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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, 1997
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 6, 1998 was $181,722,930 (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 6, 1998 was 13,183,189.
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 13,
1998 are incorporated by reference herein.
2. Portions of the 1997 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.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business .......................................................................................................... 3
Item 2. Description of Property ........................................................................................... 15
Item 3. Legal Proceedings.................................................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................................................................ 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............................................. 16
Item 6. Selected Financial Data ........................................................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 16
Item 8. Financial Statements and Supplementary Data ....................................................................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................. 16
PART III
Item 10. Directors and Executive Officers of the Registrant ................................................................ 17
Item 11. Executive Compensation ............................................................................................ 17
Item 12. Security Ownership of Certain Beneficial Owners and Management .................................................... 17
Item 13. Certain Relationships and Related Transactions .................................................................... 17
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K .................................................. 18
Signatures.................................................................................................................. 20
This Report contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements are
subject to certain risks and uncertainties, including without limitation those
discussed in the Company's 1997 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 supplier of
network servers for multimedia conferencing that enable people in multiple
locations to communicate together using any combination of voice, video, and
data information. The Company's Multimedia Conference Server products (MCSs)
provide multipoint conferencing, gateway services, conference control, network
management and bandwidth management. VideoServer's products enable
interoperability between dissimilar communications networks, video conferencing
systems and the encoding technologies used by those systems. The Company's
products, which combine audio, video and data information, are positioned to
become a key enabler of communications networks supporting emerging
collaborative multimedia applications.
VideoServer's strategy is to expand its leadership position in the
conferencing market by developing and supplying networking products that enable
multimedia collaboration, whether through end-user networks or carrier-provided
conferencing services.
The Company sells its MCS products worldwide through leading suppliers and
integrators of videoconferencing and networking equipment, and directly to major
providers of conferencing services, including long-distance and regional
telephone carriers, and private service providers. The Company believes that it
was the largest supplier in annual shipments of multimedia conference servers in
1995, 1996, and 1997.
In April, 1997, the Company acquired the network access card business unit
of Promptus Communications, Inc. (Promptus). Network access cards are an
important component of conferencing systems, and Promptus has been a market
leader and a significant supplier to the Company.
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 $6,000. In
addition, increasing competition between network carriers, and increasing demand
for applications such as Internet access, have led to wider availability and
significantly declining costs of digital lines.
With the introduction of chip sets incorporating ITU standards, a growing
number of companies have entered the desktop videoconferencing market, either
with stand-alone complete PC-based systems or with board sets that
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plug into personal computers. Companies shipping H.320 compliant desktop
conferencing products include Intel, 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 $1,500, with
some products available below $1,000. As with the decrease in the price of room
systems, this decrease in price has fueled demand for desktop endpoints.
Extending the reach of conferencing, in November 1995 the ITU introduced the
H.324 standard for low bit rate video, enabling videoconferencing over analog
lines using PCs or videophones. This is expected to bring conferencing
capability to an entirely new segment of end users, including those in smaller
businesses and homes. PC vendors such as AST, Compaq, Hewlett-Packard, IBM,
Sony, and Toshiba, and modem suppliers such as Boca Research and U.S. Robotics
began offering H.324 conferencing capabilities late in 1996. In 1997 Intel
incorporated this capability into its Pentium II processor.
In May 1996, another 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. Vendors such as Intel and
Microsoft have now introduced desktop conferencing products conforming to these
standards.
Each of these endpoints, whether room systems or desktop systems, require
server 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
potentially millions of PC users. In addition, Intel and IBM are offering
collaborative desktop applications with optional audio and video capabilities
sold through retail computer channels. Fundamental to the architecture 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
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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.
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 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. In the
future, this level of interworking will be expected to encompass emerging
conferencing endpoint technologies such as data conferencing computers,
audio-graphics systems and videophones. 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 deliver the
audio mix 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 customers to reduce their time-to-market
and their own product costs, and that the Company's technology relationships
with customers allow it to anticipate market requirements critical to its
products.
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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.
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
participants that can be connected to the Series 2000 MCS.
MODEL CAPACITY TARGET MARKET/APPLICATION
----- -------- -------------------------
Velocity 8 users Entry level Audio/Video/Data (A/V/D) multipoint for customer premises
equipment (CPE) networks; designed for on-demand multipoint for workgroups
2007 8 users Mid-range CPE for distributed network environments
2020 48 users Large CPE/central office network with extensive multimedia applications
CO 48 users High availability central office server
Each of these systems may be interconnected to provide support for larger
conferences.
The VideoServer Series 2000 MCS has an extensive number of available
software and hardware features, some of which are listed in the following table.
APPLICATIONS DESCRIPTION
----------------------------------- ------------------------------------------------------------
CONFERENCE SERVICES AND MANAGEMENT
Continuous Presence .............. Continuous viewing of multiple conference sites
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 selected video
participant
Security and Password Control..... Conference password and application security controls
Accounting and Billing............ System usage tracking for service billing
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Voice Activated Switching......... Dynamic switching of video presentation based on current
speaker
Audio Add-on...................... Conferencing for audio-only conference participants
Operator Attended Conferencing.... Operator interface at conference initiation and assistance
during the conference
NETWORK SERVICES AND MANAGEMENT
-------------------------------
Outbound Dialing.................. Automatic MCS dial-out capability
Conference Monitor................ Real-time monitor of conference activities and status
Bandwidth Management.............. Bandwidth aggregation using inverse multiplexing
Event Management.................. System activity and alarms applications for network management
Network Diagnostics............... Network loop-back and problem isolation tool kit
Premise Switching................. Integrated ISDN switching functionality
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. 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.
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 PC compatible boards that provide a standardized
physical interface to the host 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:
- - Single or Triple 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)
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All NAC products are compatible with a range of common PC operating systems and
are supported by a full Software Developers Toolkit (SDK).
FUTURE PRODUCTS
The Company expects to begin shipping its first products in the Encounter
family of IP-based network servers and gateways in the first quarter of 1998.
The following table lists the principal products in the Encounter family, and
the typical target market and application in which each is used.
MODEL CAPACITY TARGET MARKET/APPLICATION
----- -------- ----------------------------------------------------------------------------
NetServer 48 users Network server that enables multipoint, multimedia conferencing for H.323
endpoints
NetGate 16 users LAN/WAN gateway that enables point-to-point conferences between ISDN and LAN
based endpoints
Gatekeeper n/a Network management software used to control access and bandwidth utilization
by H.323 endpoints, gateways and MCSs
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.
MARKETS AND CUSTOMERS
VideoServer traditionally has marketed its products primarily through
videoconferencing equipment Original Equipment Manufacturers (OEMs), which
generally remarket the Company's products in combination with other products to
resellers or directly to end-users, and to service providers, including public
and private telephone carriers, which generally offer conferencing services
based on the Company's products. In 1997, in an effort to broaden its
distribution channels, expand the number of people selling the Company's
products, and decrease the Company's dependence on any single large company or
channel, the Company began to establish distribution relationships directly with
resellers of conferencing, communications, and networking products. These
resellers, including value added resellers (VAR's), dealers and systems
integrators, typically sell the Company's products with other conferencing or
communications products to companies of all sizes.
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, First
Virtual Corporation, VCON, Zydacron, and the leading Japanese manufacturers,
including Sony Corporation, Fujitsu Business Communications Systems, Inc. and
Panasonic Corporation. In 1997, PictureTel, currently the Company's largest OEM
customer, took steps to introduce competing products of its own manufacture. In
addition, there were significant consolidations and reorganizations during the
year among the Company's other OEM customers.
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
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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. and to international Post Telephone and Telegraph
companies (PTTs) in Europe and Asia, such as British Telecom, Deutsche Telekom,
France Telecom, the Chinese MPT, and NTT.
As conferencing moves to desktop computing and to traditional business
networks, computer systems companies, network equipment companies, 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. In 1997, Cisco Systems incorporated portions of the Company's H.323
software into Cisco's operating system software, and the companies have begun
joint marketing to large corporate 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 1995, CLI, PictureTel, who
became a customer during 1995, and BellSouth accounted for 23%, 19% and 18% of
net sales. In 1996, PictureTel and CLI accounted for 43% and 10% of net sales,
and in 1997 PictureTel and VTEL (who merged with CLI in 1997) accounted for 34%
and 16% of net sales. Sales to international customers accounted for 25% of the
Company's net sales in the year ended December 31, 1995, and 32% of the
Company's net sales for the years ended December 31, 1996 and 1997.
VideoServer conducts its sales and marketing activities from its principal
offices in Burlington, Massachusetts, as well as from seven other North American
sales locations, its European headquarters in the United Kingdom, and an office
recently opened in Australia.
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
which 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 IMTC .
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. The Company is also 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 modules for ISDN connectivity, , and . 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, 1997, VideoServer's research and development staff consisted
of 100 employees, including 88 software engineers and 12 hardware engineers. The
Company's net research and development expenditures were $5.3 million, $7.8
million and $12.9 in 1995, 1996 and 1997, representing 19%, 16% and 24% of net
sales in those years. Development funding from customers of $1,000,000 and
$1,150,000 and $464,000 was recorded as a reduction of research and development
costs in 1995, 1996 and 1997. All software development costs have been expensed
as incurred because costs eligible for capitalization have not been material to
date.
In 1997, the Company established an international development operation in
the United Kingdom, and added network access development capability through the
Promptus acquisition.
CUSTOMER SUPPORT AND SERVICE
The Company provides technical support and services to its resellers and
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 install, maintain and provide on-site and headquarters-level
technical support of products to their end-user customers, and VideoServer
provides comprehensive problem management, training, diagnostic tools, repair
services, software updates and upgrades, and spare parts programs to facilitate
and supplement these efforts. The Company installs, maintains and directly
supports products sold to its direct customers.
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 MCS 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
planning and procurement, quality control of materials, components and
subassemblies and final product configuration and testing. The Company designs
the significant hardware subassemblies for its products and uses independent
third-party contract assembly companies to perform printed circuit board
assembly. The Company configures and tests the hardware and software in
combinations to meet a wide variety of customer requirements. The Company uses
automated testing equipment, "burn-in" procedures and comprehensive inspection
and statistical process control testing intended to assure the quality and
reliability of its products. The Company has received the International Standard
Organization (ISO) 9002 certification for quality.
Although the Company generally uses standard parts and components for
its products, certain components, including key digital signal processors from
Texas Instruments, are presently available only from single sources or from
limited sources. The Company has no supply commitments from its vendors,
including Texas Instruments, and generally purchases components on a purchase
order basis as opposed to entering into
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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 the Texas Instruments 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. Currently, the Company's principal
competitor is Lucent Technologies. In addition, PictureTel Corporation,
currently the Company's largest customer, has announced its intention to
introduce competitive products of its own manufacture, and in 1997 acquired
MultiLink, Inc., a developer and supplier of multipoint control units and a
competitor of the Company. The impact of the acquisition of MultiLink on the
Company's relationship with PictureTel, and on the Company's future sales and
operating results, is unclear, but it is likely that sales of the Company's MCS
products to PictureTel, which decreased significantly in 1997 from 1996, will
continue to decline.
Many other companies have introduced or announced their intention to
introduce products which could be competitive with the Company's existing
products and those under development, including Teleos (a division of Madge
Networks), Accord, Databeam, Radvision, and White Pine. Companies competing with
the Company's network access card product line include Aculab and NetAccess (a
division of Brooktrout, Inc.). It is anticipated that other companies will
perceive opportunities to compete with the Company, and that competition will
increase significantly in the future.
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, 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 relies primarily on a combination of contractual rights, trade
secrets and copyright laws to establish and protect its intellectual property
rights. The Company holds one U.S. Patent and has several patent applications
pending. 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 a less significant factor
in the Company's success than the knowledge, abilities and experience of the
Company's
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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.
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. In
these actions, Datapoint has offered to sell them nonexclusive licenses, or has
attempted to compel them to pay them damages and ongoing royalties, under
certain Datapoint patents in the videoconferencing field (the Datapoint
Patents). While the validity or scope of the Datapoint Patents has not been
adjudicated by a court, Datapoint has, in effect, asserted that the Datapoint
Patents cover certain aspects of multipoint videoconferencing operations
involving terminals and multipoint control units, including the Company's MCS's.
As a result of the December 1994 settlement, the Company obtained a nonexclusive
license for its MCS under the Datapoint Patents, which license includes limited
rights for the products and services of the Company's customers. However, 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 adjudicated.
EMPLOYEES
At December 31, 1997, the Company employed a total of 253 persons, including
100 in research and development, 87 in sales, marketing and customer support, 34
in manufacturing, and 32 in finance and administration. Twenty-five of the
Company's employees were located in the United Kingdom 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.
Competition for qualified personnel in the computer networking and
communications industry is intense. VideoServer believes that its future success
will depend on its continued ability to attract and retain qualified personnel.
The Company does not have employment contracts with its key personnel. The
Company has recently experienced turnover, particularly in several senior sales
positions, and is currently seeking to hire additional skilled sales and
marketing personnel and development engineers.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
NAME. AGE POSITION
----- --- --------
Robert L. Castle 48 President, Chief Executive Officer and Director
Khoa D. Nguyen 44 Executive Vice President, Chief Operating Officer,
and Director
Dane A. Donaldson 50 Vice President of Customer Service and Support
Arnold C. Englander 46 Vice President of Marketing
Martin M. Falaro 42 Vice President of Business Development
Walter A. Jones 50 Vice President of Engineering
Paul Moeller 49 Vice President of Sales -- Americas
Richard J. Moulds 34 Vice President, Network Access Products
Stephen J. Nill 46 Vice President of Finance and Chief Financial Officer, Treasurer,
and Secretary
Edward C. Wade 61 Vice President of Manufacturing
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Robert L. Castle has served as President and Chief Executive Officer of the
Company since March 1993, and as a Director since March 1992. From February 1992
until March 1993, he served as President and Chief Operating Officer. Prior to
joining the Company, Mr. Castle was employed for eight years at FileNet
Corporation, a supplier of document imaging equipment, in various positions
including Senior Vice President of Marketing from October 1990 to February 1992
and Vice President of Marketing from December 1987 to October 1990. Previously,
Mr. Castle held marketing and general management positions at Basic Four Corp.,
a developer of software applications, and Sycor, Inc., a developer and
manufacturer of data-entry terminals.
Khoa D. Nguyen has served as Executive Vice President and Chief Operating
Officer of the Company since September 1997, and as a Director since December
1997. Prior to joining the Company, Mr. Nguyen was 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, and
previously held various engineering management positions with International
Business Machines, a computer manufacturer.
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. Prior to that he was employed with Philips Electronic Instruments, a
manufacturer of scientific equipment, and Prime Computer, a computer company.
Arnold C. Englander has served as Vice President of Marketing since June
1997. Prior to joining VideoServer, he served as Product Management Director for
various enhanced consumer services at Lucent Technologies, a telecommunications
equipment company, from September 1996 until June 1997. Prior to the date when
Lucent Technologies was formed upon their divestiture from AT&T in September
1996, Mr. Englander was employed with AT&T Microelectronics, a division of AT&T,
from March 1990 to the time of the divestiture. Before joining AT&T,
Mr. Englander was employed at Wang Laboratories, a computer company, and Itran
Corporation, a start-up company in the field of robotic visioning systems.
Martin M. Falaro has served as the Vice President of Business Development
since November 1997. Prior to joining the company, Mr. Falaro was Chief
Executive Officer of VDOnet Corporation, a start-up company in the internet
software industry, from January 1997 to November 1997. Mr. Falaro previously
held various senior management positions at PictureTel Corporation, a
videoconferencing company, from February 1992 to January 1997, most recently as
Vice President of Corporate Business Development. Mr. Falaro was also the
founding executive of PictureTel's Desktop Video business unit. Prior to
PictureTel, Mr. Falaro held several senior sales management positions at Lotus
Development Corporation, a software supplier.
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Walter A. Jones has served as Vice President of Research and Development
since September, 1996. He served as Director of Engineering for the Isis
Distributed Systems Division at Stratus Computer, Inc., a manufacturer of fault
tolerant servers, from January 1994 until September 1996, and served as Vice
President of Engineering at Coral Networks, a manufacturer of high performance,
multi-protocol, network routers from April, 1992 until January 1994. Previously,
Mr. Jones served as Vice President of Engineering at Prime Computer, a
manufacturer of minicomputers and network servers.
Paul Moeller has served as Vice President of Sales since October 1996. He
was previously employed at Wang Laboratories, a computer company, as Vice
President of Marketing from August 1994 to October 1996. Previously, he was Vice
President and General Manager at Network Imaging Systems Corporation, a software
company, from March 1992 to August 1994, and prior to that held various sales
management positions at FileNet Corporation, a supplier of document imaging
equipment, from October 1984 to March 1992.
Richard J. Moulds has served as Vice President of Network Access Products
for the Company since April 1997. From August 1996 to April 1997 he served as
Director of Business Development. Prior to joining the Company, he was
employed with GPT Limited, a manufacturer of telecommunications products
including videoconferencing equipment, as Marketing Manager for the Visual
Communications division from June 1992 to July 1996, and before that as a
Product Marketing Manager and Senior Design Engineer.
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. He
served at Lotus Development Corporation, a software supplier, as Director of
Finance and Operations, Consulting Services Group, from October 1993 until May
1994, as Director of Worldwide Finance and Administration Systems from April
1993 until September 1993 and as Corporate Controller and Chief Accounting
Officer from January 1989 until March 1993. Previously, Mr. Nill held various
financial positions with Computervision, Inc., a supplier of workstation-based
software, International Business Machines Corporation and Arthur Andersen & Co.
Edward C. Wade has served as Vice President of Operations since October
1997. He served at PictureTel Corporation, a video conferencing company, as
Director of Manufacturing for the Group & Network Systems Divisions from March
1991 until October 1997. From July 1988 until March 1991, he served as Vice
President of Materials Management for Symbol Technologies, a supplier of hand
held terminals and bar code scanning devices. Previously, Mr. Wade held various
manufacturing and materials management positions for Polaroid Corporation, a
manufacturer of commercial and industrial instant photographic and digital
imaging devices.
Officers are elected on an annual basis to serve at the discretion of the
Board of Directors.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate office and principal research, development, and
manufacturing facility is located in Burlington, Massachusetts, in a 60,000
square foot facility which the Company leases under agreements that expire in
February 1999, with an option to renew for two years. The Company also has
manufacturing and development facilities in a 12,000 square foot facility
located in Middletown, Rhode Island and in Marlboro, Massachusetts, both of
which are leased on a short-term basis.
In 1997, the Company relocated its European headquarters to a 4,500 square
foot facility in Bracknell, United Kingdom, which the company leases under a
three year lease expiring in February, 2000. Also in 1997, the Company entered
into a lease for a 3,100 square foot facility in Roswell, Georgia, which will
serve as a sales office, under a five year lease which expires in February 2002.
The Company also leases, on a short-term basis, various sales office space
in San Francisco, California; Herndon, Virginia; Huntington, New York; and
Dallas, Texas. In 1998, the Company secured sales office space in Sydney,
Australia.
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, 1997.
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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 1997 Annual
Report to Shareholders, and is incorporated herein by reference.(1)
As of March 6, 1998, the Company had approximately 130 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 1997 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 1997 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 1997 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 1997 Annual Report to Shareholders is not to be deemed
filed as part of this report except for those parts thereof specifically
incorporated by reference.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to Directors and compliance with Section 16(a) of
the Securities Exchange Act may be found in the sections captioned "Proposal No.
1 - Election of Director" 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 13, 1998. 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 13, 1998. 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 13, 1998. 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 13, 1998. Such information is incorporated
herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF FORM 10-K
1. CONSOLIDATED FINANCIAL STATEMENTS.
The following consolidated financial statements and supplementary data
are included in Part II Item 8 filed as part of this report:
- Consolidated Balance Sheets as of December 31, 1996 and 1997
- Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997
- Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997
- Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
- Notes to Consolidated Financial Statements
- Quarterly Financial Information (unaudited)
- Report of Independent Auditors
2. FINANCIAL STATEMENT SCHEDULE.
- Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the
consolidated financial statements or the notes thereto.
3. LIST OF EXHIBITS.
Exhibit
Number Description of Exhibit
------ ----------------------
3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Amended and Restated By-Laws of the Registrant.
4.1* Specimen Stock Certificate.
10.1* Amended and Restated 1991 Stock Incentive Plan of the Registrant.
10.2* Amended and Restated 1994 Director Option Plan of the Registrant.
10.3* 1995 Employee Stock Purchase Plan of the Registrant.
10.4* Sublease for 5 Forbes Road, Second Floor, Lexington, MA, dated as of May 1,
1991 between the Registrant and Unitrode Corporation.
10.5* Lease for 5 Forbes Road, First Floor, Lexington, MA, dated as of June 22, 1993
between the Registrant and the Trustees of Lexington Development Company
Trust.
10.6* First Amendment to Lease for 5 Forbes Road,
Lexington, MA, dated as of December 20, 1994 between
the Registrant and the Trustees of Lexington
Development Company Trust.
10.7* Unit Purchase Agreement, dated May 22, 1992 between the Registrant and
Edward Botwinick.
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10.8* Series B Convertible Preferred Stock Agreement dated as of August
10, 1992 and October 29, 1992 between the Registrant and the purchasers named
therein.
10.9* Series C Convertible Preferred Stock Agreement dated as of March 28, 1994,
May 16, 1994, and November 9, 1994 between the Registrant and the purchasers named
therein.
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.
10.13* Purchase and OEM License Agreement dated January 8, 1993 between
the Registrant and Compression Labs, Inc.
10.14* WorldWorx Personal Conferencing Service Multipoint Control Unit Agreement
dated February 15, 1995 between the Registrant and AT&T Corp.
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.
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.
13.1 Financial Section of the 1997 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
27.1996 1996 Financial Data Schedule (Restated)
(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 May 13, 1997.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VIDEOSERVER, INC.
/s/ Robert L. Castle
--------------------------------------
Robert L. Castle
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on its behalf of the registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Robert L. Castle President, Chief Executive Officer, March 27, 1998
- -------------------------------------- (Principal Executive Officer),
Robert L. Castle and Director
/s/ Khoa D. Nguyen Executive Vice President and March 27, 1998
- -------------------------------------- Chief Operating Officer, and Director
Khoa D. Nguyen
/s/ Stephen J. Nill Vice President and March 27, 1998
- -------------------------------------- Chief Financial Officer
Stephen J. Nill (Principal Financial
and Accounting Officer)
/s/ Paul J. Ferri Director March 27, 1998
- --------------------------------------
Paul J. Ferri
/s/ William E. Foster Director March 27, 1998
- --------------------------------------
William E. Foster
/s/ Steven C. Walske Director March 27, 1998
- --------------------------------------
Steven C. Walske
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VIDEOSERVER, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A - Description Column B Column C - Additions Column D Column E
- ---------------------- -------------- -------------------- --------------- ---------------
Deductions -
Balance At Charged to Charged to Uncollectible Balance at
Beginning Of Costs and Other Accounts End of
Allowance for Doubtful Accounts Period Expenses Accounts Written Off Period
- ------------------------------------ -------------- --------------- --------------- --------------- ---------------
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
Year Ended December 31, 1995 118,509 531,804 - - 650,313
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