt of the Gross-Up Payment shall be
computed assuming the application of the maximum tax rates provided by
law.
4.4 EXERCISE OF STOCK OPTIONS; PAYMENT OF REQUIRED TAXES. Following a Change of
Control, the Executive may take any or all of the following actions; Provided,
however, that the Executive shall not take any such action if the Company
reasonably requests that he not do so, in order for the company to comply with
or receive favorable treatment under legal or accounting requirements:
(a) pay any portion of the exercise price of any Options and/or satisfy
any tax withholding with respect to either the exercise of Options or the
vesting of Restricted Stock Awards by:
(i) delivering to the Company outstanding shares of common
stock of the Company, valued at the closing price of a share of such
stock on the last trading day preceding the date of delivery (the
"Market Price") and/or
(ii) authorizing the Company to withhold from issuance
pursuant to the exercise of any such Option or vesting of Restricted
Stock a number of shares of common stock otherwise issuable that, when
multiplied by the Market Price of the common stock, is equal to the
aggregate
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exercise price being paid and/or tax being withheld (and such
withheld shares shall no longer be issuable under the applicable Option
or Restricted Stock Award); and
(b) require the Company to extend to the Executive a loan to cover the
exercise price of any or all of his Options, in which case the Company shall
receive 1) a security interest in the shares issued upon exercise of such
Options and 2) full recourse to the maker, to secure payment of such loan. The
loan shall bear interest at an agreed-upon market rate, and shall be due and
payable in full no later than thirty days after the latest date that the
Executive must hold such shares in order (i) to avoid liability under Section
16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or
(ii) to comply, at the Company's reasonable request, with any other legal or
accounting regulations or requirements.
5. DEFINITION OF TERMS.
5.1 TERMINATE/TERMINATION. "Terminate," "Terminates," and "Termination" shall
mean either (a) the termination of the Executive's employment with the Company
or (b) a Change in Status of the Executive, as defined below.
5.2 CHANGE IN STATUS. A "Change in Status" of the Executive shall mean the
occurrence, without the Executive's written consent, of any of the following
circumstances (unless such circumstances constitute an isolated, insubstantial
and inadvertent action not taken in bad faith and are promptly and fully
remedied by the Company after receipt of notice thereof by the Executive): (a)
any diminution or change in a manner adverse to the Executive of (i) his title,
office or position with the Company, (ii) his salary, bonus, or other benefits,
or (iii) his duties, responsibilities or employment condition, (b) any breach of
this Agreement, including without limitation the failure by the Company to pay
to the Executive any portion of his compensation, (c) the Company's requiring
the Executive to be based at any office or location more than 35 miles from the
company's current main office or the Company's requiring the Executive to travel
on Company business to a substantially greater extent than required immediately
before the date of this Agreement, or (d) any purported termination by the
Company of the Executive's employment otherwise than as expressly permitted by
this Agreement.
5.3 CAUSE. "Cause" shall mean (a) any act of personal dishonesty taken by the
Executive in connection with his responsibilities as an employee and intended to
result in substantial personal enrichment of the Executive, (b) conviction of a
felony that is injurious to the Company, (c) a willful act by the Executive
which constitutes gross misconduct and which is injurious to the Company, and
(d) continued violations by the Executive of the Executive's obligations under
Section 1 of this Agreement that are demonstrably willful and deliberate on the
Executive's part (and not resulting from any condition that constitutes, or with
the passage of time would constitute, a Disability (as defined below)) after
there has been delivered to the Executive a written demand for performance from
the Company which describes the basis for the Company's belief that the
Executive has not substantially performed his duties, in each case as determined
by the Company's Board of Directors.
5.4 CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any of
the following events:
(a) Any transaction or series of transactions, as a result of which any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act
and the rules and regulations thereunder) (other than (i) the Company, (ii) a
person that directly or indirectly controls the Company on the date of this
Agreement, (iii) a person that is controlled by or is under common control with
the Company or (iv) any one or more employee benefit plans or related trusts
established for the benefit of the employees of the Company or any affiliate of
the Company) becomes a "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
fifty percent (50%) or more of the total voting power represented by the
Company's then outstanding voting securities; or
(b) A change in the composition of the Board of Directors of the
Company occurring within a two-year period, as a result of which fewer than a
majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (i) are directors of the Company as of the date
hereof, or (ii) are
5
<PAGE> 6
elected, or nominated for election, to the Board of Directors of the Company
with the affirmative votes of at least a majority of the Incumbent Directors at
the time of such election or nomination (but shall not include an individual not
otherwise an Incumbent Director whose election or nomination is in connection
with an actual or threatened proxy contest relating to the election of directors
to the Company); or
(c) A merger or consolidation of the Company with any other corporation
or entity, other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least fifty percent (50%) of the total
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
the approval by the stockholders of the Company of an agreement for the sale or
disposition by the Company of all or substantially all the company's assets.
5.5 DISABILITY. "Disability" shall mean that the Executive has been unable to
substantially perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Executive or the Executive's legal representative (such Agreement as to
acceptability not to be unreasonably withheld). Nothing contained herein shall
preclude the Company from appointing or employing any other person to carry out
the duties and responsibilities of the Executive, nor shall any such appointment
or employment give rise to a Change of Status, in the event of the occurrence of
a physical or mental illness or injury likely in the reasonable judgement of the
Company to result eventually in a determination of Disability.
5.6 STOCK OPTION PLAN. A "Stock Option Plan" of the Company shall mean any
stock option or equity compensation plan of the Company in effect at any time,
including without limitation the VideoServer Inc. Amended and Restated 1991
Stock Incentive Plan. The terms "Option" and "Restricted Stock Award" shall have
the meanings ascribed to them in any such Stock Option Plan.
5.7 MISCONDUCT. "Misconduct" shall mean material conduct on the part of the
Executive that is inimical, contrary or harmful to the interests of the Company,
including, but not limited to: (i) conduct related to the Executive's employment
for which criminal or civil penalties against the Executive may be sought, (ii)
willful violation of the Company's written policies, (iii) unauthorized
disclosure of confidential information or trade secrets of the Company, (iv)
engaging (directly or indirectly) in any business activity that is directly
competitive with the Company's business as of the date the Executive's
employment terminated; or (v) disparagement, defamation or slander of the
Company.
6. SUCCESSORS.
6.1 COMPANY'S SUCCESSORS. The Company shall cause any successor to the
Company (whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and assets to assume the obligations under this Agreement and
agree expressly to perform the obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform such
obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any such successor.
6.2 EXECUTIVE'S SUCCESSORS. The terms of this Agreement and all rights of the
Executive hereunder shall inure to the benefit of, and be enforceable by, the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, devisees and legatees.
7. NOTICE.
7.1 GENERAL. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or two business days after being mailed by U.S. registered
or certified mail, return receipt requested and postage prepaid. In the case of
the Executive, mailed notices shall be addressed to him at the home address
which he most recently
6
<PAGE> 7
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
7.2 NOTICE OF TERMINATION OR CHANGE IN STATUS. Any Termination by the Company
or any claim by the Executive of a Change in Status shall be communicated by a
notice to the other party hereto given in accordance with Section 7.1 of this
Agreement. Such notice shall indicate the specific provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for Termination or Change of Status under the
provision so indicated, and shall specify the Date on which the Executive shall
be Terminated or on which the Change of Status occurred. The failure by either
party to include in the notice any fact or circumstance which contributes to a
showing of Cause or Change in Status shall not waive any right of the party
hereunder or preclude the party from asserting such fact or circumstance in
enforcing its rights hereunder.
8. MISCELLANEOUS PROVISIONS.
8.1 INDEMNIFICATION. Notwithstanding any change in the Company's
certificate of incorporation or bylaws, the Company shall indemnify the
Executive and hold him harmless, at a minimum in accordance with the provisions
in effect as of the date of this Agreement in the Company's certificate of
incorporation and bylaws, against any losses, claims, damages, liabilities,
costs, expenses (including advancing from time to time his attorney's fees and
expenses in advance of the final disposition of any claim, suit, proceeding or
investigation ), judgments, fines and amounts paid in settlement in connection
with any threatened or actual claim, action, suit, proceeding or investigation ,
whether civil, criminal or administrative, in which the Executive is, or is
threatened to be, made a party by reason of being or having been a director or
office of the Company or serving or having served at the request of the Company
as a director, trustee, officer, employee or agent of another corporation or of
a partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan, whether the basis of such proceeding is
alleged action or failure to act in an official capacity as a director, trustee,
officer employee or agent.
8.2 NO DUTY TO MITIGATE. The Executive shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Executive may receive from any other source,
other than as provided specifically in Section 2.1.
8.3 WAIVER. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Executive and by an authorized officer of the Company (other
than the Executive). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
8.4 WHOLE AGREEMENT. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. The foregoing notwithstanding, this
Agreement is unrelated to, and shall have no effect upon any deferred
compensation agreement or program in effect regarding the Executive.
8.5 CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Massachusetts without giving effect to its conflicts of laws principles.
8.6 SEVERABILITY. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
8.7 NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary
7
<PAGE> 8
assignment or by operation of law, including (without limitation) bankruptcy,
garnishment, attachment or other creditor's process, and any action in violation
of this Section 8.7 shall be void.
8.8 EMPLOYMENT TAXES. All payments made pursuant to this Agreement will
be subject to withholding of applicable income and employment taxes.
8.9 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
VideoServer, Inc. Stephen J. Nill
By Khoa D. Nguyen Stepehn J. Nill
--------------------------- ----------------------------
Title President and CEO
8
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the percentage change in certain financial data
compared to the previous year, and the financial data as a percentage of revenue
for the years indicated.
<TABLE>
<CAPTION>
Percent increase (decrease) year to year Items as a percentage of revenue
- --------------------------------------------------------------------------------------------------------
1998/97 1997/96 Income and expense items 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5% 10% Revenue 100% 100% 100%
11% 22% Cost of revenue 39% 36% 33%
-------------------------------
1% 4% Gross profit 61% 64% 67%
Operating expenses: -- -- --
15% 66% Research and development 27% 24% 16%
6% 37% Sales and marketing 23% 23% 18%
14% 12% General and administrative 9% 8% 8%
* * Purchased research
and development -- 27% --
* * Non-recurring expenses 1% -- --
-------------------------------
(23%) 110% Total operating expenses 60% 82% 42%
-------------------------------
108% (178%) Income (loss) from operations 1% (18%) 25%
17% (5%) Interest income, net 4% 3% 4%
135% (156%) Income (loss) before taxes 5% (15%) 29%
-------------------------------
Provision (benefit) for
31% (181%) income taxes 2% (6%) 8%
-------------------------------
138% (146%) Net income (loss) 3% (9%) 21%
===============================
- --------------------------------------------------------------------------------------------------------
* Percentage change not meaningful
</TABLE>
OVERVIEW
Founded in 1991, VideoServer designs, develops, manufactures, sells and services
networked conferencing solutions that enable people in multiple locations to
collaborate using any combination of audio, video, and data. The Company's
principal products, Multimedia Conference Servers (MCS), provide multipoint
conferencing, gateway services, conference control, network management, and
bandwidth management. The Company 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), telecommunications
carriers, Regional Bell Operating Companies (RBOCs), and global PTTs.
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.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
REVENUE Revenue increased 5% to $55.9 million in 1998 from $53.5 million in
1997 and 10% in 1997 from $48.8 million in 1996. The growth in revenue in each
year was primarily driven by increased service revenues and additionally, sales
of network access card products included in the Company's revenue as a result of
the 1997 acquisition of the network access card business unit from Promptus.
Sales of MCS products were somewhat lower in 1998 than in both 1997 and 1996.
This decrease in sales of MCS products is primarily attributed to general
softness in the market for videoconferencing products in 1997 and early 1998,
lower sales to conferencing service providers, and lower sales to PictureTel
Corporation, currently the Company's largest customer. During 1998, quarterly
revenue grew sequentially as market conditions improved and as the Company
broadened its customer base through expanded Original Equipment Manufacturer
(OEM) relationships, new international reseller channels, and domestic service
providers.
Two customers accounted for 35% and 18% of revenue in 1998, 34% and 16% of
revenue in 1997, and 43% and 10% of revenue in 1996.
<PAGE> 2
Revenue from international markets, primarily in Europe, were approximately 30%
of revenue in 1998 and 32% of revenue in 1997 and 1996. The Company expects that
revenue from international markets, which are currently denominated in U.S.
dollars, will continue to be a significant portion of the Company's business.
GROSS PROFIT The Company's cost of revenue consists of material costs,
manufacturing labor and overhead, and customer support costs. Gross profit as a
percentage of revenues declined to 61.5% in 1998 from 63.7% in 1997 and 67.3% in
1996. These decreases are primarily attributable to a greater proportion of
lower margin products in the revenue mix, including network access cards and
lower-priced, small group conferencing servers.
Gross profit rates may continue to be lower in future periods as low-end, lower
margin products are expected to represent a larger proportion of the future
revenue mix. Increased competition may also result in lower selling prices.
RESEARCH AND DEVELOPMENT Research and development expenses consist principally
of compensation costs for engineers, depreciation expense, supplies and testing.
Research and development expenses increased 15% to $14.9 million in 1998 from
$12.9 million in 1997 and, in 1997, increased 66% from $7.8 million in 1996,
representing 27%, 24%, and 16% of revenue in those years. The increases in
spending were primarily due to increased engineering staffing to continue to
develop and enhance the Company's traditional ISDN network based conferencing
products, and to extend its conferencing technologies and introduce products for
the emerging Internet Protocol (IP) and ATM-based conferencing markets. In
addition, the Company expanded its software quality operations to continue to
ensure high-quality product releases as the Company addresses broader networking
environments. Spending increases were also the result of the addition of
development efforts associated with the network access card unit acquired from
Promptus in 1997, a portion of which efforts have been devoted to completing
research and development projects in-process at the date of acquisition. In
connection with the acquisition, the Company recorded a $14 million charge for
purchased research and development, which had not reached technological
feasibility and had no alternative future use.
SALES AND MARKETING Sales and marketing expenses consist principally of
compensation costs (including sales commissions and bonuses), travel expenses,
trade shows, and other marketing programs. Sales and marketing expenses
increased 6% to $13 million in 1998 from $12.2 million in 1997 and, in 1997,
increased 37% from $8.9 million in 1996, representing 23% of revenue in 1998 and
1997, and 18% of revenue in 1996. The increased spending was primarily due to
the addition of sales and marketing personnel, the expansion of field sales
offices, particularly in the European and Asia Pacific markets, and an increase
in marketing programs. The Company expects continued increases in sales and
marketing expenses as it broadens its channels of distribution and extends its
reach into new geographic territories.
GENERAL AND ADMINISTRATIVE General and administrative expenses consist
principally of expenses for finance, administration, and general management
activities, including legal, accounting, and other professional fees. General
and administrative expenses increased 14% to $5.1 million in 1998 from $4.5
million in 1997, and in 1997, increased 12% from $4.0 million in 1996,
representing 9% of revenue in 1998 and 8% of revenue in 1997 and 1996. The
increased spending was primarily due to the addition of finance and
administrative personnel to support overall company growth and the
implementation of a new corporate-wide financial accounting, manufacturing, and
sales and distribution system. The Company expects continued increases in
general and administrative expenses in 1999, although the rate of increase of
these expenses over time is expected to be less than that of revenue.
NON-RECURRING EXPENSES In March 1998, the Company adopted a plan to restructure
certain of its operations to increasingly focus and streamline its product
offerings. As a result of these actions, the Company recorded charges of
approximately $1,300,000 in the quarter ended March 31, 1998. These one-time
charges included $657,000 reported as non-recurring restructuring expenses
primarily covering estimated severance costs, $450,000 reported as cost of
revenue for various write-downs of excess and obsolete inventory, and $193,000
for certain facilities costs reported as research and development expenses.
Approximately $650,000 of the $1,300,000 charge required a cash outlay,
substantially all of which has been paid as of December 31, 1998.
INTEREST INCOME, NET Interest income, net, consists of interest on cash, cash
equivalents, and marketable securities. The increase in interest income in 1998
was primarily related to an increase in cash available for investment. The
modest reduction in interest income in 1997 was due to lower cash available for
investment as a result of the Company's acquisition of the network access card
business unit from Promptus.
PROVISION (BENEFIT) FOR INCOME TAXES The provision (benefit) for income taxes
was at a 34% rate in 1998, (39%) in 1997, and 27% in 1996. In 1998, the
effective tax rate was the same as the federal statutory tax rate. Tax benefits
primarily related to research and development tax credits and interest earned on
tax-exempt securities were offset by the impact of state and foreign income
taxes. Income taxes for 1997 included tax benefits related to the charge to
operations of $14.0 million for purchased in-process research and development
resulting from the acquisition of the network access card business unit from
Promptus. In 1996, the effective tax rate was less than the federal statutory
tax rate as a result of the recognition of deferred tax assets previously
subject to valuation allowances. The Company has approximately $7.3 million in
deferred tax assets at December 31, 1998. The Company believes that these assets
can be realized through a combination of carry-back claims and future taxable
income.
<PAGE> 3
OTHER FACTORS WHICH MAY AFFECT FUTURE OPERATIONS
DEPENDENCE ON MAJOR CUSTOMERS. While the Company is focusing efforts on
broadening its reseller, distributor and OEM sales channels, sales to a
relatively small number of customers have accounted for a significant portion of
the Company's revenue. The Company believes that its dependence on a similarly
few number of customers will continue during 1999. This concentration of
customers may cause revenue and operating results to fluctuate from quarter to
quarter based on major customers' requirements and the timing of their orders
and shipments. The Company's agreements with its customers generally do not
include minimum purchase commitments or exclusivity arrangements. The Company's
operating results could be materially and adversely affected if any present or
future major customer were to choose to reduce its level of orders, change to
another vendor for purchases of a similar product, combine their operations with
another company who had an established relationship with another vendor for
purchases of a similar product, experience financial, operational or other
difficulties, or delay paying or fail to pay amounts due the Company.
MARKET GROWTH. Sales of Multimedia Conference Server (MCS) products account for
most of the Company's revenue. The Company's success depends, to a significant
extent, on the acceptance, and the rate of adoption, of MCS products in a number
of market segments, many of which are in the early stages of development. These
markets, including group teleconferencing systems, desktop conferencing systems,
collaborative data-sharing and carrier-based conferencing services, historically
have experienced significant fluctuations in growth rates from year to year.
There can be no assurance that any of the markets for the Company's products
will develop to the extent, in the manner, or at the rate anticipated by the
Company. In addition, future prices the Company is able to obtain for its
products may decrease from historical levels as a result of new product
introductions by others, price competition, technological change, or other
factors.
RAPID TECHNOLOGICAL CHANGE. The market for the Company's products is
characterized by rapidly changing technology, evolving industry standards,
emerging network architectures, and frequent new product introductions. The
adoption rate of new technologies and conferencing products, such as those
designed for Internet Protocol (IP) and ATM networks, may adversely impact
near-term growth of the conferencing market as users evaluate the alternatives.
The Company has invested, and for 1999 plans to continue to invest, in software
development and products incorporating certain of these new technologies. Many
other companies, including the Company's largest customer, are also developing
products incorporating these new technologies that are competitive with the
Company's current and future offerings. The Company's success will depend, in
part, upon its ability through continued investments to maintain technological
leadership, to enhance and expand its existing product offerings, and to select
and develop in a timely manner new products that achieve market acceptance.
COMPETITION. The market for networking and communications products is highly
competitive. The Company expects competition to increase significantly in the
future. Currently, the Company's main competitors include 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, and the rapidly evolving
nature of the markets in which the Company competes may attract other new
entrants as they perceive opportunities. Some of the Company's current and
potential competitors have longer operating histories and greater financial,
technical, and sales and marketing resources.
ACQUISITIONS. In 1997, the Company acquired the network access card business
unit from Promptus Communications. The Company may continue to make acquisitions
of, or significant investments in, businesses that offer complementary products,
services, and technologies as part of its overall business strategy. Any such
acquisitions or investments will likely be accompanied by the risks commonly
encountered in acquisitions of businesses, including, among others, the
difficulty of assimilating the operations and personnel of the acquired
businesses, the potential disruption of the Company's ongoing business, and a
reduction in the value of the investment.
PERIOD TO PERIOD FLUCTUATIONS. The Company's operating results are likely to
vary significantly from quarter to quarter as a result of several factors,
including: the timing of new product announcements and introductions by the
Company, its major customers and its competitors; market acceptance of new or
enhanced versions of the Company's products; changes in the product mix of
revenue; changes in the relative proportions of revenue among distribution
channels or among customers within each distribution channel; changes in
manufacturing costs; price reductions for the Company's products; the gain or
loss of significant customers; increased research and development expenses
associated with new product introductions; seasonality; and general economic
conditions. New orders may be characterized by lengthy sales cycles, making it
difficult to predict the quarter in which the sales will occur. Carriers'
deployment projects involve particularly long sales cycles, and shipments for
such projects are therefore often difficult to forecast. In addition, such
shipments are subject to delays in the timing of such projects. The Company
typically operates with a small backlog. As a result, quarterly revenue and
operating results generally depend on the volume, timing of, and ability to
fulfill orders received within the quarter. Also, changes in ordering patterns
have resulted in the Company recognizing a substantial portion of its revenue in
a given quarter from sales booked and shipped in the last weeks of that quarter.
All of the above factors can have a material adverse affect on the Company's
business and operating results for one quarter or a series of quarters, and are
<PAGE> 4
difficult to forecast. The Company establishes its expenditure levels for
product development and other operating expenses based, in large part, on its
expected future sales. As a result, if revenue for a particular period is below
expectation, there would likely be a material adverse effect on the Company's
operating results and net income because only a small portion of the Company's
operating expenses vary with its sales in the short term.
PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's success depends, to a large
extent, on its ability to protect its proprietary technology. The Company
currently holds three U.S. patents relating to its existing products and has
several patent applications pending. In addition to its patents, the Company
relies on a combination of contractual rights, trade secrets, and copyrights to
protect its intellectual property rights.
RETENTION OF KEY EMPLOYEES. 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.
UNCERTAINTIES REGARDING PATENTS. In 1994 the Company settled patent
infringement litigation brought against it by Datapoint Corporation
("Datapoint") for a cash payment by the Company. However, patent infringement
litigation continued to exist 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, in
effect, has asserted that certain Datapoint patents in the videoconferencing
field (the "Datapoint Patents") cover certain aspects of multipoint conferencing
operations involving terminals and multipoint control units, including MCS. 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 revenue
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 at least 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 allows
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.
IMPACT OF YEAR 2000. The Company is continuing efforts to ready itself for the
impact of Year 2000 related technology matters. The Company believes that
current releases of its products are Year 2000 compliant. However, the Company
is continually assessing the Year 2000 compliance of its products and the
ability of its products to interoperate with products of its customers and
suppliers. The Company is continually communicating with its customers
concerning the Year 2000 issue and has created a web site which provides Year
2000 compliance information regarding its products. Although it is the Company's
intention to identify and address all significant Year 2000 issues with its
products, it is possible that not all Year 2000 issues will be identified. The
Company is unable to assess the impact on its operations should significant,
currently unidentified, non-compliance issues arise or remain unidentified.
Also, the majority of the Company's revenue stream is delivered through
videoconferencing equipment OEMs, or through Value Added Resellers (VARs) which
generally remarket the Company's products in combination with other products to
present an integrated conferencing solution to end-users. The Company has not
determined the current state of compliance of its key customers. Should any key
customer not be Year 2000 compliant, their operations may be significantly
impacted. In addition, demand for the Company's products may be impacted by
end-users' decisions to refocus capital spending on efforts to address Year 2000
compliance. The resultant impact on the Company's operations may be significant.
In addition to reviewing the impact of the Year 2000 on its products, on an
ongoing basis the Company is assessing what impact the Year 2000 might have on
its internal systems and operations. To meet general requirements of the
business, in January 1999, the Company completed the initial implementation of a
new company-wide financial accounting, manufacturing, sales and distribution
system. The Company believes this system is fully Year 2000 compliant. Initial
reviews of other internal systems - both information technology systems and
embedded systems - revealed that the majority of the Company's internal systems
are Year 2000 ready. The Company expects, through a combination of software
updates and replacement with new technologies, to render all significant
internal systems Year 2000 ready so as to avoid any significant impact on its
operations. At this point, the Company believes that the incremental costs of
bringing its internal systems into compliance will not be materially greater
than its ongoing normal costs of maintaining and upgrading these systems.
<PAGE> 5
The Company is surveying its key suppliers and vendors to ascertain their
preparedness for the Year 2000. The Company currently does not have sufficient
information to assess the potential resultant impact to the Company's operations
should one or more of those key suppliers not be adequately prepared. However,
as the Company has a limited number of key suppliers, it believes the process of
identifying potential issues will not be unduly burdensome. In the event that
the Company discovers issues that cannot be readily addressed, the availability
of alternative suppliers of its products may provide the Company with other
resolution options. As Year 2000 readiness issues are identified, the Company
intends to evaluate contingency plans as needed to address the Company's
requirements. Notwithstanding the Company's efforts, interruptions of key
components or services provided by outside vendors could have an adverse impact
on the Company's operations and future results. The Company has not incurred any
significant costs to date in surveying key suppliers and vendors and further
believes that the future costs of these efforts will not have a material impact
on its operations.
The cost of addressing the Company's Year 2000 compliance is currently being
expensed as incurred and funded through ongoing operations and cash flow. For
the year ended December 31, 1998, the identification and resolution of Year 2000
compliance issues was being carried out primarily by Company personnel. It is
the Company's intention, in 1999, to continue addressing Year 2000 compliance
issues in the same manner.
The Company's review of the full potential impact of Year 2000 issues is
ongoing. It is not likely that every potential Year 2000 issue will be
identified and addressed. However, the Company believes it is taking the
appropriate actions to significantly reduce the risk and impact of Year 2000
issues on its financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company has cash, cash equivalents, and marketable
securities of $50.6 million, an increase of $4.1 million from December 31, 1997.
The Company regularly invests excess funds in short-term money market funds,
government securities, and commercial paper. The Company has no long-term debt.
The Company generated cash from operations of $7.7 million in 1998, primarily
through net income and an increase in accounts payable and accrued expenses.
Investing activities included $4.5 million for equipment and improvements of
which approximately $1.2 million was for the purchase and implementation of a
corporate-wide financial accounting, manufacturing, and sales and distribution
system. The Company also purchased computers and equipment for research and
development, product support, sales, marketing and general administration to
support the Company's growth. Other assets increased $1.1 million primarily as
the result of the prepayment of royalties for various software licenses and
certain other investments.
Net proceeds from the issuance of stock under the Company's employee stock
programs generated $2.1 million of cash.
At December 31, 1998, the Company has available a bank revolving credit facility
providing for borrowings up to $7.5 million. Borrowings are limited to a
percentage of eligible accounts receivable and are unsecured. Under this credit
facility, the Company is required to maintain certain financial ratios and
minimum levels of net worth and profitability, and is prohibited from paying
cash dividends without the bank's consent. No borrowings have been made under
this facility.
The Company believes that its existing cash, cash equivalents, and marketable
securities, together with cash generated from operations and borrowings
available under the Company's credit facility, will be sufficient to meet the
Company's cash requirements for the foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to risk involving changing interest rates, which would
affect the return on its investments, and to risk involving foreign currency
fluctuations. In order to limit the potential for market risk on its
investments, the Company has policies restricting investments to high quality
instruments including highly rated U.S. and state government securities,
commercial paper and short-term money market funds and does not use derivative
financial instruments in its investment portfolio. In addition, the Company has
classified all its debt securities as available for sale. This classification
reduces the income statement exposure to interest rate risk. International
revenues are currently denominated in U.S. dollars and the Company's
international operations do not currently present significant exposure to
foreign currency fluctuation. The Company believes the potential impact of the
exposure to risk involving fluctuations in interest or foreign currency rates
would not be material to its financial position or results of operations.
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
---------------------------
In thousands, except for share-related data
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,225 $ 24,866
Marketable securities 27,381 21,665
Accounts receivable, net of allowances of $1,534 and $1,338 in 1998 and 1997 7,778 7,244
Inventories 3,693 3,882
Deferred income taxes 3,300 2,619
Other current assets 1,497 941
----------------------
Total current assets 66,874 61,217
Equipment and improvements, net of accumulated depreciation 6,616 5,142
Deferred income taxes 4,000 4,341
Other assets, net of accumulated amortization of $1,599 and $984 in 1998 and 1997 2,642 2,199
----------------------
Total assets $ 80,132 $ 72,899
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,546 $ 2,458
Accrued expenses 11,396 9,219
Deferred revenue 1,045 964
Current portion of long-term debt -- 167
----------------------
Total current liabilities 15,987 12,808
Commitments and contingencies-Note 10
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized, none issued and outstanding
Common stock, $.01 par value; 40,000,000 shares
authorized; 13,382,206 issued and outstanding in 1998;
13,122,843 issued and outstanding in 1997 134 131
Capital in excess of par value 56,720 54,584
Retained earnings 7,307 5,493
Cumulative translation adjustment (16) (117)
----------------------
Total stockholders' equity 64,145 60,091
----------------------
Total liabilities and stockholders' equity $ 80,132 $ 72,899
======================
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 7
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
In thousands, except per share amounts
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Product revenue $ 50,340 $ 49,415 $ 46,157
Service revenue 5,599 4,080 2,676
------------------------------------
Total revenue 55,939 53,495 48,833
------------------------------------
Cost of revenue:
Cost of product revenue 17,338 15,660 13,556
Cost of service revenue 4,191 3,736 2,399
------------------------------------
Total cost of revenues 21,529 19,396 15,955
------------------------------------
Gross Profit 34,410 34,099 32,878
Operating expenses:
Research and development 14,878 12,886 7,767
Sales and marketing 13,005 12,217 8,945
General and administrative 5,119 4,490 4,004
Purchased research and development -- 14,000 --
Non-recurring charges 657 -- --
------------------------------------
Total operating expenses 33,659 43,593 20,716
------------------------------------
INCOME (LOSS) FROM OPERATIONS 751 (9,494) 12,162
Interest expense (77) (165) (93)
Interest income 2,075 1,877 1,895
------------------------------------
Income (loss) before income taxes 2,749 (7,782) 13,964
Provision (benefit) for income taxes 935 (3,050) 3,770
------------------------------------
NET INCOME (LOSS) $ 1,814 $ (4,732) $ 10,194
====================================
Net income (loss) per share:
Basic $ 0.14 $ (0.37) $ 0.82
Diluted $ 0.13 $ (0.37) $ 0.77
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
In thousands, except for share-related data
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Retained
Capital In Earnings Cumulative Total
Common Stock Excess Of (Accumulated Translation Treasury Stock Stockholders'
Shares Par Value Par Value Deficit) Adjustment Shares Cost Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AS OF
JANUARY 1, 1996 12,548,769 $125 $45,635 $ 31 $ 0 163,038 $(2) $45,789
Stock issued under
employee benefit plans 71,991 1 1,788 (163,038) 2 1,791
Tax benefit related to employee
stock plans 2,150 2,150
Foreign currency
translation adjustment (53) (53)
Net income 10,194 10,194
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AS OF
DECEMBER 31, 1996 12,620,760 $126 $49,573 $10,225 $ (53) 0 $ 0 $59,871
Stock issued under
employee benefit plans 278,202 3 1,418 1,421
Tax benefit related to employee
stock plans 180 180
Stock issuance related to
acquisition of business, net
of issuance costs of $27 223,881 2 3,413 3,415
Foreign currency
translation adjustment (64) (64)
Net loss (4,732) (4,732)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AS OF
DECEMBER 31, 1997 13,122,843 $ 131 $54,584 $ 5,493 $(117) 0 $ 0 $60,091
Stock issued under
employee benefits plans 258,903 3 2,066 2,069
Tax benefit related to employee
stock plans 70 70
Foreign currency
translation adjustment 101 101
Net income 1,814 1,814
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AS OF
DECEMBER 31, 1998 13,381,746 $134 $56,720 $ 7,307 $ (16) 0 $ 0 $64,145
=========================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
In thousands
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,814 $ (4,732) $ 10,194
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Purchased research and development -- 14,000 --
Depreciation and amortization 3,686 3,076 1,739
Provision for doubtful accounts 196 261 427
Deferred taxes (340) (4,680) (1,980)
Tax benefit related to stock plan activities 70 180 2,150
Changes in operating assets and liabilities:
Accounts receivable (730) 1,859 (3,448)
Inventories 189 979 (2,055)
Other current assets (556) (50) (300)
Accounts payable and accrued expenses 3,265 (1,338) 6,085
Deferred revenue 81 133 (298)
------------------------------------
Net cash provided by operating activities 7,675 9,688 12,514
INVESTING ACTIVITIES
Net purchases of equipment and improvements (4,545) (2,954) (3,901)
Purchases of marketable securities (13,198) (2,634) (21,438)
Proceeds from sale of marketable securities 7,482 7,777 8,119
Acquisition of business, net of cash acquired -- (15,416) --
Increase in other assets (1,058) (271) (160)
------------------------------------
Net cash used in investing activities (11,319) (13,498) (17,380)
FINANCING ACTIVITIES
Repayment of long-term debt (167) (557) (675)
Net proceeds from issuance of stock
under employee benefit plans 2,069 1,421 1,791
------------------------------------
Net cash provided by financing activities 1,902 864 1,116
Effect of exchange rate on cash and cash equivalents 101 (64) (53)
------------------------------------
Decrease in cash and cash equivalents (1,641) (3,010) (3,803)
Cash and cash equivalents at beginning of year 24,866 27,876 31,679
------------------------------------
Cash and cash equivalents at end of year $ 23,225 $ 24,866 $ 27,876
====================================
Supplementary disclosure of cash flow information:
Interest paid $ 77 $ 165 $ 94
====================================
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 BUSINESS
VideoServer, Inc. and its subsidiaries ("the Company") operate in one
business segment, which is the design, development, manufacture, marketing,
sale, and service of networking equipment and associated software used to
create multimedia networked conferences that connect multiple users over
any network and allow them to interact as a group.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. All assets and
liabilities of foreign subsidiaries are translated at the rate of exchange
at year end, while sales and expenses are translated at the average rates
in effect during the year. The net effect of these translation adjustments
is shown in the accompanying financial statements as a component of
stockholders' equity.
SIGNIFICANT ESTIMATES AND ASSUMPTIONS The preparation of the 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, if any, at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
REVENUE RECOGNITION Revenue from product sales is recognized upon
shipment, and the Company's products are generally delivered without
significant post-sale obligations to the customer. If significant
obligations exist, revenue recognition is deferred until the obligations
are satisfied. Estimated product warranty costs are provided for at the
time of sale. Revenue from maintenance agreements is recognized ratably
over the term of the agreements, and other service revenue is recognized as
the services are performed.
CASH EQUIVALENTS AND MARKETABLE SECURITIES All of the Company's cash
equivalents and marketable securities are classified as available-for-sale,
and accordingly are carried at fair market value based on quoted market
prices, which approximates their cost. Unrealized gains and losses, which
are reported as a component of stockholders' equity, were not material in
1997 or 1998. Realized gains and losses are included in net interest
income. The Company considers all liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents. Cash
equivalents and marketable securities consist of highly rated U.S. and
state government securities, commercial paper, and short-term money market
funds.
Marketable securities at December 31, 1998, classified by contractual
maturity, included $19.9 million due in one year or less, and $7.5 million
due between one year and two years.
CONCENTRATIONS OF CREDIT RISK Sales to two customers accounted for 53%,
50%, and 53% of total revenue in 1998, 1997, and 1996. The accounts
receivable from these customers amounted to approximately $3.3 million and
$3.0 million at December 31, 1998 and 1997. Export sales, primarily to
Europe, were $15.7 million in 1998, $17.4 million in 1997, and $15.8
million in 1996.
<PAGE> 11
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash equivalents, marketable securities
and accounts receivable. All of the Company's cash equivalents and
marketable securities are maintained by major financial institutions.
Concentration of credit risk with respect to accounts receivable is limited
to certain customers to whom the Company makes substantial sales. To reduce
risk, the Company routinely assesses the financial strength of its
customers. The Company has not incurred any material write-offs related to
its accounts receivable.
INVENTORIES Inventories are stated at the lower of cost or market, with
cost determined using the first-in, first-out method.
EQUIPMENT AND IMPROVEMENTS Equipment and improvements are stated at cost.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
-----------------------------------------------------------
Computer and office equipment 3 years
-----------------------------------------------------------
Furniture and fixtures 5 years
-----------------------------------------------------------
Leasehold Improvements Shorter of lease term of
estimated useful life
-----------------------------------------------------------
DEFERRED REVENUE Deferred revenue represents amounts received from
customers under maintenance agreements or for product sales in advance of
revenue recognition.
RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged
to expense as incurred. To date, costs of internally developed software
eligible for capitalization have been immaterial and have been expensed as
incurred.
The Company receives fees under product development contracts with certain
customers. Product development fees are recorded as a reduction of research
and development costs as work is performed pursuant to the related
contracts and defined milestones are achieved. Payments received in advance
are recorded as accrued liabilities. Fees recorded as a reduction of
research and development costs, including amounts received from a customer
who is also a stockholder, amounted to $0.5 million and $1.2 million in
1997 and 1996.
NET INCOME (LOSS) PER SHARE As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of stock options. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. For the Company, the
difference between the shares used in computing basic and diluted net
income (loss) per share is entirely the result of dilutive stock options.
All net income (loss) per share amounts have been presented, and where
appropriate, restated in accordance with SFAS 128.
Shares used in computing basic and diluted net income (loss) per share are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Basic 13,236,000 12,867,000 12,486,000
Diluted 13,578,000 12,867,000 13,311,000
========================================
------------------------------------------------------------
</TABLE>
The effect of dilutive stock options on the total shares used to compute
diluted net income per share was 342,000 in 1998 and 825,000 in 1996.
ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has elected to account
for its stock-based compensation plans following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25),
and related interpretations rather than the alternative fair value
accounting provided under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, no
compensation expense has been recognized by the Company for its stock
option plans and its stock purchase plan.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), and Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of An Enterprise
and Related Information" (SFAS 131). SFAS 130 establishes standards for
reporting and displaying comprehensive income and its components as part of
a complete set of financial statements.
<PAGE> 12
Comprehensive income is a measure of all changes in stockholders' equity
that result from recognized transactions and other economic events of a
period, other than transactions with owners in their capacity as owners.
SFAS 131 requires the use of the 'management approach' in disclosing
segment information, based largely on how senior management generally
analyzes the business operations. The Company has adopted both SFAS 130 and
SFAS 131 in 1998. Application of the new standards had no significant
impact on the financial condition, results of operations or reporting of
the Company.
3 BUSINESS COMBINATION
On April 28, 1997, the Company purchased the network access card ("NAC")
business unit of Promptus Communications, Inc. ("Promptus"). The assets
acquired included all tangible and intangible assets of Promptus' NAC
business unit, including fixed assets, inventories, trade receivables,
products, and technology. Liabilities assumed included all third-party
trade liabilities and other accrued obligations pertaining to the acquired
NAC assets. The total purchase price of approximately $18.8 million
included $14.5 million of cash consideration and 223,881 shares of the
Company's common stock. The acquisition was accounted for under the
purchase method of accounting.
The purchase price was allocated to the tangible and intangible assets
acquired based upon their estimated fair market values. The intangible
assets acquired were valued using risk adjusted cash flow models under
which estimated future cash flows were discounted taking into account risks
related to existing and future target markets and to the completion of the
products expected to be ultimately marketed by the Company, and assessments
of the life expectancy of the underlying technology. The analysis resulted
in an allocation of $2.0 million to purchased software which had reached
technological feasibility, principally represented by the technology
comprising the NAC products being sold by Promptus at the acquisition date.
This amount was capitalized and is being amortized over a five-year period.
In addition, $14.0 million was allocated to purchased research and
development which had not reached technological feasibility and had no
alternative future use. This amount was charged to operations at the
acquisition date.
Operating results of the NAC business unit have been included in the
financial statements from the acquisition date. The following pro forma
information presents the results of operations for the years ended December
31, 1997 and 1996, as if the NAC business unit of Promptus had been
acquired as of January 1, 1997 and 1996, including the charge to operations
of $14.0 million related to purchased in-process research and development
resulting from the acquisition, as if expensed on the date acquired. The
NAC business unit was fully incorporated in the Company's 1998 operating
results.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
In thousands, except per share amounts 1997 1996
---------------------------------------------------------------------
<S> <C> <C>
Total revenue $57,122 $58,469
Net income (loss) $(4,692) $ 1,257
Net income (loss) per share:
Basic $(0.36) $ 0.10
Diluted $(0.36) $ 0.09
---------------------------------------------------------------------
</TABLE>
The unaudited pro forma results do not purport to be indicative of the
results which actually would have been obtained had the acquisition been
effected on the dates indicated, or of results which may be achieved in the
future.
4 INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
---------------------
In thousands 1998 1997
-------------------------------------------------------------
<S> <C> <C>
Raw materials and subassemblies $3,188 $2,673
Work in process 27 761
Finished goods 478 448
---------------------
$3,693 $3,882
=====================
-------------------------------------------------------------
</TABLE>
<PAGE> 13
5 EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of:
<TABLE>
<CAPTION>
December 31,
----------------------
In thousands 1998 1997
--------------------------------------------------------------
<S> <C> <C>
Computer and office equipment $15,532 $11,041
Furniture and fixtures 411 383
Leasehold improvements 921 895
----------------------
16,864 12,319
Less accumulated depreciation 10,248 7,177
----------------------
$ 6,616 $ 5,142
======================
--------------------------------------------------------------
</TABLE>
6 ACCRUED EXPENSES
Accrued expenses consist of:
December 31,
----------------------
In thousands 1998 1997
--------------------------------------------------------------
Employee compensation
and benefits $ 2,974 $2,975
Professional fees 1,191 599
Warranties and other customer-
related costs 4,093 3,966
Income taxes payable 2,299 850
Other accrued expenses 839 829
----------------------
$11,396 $9,219
======================
--------------------------------------------------------------
7 BANK ARRANGEMENTS
The Company has a revolving credit facility of $7,500,000 which bears
interest at the prime rate (7.75% at December 31, 1998) and is available
until March 2001. Borrowings under the facility may not exceed 80% of
qualified accounts receivable, as defined. No borrowings have been made
under this facility.
The revolving credit facility is unsecured; however, the Company is
required to maintain certain financial ratios and minimum levels of net
worth and profitability, and the Company's ability to pay dividends to
stockholders is restricted under the terms of the loan agreement.
8 INCOME TAXES
The provision (benefit) for income taxes for 1998, 1997, and 1996 is as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
In thousands 1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,029 $ 1,104 $4,359
State 112 403 1,330
Foreign 134 123 61
------------------------------------
1,275 1,630 5,750
Deferred:
Federal (298) (4,095) (1,695)
State (42) (585) (285)
------------------------------------
$ 935 $(3,050) $ 3,770
====================================
--------------------------------------------------------
</TABLE>
Cash payments for income taxes totaled approximately $254,000, $1,254,000,
and $2,408,000 in 1998, 1997, and 1996.
The effective tax rate differs from the statutory federal income tax rate
due to the following:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1998 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C>
Statutory income tax rate 34.0% (34.0)% 35.0%
State income taxes, net of
federal benefit 6.0 (1.5) 4.9
Research and development
tax credits (3.4) (2.0) (1.4)
Tax benefit from Foreign
Sales Corporation -- -- (1.9)
Tax-exempt interest income (7.2) (4.1) (2.7)
Foreign and other 4.6 2.4 .4
Change in valuation
allowance -- -- (7.3)
----------------------------------
Effective tax rate 34.0% (39.2)% 27.0%
==================================
---------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Income taxes for 1997 include tax benefits related to the charge to
operations of $14.0 million for purchased research and development
resulting from the acquisition of the NAC business unit. In 1996, a
valuation allowance, recorded in 1995 to offset certain net deferred tax
assets, was eliminated as the Company deemed it more likely than not that
sufficient future taxable income would be generated to realize the full
benefit of deferred tax assets.
The following is a summary of the significant components of the Company's
deferred tax asset:
<TABLE>
<CAPTION>
December 31,
---------------------
In thousands 1998 1997
--------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Purchased research
and development $4,481 $4,900
Reserves not currently
deductible 2,606 2,136
Depreciation and other 213 (76)
---------------------
Total deferred tax asset $7,300 $6,960
=====================
--------------------------------------------------------
</TABLE>
<PAGE> 14
9 RESTRUCTURING
In March 1998, the Company adopted a plan to restructure certain of its
operations to increasingly focus and streamline its product offerings. As a
result of these actions, the Company recorded charges of approximately
$1,300,000 in the quarter ended March 31, 1998. These one-time charges
included $657,000 reported as non-recurring restructuring expenses
primarily covering estimated severance costs, $450,000 reported as cost of
sales for various write-downs of excess and obsolete inventory, and
$193,000 for certain facilities costs reported as research and development
expenses. Approximately $650,000 of the $1,300,000 charge required a cash
outlay, substantially all of which has been paid as of December 31, 1998.
10 COMMITMENTS AND CONTINGENCIES
The Company rents its primary facility under an operating lease which
expires in February 2001. The Company also leases sales offices under
leases that expire on various dates through February 2001. Future minimum
lease payments at December 31, 1998 under these non-cancelable operating
leases are approximately $624,000 in 1999, $486,000 in 2000, and $78,000 in
2001. Rent expense was approximately $997,000, $895,000, and $595,000 in
1998, 1997, and 1996.
In 1994, the Company settled patent infringement litigation brought against
it by Datapoint Corporation ("Datapoint") for a cash payment by the
Company. The Company recorded charges against 1994 operations of
approximately $850,000 for the agreed-upon costs of the settlement and
indemnification of one of its customers. However, patent infringement
litigation continued to exist 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, in effect, has asserted that certain Datapoint patents in the
videoconferencing field (the "Datapoint Patents") cover certain aspects of
multipoint conferencing operations involving terminals and multipoint
control units, including MCS. 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 at least 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") in the United
States District Court for the District of Massachusetts. 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. 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. In addition, Accord has asserted a
declaratory judgement counterclaim, seeking that the court declare that the
patents at issue are not infringed by the Accord products and/or that the
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.
<PAGE> 15
11 STOCKHOLDERS' EQUITY
The Company has 40,000,000 authorized shares of common and 2,000,000
authorized shares of undesignated preferred stock. Each series of Preferred
Stock shall have such rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges, and liquidation preferences as determined by the Board of
Directors.
12 BENEFIT PLANS
STOCK INCENTIVE PLAN The Company's Amended and Restated 1991 Stock
Incentive Plan (the "1991 Plan") provides for the sale or award of common
stock, or the grant of incentive stock options or nonqualified stock
options for the purchase of common stock, of up to 4,756,466 shares to
officers, employees, and consultants. The Plan is administered by the Board
of Directors. Options have been granted at a price not less than the fair
market value on the date of grant. The options generally become exercisable
over a five-year period and expire over a period not exceeding ten years.
Shares issuable will increase as of January 1, 1999, and will increase each
January 1 thereafter during the term of the plan, by an additional number
of shares of common stock equal to five percent of the total number of
shares of common stock issued and outstanding as of December 31 of the
preceding year.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN The Company's Amended and Restated
1994 Non-Employee Director Stock Option Plan (the "Director Plan") provides
that each non-employee director of the Company be granted an option to
acquire 15,000 shares of common stock on the date that person becomes a
director and annually be granted, beginning with the January 1 falling at
least twelve months after a director's initial grant, an option to purchase
an additional 3,000 shares. Options are granted at a price equal to the
fair market value on the date of grant. The option becomes exercisable over
a four-year period, and the term of the option is ten years from the date
of grant. The Company has reserved 200,000 shares of common stock for
issuance under the Director Plan.
A summary of option activity under the 1991 Plan and the Director Plan is
as follows:
<TABLE>
<CAPTION>
--------------------------
Weighted
Average Exercise
Shares Price
-----------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1996: 972,900 $ 7.36
Granted 791,425 $26.75
Terminated (97,775) $17.20
Exercised (191,011) $ 5.53
-----------------------------------------------------------------------
Outstanding at December 31, 1996: 1,475,539 $17.35
Granted 1,343,000 $13.14
Terminated (411,102) $17.80
Exercised (217,798) $ 3.29
-----------------------------------------------------------------------
Outstanding at December 31, 1997: 2,189,639 $16.08
Granted 965,500 $ 9.10
Terminated (815,090) $19.63
Exercised (163,192) $ 7.33
-----------------------------------------------------------------------
Outstanding at December 31, 1998 2,176,857 $12.31
Exercisable at December 31, 1996 202,192
Exercisable at December 31, 1997 377,840
Exercisable at December 31, 1998 519,847
============================
-----------------------------------------------------------------------
</TABLE>
<PAGE> 16
Related information for options outstanding and exercisable as of December
31, 1998 under these benefit plans is as follows:
<TABLE>
<CAPTION>
-----------------------------------------
Weighted Weighted
Average Average
OUTSTANDING Remaining Exercise
OPTIONS Shares Contractual Life Price
--------------------------------------------------------------------------
Range of Exercise Prices
<S> <C> <C> <C>
$ .01 - $ 7.81 686,199 8.0 $ 7.10
$ 8.13 - $10.00 372,794 5.7 $ 9.34
$10.06 - $19.25 949,554 5.2 $13.53
$23.25 - $43.25 168,310 3.9 $33.29
-----------------------------------------
Total outstanding 2,176,857 6.1 $12.31
=========================================
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------
Weighted
EXERCISABLE Average
OPTIONS Shares Exercise Price
--------------------------------------------------------
Range of Exercise Prices
<S> <C> <C>
$ .01 - $ 7.81 133,729 $ 4.36
$ 8.13 - $10.00 90,732 $ 9.22
$10.06 - $19.25 215,138 $14.59
$23.25- $43.25 80,248 $32.78
---------------------------
Total exercisable 519,847 $13.83
===========================
--------------------------------------------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase
Plan (the "Stock Purchase Plan") under which eligible employees may
purchase common stock at a price per share equal to 85% of the lower of the
fair market value of the common stock at the beginning or end of each
offering period. Participation in the offering is limited to 10% of an
employee's compensation (not to exceed amounts allowed under Section 423 of
the Internal Revenue Code), may be terminated at any time by the employee
and automatically ends on termination of employment with the Company. A
total of 300,000 shares of common stock have been reserved for issuance
under this plan. The first offering period commenced on the effective date
of the Company's initial public offering of shares of its common stock, and
continued until January 31, 1996. Subsequent six month offering periods
commenced on February 1 and August 1, 1996, and have commenced on each
February 1 and August 1 thereafter.
PRO FORMA INFORMATION FOR STOCK-BASED COMPENSATION Pro forma information
regarding net income (loss) and earnings (loss) per share, as if the
Company had used the fair value method of SFAS 123 to account for stock
options issued under its 1991 Plan and Director Plan, and shares purchased
under the Stock Purchase Plan, is presented below. The fair value of stock
activity under these plans was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions as of the
date of grant: risk-free interest rates equal to the then available rate
for zero-coupon U.S. government issues with a remaining term equal to the
expected life of the options; no dividend yields; an average volatility
factor of the expected market price of the Company's common stock over the
expected life of the option of .85 in 1998, .68 in 1997, and .50 in 1996;
and a weighted-average expected life of the option of 5.3 years in 1998 and
1997, and 5.4 years in 1996.
<PAGE> 17
For purposes of pro forma disclosures, the estimated weighted average fair
value of options granted during the year of $6.47, $8.39, and $9.51 in
1998, 1997, and 1996 is amortized to expense over the related vesting
period. Pro forma information is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
In thousands, except ------------------------------------
per share amounts 1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $(2,375) $(8,137) $8,973
Pro forma earnings
per share:
Basic $ (0.18) $ (0.63) $ 0.73
Diluted $ (0.17) $ (0.63) $ 0.69
====================================
------------------------------------------------------------------
</TABLE>
SAVINGS PLAN The Company sponsors a savings plan for its employees which
has been qualified under Section 401(k) of the Internal Revenue Code.
Eligible employees are permitted to contribute to the 401(k) plan through
payroll deductions within statutory and plan limits. Contributions from the
Company are made at the discretion of the Board of Directors. Through
December 1996, the Company made no contributions to the 401(k) plan. In
1997, as authorized by the Board of Directors, the Company began to match a
portion of its employees' contributions to the plan, which approximated
$227,000 in 1998 and $205,000 in 1997.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) All previously presented net
income (loss) per share amounts have been restated to comply with Statement
of Financial Accounting Standards No. 128, "Earnings per Share."
<TABLE>
<CAPTION>
Quarters ended
In thousands except -----------------------------------------------------
per share amounts March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C>
Revenue $15,303 $11,451 $12,903 $13,838
Gross profit 10,344 7,231 7,961 8,563
Operating income (loss) 4,002 (13,970) 38 436
Net income (loss) 2,897 (8,679) 485 565
Net income (loss)
per share - basic 0.23 (0.68) 0.04 0.04
Net income (loss)
per share - diluted 0.22 (0.68) 0.04 0.04
Common stock
price - high $ 46.25 $ 23.00 $ 13.63 $ 16.88
Common stock
price - low $ 20.38 $ 12.13 $ 9.88 $ 9.88
- ---------------------------------------------------------------------------------
1998
Revenue $11,753 $13,007 $14,717 $16,462
Gross profit 6,749 8,123 9,240 10,298
Operating income (loss) (1,763) 310 878 1,326
Net income (loss) (1,298) 518 1,042 1,552
Net income (loss)
per share - basic (0.10) 0.04 0.08 0.12
Net income (loss)
per share - diluted (0.10) 0.04 0.08 0.11
Common stock
price - high $ 16.00 $ 12.63 $ 14.00 $ 18.50
Common stock
price - low $ 12.48 $ 7.75 $ 6.75 $ 6.75
- ---------------------------------------------------------------------------------
</TABLE>
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
VIDEOSERVER, INC.
We have audited the accompanying consolidated balance sheets of VideoServer,
Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
VideoServer, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young, LLP
- ----------------------
Boston, Massachusetts
January 19, 1999
<PAGE> 1
Exhibit 21.1
The following is a list of the Company's current subsidiaries, all of which are
wholly-owned:
- --------------------------------------------------------------------------------
Organized Under
- --------------------------------------------------------------------------------
Subsidiary Name The Laws Of
- --------------- -----------
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VideoServer International Inc. Massachusetts
- --------------------------------------------------------------------------------
VideoServer Foreign Sales Corporation Barbados
- --------------------------------------------------------------------------------
VideoServer Securities Corporation Massachusetts
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following is a subsidiary of VideoServer International, Inc. which is
wholly-owned:
- --------------------------------------------------------------------------------
Organized Under
- --------------------------------------------------------------------------------
Subsidiary Name The Laws Of
- --------------- -----------
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VideoServer Ltd. United Kingdom
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of VideoServer, Inc. of our report dated January 19, 1999, included in the 1998
Annual Report to Shareholders of VideoServer, Inc.
Our audits also included the financial statement schedule of VideoServer, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Forms S-3 No. 333-28209 and S-8 No. 33-96192) of VideoServer, Inc.
and in the related Prospectuses of our report dated January 19, 1999, with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
VideoServer, Inc.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 23,225
<SECURITIES> 27,381
<RECEIVABLES> 9,312
<ALLOWANCES> (1,534)
<INVENTORY> 3,693
<CURRENT-ASSETS> 66,874
<PP&E> 6,616
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,132
<CURRENT-LIABILITIES> 15,987
<BONDS> 0
0
0
<COMMON> 134
<OTHER-SE> 64,011
<TOTAL-LIABILITY-AND-EQUITY> 80,132
<SALES> 55,939
<TOTAL-REVENUES> 55,939
<CGS> 21,529
<TOTAL-COSTS> 21,529
<OTHER-EXPENSES> 33,659
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (77)
<INCOME-PRETAX> 2,749
<INCOME-TAX> 935
<INCOME-CONTINUING> 1,814
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,814
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
<FN>
ADDITIONAL CURRENT ASSET-DEFERRED TAX 3,300
ADDITIONAL CURRENT ASSET-OTHER 1,497
OTHER ASSET-DEFERRED TAXES 4,000
OTHER ASSETS-NET 2,642
INTEREST INCOME 2,075
</TABLE>
