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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27978
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POLYCOM, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3128324
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1565 Barber Lane, Milpitas, California 95035
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 474-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0005 PAR VALUE, PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicated by a 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 the voting stock held by non-affiliates
of the Registrant was approximately $2,972,896,788 as of February 29, 2000.
Shares of Common Stock held by each executive officer and director and by each
person who beneficially owns more than 5% of the outstanding Common Stock have
been excluded in that such persons may under certain circumstances be deemed to
be affiliates. This determination of executive officer or affiliate status is
not necessarily a conclusive determination for other purposes.
35,167,842 shares of the Registrant's $0.0005 par value Common Stock
were outstanding as of February 29, 1999.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Proxy Statement for the 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III. Such Proxy
Statement will be filed within 120 days of the fiscal year covered by this
Annual Report on Form 10-K.
ITEM 1. BUSINESS
Polycom, Inc. develops, manufactures and markets a full range of
high-quality, media-rich communication tools and network solutions. Our
broadband communication solutions enable business users to immediately realize
the benefits of video, voice and data over rapidly growing converged networks.
We are the leading videoconferencing and voice conferencing product provider and
have recently entered the DSL access market, particularly in the area of
integrated voice appliances and broadband access devices.
In the video communications market, we offer various videoconferencing
end-points and media servers which facilitate data communications. Our video end
point products are anchored by the ViewStation product family which provides
high-quality, low-cost, easy-to-use, group videoconferencing systems that
utilize advanced video and audio compression technologies along with
Internet/Web-based features. We began shipping our first video end point product
in February 1998. Our media server products include streaming servers, such as
the StreamStation, webconferencing servers, and MeetingSite 5000 which provides
for large multipoint videoconference calls.
With our SoundStation products, we are the leading provider of voice
communications equipment designed for group use. The SoundStation is a
high-quality, full-duplex, easy-to-use voice communications solution designed to
operate with local telephone systems throughout the world. Our technologies
permit the SoundStation products to achieve voice communications quality that
approaches handset communications quality. The complete voice conferencing
equipment product line, including the SoundStation, began shipping in late 1992
and through December 31, 1999, approximately 500,000 systems have shipped.
In December 1999, we acquired Atlas Communication Engines, an OEM
supplier of Integrated Access Devices (IADs) and an emerging provider of
data-only Digital Subscriber Line (DSL) routers. Under the terms of the
agreement, we exchanged approximately 1.3 million shares of our common stock for
all outstanding shares of Atlas, and we assumed all outstanding Atlas stock
options of approximately 0.5 million shares. The value of the transaction was
approximately $110 million, and was accounted for as a pooling of interests.
By leveraging Atlas' early leadership position in IADs and our
leadership position in multimedia communications tools, this acquisition enables
us to create a uniquely differentiated product line of IADs and DSL routers that
provide video, voice, and data over the rapidly-growing DSL network. Through
this acquisition, we will now provide equipment for the emerging market for
high-speed connectivity by delivering a more complete DSL solution to small and
medium sized businesses around the globe.
We sell our products globally through a large number of resellers and
OEMs. We have marketing and sales and partnering relationships with Lucent
Technologies, Cisco Systems, Nortel, MCI Worldcom, Inc., Southwestern Bell,
Ameritech, Ingram Micro, British Telecom, Audeo Systems LTD, Siemens, Sprint,
Computer 2000, SKC Communications, GBH Distributing, All Communications, Target
Distributing, Jetstream Communications, Adcom, Inc., France Telecom, Office
Depot, Unitel and Hello Direct, which collectively represented approximately 52%
of our net revenues in 1999.
Polycom was incorporated in December 1990 in Delaware and has thirteen
wholly owned subsidiaries located throughout the world. Our principal executive
offices are located at 1565 Barber Lane, Milpitas, California 95035, and our
telephone number at this location is (408) 474-2000.
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INDUSTRY BACKGROUND
The communications industry has experienced substantial growth in
recent years. Voice communications have expanded with the proliferation of
cellular phones and voice mail and the emergence of high-speed switching
technologies, while the data communications infrastructure has been widely
expanded through the growing use of corporate intranets and the public internet.
One of the fastest growing segments of the communications market is equipment
and services for broadband communications, which includes ISP access, voice and
video communications. These markets are being enabled by the evolution of the
shift from traditional circuit-switched networks to the broadband IP and ATM
infrastructures.
Numerous factors are driving the growth of the communications
market, including the development of a global economy, the
internationalization of business organizations, the development of "extended
enterprises" of companies and their suppliers, customers and other business
partners and the increasing corporate emphasis on team projects and group and
interoffice communication. As a result, tools such as voice mail, e-mail, fax
and the internet that allow workers to communicate more effectively and
facilitate business interactions have become vital to improving productivity
in most organizations. To enhance the real-time exchange of information when
face-to-face meetings are not possible or practical, companies are
increasingly seeking advanced communications solutions to facilitate meetings
at a distance.
Video communications enhance remote meetings by permitting groups in
disparate locations to see each other and make reactions and body language
visible. Video communication is, therefore, the ideal communications tool for
the relationship building aspect of a remote meeting. The first video
communication products were introduced in the late 1970's. Early video
communication products were costly and usually required dedicated transmission
facilities, specially trained operators, and specialized rooms. Although there
was broad interest in video communications as a means of eliminating travel time
and expenses, most potential users could not justify the high cost of investing
in video communications technology given the level of quality and performance of
the products at that time. However, improved technology, implementation of
industry standards, lower costs, and greater connectivity and greater
availability of broadband technologies have improved the quality and
price/performance relationship of video communications and driven its
evolutionary growth.
The video communications market has evolved into two distinct segments,
group systems and desktop or personal systems. Historically, the group segment
has been divided into large and small group segments. However, with the advent
of a new generation of high performance set-top products this distinction is
blurring and the group system category is being segmented into pricing and
feature bands. The new generation of set-tops typically are priced from about
$3,000 - $4,000 for an entry level product to around $10,000 - $19,000 for
feature rich, high-bandwidth systems designed for large conference rooms or for
use in multi-point calls. The desktop or personal system market segment is
characterized by products designed for one-to-one communication and also
benefits from the availability of broadband in the enterprise. The desktop
systems are typically PC-based and require a hardware and software component to
be added to a personal computer. Personal video communications products
currently range in price from $500 - $1,500. In addition, streaming video is
becoming increasingly necessary to provide real-time and on-demand video
participation in a meeting or webcast. These streaming servers and other
webconferencing devices that provide for the sharing of graphics or other
detailed visual data are just beginning to evolve to fulfill this new demand and
typically sell for $4,000 - $20,000, depending on functionality and scalability.
Voice communication is the essential component of all discussions and
meetings. In the voiceconferencing segment of this market, bridging services
provided by AT&T, MCI Worldcom, Sprint and other carriers have increased demand
for high-quality voiceconferencing equipment that allow both parties to talk and
be heard simultaneously (full duplex) in an easy to install and use network
appliance. These products, designed for group use, sell for $500 - $3,000, while
such products designed for individual use sell for $200 - $400.
Broadband access is a rapidly emerging market as small to mid-sized
businesses, large enterprises, and telecommuters seek ISP access and voice and
video communications through one, convenient transport. This has created the
demand for both data-only routers and for integrated access devices that provide
voice and data over a single DSL or other broadband connection. In addition,
this market is already beginning to seek a solution that would enable video
devices to communicate over this same access point. These network access devices
typically sell for a few hundred to a few thousand dollars, depending on options
and scalability.
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THE POLYCOM SOLUTION
Polycom's integrated communication solutions enable business users to
immediately realize the benefits of video, voice and data over rapidly growing
converged and broadband networks. With our wide array of video communications,
voice communications and network access products, we offer customers numerous
high-quality, low-cost solutions to their media-rich and broadband communication
needs.
Our video communication products include group videoconferencing and
media servers. Our ViewStation group and videoconferencing systems deliver the
performance and features of a high-end room video communications system, but at
a fraction of the cost. Distinctively easy to set up and use, the ViewStation
product line offers high quality audio and video technology, embedded Web based
features, an integrated presentation system, a voice-tracking camera, and a
variety of other features in H.323 or H.320 networks. In addition, an "MP"
version of the product is available that provides up to four locations to
participate in a multi-point videoconference call. Using a unique embedded
system architecture, we are delivering a new generation of high performance,
affordable systems that we believe will radically shift the way customers view
video communications.
The media server product family consists of the StreamStation,
WebStation, ShowStation IP and MeetingSite 5000. The StreamStation, introduced
in May 1999, is the industry's only streaming "appliance" designed to make live
or on-demand webcast easy and affordable for business users. It provides an easy
and affordable way to view training sessions or meetings utilizing streaming
media technology from Microsoft or RealNetworks, as either a live webcast or for
video on-demand. With our WebStation system, introduced in December 1998,
remote-meeting participants anywhere in the world can join a meeting by simply
browsing the Web with any Java-enabled Web browser, or using any fully T.120
compatible data communication system. The ShowStation IP provides a
cost-effective method for two or more groups or individuals that are separated
by a distance to view, edit and annotate paper and electronic documents and data
in real-time over the internet or standard telephone lines. Polycom's
MeetingSite 5000 was announced in April 1998 and is an OEM version of the Lucent
Technologies' multipoint conferencing unit product (MCU). The MeetingSite 5000
provides connectability for large multipoint videoconference calls.
Our voice communication product line, containing a wide range of
SoundStation and SoundPoint products, is a family of systems that provide near
handset quality communications. SoundStation products are easy to use, and our
advanced acoustic technologies minimize background echoes, word clipping and
distortion. Users can engage in natural, free-flowing discussions without having
to shout to be heard or strain to hear what others are saying. The SoundStation
is configurable and has been approved for use with the local telephone systems
in more than 30 countries. Additionally, the SoundPoint Pro, introduced in 1998,
brings the same quality of conferencing to the desktop with the full
functionality of a business phone.
Polycom's new network access NetEngine products consist of the
NetEngine 3300R SDSL Router, the NetEngine 3300D SDSL DSU and the NetEngine 8000
series of products. This product family is intended to provide integrated
broadband voice and data services for small to mid-sized businesses, branch
offices of large enterprises and telecommuters. This enhanced bandwidth is
intended for ISP access for voice and video traffic as well as potentially
enabling a broader deployment of Polycom's voice and video products.
PRODUCTS
VIDEO COMMUNICATIONS
Polycom's video endpoint products are designed to be low-cost,
high-quality, and web-enabled, with list prices below most competitive video
communication products currently in the market.
VIDEO ENDPOINTS:
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VIEWSTATION128: The ViewStation 128 features outstanding audio and video
quality, embedded web capabilities, a voice tracking camera, automatic ISDN
configuration on set-up and a robust set of Web based management, diagnostic and
presentation tools. In addition, it can be upgraded to support 512 kbps ISDN and
multipoint capabilities. The ViewStation 128 has a U.S. list price of $5,999.
VIEWSTATION 512. The ViewStation 512 is a high performance product which
operates at up to 512Kbps or four ISDN lines which are multiplexed together at
up to 30 frames per second giving full motion video as well as increased quality
of audio using one of the standards based wide band algorithms. The ViewStation
512 has a U.S. list price of $8,999.
VIEWSTATION V.35. The ViewStation V.35 supports up to 768Kbps or half the
bandwidth of a T1 line through the V.35 physical interface, a universal serial
connector used to connect to a variety of brands of multiplexers and satellite
connections. It has a U.S. list price of $9,999.
VIEWSTATION MP. The ViewStation MP incorporates the ability to make an ad-hoc
multi-way video call as conveniently as pressing the "conference" button on any
office PBX phone. The ViewStation MP can make up to a 4 way call at single ISDN
line rates of 128KBps or a three way call using 2 ISDN lines for each of
256Kbps. The ViewStation MP has a U.S. list price of $11,999.
VIEWSTATION FX. The newest ViewStation extends the standard of high quality
video communications with the 60 fields feature that delivers TV quality video.
The ViewStation FX has embedded multipoint capabilities of up to a 4-way call at
384Kbps or a 3 way call at 512kbps. The ViewStation FX has a U.S. list price of
$16,999 to $19,499.
VS4000. The VS4000 is a cameraless codec that is designed for custom integration
in boardrooms and auditoriums that require the highest video and audio quality.
It offers the same features and functionality as the ViewStation FX but is
packaged in a rack mount configuration. The VS4000 has a U.S. list price of
$16,999 to $18,999.
VIEWSTATION SP. ViewStation SP is the entry level point solution that offers
business quality video and audio capabilities, embedded web capabilities and
presentation system. Additionally it contains a voice tracking camera, automatic
network configuration and web based management tools. It has a U.S. list price
ranging from $3,999 to $4,199.
The ViewStation product family delivers the most powerful video
communication group and desktop systems in a convenient footprint about the size
of a sheet of notebook paper. The ViewStation delivers high-quality images on
small or large display monitors and is a self-contained unit that sits atop an
S-Video or composite television monitor. The ViewStation is one of the first
systems to implement the H.263 and H.263+ video compression algorithm that
delivers enhanced video performance. Using a unique, high-performance low-delay
codec architecture, the ViewStation has a short delay and is fully interoperable
with legacy video communication systems using the H.320 and H323 standards.
ViewStation supports full dual monitor functionality as a standard feature, as
well as VCR playback/record and a document or second room camera. ViewStation
also supports high resolution Annex D slide send and receive and high resolution
SXGA graphics on the newest products.
Integrating our market-leading Acoustic Clarity Technology(TM), the
ViewStation provides full-duplex, digital audio with noise suppression and echo
cancellation which adapts almost instantly to the changing characteristics of
the conference room to deliver crystal-clear audio. In addition, the ViewStation
supports the G.711, G.722 and G.728 audio standards. The custom digital tabletop
microphone pod uses the latest hypercardioid microphone technology and is able
to be daisy-chained to provide superb audio coverage for even the largest
conference rooms.
MEDIA SERVERS:
Our media server products are designed to allow for the real-time
exchange of data and other images between groups or individuals engaged in an
audioconference or videoconference. By integrating voice or video communications
with data communications, our products are designed to significantly enhance the
productivity of workers, allowing them to conduct meetings remotely with a level
of data exchange that we believe has traditionally been possible only through a
personal meeting.
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STREAMSTATION. StreamStation is the first meeting appliance that enables
streaming of real-time or recorded video meetings to any Web browser.
StreamStation provides an easy-to-use solution for holding live webcast and
creating on-demand World Wide Web streaming content. StreamStation enables users
to easily conduct ad-hoc streaming events or meetings, and to create rich
multimedia presentations for on-demand viewing. With the press of a button, any
user can create streaming media content that can be viewed with either the
Microsoft Windows(R) Media Player or RealNetworks(R) RealPlayer-TM- G2.
StreamStation also adds powerful new streaming media functionality to
the Polycom ViewStation products. This complete solution provides the easiest
method for participants to view video, hear audio, and see presentation content
over the World Wide Web. Our SoundStation products can also be used with the
StreamStation to stream audioconferences and presentation content from meetings
over the Web. The Polycom StreamStation has a U.S. list price of $8,999.
WEBSTATION. Designed to enhance full participation and collaboration in group
meetings, the WebStation provides an affordable and easy way to present and
collaborate with both local and remote group meeting participants via the
Web. With a simple one-cable connection to any LCD projector and a standard
local area network connection, the Polycom WebStation delivers a full range
of features that enable an LCD projector to communicate over the Internet for
sharing documents and presentations with both local and remote meeting
locations. Presenters have several options for bringing presentation
materials into a meeting using WebStation. Because WebStation integrates the
full Microsoft(R) Office(R) suite, presenters can send PowerPoint-TM-,
Word-TM-, or Excel-TM- files directly to WebStation from their desktop
computer before the meeting, and then attend the meeting where the
presentation is ready and waiting. Presenters also have the option of
bringing Microsoft Office files into the meeting on a diskette and then load
them using WebStation's built-in floppy diskette drive. With our WebStation
system, remote-meeting participants anywhere in the world can join a meeting
by simply browsing the Web with any Java-enabled Web browser, or using any
fully T.120 compatible data communication system. Remote participants can
then collaborate in real-time and even share presentations or documents with
other meeting participants. The Polycom WebStation presentation and meeting
system has a U.S. list price of $2,999.
SHOWSTATION IP. ShowStation IP, Polycom's first internet data communication
product, is a fully integrated, easy-to-use unit that can exchange and project
data, documents and images, using corporate LAN connections or ordinary
telephone lines, between ShowStation IP's. In addition, the ShowStation IP can
exchange data, documents and images using the World Wide Web with any personal
computer that has a Java-enabled browser or T.120 data communication protocol
software, such as the DataBeam software that is distributed by Polycom. Working
in tandem with the SoundStation or ViewStation, ShowStation IP provides a
cost-effective method for two or more groups or individuals that are separated
by a distance to simultaneously view, discuss, edit and annotate paper or
electronic documents and data. Multipoint dataconferences are possible with the
LAN/Multipoint option, which allows one ShowStation IP to connect to as many as
nine other ShowStation IPs and 25 browsers simultaneously. ShowStation IP
incorporates advanced imaging, data compression and communication technology
into a compact and easy-to-use unit that includes pen-based editing capabilities
ShowStation IP captures an image of the original document using an
integrated camera or receives data from a personal computer and displays a
high-resolution image on a flat-panel LCD display. Light is then projected
through the LCD panel and onto a screen for local viewing, without having to dim
conference room lights. Simultaneously, the image is compressed and transmitted
over the Internet using the T.120 open standard protocol to other T.120
compliant participants or using HTML to Web-based browser participants where the
image is decompressed and displayed. The images can then be annotated or
highlighted in real-time by the transmitting person or any of the T.120
compliant participants using an integrated computer pen or through mouse-based
editing from remote personal computers and saved in memory for review and
printing. Pen or mouse annotations can be seen simultaneously by all parties
participating in the dataconferences and each ShowStation IP can print the image
and all annotations on a printer connected via a parallel cable.
The North American list price for the ShowStation IP product ranges
from $9,999 to $12,999 depending on options.
MEETINGSITE 5000. The MeetingSite 5000 product, a MCU product, is a Lucent
Technologies manufactured H.320-based voice, data and video communication bridge
that allows up to 16 users to have worldwide, multi-party face-to-face
conferences. The MCU includes industry-leading features such as Continuous
Presence Plus, a capability that shows
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multiple sites on the same screen, and SpeedMatching, which allows endpoints
transporting video at different rates of speed to carry on a video conference.
The MCU supports the emerging H.263 video standard and incorporates the H.320
Translator, allowing H.263 endpoints to maintain their improved quality while
communicating with endpoints using the existing H.261 standard. The MCU is used
by major service providers, government organizations and commercial customers
throughout the world. This product is custom configured for the end-user and has
a base list price of $24,950.
VOICE COMMUNICATIONS
Polycom's voice communication products are designed to overcome the
poor audio problems associated with traditional speaker phones by providing high
quality, full-duplex, easy-to-use audio equipment.
SOUNDSTATION. SoundStation is a high quality, digital, full-duplex voice
communication system that operates over ordinary telephone lines. It provides
clear, two-way voice communication with no echoes, clipping or distortion. Users
can engage in natural, free-flowing discussions without having to shout to be
heard or strain to hear what others are saying. SoundStation's three built-in
directional microphones pick up sound from around the room while limiting
reverberation. The unit's central sorbathane-encased, acoustically-suspended
speaker and advanced digital signal processing ("DSP") and integrated software
technology eliminate acoustic feedback while broadcasting sound at sufficient
volume and clarity to be heard up to 30 feet away.
SoundStation has a distinctive design that Polycom believes is widely
associated with high-quality voice communication. SoundStation is connected via
a single cord to a power transformer that plugs into a standard electrical
outlet and a telephone cord that connects to a standard telephone outlet. Due to
this inherent simplicity, customers are able to self-install and immediately
begin using the SoundStation. The U.S.
list price for SoundStation is $499.
SOUNDSTATION EX. SoundStation EX contains all of the technology and physical
elements of the SoundStation but also offers two connectors for additional
microphones. The microphones can extend up to 25 feet in each direction allowing
the SoundStation EX to accommodate larger conference rooms. Each extended
microphone also contains a mute button and LED mute indicator. An optional
wireless lapel microphone is available for the SoundStation EX that provides
flexibility for stand-up presenters. The U.S. list price for SoundStation EX
ranges from $799 to $1,299, depending on options.
Polycom also manufactures private label versions of its SoundStation
products for Lucent Technologies, Nortel and British Telecom pursuant to OEM
relationships.
SOUNDSTATION PREMIER. Incorporating the latest in DSP technology, the
SoundStation Premier is designed for larger, more demanding environments and
those requiring higher performance. Using a unique active microphone steering
algorithm in conjunction with multiple aligned microphone patterns, the
SoundStation Premier connects every conference participant more clearly and with
less room reverberation than older systems. With additions including an LCD
display, caller ID, and infrared remote control, the SoundStation Premier
provides a complete full duplex business conference phone solution. The U.S.
list price ranges from $999 to $1,899, depending on options.
SOUNDSTATION PREMIER EX. SoundStation Premier EX contains all of the technology
and physical elements of the SoundStation Premier but also offers two connectors
for additional microphones. The microphones can extend up to 25 feet in each
direction allowing the SoundStation Premier EX to accommodate larger conference
rooms. Each extended microphone also contains a mute button and LED mute
indicator. An optional wireless lapel microphone is available for the
SoundStation Premier EX that provides flexibility for stand-up presenters. With
the SoundStation Premier Satellite, up to 4 additional microphones, a separate
speaker module or spread spectrum wireless microphones are available to cover
larger and more complex rooms. The U.S. list price for ranges from $999 to
$2,199, depending on configuration and options.
SOUNDPOINT AND SOUNDPOINT PC. SoundPoint, Polycom's first desktop conference
phone adjunct product, is designed for the office environment. The SoundPoint
system is connected between the telephone line and an analog telephone set, and
provides near-handset quality full-duplex conversations. A special version of
this SoundPoint is manufactured for direct communication to Lucent's Definity
telephone sets, pursuant to the Lucent OEM relationship. The SoundPoint PC
system is similar to the basic SoundPoint system, but is designed for desktop
video communications and Internet telephony
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applications. The SoundPoint PC is connected to a personal computer video codec
or sound card through a standard set of audio jacks, and includes a handset when
more privacy is desired. The U.S. list price ranges from $99 to $299.
SOUNDPOINT PRO. SoundPoint Pro brings Polycom's high-quality hands-free voice
communication to telecommuters, home offices, and small businesses, and combines
professional-quality voice communication and elegant styling, in a fully
featured business telephone. Available in 2-line or 3-line models, users can
conduct conference calls with up to three other remote sites at the touch of a
button, and without using outside bridging services. Features also includes
20-number programmable speed dial, integrated primary Caller ID as well as
Caller ID for Call Waiting, and 99 number caller history. The U.S. list price
ranges from $249 to $299.
NETWORK ACCESS PRODUCTS
The NetEngine product line enables integrated broadband voice and data services
for small to medium-sized business customers.
NETENGINE 3300R SDSL ROUTER. The NetEngine 3300R SDSL Router is designed to
provide access to emerging high-speed SDSL data services. For new SDSL service
customers who do not yet have a router, the NetEngine 3300R provides both
transparent bridging and full IP routing capabilities. Its interoperability with
industry-leading DSLAM manufacturers, NAT, DHCP, and simple configurability make
it the ideal choice for small and medium businesses and branch office
connectivity. Its U.S. list price is $499.
NETENGINE 3300D SDSL DSU. The NetEngine 3300D SDSL DSU allows users to change to
SDSL technology without compromising CPE investments. Its support for Nx64 Kbps
data rates up to T1 and E1 make it an ideal network access point and affords
seamless migration from traditional T1 or E1 Leased Line or Frame Relay services
to SDSL. It's U.S. list price is $599.
NETENGINE 8000 MULTI-SERVICE ACCESS DEVICE. The NetEngine 8000 Multi-Service
Access Device is a flexible broadband voice and data access product with a four
slot modular architecture that provides a wide range of connectivity options.
Its ADSL, SDSL, ATM, T1/E1 and POTS modules enable the NetEngine 8000 to provide
access for small and medium-sized enterprises and branch offices into a broad
range of existing and emerging high-speed public networks. Its wide variety of
uses, including an ATM access device, multiport DSL router and IAD among others,
make the NetEngine 8000 one of the most advanced access products available. The
U.S. list price starts at $1,729.
Polycom also manufactures private label versions of some of its NetEngine
products for Jetstream Communications.
TECHNOLOGY
We intend to continue to invest in and leverage our core technologies
to develop and market our network access and conferencing products and product
enhancements. Our core technologies include the following:
INTEGRATION IN NETWORK ACCESS. We actively invest in technologies that will
enhance the ability of users to integrate network and internet access with their
communication and conferencing requirements. We are pursuing the extension of
our IAD (Integrated Access Device), gateway, and router products with enhanced
performance and functionality.
NETWORK/INTERNET CONNECTIVITY. We continue to extend our teleconferencing
products to operate over local and extended networks utilizing standard
protocols, including H.323, LDAP, IEEE 802.3 10 and 100 Mbps networks, ATM,
frame relay, and TCP/IP. Within the next several years, industry analysts
believe that a significant percentage of business communication, video and voice
as well as data, will take place over packet-switched rather than
circuit-switched networks (i.e., internal and external networks rather than the
public telephone network). Some of the advantages to this approach are greater
bandwidth availability, lower transmission costs, expandability, and the ability
to operate by managing only one network instead of several.
STREAMING MEDIA. We have developed a set of core technologies for generating,
managing, distributing and archiving portable streamed full-content media
streams. These are initially incorporated in the StreamStation system, and
provide
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users the ability to easily enhance their communication abilities for training,
marketing, documenting, remote conferencing, and a variety of other uses.
WEB-BASED DATA COMMUNICATIONS. We are a leader in developing "push" technology
for sending HTML pages to Java-enabled Web browsers on demand, allowing the
secure participation of multiple sites in presentations and data conferences.
Polycom uses proprietary techniques to assure meeting security and to provide
for smooth presentation flow that is normally unaffected by limited network
bandwidth.
ACOUSTICS TECHNOLOGY. We are making a significant investment in further
exploration in acoustics and digital acoustic processing. With the recent
opening of our Advanced Research Laboratories in Massachusetts, we are both
extending the state-of-the-art in these critical areas, and creating a powerful
mechanism to facilitate the incorporation of these technologies into products of
all divisions.
INTERNETWORKING. With a variety of different network protocols in use today,
communication between one system and another can be complex and expensive. We
are investing in continued extension of our internetworking products, which
today have an ability to simply and efficiently link networks running different
protocols such as IP, Frame Relay, and ATM.
INTEGRATED VOICE AND DATA. We are increasing functionality and tailoring our
products for some of the most popular needs. Polycom's IAD's perform multiple
functions: they act as CPE voice gateways, working with the major voice gateway
manufacturers to provide low-cost access for multiple independent telephones in
a small or medium-sized business, as bridges, and as data routers. These
multiple data streams are then combined by the IAD into a single DSL line,
providing a very efficient means of connecting both voice and data to the
commercial network.
ACOUSTICS TECHNOLOGY. The design and interaction of transducers within a
full-duplex audio device significantly impacts the effectiveness of the digital
echo canceling systems and the resulting sound quality. Working with carefully
designed algorithms and electronics, we develop and design proprietary speaker
and microphone enclosure systems that are a critical part of high-clarity audio
communication systems.
CONFERENCING INTEGRATION AND MANAGEMENT. Our GMS (Global Management System) is a
versatile client/server system for meeting and device coordination and
management via integrated network control. This can improve the reliability and
accessibility of the systems, can help assure completeness and uniformity among
users, and is especially useful to corporate users and IT organizations.
VIDEO SYSTEM ARCHITECTURE. We continue to exploit the advantages of our
proprietary flexible ViewStation system architecture, which allows for a wide
range of very high performance but low cost video communication products. The
proprietary application-specific software developed for our systems addresses
the unique requirements of the various end-user conferencing markets as well as
international video telephony standards.
MULTIMEDIA TELECONFERENCING. We have developed a series of algorithms and
techniques to integrate video from multiple sources with electronic and physical
documents and wideband and narrowband audio to efficiently support conferences
from multiple sites. These methods include coordinated activities between the
ViewStation and WebStation products, allowing a conference to draw on the best
of both products in a single meeting setup.
DIGITAL ACOUSTIC PROCESSING. Traditional speakerphone architectures employ
simple back-and-forth switching to compensate for the feedback that often occurs
when microphones and speakers are located in close proximity. This can cause
numerous problems during the course of a natural conversation, such as words or
phrases being clipped off because both ends of the call were speaking
simultaneously. We have developed patented and proprietary techniques and
algorithms in our DSP software which solve these problems by creating accurate
simulations of how the sound waves reflect off the walls and obstructions in a
room and using these simulations to digitally extract the feedback before it
becomes a problem. By doing this, the instrument can allow both sides to talk at
the same time, restoring much of the "natural" feel to group telephone
conferences.
SALES AND DISTRIBUTION
9
We market our products primarily to businesses and organizations of all
sizes through a wide network of value-added resellers ("VARS"),
telecommunication equipment distributors, wireline equipment manufacturers,
telecommunication service providers, and retailers. We sell our products through
a group of approximately 242 resellers and partnering relationships, which
include Lucent Technologies, Cisco Systems, Nortel, MCI Worldcom, Inc.,
Southwestern Bell, Ameritech, Ingram Micro, British Telecom, Audeo Systems LTD,
Siemens, Sprint, SKC Communications, Jetstream Communications, GBH Distributing,
All Communications, Target Distributing, Adcom, Inc., France Telecom, Office
Depot, Unitel and Hello Direct. Many of these resellers sell a variety of
communication products and/or services and, with Polycom's products, offer a
complete product portfolio. To complement our sales efforts, we advertise in
trade and general business print media as well as participating in a wide array
of trade shows and public relations activities. We currently maintain North
American sales offices in the metropolitan areas of Boston, Austin, Chicago, San
Jose and Santa Barbara.
We have historically focused our international sales efforts in regions
of the world where we believe customers have begun to invest significantly in
conferencing equipment and services. These regions currently include Europe,
Japan, Australia, Singapore, China and parts of Southeast Asia. We intend to
significantly expand our international distribution network. The principal
international resellers of Polycom's products currently include British Telecom,
France Telecom, Unitel, Genedis, Eurodis Onboard, Computer 2000, Hibino
Corporation, PTT Telecom, Siemens, CHS Latin America, Adcom and Telenor.
Additionally, in 1999, we made additional investments in Europe and further
investment will be made in Europe in the year 2000. In addition, similar
investments will be made in Asia in the year 2000. We currently have sales
offices in the U. K., France, Germany, Norway, Hong Kong, Japan, China,
Australia and Singapore. If we are not successful in expanding internationally
or if the anticipated growth in Europe or Asia does not materialize, it could
harm our business.
We have established product distribution centers in the European and
Asian markets in order to better serve our international customers, which will
increase the costs associated with such international operations. International
sales are subject to a number of risks, including changes in foreign government
regulations and telecommunications standards, export license requirements,
tariffs and taxes, other trade barriers, fluctuations in currency exchange
rates, difficulty in collecting accounts receivable, difficulty in staffing and
managing foreign operations and political and economic instability. Sales to
international resellers are usually made in U.S. dollars in order to minimize
the risks associated with fluctuating foreign currency exchange rates. To date,
a substantial majority of our international sales have been denominated in U.S.
currency; however, we expect that in the future more international sales may be
denominated in local currencies. Declines in currency exchange rates, as
happened in the Asian market in late 1997, could cause our products to become
relatively more expensive to customers in a particular country, leading to a
reduction in sales or profitability in that country. In addition, the costs
associated with developing international sales may not be offset by increased
sales in the short term, or at all.
A majority of our revenues are from value-added resellers,
telecommunication equipment distributors, telecommunication service providers
and wireline equipment manufacturers. One customer, Lucent Technologies,
accounted for 11%, 11% and 10% of net revenues in 1999, 1998 and 1997,
respectively. On March 1, 2000, Lucent Technologies announced their intention to
spin off their PBX and LAN-based equipment business which will include Lucent's
conferencing and collaboration systems business. The effect of this spin-off on
Polycom is not known at this time, but if it significantly reduces the purchases
of equipment from us, it could harm our business. No other customer or reseller
accounted for more than 10% of our net revenues during these periods.
Value added resellers generally offer products of several different
companies, including products that compete with Polycom's products. Accordingly,
these resellers may give higher priority to products of other suppliers, thus
reducing their efforts to sell Polycom's products. Agreements with resellers may
be terminated at any time. A reduction in sales effort or termination of a
distribution relationship by one or more of our resellers could harm future
operating results. Use of resellers also entails the risk that resellers will
build up inventories in anticipation of a growth in sales. If such sales growth
does not occur as anticipated by these resellers, these resellers may
substantially decrease the amount of product ordered in subsequent quarters,
causing or contributing to fluctuations in our future operating results.
The conferencing and network access distribution industries have
historically been characterized by rapid change, including consolidations and
the emergence of alternative distribution channels. In addition, there is an
increasing number of companies competing for access to these channels. The
loss or
10
ineffectiveness of any of our major resellers could have a material adverse
effect on our operating results. For example, 3M Company was a distributor of
our video and data conferencing products until the second quarter of 1999. In
April 1999, 3M announced that they were exiting the businesses associated with
prior development and distribution agreements they had with Polycom. The loss of
this distribution resulted in a reduction in royalty revenue in 1999 when
compared to 1998. We cannot assure you that we will be able to successfully sell
our products through any new channels that we may be required to develop as a
result of changes in our reseller channels.
CUSTOMER SERVICE AND SUPPORT
We believe that service and support are critical components of customer
satisfaction. We maintain and support products sold directly by us to our North
American customers, while resellers maintain and provide technical support to
their end-user customers. Polycom operates a toll-free Technical Service Center
"hotline" to provide a full range of telephone support to its North American
resellers and to Polycom's end-user customers. If an issue cannot be resolved
remotely or through product repair and return, Polycom or its reseller may
dispatch a service engineer to the customer site. Internationally, customer
service is provided to the end-user by either Polycom or local resellers. In
1999, we contracted with Imation Corp. a worldwide provider of a variety of
products and services for the information and image management industry, to
provide on-site technical support and installation services for our conferencing
product lines.
We generally warrant our voice and video products for 12 months and
our network access products for 36 months. In 1999, our warranty expense
increased over 1998 and, due to uncertainties concerning the service and
support requirements of the NetEngine, ShowStation IP, StreamStation,
ViewStation and MCU products, we may experience higher warranty claims in the
future. We offer a variety of installation, maintenance and extended warranty
services that are fulfilled either directly by Polycom or by an authorized
reseller.
RESEARCH AND DEVELOPMENT
We believe that our future success depends in part on our ability to
continue to enhance existing products and to develop new products that maintain
technological competitiveness. Our current development efforts focus principally
on the video communications, network access, voice communications and data
communications businesses. In the video communication market, our ViewStation
product line is being enhanced to provide an even broader array of product
offerings, and extended to address related markets. Also, we are investing in
desktop video and video gateway and directory software, as well as enhancing our
web-based products. In the voice communication market, we are developing
products for related areas of the market, including proprietary interface and
IP-based systems, high-performance systems, and lower-end systems. In the
network access market, we are extending our product line and developing critical
new functions and capabilities in our products that can best exploit the shift
in the communication infrastructure to the IP network. We intend to expand upon
these new product platforms through the development of options, upgrades and
future product generations. However, we cannot assure you that these products
will be made commercially available as expected or otherwise on a timely and
cost-effective basis or that, if introduced, these products will achieve market
acceptance. Furthermore, we cannot assure you that these products will not be
rendered obsolete by changing technology or new product announcements by other
companies.
We believe that the structure of our development group, which combines
independent development teams with coordinated application of common
technologies and resources, represents a significant competitive advantage for
Polycom. Our product development staff includes product marketing personnel, in
order to maintain channel and customer input throughout the development process.
This team structure is the basis for an integrated process designed to enable us
to develop superior products with minimum time-to-market. Additionally, the
development staff focuses on our core technologies and outsources other
development tasks such as industrial design. This structure is designed to
enable us to devote our key resources to technological advancement in its
primary areas of business.
Research and development expenses were approximately $21.6 million,
$14.7 million and $17.0 million for the years ended 1999, 1998 and 1997,
respectively. We believe that significant investments in research and
development are required to remain competitive since technological
competitiveness is key to our future success. We intend to continue to make
substantial investments in product and technology development. Polycom also
intends to continue to participate in the development of various
teleconferencing industry standards, which are or may be incorporated into its
products.
11
The video communication, voice communication and network access markets
are subject to rapid technological change, frequent new product introductions
and enhancements, changes in end-user requirements and evolving industry
standards. Our ability to remain competitive in this market will depend in
significant part upon our ability to successfully develop, introduce and sell
new products and enhancements on a timely and cost-effective basis. Our success
in developing new and enhanced products depends upon a variety of factors
including new product selection, timely and efficient completion of product
design, timely and efficient implementation of manufacturing, assembly and test
processes, product performance at customer locations and development of
competitive products and enhancements by competitors. We are currently engaged
in the development of a number of new products and extensions of our network
access products such as IADs and routers, ViewStation, SoundStation,
SoundStation Premier, SoundPoint Pro and web-based product families, and we
expect to continue to invest significant resources in new product development
and enhancements to current and future products. In addition, our introduction
of new products could result in higher warranty claims, product returns and
manufacturing, sales and marketing and other expenses that could harm our
business. Our business may be harmed if we are unable to introduce new products
or enhancements on a timely and cost-effective basis that maintain or enhance
our competitive position and contribute significantly to net revenues. In the
past, we have experienced delays from time to time in the introduction and in
the continued production of certain of our products. For example, the
introduction of ShowStation was delayed by approximately eighteen months from
the originally anticipated date of introduction because of unforeseen technical
challenges and difficulties in building core technologies, and for approximately
six weeks in the first quarter of 1996 shipments were interrupted in order to
correct software and other technical problems identified by initial customers.
In addition, new product or technology introductions by our competitors could
cause a decline in sales or loss of market acceptance of our existing products
or new products. Further, from time to time, we may announce new products,
capabilities or technologies that have the potential to replace our existing
products or future products. Announcements of product enhancements or new
product offerings by us or our competitors could cause customers to defer or
stop purchasing our products.
COMPETITION
In the video communication market, our major competitors include
PictureTel, Tandberg, Sony, VCON and VTEL. Many of these companies have
substantially greater financial resources and production, marketing, engineering
and other capabilities than Polycom with which to develop, manufacture, market
and sell their products. In addition, with advances in telecommunications
standards, connectivity, and video processing technology and the increasing
market acceptance of video communications, other established or new companies
may develop or market products competitive with our video communication
products. In addition, our video streaming products employ technology from
Microsoft and Real Networks who both have solutions competitive with our
products.
The market for voice communication, particularly voiceconferencing, is
highly competitive and subject to rapid technological change, regulatory
developments and emerging industry standards. We expect competition to persist
and increase in the future. At the current time, we are the market leader in
voiceconferencing based principally on product quality, breadth of product line,
and ease of use. In the voice communication market segment, our major
competitors include ClearOne, SoundGear, NEC, Gentner and other companies that
offer lower cost full duplex speakerphones such as Lucent Technologies (one of
our resellers) and Hello Direct (one of our resellers). Hello Direct offers a
competitive product under the Hello Direct name through an OEM relationship with
Gentner. Most of these companies have substantially greater financial resources
and production, marketing, engineering and other capabilities than Polycom with
which to develop, manufacture, market and sell their products. In addition, all
major telephony manufacturers produce hands-free speakerphone units that are a
lower cost, lower quality alternative to our voice communication products.
Our network access products have significant competition from Efficient
Networks, Netopia, 3Com (a customer of Polycom) and Cisco Systems (a strategic
partner of Polycom).
We believe our ability to compete depends on such factors as
reputation, quality, customer support and service, price, features and functions
of products, ease of use, reliability, and marketing and distribution channels.
We believe we compete favorably with respect to each of these factors. However,
we cannot assure you that we will be able to compete successfully in the future
with respect to any of the above factors.
12
We expect our competitors to continue to improve the performance of
their current products and to introduce new products or new technologies that
provide improved performance characteristics. New product introductions by our
competitors could cause a significant decline in sales or loss of market
acceptance of our existing products and future products. We believe that the
possible effects from ongoing competition may be the reduction in the prices of
our products and our competitors' products or the introduction of additional
lower priced competitive products. We expect this increased competitive pressure
may lead to intensified price-based competition, resulting in lower prices and
gross margins which would materially adversely affect our business. We cannot
assure you that we will be able to compete successfully.
MANUFACTURING
Our manufacturing operations consist primarily of materials planning
and procurement, test development and manufacturing engineering. We subcontract
the manufacture of most of our products to Celestica, Inc., a global third-party
contract manufacturer. In addition, Polycom and Celestica are working to
transition the manufacture our network access product to Celestica. We use
Celestica's Thailand facilities and should there be any disruption in supply due
to economic or political difficulties in Thailand and Asia, such disruption
would harm our business. Celestica is ISO 9002 approved and has British
Approvals Board for Telecommunications ("BABT") registration. Our products are
quality tested by automated test equipment with final functional tests performed
on equipment and with processes developed or approved by us. We manufacture our
SoundPoint product through the Shenzen facility of Jabil Circuits and purchase
our web-based products from Gateway. Our MCU product line is an OEM version of
the Lucent Technologies multipoint conferencing product, which is manufactured
by Lucent Technologies in Denver, Colorado. However, as Lucent Technologies is
spinning off components of its equipment business including the conferencing and
collaboration systems business, and the effect of this spin-off on us is not
known yet.
Polycom is located in the San Francisco Bay Area, which has in the past
and may in the future experience significant, destructive seismic activity that
could damage, destroy or disrupt our facilities or operations. We maintain no
earthquake insurance for damages or business interruptions. In the event that
Polycom or its contract manufacturers were to experience financial or
operational difficulties that are not covered by insurance, it would adversely
affect our results of operations until we could establish sufficient
manufacturing supply through an alternative source, and the effect of such
reduction or interruption in supply on results of operations would be material.
We believe that there are a number of alternative contract manufacturers that
could produce our products, but in the event of a reduction or interruption of
supply, for any reason, it would take a significant period of time to qualify an
alternative subcontractor and commence manufacturing, which would harm our
business.
Certain key components used in our products are currently available
from only one source and others are available from only a limited number of
sources, including certain key integrated circuits and optical elements. We also
obtain certain plastic housings, metal castings and other components from
suppliers located in Singapore and China, and any political or economic
instability in that region in the future, or future import restrictions, may
cause delays or an inability to obtain such supplies. We have no supply
commitments from our suppliers and generally purchase components on a purchase
order basis either directly or through its contract manufacturers. Polycom and
Polycom's contract manufacturers have had limited experience purchasing volume
supplies of various components for our product lines and some of the components
included in these products, such as microprocessors and other integrated
circuits, have from time to time been subject to limited allocations by
suppliers. In the event that we or our contract manufacturers were unable to
obtain sufficient supplies of components or develop alternative sources as
needed, our operating results could be materially adversely affected. Moreover,
operating results could be materially adversely affected by receipt of a
significant number of defective components, an increase in component prices or
our inability to obtain lower component prices in response to competitive price
reductions. Additionally, our video communication products are designed based on
certain integrated circuits produced by Philips and certain video equipment
produced by Sony. If we could no longer obtain such integrated circuits or video
equipment, we would incur substantial expense and take substantial time in
redesigning our products to be compatible with components from other
manufacturers which would harm our business. Additionally, both Sony and Philips
are competitors of Polycom in the video communication market, which may
adversely affect our ability to obtain necessary components. The failure to
obtain adequate supplies could prevent or delay product shipments, which could
harm our business.
13
We are also reliant on the introduction schedules of certain key
components in the development or launch of new products. Any delays in the
availability of these new, key components could harm our business.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
While we rely on a combination of patent, copyright, trademark and
trade secret laws and confidentiality procedures to protect our proprietary
rights, we believe that factors such as technological and creative skills of our
personnel, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are more essential to establishing
and maintaining a technology leadership position. We currently has sixteen
United States patents issued covering the SoundStation, ShowStation and
ViewStation designs, some aspects of the ViewStation and ShowStation; and
certain acoustic technology that expire in 2007, 2010, 2011, 2012, 2013, 2014,
2015, 2016, and 2017. In addition, we currently have thirteen United States
patents pending, thirty-one foreign patents issued, which expire in 2001, 2002,
2003, 2007, 2008, 2009, 2010, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2021 and
2022, and eleven foreign patent applications pending. Polycom, Polyspan,
SoundStation Premier, ShowStation, SoundPoint, SoundStation and Polycom logos
are registered trademarks of Polycom, and ViewStation, StreamStation,
WebStation, NetEngine, MeetingSite, ViaVideo Communications, SoundStation
Premier Satellite, IPrioirty and Clarity by Polycom are trademarks of Polycom,
in the U.S. and various countries. According to federal and state law, Polycom's
trademark protection will continue for as long as we continue to use our
trademarks in connection with the products and services of Polycom. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which only afford limited protection. Others may
independently develop similar proprietary information and techniques or gain
access to Polycom's intellectual property rights or disclose such technology. In
addition, we cannot assure you that any patent or registered trademark owned by
Polycom will not be invalidated, circumvented or challenged in the U.S. or
foreign countries, that the rights granted thereunder will provide competitive
advantages to us or that any of our pending or future patent applications will
be issued with the scope of the claims sought by Polycom, if at all.
Furthermore, others may develop similar products, duplicate our products or
design around the patents owned by Polycom. In addition, foreign intellectual
property laws may not protect our intellectual property rights.
Litigation may be necessary to enforce our patents and other
intellectual property rights, to protect our trade secrets, to determine the
validity of and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business. We cannot assure you that infringement or invalidity
claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future or that such assertions,
if proven to be true, will not harm our business.
In March 2000, Polycom and VTEL Corporation ("VTEL") entered into a
cross license agreement pursuant to which we obtained non-exclusive license
rights under three VTEL patents, and VTEL obtained non-exclusive license rights
to a patent for our videoconferencing technology.
DEPENDENCE ON THIRD-PARTY LICENSES
We have licensing agreements with various suppliers for software
incorporated into our products. For example, we license certain video
communication source code from RADVision, Telesoft, Omnitel, Adtran and EBSNet,
Inc., certain video algorithm protocols from REAL Networks and VideoServer,
development source code from Digital Equipment Corporation and Philips
Semiconductor, camera tracking technology from Brown University, audio
algorithms from Lucent Technologies, communication software from DataBeam
Corporation ("DataBeam"), digitizer and pen software from Scriptel Corporation
("Scriptel") and Windows software from Microsoft Corporation ("Microsoft"). In
addition, for our new network access products, we have interoperability
agreements with Jetstream Communications and Tollbridge, and we are highly
dependent on these agreements and our ability to secure similar licenses for
companies competitive to these gateway providers. These third-party software
licenses may not continue to be available to us on commercially reasonable
terms, if at all. The termination or impairment of these licenses could result
in delays or reductions in new product introductions or current product
shipments until equivalent software could be developed, licensed and integrated,
if at all possible, which would harm our business.
14
EMPLOYEES
As of December 31, 1999, Polycom employed a total of 362 persons,
including 147 in sales, marketing and customer support,112 in product
development, 44 in manufacturing and 59 in finance and administration. Of these,
fifteen employees were located in the U.K., five were located in Singapore, four
were located in China, four in France, one in Germany, four in Hong Kong, two in
the Netherlands, one in Norway, one in Japan, one in Australia and the remainder
were located in the United States. None of our employees is represented by a
labor union. We have experienced no work stoppages and believes its relationship
with its employees is good.
We believe that our future success will depend in part on our continued
ability to hire, assimilate and retain qualified personnel. Competition for such
personnel is intense, and we may not be successful in attracting or retaining
such personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position or our inability to attract and retain
skilled employees, particularly technical and management, as needed, could harm
our business. The loss of the services of any executive officer or other key
technical or management personnel could harm our business.
ITEM 2. PROPERTIES
Through February 2000, Polycom's headquarters were located in a
leased 52,000 square foot facility in San Jose, California. In February 2000,
Polycom moved its headquarters to a 102,240 square foot facility in Milpitas,
California pursuant to a lease which expires in January 2007. This facility
accommodates corporate administration, research and development,
manufacturing, marketing, sales and customer support. The majority of our
video communication engineering and marketing operations are located in a
23,000 square foot facility in Austin, Texas pursuant to a sublease which
expires in February 2004. We also lease approximately 20,000 square feet of a
building in Livermore, California which is used as our North American and
Latin American distribution center. This lease expires on May 31, 2000 after
which we plan to move this distribution center to an approximately 44,000
square foot facility in Tracy, California. In addition, we lease space in
Santa Barbara, California for our network access products' engineering,
manufacturing and marketing organizations pursuant to a lease due to expire
in January 2002. Further, we utilize space at our manufacturing contractor in
Thailand and its European distribution contractor in the United Kingdom and
Netherlands to provide Asian and European distribution and repair centers,
respectively. We lease sales office space in the metropolitan areas of
Rosemont (Illinois ), Chicago (Illinois), Boston, Oxnard (California), the
U.K., Netherlands, France, Germany, Hong Kong, Japan, China, Australia and
Singapore. We believe that our current facilities are adequate to meet our
needs for the foreseeable future, and that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.
15
ITEM 3. LEGAL PROCEEDINGS
On September 3, 1997, VTEL Corporation ("VTEL") filed a lawsuit in the
State District Court in Travis County, Texas against ViaVideo Communications,
Inc., a subsidiary of Polycom, and its founders (who were formerly employed by
VTEL). On May 27, 1998, VTEL amended its suit to add Polycom as a defendant. In
the lawsuit, VTEL alleged breach of contract, breach of confidential
relationship, disclosure of proprietary information and related allegations.
ViaVideo, its founders and Polycom answered the suit, denying in their entirety
VTEL's allegations. On March 3, 2000, VTEL dismissed the lawsuit against Polycom
and ViaVideo with prejudice for no consideration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
PRICE RANGE OF COMMON STOCK
Polycom's Common Stock is quoted on the Nasdaq National Market
(Nasdaq) under the symbol "PLCM". Prior to its initial public offering on
April 29, 1996, there was no public market for Polycom's Common Stock. The
following table sets forth the high and low sales prices for the Common Stock as
reported by Nasdaq for the periods indicated. These prices do not include retail
mark-ups, markdowns or commissions.
HIGH LOW
---- ---
FISCAL YEAR 1998
First Quarter 12.25 4.75
Second Quarter 17.63 10.38
Third Quarter 18.00 7.06
Fourth Quarter 23.13 8.63
FISCAL YEAR 1999
First Quarter 27.13 11.94
Second Quarter 60.13 17.63
Third Quarter 50.00 26.94
Fourth Quarter 67.69 42.63
FISCAL YEAR 2000
First Quarter (through February 29, 2000) 121.00 53.50
On February 29, 2000, the last sale price reported on the Nasdaq
National Market for Polycom's Common Stock was $116.31 per share. As of such
date, there were approximately 289 registered shareholders of record who held
shares of Polycom's Common Stock and approximately 12,500 beneficial owners, as
shown on the records of Polycom's transfer agent for such shares.
DIVIDEND POLICY
Polycom has never declared or paid any dividends on its capital stock
and does not intend to pay any dividends in the foreseeable future. Polycom
currently intends to retain its earnings, if any, for the growth and development
of its business. Any future determination to pay cash dividends will be at the
discretion of Polycom's Board of Directors and will depend upon the earnings of
Polycom, its financial condition, capital requirements and such other factors as
Polycom's Board of Directors may deem relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Polycom's audited consolidated financial statements and related
notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are included elsewhere in this
Form10-K. The consolidated statement operations data for the years ended
December 31, 1999, 1998 and 1997 and the consolidated balance sheet data at
December 31, 1999 and 1998, are derived from, and are qualified by reference to,
the audited consolidated financial statements and are included in this Form
10-K. The consolidated statement of operations data for the year ended December
31, 1996 and 1995 and the consolidated balance sheet data at December 31,
1997, 1996 and 1995 are derived from audited consolidated financial statements.
17
SELECTED CONSOLIDATED FINANCIAL DATA
December 31,
-----------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Operating Data:
Net revenues $200,067 $116,886 $50,394 $39,006 $25,073
Costs and expenses:
Cost of net revenues 91,257 57,906 27,583 18,987 10,944
Sales and marketing 36,047 22,156 13,247 9,170 7,073
Research and development 21,615 14,719 17,038 8,088 6,928
General and administrative 8,269 5,518 7,019 2,310 1,820
Acquisition costs 1,650 185 597 -- --
-------- -------- -------- ------- -------
Operating income (loss) 41,229 16,402 (15,090) 451 (1,692)
Interest, net and other income (expense) 1,740 948 1,166 1,087 69
-------- -------- -------- ------- -------
Income (loss) before taxes 42,969 17,350 (13,924) 1,538 (1,623)
Taxes 13,616 1,749 171 108 12
-------- -------- -------- ------- -------
Net income (loss) $ 29,353 $ 15,601 $(14,095) $ 1,430 $(1,635)
======== ======== ======== ======= =======
Basic net income (loss) per share $ 0.90 $ 0.54 $(0.66) $0.10 $(0.35)
Diluted net income (loss) per share $ 0.81 $ 0.46 $(0.66) $0.07 $(0.35)
Weighted average shares outstanding for basic EPS 32,536 28,810 21,489 14,798 4,712
Weighted average shares outstanding for diluted EPS 36,458 33,847 21,489 21,183 4,712
December 31,
---------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments $ 75,817 $ 23,489 $ 17,747 $21,507 $6,269
Working capital 86,324 46,417 22,023 29,676 7,797
Total assets 164,721 78,305 44,469 39,806 18,050
Notes payable, less current portion --- --- --- --- 1,178
Convertible redeemable preferred stock --- --- --- --- 22,360
Convertible preferred stock --- --- 9,496 1,975 ---
Total stockholders' equity (deficit) 113,270 53,928 26,927 33,033 (12,672)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND OTHER SECTIONS OF THIS FORM 10-K CONTAIN FORWARD
LOOKING STATEMENTS, INCLUDING STATEMENTS CONCERNING FUTURE REVENUES OF THE
VIEWSTATION, SOUNDSTATION, NETENGINE AND STREAMSTATION PRODUCT FAMILIES, FUTURE
INTERNATIONAL SALES, EXPECTATIONS FOR THE COST OF NET REVENUES PERCENTAGE,
EXPECTED EXPENSES IN ABSOLUTE DOLLARS AND AS A PERCENTAGE OF NET REVENUES, AND
THE IMPACT OF THE YEAR 2000 ISSUE ON POLYCOM. THESE STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
AND ASSUMPTIONS THAT ARE DIFFICULT, IF NOT IMPOSSIBLE, TO PREDICT. THEREFORE,
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY
SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE THE
SUCCESSFUL LAUNCH OF NEW PRODUCTS AND MANUFACTURING RAMP OF THE VIEWSTATION,
NETENGINE, STREAMSTATION, MEETINGSITE AND OTHER NEW PRODUCTS; LEVEL OF SALES TO
KEY
18
CUSTOMERS, INCLUDING LUCENT AND ITS NEW SPIN-OFF COMPANY; POSSIBLE PRICE
COMPETITION; DEMAND FOR VIEWSTATION, NETENGINE, STREAMSTATION, SHOWSTATION IP,
WEBSTATION, SOUNDPOINT PRO, MEETINGSITE, NETENGINE AND OTHER NEW PRODUCTS;
POTENTIAL DIFFICULTIES ASSOCIATED WITH TRANSITIONING TO THE NEW MANAGEMENT
INFORMATION SYSTEM; UNCERTAINTIES RELATING TO THE INTEGRATION OF OPERATIONS OF
ATLAS COMMUNICATION ENGINES, INC. AND RETENTION OF KEY STAFF; EFFECTS OF THE
ACQUISITION ON EXISTING BUSINESS PARTNERSHIPS; DEPENDENCE ON THIRD PARTY
DISTRIBUTORS; THE PROFITABILITY OF THE MEDIA SERVER PRODUCT LINE; THE SUCCESS OF
THE RECENTLY ANNOUNCED BUSINESS RELATIONSHIPS SUCH AS JETSTREAM COMMUNICATION
INC., LUCENT TECHNOLOGIES, CISCO SYSTEMS AND NORTEL NETWORKS; RISKS ASSOCIATED
WITH INTERNATIONAL OPERATIONS; DEPENDENCE ON THIRD PARTY MANUFACTURERS AND
SOLE-SOURCE SUPPLIERS; RECRUITING AND RETENTION OF KEY TECHNICAL AND MANAGEMENT
PERSONNEL; AND OTHER RISKS DETAILED IN THIS REPORT AND POLYCOM'S OTHER SEC
REPORTS. POLYCOM UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
FURTHERMORE, INVESTORS SHOULD CAREFULLY REVIEW THE RISK FACTORS AND OTHER
INFORMATION SET FORTH IN THE REPORTS AND OTHER DOCUMENTS POLYCOM FILES FROM TIME
TO TIME WITH THE COMMISSION.
OVERVIEW
We were engaged principally in research and development from inception
through September 1992, when we began volume shipments of our first voice
communication product, SoundStation. As of December 31, 1999, our voice
communication product line consisted principally of the SoundStation,
SoundStation EX, SoundStation Premier, SoundStation Premier EX, SoundPoint and
SoundPoint Pro. In January 1998, we completed the acquisition of ViaVideo
Communications, Inc., (ViaVideo), a development stage company that designed
and developed high quality, low cost, easy-to-use, group video communication
systems. In February 1998, we began customer shipments of the ViewStation
product family, our video communication equipment product line. As of December
31, 1999, our video communication product line consisted principally of the
ViewStation 128, ViewStation 512, ViewStation V.35, ViewStation MP ViewStation
SP, StreamStation, WebStation, ShowStation IP and the MeetingSite 5000. In
December 1999, we acquired Atlas Communication Engines, Inc. (Atlas), a
privately-held, OEM supplier of Integrated Access Devices (IADs) and emerging
supplier of Digital Subscriber Line (DSL) routers. Atlas's line of IADs and DSL
routers, which will become our network access product line, provides voice and
data over the rapidly-growing DSL network.
Through December 31, 1999, we derived a majority of our net revenues
from sales of our ViewStation and SoundStation products. Although the IAD and
DSL routers are expected to become an increasingly important revenue
contributor, we anticipate that the ViewStation and SoundStation product lines
will continue to account for a significant portion of our net revenues at least
through the year ending December 31, 2000. Any factor adversely affecting the
demand or supply for these products would harm our business, financial
condition, cash flows and results of operations.
19
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999
The following table sets forth, as a percentage of net revenues,
consolidated statement of operations data for the periods indicated.
Year Ended December 31,
------------------------------------
1999 1998 1997
---- ---- ----
Net revenues 100% 100% 100%
Cost of net revenues 46% 50% 55%
------------------------------------
Gross profit 54% 50% 45%
Operating expenses:
Sales and marketing 18% 19% 26%
Research and development 11% 12% 34%
General and administrative 4% 5% 14%
Acquisition costs 1% 0% 1%
------------------------------------
Total operating expenses 34% 36% 75%
------------------------------------
Operating income (loss) 20% 14% (30%)
Interest income, net 1% 1% 2%
Other expense, net 0% 0% 0%
------------------------------------
Income (loss) before provision for income taxes 21% 15% (28%)
Provision for income taxes 6% 2% 0%
------------------------------------
Net income (loss) 15% 13% (28%)
====================================
NET REVENUES
Total net revenues for 1999 were $200.1 million, an increase of $83.2
million, or 71%, compared to 1998. This increase was due in large part to
revenues from the video communication products. This product line began shipping
in February of 1998 and Polycom has added various models since that time.
Additionally, voice communication product line sales volume increases also
contributed to the revenue growth. Further, while a majority of the growth was
in North America, we also saw growth in Europe due to our increase in investment
in this region in 1999.
Total net revenues for 1998 were $116.9 million, an increase of $66.5
million, or 132%, compared to 1997. This increase was due in large part to
revenues from the video communication products which were not part of the prior
year revenue stream. Additionally, voice communication product line sales volume
increases, primarily in North America, also contributed to the revenue growth.
Further, in 1998 we recorded $2.5 million in revenue relating to a joint
development and marketing agreement with 3M concerning the ViewStation product
line. This 1998 3M revenue compares with the $3.0 million in 1997 revenue
associated with a joint development and marketing agreement with 3M concerning
the ShowStation IP.
In 1999, 1998 and 1997, we derived a substantial majority of our net
revenues from sales of our video communication and voice communication products.
Lucent Technologies accounted for 11%, 11% and 10% of net revenues in 1999, 1998
and 1997, respectively. No other customer or reseller accounted for more than
10% of our net revenues during these periods. See Note 13 of Notes to
Consolidated Financial Statements for business segment information.
International net revenues (revenues outside of North America)
accounted for 31%, 23% and 21% of total net revenues for 1999, 1998, and 1997,
respectively (see Note 13 of Notes to Consolidated Financial Statements). In
1999, we invested greater resources in Europe over 1998 which helped drive
volumes and revenues up as a percentage of our revenue. Within Europe, video
revenues were the main driver of the increase. In addition, Asia also increased
as a percentage of our net revenue. In 1998, volume increases in all
international regions, primarily Europe, contributed to the increase in the
percentage of international revenue over 1997. We anticipate that international
sales will continue to account for a significant portion of total net revenues
for the foreseeable future, and we plan to continue our expansion in
20
Europe and Asia in 2000. International sales, however, are subject to certain
inherent risks, including unexpected changes in regulatory requirements and
tariffs, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable and potentially
adverse tax consequences. Additionally, international net revenues may fluctuate
as a percentage of net revenues in the future as we introduce new products,
since we expect to initially introduce such products in North America and also
because of the additional time required for product homologation and regulatory
approvals of new products in international markets. To the extent we are unable
to expand international sales in a timely and cost-effective manner, our
business could be harmed. We cannot assure you that we will be able to maintain
or increase international market demand for our products. Additionally, to date,
a substantial majority of our international sales has been denominated in U.S.
currency; however, if international sales were denominated in local currencies
in the future, these transactions would be subject to currency fluctuation
risks. Further, beginning January 1, 1999, the participating member countries of
the European Union agreed to adopt the European Currency Unit (the "Euro") as
the common legal currency. On that same date they established fixed conversion
rates between their existing sovereign currencies and the Euro. The
establishment of the Euro has not had any significant impact on us to date and
should not in the future since a substantial majority of our international sales
are denominated in U.S. currency.
COST OF NET REVENUES
Cost of net revenues consists primarily of contract manufacturer costs
including material and direct labor, Polycom's manufacturing organization,
tooling depreciation, warranty expense and an allocation of overhead expenses.
The cost of net revenues as a percentage of net revenues was 46% in 1999
compared to 50% in 1998 and 55% in 1997. The improvement in cost over 1998 is
attributable to a more favorable product mix as more shipments of the higher
margin video products occurred, and favorable material price improvements. These
decreases were offset by a write-down of ShowStation IP inventory and the
SoundPoint inventory to net realizable value and reduced revenue received under
a joint development and marketing agreement with 3M concerning the ViewStation
which had very low associated costs. We received $0.9 million in revenue under
this agreement in 1999 compared to $2.5 million in 1998. The margin improvement
in 1998 over 1997 is attributable to a more favorable product mix, royalty
revenues with no associated costs, favorable material price improvements and
favorable manufacturing variances related to increased production levels.
Forecasting future gross margin percentages is difficult. While we
expect that the overall cost of net revenues percentage will be within a few
percentage points of the current level, there are a number of risks associated
with maintaining our current gross margin levels. For example, uncertainties
surrounding competition, changes in technology, changes in product mix,
manufacturing efficiencies of subcontractors, manufacturing and purchased part
variances, warranty costs, and timing of sales over the next few quarters can
cause our cost of net revenues percentage to fluctuate significantly.
Additionally, the IAD and DSL equipment products, Voice-over-IP (VoIP) products
and other desktop products have a significantly higher cost of net revenue
percentage than ViewStation and SoundStation product lines. If the IAD, DSL,
VoIP and other desktop products grow to be become a significant revenue stream,
this will have a negative effect on the future cost of revenue percentages.
Also, we may reduce prices on our products in the future for competitive reasons
or to stimulate demand which could increase our cost of net revenues percentage;
however, these possible price reductions may not offset competitive pressures or
stimulate demand. In addition, costs variances associated with the manufacturing
ramp of new products, such as the ViewStation 4000 and ViewStation FX or any
other new product, could occur which would increase our cost of net revenues
percentage. Further, gross margins associated with the ShowStation IP,
ViewStation SP and the SoundPoint Pro are lower than the targeted gross margins
of the total product portfolio, yet the gross margins for the WebStation are
closer to the targeted gross margins. The contribution of these products can
have a significant impact on our overall gross margins.
In addition to the uncertainties listed above, the cost of net revenues
percentage may increase due to a change in the mix of distribution channels and
the mix of international versus North American revenues. We had realized lower
cost of net revenue percentages on our direct sales than on sales through
indirect channels. Now that we no longer sell our products through a direct
sales force, profit margins will be negatively impacted.
21
SALES AND MARKETING EXPENSES
Increase (Decrease)
Year End December 31, From Prior Year
------------------------------------ --------------------------
Dollars In Thousands 1999 1998 1997 1999 1998
-------------------- ------------------------------------- ---------------------------
Expenses $ 36,047 $ 22,156 $ 13,247 63% 67%
% of Net Revenues 18% 19% 26% (1%) (7%)
Sales and marketing expenses consist primarily of salaries and
commissions, advertising and promotional expenses, product marketing, an
allocation of overhead expenses and customer service and support costs. The
increase in sales and marketing expenses in absolute dollars in 1999 over 1998
was primarily related to increased advertising and promotional expenditures for
the video and voice products. Additionally, an increase in the investment in the
worldwide sales effort and the resulting staff increases also contributed to the
increase over 1998. The increase in sales and marketing expenses in absolute
dollars in 1998 over 1997 was primarily related to increased investment in the
video communication sales effort. As mentioned previously, we only began selling
the ViewStation products in 1998 and, consequently, had little sales and
marketing expense in 1997 associated with these products. Additionally,
increases in the voice communication sales efforts in 1998 have also contributed
to the overall increase over 1997.
We expect to continue to increase our sales and marketing expenses in
absolute dollar amounts in an effort to expand North American and international
markets, market new products and establish and expand distribution channels. In
particular, our acquisition of Atlas Communication Engines, Inc. expands our
product portfolio into the DSL access market which will require significant
additional marketing expenditures to communicate the value of our new product
offerings as well as significant additional sales expenditures to develop a
new sales organization for this market. In addition, due to the innovative
nature of the ViewStation, StreamStation, WebStation and ShowStation IP
products, we believe we will incur additional expenses for sales and marketing,
especially advertising, to educate potential customers as to the desirability of
these products over competing products. In addition, we will further invest in
the European and Asian markets, thereby, increasing the absolute dollars spent
in this area. Also, the launch of the StreamStation product, a product that
streams point-to-point or multipoint video communications using the ViewStation
to the Web, as well as VoIP and other potential desktop products, will cause an
increase in our sales and marketing expenses. Additionally, this video streaming
market is new for us and significant investments may need to be made to become
successful. Further, we are currently expanding the service organization to
provide expanded and improved support for its products which will increase our
sales and marketing expenses.
RESEARCH AND DEVELOPMENT EXPENSES
Increase (Decrease)
Year End December 31, From Prior Year
------------------------------------- --------------------------
Dollars In Thousands 1999 1998 1997 1999 1998
-------------------- ------------------------------------- --------------------------
Expenses $ 21,615 $ 14,719 $ 17,038 47% (14%)
% of Net Revenues 11% 12% 34% (1%) (22%)
Research and development expenses consist primarily of compensation
costs, consulting fees, depreciation and an allocation of overhead expense. The
research and development expense increased in 1999 over 1998 due to increases in
the network access, video and voice product lines. The expense decrease in 1998
when compared to 1997 was primarily attributable to higher development expenses
for the ShowStation IP and ViewStation products in 1997 which resulted in the
initial launch of these products in early 1998. For the remainder of 1998, the
development charges for these products normalized. These decreases were offset
somewhat by increases related to the voice communication product line. In all
years presented, all research and development costs have been expensed as
incurred.
22
We believe that technological leadership is critical to our success and
we are committed to continuing a high level of research and development. Also,
continued investment in new product initiatives such as VoIP and desktop
products will require significant research and development spending.
Consequently, we intend to increase research and development expenses in
absolute dollars and as a percentage of net revenues in the future. However, due
to the extremely competitive hiring market in the high-technology industries, we
may not be able to find or hire qualified personnel in a timely manner or at
all. In fact, we established a development office in Boston, Ma. in 1999 in an
attempt to broaden our recruiting of top technical talent.
GENERAL AND ADMINISTRATIVE EXPENSES
Increase (Decrease)
Year End December 31, From Prior Year
------------------------------------- ---------------------------
Dollars in Thousands 1999 1998 1997 1999 1998
-------------------- ------------------------------------- ---------------------------
Expenses $ 8,269 $ 5,518 $ 7,019 50% (21%)
% of Net Revenues 4% 5% 14% (1%) (9%)
General and administrative expenses consist primarily of compensation
costs, an allocation of overhead expense, bad debt write-offs, legal expenses
and accounting expenses. The increase in general and administrative expenses in
1999 over 1998 is due to increased staffing and infrastructure costs to support
Polycom's growth including the conversion of the management information system.
The decrease in general and administrative expenses in 1998 when compared to
1997 is due to lower legal expenses associated with the VTEL and Datapoint
lawsuits. This decrease was offset by increases related to increased staffing
and infrastructure to support our growth. Additionally, during the third quarter
of 1998, we reversed a contingency reserve associated with the Datapoint
litigation which was resolved favorably during that quarter.
We believe that our general and administrative expenses will increase in
absolute dollar amounts in the future primarily as a result of expansion of our
administrative staff and costs related to supporting a larger company. These
additional charges include expenses related to a new information system, a new
tax deferral strategy and infrastructure charges related to the significant
investments being made in Europe and Asia. Additionally, write-offs associated
with bad debt are difficult to predict and material write-offs could negatively
affect the profitability in the quarter they are realized.
ACQUISITION COSTS
We incurred expenses totaling $1.7 million, $0.2 million and $0.6 million
in 1999, 1998 and 1997, respectively. In 1999, these costs were related to the
acquisition of Atlas in December 1999. In 1998 and 1997, the cost incurred were
related to the acquisition of ViaVideo. A significant portion of these charges
for both acquisitions were for outside legal, accounting and financial advisory
services. We do not anticipate any further material acquisition related expenses
associated with either of these acquisitions; however, there can be no
assurances that other expenses related to these or other acquisitions will not
be incurred or, if incurred, will not be material.
OTHER INCOME AND EXPENSE
Interest income consists of interest earned on our cash, cash
equivalents and investments. Interest expense is from our bank debt facilities.
Interest income, net of interest expense was $1.8 million, $1.0 million and $1.2
million for 1999, 1998, and 1997, respectively. The fluctuations in interest
income, net are due primarily to changes in average cash and investment balances
throughout the year.
23
PROVISION FOR INCOME TAXES
In 1999, 1998 and 1997, the provision for income taxes was $13.6
million, $1.7 million and $0.2 million, respectively. The provision for income
taxes in 1998 and 1997 were primarily for state, federal alternative minimum and
certain foreign taxes. The increase in income taxes for 1999 is due to increased
profitability. The valuation allowance established in prior years was reversed
in 1999 due to our belief that the deferred tax assets will more likely than not
be realized.
As of December 31, 1999, we had approximately $4.8 million in net
operating loss carryforwards and $0.3 million in tax credit carryforwards as
well as other deferred tax assets arising from temporary differences. See
Note 12 of Notes to Consolidated Financial Statements.
YEAR 2000
Prior to the Year 2000, many currently installed computer systems and
software products were coded to accept only two digit entries in the date code
field. These code fields needed to accept four digit entries to distinguish
years beginning with "19" from those beginning with "20". As a result, computer
systems and/or software products used by many companies needed to be upgraded to
comply with such Year 2000 requirements. In anticipation of this issue, we
expended resources to review our internal use software in order to identify and
modify those systems that were not Year 2000 compliant. In addition, our
products and services were reviewed and certified to be Year 2000 compliant.
Further, we also initiated a project to replace our current internal business
information system in 1999. While this effort addressed the Year 2000 issues of
the legacy system, this internal system implementation effort was principally
being conducted to improve operating efficiencies.
The costs associated with this effort were immaterial yet incremental
to our operations and also represented a reallocation of existing resources.
These costs were expensed as incurred and were funded through cash generated
from operations.
We have not experienced a material adverse impact on our financial
condition or results of operations due to Year 2000 compliance issues. In
addition, to date, no significant projects have been delayed due to the Year
2000 project.
LIQUIDITY AND CAPITAL RESOURCES FOR THE THREE YEARS ENDED DECEMBER 31, 1999
As of December 31, 1999, our principal sources of liquidity included
cash and cash equivalents of $36.0 million, short-term investments of $24.8
million and long-term investments of $15.1 million. Additionally, we established
a $15.0 million line of credit with a bank. The line of credit facility contains
provisions that require the maintenance of certain financial ratios and
profitability requirements. As of December 31, 1999, we were in compliance with
these covenants. See Note 9 of Notes to Consolidated Financial Statements.
We generated cash from operating activities totaling $38.6 million and
$2.7 million and used cash in operating activities of $8.6 million for the years
ended 1999, 1998, and 1997, respectively. The improvement in cash from operating
activities in 1999 over 1998 was due primarily to the improvement in net income
before non-cash items, an increase in accounts and taxes payable and a smaller
increase in inventories, offset somewhat by the growth in receivables and
deferred taxes. The improvement in cash from operating activities in 1998
over 1997 was due primarily to the improvement in net income before non-cash
items and a reduction in non-trade receivables, offset somewhat by the growth
in receivables and inventory and a smaller increase in accounts payable and
accrued liabilities.
The total net change in cash and cash equivalents for 1999 was an
increase of $17.9 million. The primary sources of cash were $38.6 million from
operating activities, $15.0 million in proceeds from an exercise of warrants by
3M, and $5.6 million from the issuance of stock associated with the exercise of
stock options and purchases under the employee stock purchase plan. The primary
uses of cash during 1999 were net purchases of investments of $34.5 million and
purchases of property, plant and equipment of $7.2 million. The positive cash
from operating activities was primarily the result of positive net income before
considering non-cash expenses such as depreciation and higher total
24
current liabilities (including accounts payable and taxes payable), offset by an
increase in accounts receivable, deferred taxes and inventory.
Our material commitments consist of obligations under our operating
leases. We also maintains, from time to time, commercial letters of credit as
payments for the importation of certain products. The amounts do not exceed
$300,000 and are outstanding less than 120 days. See Notes 8 and 9 of the Notes
to Consolidated Financial Statements.
We believe that our available cash, cash equivalents, investments and
bank line of credit will be sufficient to meet our operating expenses and
capital requirements through at least December 31, 2000. However, it cannot be
determined with any degree of certainty how successful we will be at growing the
market for our products, if at all. If there is substantial growth and, as a
result, we go beyond current acceptable liquidity levels, or if the financial
results were to violate the financial covenants of the bank line of credit, we
may require or desire additional funds to support our working capital
requirements or for other purposes, such as acquisitions or competitive reasons,
and may seek to raise such additional funds through public or private equity
financing or from other sources. We cannot assure you that additional financing
will be available at all or that, if available, such financing will be
obtainable on terms favorable to Polycom and would not be dilutive. Our future
liquidity and cash requirements will depend on numerous factors, including the
introduction of new products and potential acquisitions of related businesses or
technology.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 established methods of
accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities, and is
effective for the fiscal years beginning after June 15, 2000, as amended by SFAS
No. 137. We believe that adoption of this pronouncement will not have a material
impact on our financial position and results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provide guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the second quarter of
the fiscal year beginning after December 15, 1999. We believe that adopting SAB
101 will not have a material impact on our financial position and results of
operations.
OTHER FACTORS AFFECTING FUTURE OPERATIONS
INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE
MAKING AN INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING OUR COMPANY. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR
BUSINESS COULD BE HARMED BY ANY OF THESE RISKS. THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND INVESTORS MAY LOSE ALL OR
PART OF THEIR INVESTMENT. IN ASSESSING THESE RISKS, INVESTORS SHOULD ALSO REFER
TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS FORM
10-K REPORT, INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES.
CHANNEL SALES AND INVENTORY. We sell a significant amount of our products to
distributors and resellers which maintain their own inventory of products for
sale to dealers and end-users. A substantial percentage of the total products
sold during a particular quarter consist of distributor stocking orders. We
typically provide special cost or early payment incentives for distributors to
purchase the minimum or more than the minimum quantities required under their
agreements with us. If these resellers are unable to sell through an adequate
amount of their inventory, as determined by these resellers, of our products in
a given quarter to dealers and end-users or if resellers decide to decrease
their inventories, it would negatively affect the volume of our sales to these
resellers in the current or future quarters and also negatively affect our total
revenues. Also, if we choose to eliminate or reduce stocking incentive programs,
quarterly revenue may be lower than historical levels or under the capital
market expectations.
Our revenue estimates are based largely on the sell-through reporting
that the resellers provide to us on a monthly basis. The accuracy of this data
has been good in North America but is questionable outside of this region. To
the extent
25
that this data (sell-through and channel inventory) is inaccurate in either
North America or outside of North America, we may not be able to make reseller
estimates or may find that our previous estimates are entirely inaccurate.
Many of our distributors and resellers, on whom our revenues depend
significantly, are undercapitalized yet carry multiple Polycom product lines.
Failure of these businesses to establish and sustain profitability or obtain
financing could significantly affect future revenue levels for Polycom. The loss
of distributors or resellers could harm our business. In addition, the effect of
the spin-off of Lucent Technologies' business equipment segment on Polycom is
not yet known. In light of the restructure, if Lucent decides to significantly
reduce the amount of the orders to Polycom, it could harm our financial
condition.
CHANNEL AND CUSTOMER ORDERS. We typically ship products within a short time
after receipt of an order and historically have no material backlog. As a
result, backlog, at any point in time, is not a good indicator of future net
revenues and net revenues for any particular quarter cannot be predicted with
any degree of accuracy. Additionally, orders from our reseller customers are
based on the level of demand from end-users. The uncertainty of such end-user
demand means that any quarter could be significantly negatively impacted by
lower end-user orders which could negatively affect orders we receive from our
resellers. Accordingly, our expectations for both short- and long-term future
net revenues are based almost exclusively on our own estimate of future demand
and not on firm customer orders. Expense levels are based, in part, on these
estimates and, since we are limited in our ability to reduce expenses quickly if
orders and net revenues do not meet expectations in a particular period,
operating results would be lower than expected. In addition, a seasonal demand
appears to be evident in a lag in demand during the summer months. This
seasonality can make predicting revenues levels difficult, if not impossible.
A substantial portion of our orders are received and shipped within the last few
weeks of a quarter, therefore, should Polycom, its suppliers or major customers
be subject to a business interruption, for example, a natural disaster, during
the last few weeks of a quarter, it would negatively affect our business.
Further, we cannot assure you that our contract manufacturers will be able to
meet product demand before any given quarter ends.
UNCERTAINTY OF FUTURE REVENUES AND RESULTS. As a result of several factors,
including reliance on channel sales and the timing of orders and shipments
during each quarter, throughout most of each quarter, we are uncertain as to the
level of revenues we will achieve in the quarter and the impact distributor
stocking orders will have on revenues and profitability in that quarter. In
addition, because a substantial percentage of product sales occur at the end of
the quarter, product mix and, therefore, profitability is difficult, if not
impossible, to predict. Due to these factors, it is likely that in a future
quarter our operating results will be materially below the expectations of
public market analysts and investors. In such event, the price of our common
stock would likely decrease significantly.
Our net revenues have grown primarily through increased market acceptance of our
ViewStation and SoundStation product lines and through the expansion of our
North American and international distribution networks. While we have
experienced growth in net revenues in recent quarters, we do not believe that
the historical growth rates in net revenues will be sustainable nor are they
indicative of future operating results. For example, we lowered the price of the
ShowStation IP 23% effective March 1999 due to market acceptance issues for this
product; similar price reductions and demand issues could occur for this and
other products which could negatively impact our net revenues and profitability.
Further, recent growth rates of voice and video product sales out from the sales
channels to end-users have been significant. Future growth rates may not achieve
these levels of success.
We believe that profitability could be negatively affected in the future as a
result of several factors including low to negative gross margins for the
ShowStation IP and continuing competitive price pressure in the conferencing
equipment market. Although price reductions have been driven by our desire to
expand the market for our products, and we expect that in the future we may
further reduce prices or introduce new products that carry lower margins in
order to further expand the market or to respond to competitive pricing
pressures, such actions may not expand the market for our products or be
sufficient to meet competitive pricing pressures. Additionally, if end-users
decide to purchase the StreamStation or WebStation product instead of the
ShowStation IP, our net revenues could be significantly adversely affected and
it could create an excess and obsolescence issue for the ShowStation IP
inventory which could negatively impact our profitability. Similarly, if the
SoundPoint Pro product materially negatively affects the future sales of the
SoundPoint product, Polycom's total revenue could be lower and it could create
an excess and obsolescence issue concerning the SoundPoint inventory which could
26
lower our profitability. For example, during the third quarter of 1999, we
recorded a charge for excess and obsolete inventory concerns for the ShowStation
IP and SoundPoint product line which negatively impacted our cost of net
revenues percentage. The issue of new products rendering existing products
obsolete or reducing the demand for existing products, exists for every one of
our products. In addition, costs related to the introduction of our new products
such as NetEngine, ViewStation 4000, ViewStation FX, ViewStation SP, SoundPoint
Pro, WebStation and StreamStation could also negatively impact future
profitability.
Our operating results have fluctuated in the past and may fluctuate in the
future as a result of a number of factors, including market acceptance of
ViewStation, SoundPoint Pro, NetEngine, WebStation, ShowStation IP,
MeetingSite, StreamStation and other new product introductions and product
enhancements by us or our competitors, the prices of our or the competition's
products, the mix of products sold, the mix of products sold directly and
through resellers, fluctuations in the level of international sales, the cost
and availability of components, manufacturing costs, the level and cost of
warranty claims, changes in our distribution network, the level of royalties
to third parties and changes in general economic conditions. For example,
beginning in November 1999, we eliminated our direct sales force and moved
our direct customers to resellers in our VAR channel. This sales channel
shift negatively impacted our cost of net revenues percentage and will
continue to negatively impact gross margins in the year 2000. In addition,
competitive pressure on pricing or demand levels in a given quarter could
adversely affect our operating results for such period, and such price
pressure over an extended period could materially adversely affect our near
and long-term profitability. Our ability to maintain or increase net revenues
will depend upon our ability to increase unit sales volumes of the
ViewStation product line, SoundStation, SoundStation Premier and SoundPoint
families of products, the ShowStation and WebStation line of products, our
new network access products and any new products or product enhancements. We
cannot assure you that we will be able to increase unit sales volumes of
existing products, introduce and sell new products or reduce our costs as a
percentage of net revenues.
PRODUCT INTRODUCTIONS. Our revenue growth since the beginning of 1998 was due in
large part to new product introductions in the video communication product line.
In each quarter of 1998 we had a major new video product introduction which
significantly contributed to the revenue growth. Although we are continuing to
introduce new product releases, such as the recently announced ViewStation 4000
and ViewStation FX, we cannot assure you that new product releases will be
timely or that they will be made at all. Additionally, we cannot assure you that
these or any new product introductions in 2000 will produce the revenue growth
experienced in 1998 and 1999.
In the past we have experienced delays in the introduction of certain new
products and enhancements and believe that such delays may occur in the future.
For instance, we experienced delays in introducing the ViewStation MP and
WebStation in 1998 from their original expected release dates due to unforeseen
technology and manufacturing ramp issues. Additionally, the ShowStation IP was
delayed from its original shipment target of September 1997 to its first
customer shipment date of March 1998 due to engineering and manufacturing
start-up issues. Similar delays occurred during the introduction of the
SoundStation Premier and the ShowStation affecting the first customer ship dates
of these products. Any similar delays in the future for other new product
offerings such as VoIP, desktop or NetEngine product line extensions could have
a material adverse effect on our results of operations.
ATLAS INTEGRATION. We completed the acquisition of Atlas Communication Engines,
Inc. in December 1999. We acquired Atlas with the expectation that the
acquisition would result in operating and strategic benefits, including product
development and marketing and sales synergies. If outstanding merger related
issues are not successfully addressed in a coordinated, timely and efficient
manner, our business and results of operations could be harmed. The integration
of Atlas's product offerings and operations with our product offerings and
operations and the coordination of the two companies' sales and marketing
efforts may require substantial attention from management. The diversion of the
attention of management and any difficulties encountered in the transition
process could harm our business. The difficulties of assimilation may be
increased by the necessity of integrating personnel with disparate business
backgrounds and combining two different corporate cultures which may result in
problems with employee retention. In addition, the process of combining the two
organizations could cause the interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses, which could have an
adverse effect on the combined operations. As a result of the acquisition, our
operating expenses will likely increase in absolute dollars. In fact, we are
currently recruiting both management and technical staff to be added to this
group. Should future expected revenues from Atlas's products not occur, or occur
later or in an amount less than expected, the higher operating expenses could
harm our
27
business. Failure to achieve the anticipated benefits of the acquisition or to
successfully integrate the operations of the companies could also harm our
business and results of operations. Additionally, we cannot assure you that we
will not incur additional material charges in future quarters to reflect
additional costs associated with the acquisition.
CHANNEL CONFLICTS. We have various OEM agreements with some major
telecommunications equipment manufacturers such as Lucent Technologies whereby
we manufacture our products to work with the equipment of the OEM partner. These
partnerships can create channel conflicts with other Polycom distributors who
directly compete with our OEM partner, which could adversely affect revenue from
such non-OEM channels. Because many of our distributors also sell equipment that
compete with the Polycom product lines, the distributors could devote more
attention to the other product lines which could materially adversely affect our
profitability. Further, other channel conflicts could arise which cause
distributors to devote resources to other non-Polycom conferencing equipment
thereby negatively affecting our business or results of operations.
We currently have agreements with certain video communication equipment
providers whereby these equipment suppliers resell our SoundPoint PC products
along with their video communication products. Polycom and these equipment
suppliers are competitors in the conferencing market and, as such, there can be
no assurance that they will enter into future agreements to resell or supply any
of our new or enhanced conferencing products. Further, certain current Polycom
video products and other video products under development are directly
competitive with the products of these suppliers, and thus competition between
us and the other suppliers is likely to increase, resulting in a strain on the
existing relationship between the companies. If this occurs, it could limit the
potential contribution of these relationships on our results of operations.
In addition, we are dependent on certain agreements with critical partners, such
as Jetstream Communications, in the network access arena. Conflicts may occur in
this evolving market as we seek other relationships with partners competitive to
our current relationships. If this occurs, it could harm our business.
TECHNOLOGY AND TRAINING. The markets for voice and video communication products
and network access products are characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. The success
of our new ViewStation and NetEngine is dependent on several factors, including
proper new product definition, product cost, timely completion and introduction
of new products, differentiation of new products from those of our competitors
and market acceptance of these products. Additionally, properly addressing the
complexities associated with DSL and ISDN compatibility, reseller training,
technical and sales support as well as field support are also factors that may
affect our success in this market. Further, the shift of communications from the
circuit-switched to IP network over time may require us to add new resellers and
gain new core technological competencies. We are attempting to address these
needs and the need to develop new products through our internal development
efforts and joint developments with other companies. We cannot assure you that
we will successfully identify new voice, video and network access product
opportunities and develop and bring new voice, video and network access products
to market in a timely manner, or that competing and technologies developed by
others will not render our ViewStation and SoundStation products or technologies
obsolete or noncompetitive. The failure of our new voice, video and network
access product development efforts on our ability to service or maintain the
necessary third party interoperability licenses would harm our business and
results of operations.
MANUFACTURING DISRUPTIONS. We subcontract the manufacture of our SoundStation,
SoundStation Premier, SoundPoint Pro and ViewStation product families and are
currently migrating the production of our new network access products to
Celestica, Inc., a global third-party contract manufacturer. We use Celestica's
Thailand facilities and should there be any disruption in supply due to economic
and political difficulties in Thailand and Asia, such disruption would harm our
business and results of operations. Also, Celestica is currently the sole source
provider of these product lines and if the supply from this subcontractor
experiences an interruption in operations, we would experience a delay in
shipping these products which could negatively affect revenues in the quarter of
the disruption. In addition, operating in the international environment exposes
us to certain inherent risks, including unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations and potentially adverse tax consequences all of which could harm our
business and results of operations.
28
MANAGEMENT INFORMATION SYSTEM TRANSITION. We are transitioning to a new
enterprise resource planning system which affects almost every facet of our
business operations. This conversion is expected to bring new process
efficiencies which should improve our business operations. However, typically,
these conversions negatively affect a company's ability to conduct business
initially due to problems such as historical data conversion errors, the
learning curve associated with the new system, delays in implementation or
unforeseen technical problems during conversion. If such problems arise during
this transition, we could experience, for a period of time, delays in or lack of
shipping, an inability to support our existing customer base, delays in paying
vendors, delays in collecting from customers, an inability to place or receive
product orders or other operational problems. If this were to occur, our
profitability or financial position could be negatively impacted.
INFRASTRUCTURE GROWTH. Our recent overall growth has and will likely continue to
cause strains on our normal business processes and infrastructure. If we do not
manage this growth through resource additions such as headcount, capital and
processes, in a timely and efficient manner, future growth and profitability
will likely be significantly negatively affected. We cannot assure you that
resources will be available when we need them or that capital will be available
to fund these resource needs.
SERVICE AND SUPPORT. Our recent growth has been due in large part to an
expansion into product lines with more complex technologies and protocols. This
shift, as well as the acquisition of Atlas Communication Engines and its network
products has increased the need for increased product warranty and service
capabilities. In addition, increased international competition has forced
companies in the conferencing market to provide a complete service and support
package. We maintain an in-house hotline support group and subcontracts on-site
technician support functions. If we cannot develop and train our internal
support organization, maintain our relationship with our outside technical
support or efficiently transition to a new service contractor, it could
negatively affect future sales of the higher technology products like video and
VoIP equipment and network access products which would have a material negative
effect on our results from operations.
CASH FLOW FLUCTUATIONS DUE TO RECEIVABLE COLLECTIONS. In 1999, we initiated a
significant investment in Europe to expand our business in this region. In
Europe and Asia, as with other international regions, credit terms are typically
longer than in the United States. Therefore, as Europe, Asia and other
international regions grow as a percentage of our total net revenues, as has
happened during 1999, accounts receivable balances will likely increase over
previous years. Additionally, sales in the video communication product market
typically have longer payment periods over our traditional experience in the
voice communication market. Therefore, as we sell more video products as a
percentage of net revenues, accounts receivable balances will increase over
previous experience. These increases will cause our days sales outstanding to
increase over prior years and will negatively affect future cash flows. In
addition, we have been able to offset the affect of these influences through the
additional incentives offered to resellers at the end of the quarter in the form
of prepay discounts. These additional incentives has lowered profitability and
improved days sales outstanding performance.
POTENTIAL ASSET IMPAIRMENT CONCERNS. We operate in a high technology market
which is subject to rapid and frequent technology changes. These technology
changes can and do often render existing technologies obsolete. These
obsolescence issues can require write-downs in inventory value when it is
determined that the existing inventory can not be sold at or above net
realizable value. This situation occurred during the third quarter of 1999 for
the ShowStation IP and the SoundPoint products when we recorded $1.3 million in
excess and obsolescence charges and for the original ShowStation product in the
third quarter of 1998 when we wrote-down an additional $1.5 million related to
the loss in value associated with this inventory.
STOCK PRICE FLUCUATIONS. Our stock price has varied greatly as has the trading
volume of our common shares. We expect these fluctuations to continue due to
factors such as announcements of new products, services or technological
innovations by us or our competitors, announcements of major restructurings by
us or our competitors, quarterly variations in our results of operations,
changes in revenue or earnings estimates by the investment community,
speculation in the press or investment community, general conditions in the
communications industry, changes in our revenue growth rates or the growth rates
of our competitors, and sales of large blocks of our stock.
29
The stock market will likely experience extreme price and volume fluctuations
from time to time. Many technology companies, such as Polycom, have experienced
such fluctuations. In addition, our stock price may be affected by general
market conditions and domestic and international macroeconomic factors unrelated
to our performance. Often such fluctuations have been unrelated to the operating
performance of the specific companies.
BUSINESS INTERRUPTION. Our operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure and other events beyond our
control. We do not have a detailed disaster recovery plan. In addition, we do
not carry sufficient business interruption insurance to compensate us for losses
that may occur and any losses or damages incurred by us could have a material
adverse effect on our business, financial condition or operating results.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Polycom's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and bank borrowings. Polycom does not use
derivative financial instruments in its investment portfolio, and its investment
portfolio only includes highly liquid instruments.
Polycom is subject to fluctuating interest rates that may impact,
adversely or otherwise, its results of operations or cash flows for its variable
rate bank borrowings, available-for-sale securities and cash and cash
equivalents.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for Polycom's investment portfolio and debt
obligations:
As of December 31, 1999:
Expected Maturity
2000 2001 2002 Total
---- ---- ---- -----
(in thousands, except interest rates)
ASSETS
Cash and cash equivalents 35,952 --- --- 35,952
Average interest rates 2.53% --- --- 2.53%
Investments 24,815 15,050 --- 39,865
Average interest rates 4.40% 4.95% --- 4.61%
LIABILITIES
Bank line of credit --- --- --- ---
Average interest rates 8.75% --- --- 8.75%
The estimated fair value of our cash, cash equivalents and investments
approximates the principal amounts reflected above based on the short maturities
of these financial instruments. The estimated fair value of our debt obligations
approximates the principal amounts reflected above based on rates currently
available to us for debt with similar terms and remaining maturities.
All of our sales are denominated in US dollars. As only a small amount of
foreign bills are paid in currencies other than the US dollar, our foreign
exchange risk is considered immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 and the financial statement
schedules required by Item 14(d) are included in pages F-1 to F-23 and S-1 to
S-4. The supplemental data called for by Item 8 is not applicable to Polycom.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS - The information required by this item is included in Polycom's
Proxy Statement for the 2000 Annual Meeting of Stockholders and is
incorporated herein by reference.
(b) EXECUTIVE OFFICERS - The executive officers of Polycom, and their ages, as
of March 29, 2000 are as follows:
NAME AGE POSITION
---- --- --------
Robert C. Hagerty * 48 Chairman of the Board of Directors, Chief Executive Officer and President
Michael R. Kourey * 40 Senior Vice President, Finance and Administration, Chief Financial Officer, Secretary and
Director
Sunil K. Bhalla 43 Senior Vice President and General Manager, Business Communications
Dale A. Bastian 46 Senior Vice President, Worldwide Sales
Ardeshir Falaki 41 Senior Vice President and General Manager, Business Solutions and Services
Alan D. Hagedorn 52 Senior Vice President, Manufacturing
Craig B. Malloy 38 Senior Vice President and General Manager, Enterprise Visual Communications
- ------------------------
* Member of the Board of Directors.
ROBERT C. HAGERTY joined Polycom in January 1997 as President and Chief
Operating Officer and as a member of the Board of Directors. In July 1998, Mr.
Hagerty was appointed the role of President and Chief Executive Officer and in
March 2000 he was named the Chairman of the Board of Directors. Prior to joining
Polycom, Mr. Hagerty served as president of Stylus Assets, Ltd., a developer of
software and hardware products for fax, document management and Internet
communications. He also held several key management positions with Logitech,
including Operating Committee Member to the Office of the President, and Senior
Vice President/General Manager of Logitech's retail division and worldwide
operations. In addition, Mr. Hagerty's career history includes positions as Vice
President, High Performance Products for Conner Peripherals, Director of
Manufacturing Operations and General Manager for Signal Corporation, and
Operations Manager for Digital Equipment Corporation. Mr. Hagerty holds a B.S.
in Operations Research and Industrial Engineering from the University of
Massachusetts, and an M.A. in Management from St. Mary's College of California.
MICHAEL R. KOUREY joined Polycom in July 1991 and served as Polycom's
Senior Vice President, Finance and Operations until January 1995. He assumed the
additional roles of Secretary and Treasurer in June 1993. Since January 1995,
Mr. Kourey has served as Senior Vice President, Finance and Administration and
Chief Financial Officer of Polycom. In January 1999, Mr. Kourey became a member
of the Board of Directors. Prior to joining Polycom, he was Vice President,
Operations of Verilink, a supplier of T1 telecommunications equipment. He brings
over 19 years experience in high-technology finance and manufacturing management
to Polycom. Mr. Kourey holds a B.S. in Managerial Economics from the University
of California, Davis, and an M.B.A. from the University of Santa Clara.
SUNIL K. BHALLA joined Polycom in February 2000 as Senior Vice
President, Business Communications. Before joining Polycom, Mr. Bhalla served as
Vice President and General Manager of Polaroid Corporation's Internet Business
and also served as Polaroid's Vice President and General Manager, Worldwide
Digital Imaging Business. Previously, Mr. Bhalla also held posts as Director of
Strategic Marketing at Computervision Corporation, as well as senior management
positions with Digital Equipment Corporation. He has over 18 years of
high-technology experience. Mr. Bhalla holds a M.S. in Mechanical/Systems
Engineering and CAD/CAM from Lehigh University.
DALE A. BASTIAN joined Polycom in July 1997 as Senior Vice President,
Worldwide Sales and Service. Before joining Polycom, Mr. Bastian served as Vice
President, Sales and Marketing for Allen Telecom Group. Previously, Mr. Bastian
also held posts as Vice President of Sales for Rose Communications and Digital
Sound Corporation, as well as sales management positions with Commterm
Corporation, Code-A-Phone Corporation and Sony Corporation. He brings
31
over 18 years of sales experience in the telecommunications to his position at
Polycom. Mr. Bastian holds a B.B.A. in Management from Ohio University.
ARDERSHIR FALAKI joined Polycom in April 1996, as Vice President, Data
Communications Engineering. In January 1998 he was promoted to Senior Vice
President and General Manager, Data Communications Products and in 1999 he
assumed the responsibility of the Business Solutions and Services Organization
which provide worldwide service and support for Polycom customers. Mr. Falaki
was formerly Director of Performance Systems for PictureTel Corporation, a
leading video communications provider. Previously, he held a variety of key
engineering, sales and marketing positions at PictureTel. Before joining
PictureTel, Mr. Falaki served in various engineering positions at Siemens Energy
and Automation, Inc. Mr. Falaki brings over 9 years of conferencing development
experience to Polycom. Mr. Falaki holds a B.S.E.E. from Northeastern University
and participated in graduate studies in electrical engineering and physics at
the University of Massachusetts, Dartmouth.
ALAN D. HAGEDORN joined Polycom in September 1996 as the Senior Vice
President, Manufacturing. Mr. Hagedorn was formerly Vice President of
Manufacturing for Amati Communications, Inc., a leading developer of advanced
transmission equipment. Prior to that, he served as Vice President of
Manufacturing for Network Computing Devices, Inc. and has held senior
manufacturing positions with companies including PRIAM, Inc. and Anicon, Inc.
Mr. Hagedorn brings over 26 years of experience in high tech manufacturing to
his position at Polycom. Mr. Hagedorn holds a B.A. in Management from California
State University, Fullerton.
CRAIG B. MALLOY joined Polycom in January 1998 and is currently Senior
Vice President and General Manager, Enterprise Visual Communications. Mr. Malloy
co-founded ViaVideo Communications, Inc. in 1996. Prior to founding ViaVideo,
Mr. Malloy served in various marketing management roles at VTEL, including
Manager of Product Marketing and Director of Commercial Analysis. Mr. Malloy
also held marketing and manufacturing management positions with Baxter
Healthcare and Pfizer-Shiley, and served as a lieutenant in the U.S. Navy. Mr.
Malloy holds a B.S. degree in Political Science from the United States Naval
Academy and a M.B.A. degree from the University of California, Los Angeles.
The information required by this item regarding compliance with Section
16(a) of the Exchange Act is included in the Proxy Statement for Polycom's 2000
Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Proxy Statement for
Polycom's 2000 Annual Meeting of Stockholders and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSHIP AND MANAGEMENT
The information required by this item is included under the captions
"Ownership of Securities" in the Proxy Statement for Polycom's 2000 Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the captions
"Certain Transactions" in the Proxy Statement for Polycom's 2000 Annual Meeting
of Stockholders and is incorporated herein by reference.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. (see Item 8 above)
Polycom, Inc. Consolidated Financial Statements as of December 31,
1999 and 1998 and for each of the three years in the period ended
December 31, 1999.
2. Financial Statement Schedule. (see Item 8 above) The following
Financial Statement Schedule is filed as part of this Report:
Schedule II - Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
3. Exhibits.
The following Exhibits are filed as part of, or incorporated
by reference into, this Report:
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Reorganization, dated
as of June 11, 1997, by and among Polycom,
Inc., Venice Acquisition and ViaVideo
Communications, Inc. . (which is
incorporated herein by reference to Exhibit
2.1 to Form 8-K filed by the Registrant with
the Commission on August 13, 1997).
2.2 Amendment No. 1 to the Agreement and Plan of
Reorganization, dated as of September 2,
1997, by and among the Registrant, Venice
Acquisition Corporation and ViaVideo
Communications, Inc. (which is incorporated
herein by reference to Exhibit 2.2 to Form
8-K filed by the Registrant with the
Commission on January 16, 1998).
2.3 Agreement and plan of reorganization by and
among Polycom, Inc. Periscope Acquisition
Corporation and Atlas Communication Engines,
Inc., dated as of November 18, 1999 (which
is incorporated herein by reference to
Exhibit 2.1 to Form 8-K filed by the
Registrant with the Commission on December
15, 1999).
3.1 Amended and Restated Certificate of
Incorporation of Polycom, Inc. (which is
incorporated herein by reference to Exhibit
A to the Registrant's Definitive Proxy
Statement on Schedule 14A filed with the
Securities and Exchange Commission on April
21, 1998).
3.2 Amended and Restated Bylaws of Polycom, Inc.
(which is incorporated herein by reference
to Exhibit 3.4 to the Registrant's 1996
S-1).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock certificate (which is
incorporated herein by reference to 4.2
Exhibit 4.2 to the Registrant's 1996 S-1).
4.3 Amended and Restated Investor Rights
Agreement, dated May 17, 1995, among the
Registrant and the Investors named therein
(which is incorporated herein by reference
to Exhibit 4.3 to the Registrant's 1996
S-1).
4.4 Preferred Shares Rights Agreement dated as
of July 15, 1998, between Polycom, Inc. and
BankBoston N.A., including the Certificate
of Designation, the form of Rights
Certificate and the Summary of Rights
Attached thereto as Exhibits A, B and C,
respectively (which is incorporated herein
by reference to Exhibit 1 to the
Registrant's
33
Form 8-A filed with the Securities and
Exchange Commission on July 22, 1998).
10.1 Form of Indemnification Agreement entered
into between the Registrant and each of its
directors and officers (which is
incorporated herein by reference to Exhibit
10.1 to the Registrant's 1996 S-1).
10.2 The Registrant's 1991 Stock Option Plan and
forms of agreements thereunder (which 10.2
is incorporated herein by reference to
Exhibit 10.2 to the Registrant's 1996 S-1).
10.3 The Registrant's 1996 Stock Incentive Plan
and forms of agreements thereunder as
amended and restated March 5, 1997(which is
incorporated herein by reference to Exhibit
10.3 to the Registrant's 1996 S-1 and
Exhibit 99.1 to the Registrant's
registration statement on Form S-8
registration No. 333-43059).
10.4 The Registrant's Employee Stock Purchase
Plan and forms of agreements thereunder
(which is incorporated herein by reference
to Exhibit 10.4 to the Registrant's 1996
S-1).
10.5 Lease Agreement by and between the
Registrant and Orchard Investment Company
Number 701 dated June 24, 1993, as amended,
regarding the space located at 2584 Junction
Avenue (which is incorporated herein by
reference to Exhibit 10.5 to the
Registrant's 1996 S-1).
10.6 Amended and Restated Development, Volume
Purchase and Distribution Agreement, dated
December 22, 1995, by and between PictureTel
Corporation and Polycom, Inc. (which is
incorporated herein by reference to Exhibit
10.6 to the Registrant's 1996 S-1).
10.7(1) Sublicense Agreement, dated March 31, 1994,
by and between DataBeam Corporation and
Polycom, Inc. (which is incorporated herein
by reference to Exhibit 10.7 to the
Registrant's 1996 S-1).
10.8(1) Amended and Restated General Distribution
Agreement, dated February 14, 1996, by and
between DataBeam Corporation and Polycom,
Inc. (which is incorporated herein by
reference to Exhibit 10.8 to the
Registrant's 1996 S-1).
10.9(1) Volume Purchase Agreement, dated March 1,
1994, as amended, by and between Scriptel
Corporation and Polycom, Inc. (which is
incorporated herein by reference to Exhibit
10.10 to the Registrant's 1996 S-1).
10.10(1) Volume Purchase Agreement, dated March 29,
1996, by and between Scriptel Corporation
and Polycom, Inc. (which is incorporated
herein by reference to Exhibit 10.11 to the
Registrant's 1996 S-1).
10.11 Stock Pledge Agreement and Note Secured by
Stock Pledge Agreement, each dated June 9,
1995, by and between Polycom, Inc. and
Patrick P. Day. (which is incorporated
herein by reference to Exhibit 10.1 to the
Registrant's Form 10-Q dated May 14, 1997).
10.12 Series D Preferred Stock Purchase Agreement
and Amended and Restated Investor Rights
Agreement dated May 17, 1995. (which is
incorporated herein by reference to Exhibit
10.13 to the Registrant's 1996 S-1).
10.13(1) Joint Marketing and Development Agreement
and Stock Warrant Agreement, each dated
March 28, 1997, by and between Polycom, Inc.
and Minnesota Mining and Manufacturing
Company (which is incorporated herein by
reference to Exhibit 10.2 to the
Registrant's Form 10-Q dated May 14, 1997).
10.14(1) Joint Marketing and Development Agreement,
dated June 10, 1997, by and between Polycom,
Inc. and Minnesota Mining and Manufacturing
Company, as amended on June 10, 1997 (which
is incorporated herein by reference to
Exhibit 10.1 to the Registrant's Form 10-Q
dated August 13, 1997).
10.15 Lease Agreement by and between the
Registrant and The Joseph and Eda Pell
Revocable Trust, dated May 12, 1997,
regarding the space located at Arroyo
Business Center in Livermore, California
(which is incorporated herein by reference
to Exhibit
34
10.15 to the Registrant's Form 10-K dated
March 13, 1998).
10.16 Stock Pledge Agreement and Note Secured by
Stock Pledge Agreement, each dated March 17,
1997 (which is incorporated herein by
reference to Exhibit 10.1 to the
Registrant's Form 10-Q dated May 14, 1997).
10.17 ViaVideo Communications, Inc. 1996 Stock
Option/Stock Issuance Plan and related
agreements (which is incorporated by
reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-8,
Registration No. 333-45351).
10.18 Lease Agreement by and between the
Registrant and Trinet Essential Facilities
XXVI, dated December 1, 1999, regarding the
space located at 1565 Barber Lane (filed
herein).
21.1 Subsidiaries of the Registrant (filed
herein).
23.1 Consent of Independent Accountants (filed
herein).
24.1 Power of Attorney (filed herein).
27.1 Financial Data Schedule (filed herein).
27.2 Financial Data Schedule Annual Restatement
for 1998, 1997 and 1996 for Pooling
Transaction with Atlas Communication
Engines, Inc. (filed herein).
27.3 Financial Data Schedule Quarterly
Restatement for 1999, 1998 and 1997 for
Pooling Transaction with Atlas Communication
Engines, Inc. (first, second and third
quarter of 1997 and first and second
quarter of 1998) (filed herein).
27.4 Financial Data Schedule Quarterly
Restatement for 1999, 1998 and 1997 for
Pooling Transaction with Atlas Communication
Engines, Inc. (third quarter of 1998 and
first, second and third quarter of 1999)
(filed herein).
(1) Confidential treatment requested as to certain portions of
these documents.
(b) REPORTS ON FORM 8-K.
A report on Form 8-K was filed on December 15, 1999, regarding
Polycom's acquisition of Atlas Communication Engines. Inc. effective
December 1, 1999.
A report on Form 8-K/A was filed on February 11, 2000, providing an
update concerning Polycom's acquisition of Atlas Communication Engines.
Inc. effective December 1, 1999. This update clarified that the
financial statements of Atlas and the pro forma financial information
relating to the Merger specified in Items 7(a) and (b) of Form 8-K are
not required to be filed because the Merger does not the meet the
conditions specified in Sections 210.3-05(b)(2)(i) and 210.11-01,
respectively, of Regulation S-X.
(c) EXHIBITS.
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES.
See Items 8 and 14(a)(2) above.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on this 29th day of March, 2000.
POLYCOM, INC.
/s/ Robert C. Hagerty /s/ Michael R. Kourey
- ------------------------------------ --------------------------------
Robert C. Hagerty Michael R. Kourey
Chairman of the Board of Directors, Senior Vice President, Finance
Administration, and
Chief Executive Officer and President Chief Financial Officer and
Secretary
36
POLYCOM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of PricewaterhouseCoopers LLP, Independent Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Polycom, Inc. and Polycom, Inc. Stockholders,
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Polycom, Inc. and its subsidiaries at December 31, 1999 and 1998, and results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 28, 2000, except for Note 15
which is as of March 3, 2000
F-2
POLYCOM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
------------------------------
1999 1998
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 35,952 $ 18,006
Short-term investments 24,815 5,483
Accounts receivable, net of allowance for doubtful accounts of $1,304 and
$871 in 1999 and 1998, respectively 47,445 25,168
Inventories 18,136 17,326
Deferred and refundable taxes 9,059 2,594
Prepaid expenses and other current assets 2,368 2,217
------------- -------------
Total current assets 137,775 70,794
Fixed assets, net 9,795 6,802
Noncurrent deferred taxes 1,546 -
Long-term investments 15,050 -
Other assets 555 709
------------- -------------
Total assets $ 164,721 $ 78,305
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,433 $ 12,683
Accrued payroll and related liabilities 4,031 3,505
Taxes payable 9,633 1,405
Other current liabilities 11,354 6,784
------------- -------------
Total current liabilities 51,451 24,377
------------- -------------
Commitments and contingencies (Note 8) --- ---
Stockholders' equity :
Preferred stock, $0.001 par value:
Authorized: 5,000,000 shares in 1999 and 1998
Issued and outstanding: none in 1999 and 1998 --- ---
Common stock, $0.0005 par value:
Authorized: 50,000,000 shares
Issued and outstanding: 34,342,874 shares in 1999 and 31,097,583 in 1998 17 16
Additional paid-in capital 97,594 65,465
Unrealized loss on marketable securities (85) ---
Unearned stock-based compensation (1,953) ---
Retained earnings (deficit) 17,697 (11,553)
------------- -------------
Total stockholders' equity 113,270 53,928
------------- -------------
Total liabilities and stockholders' equity $ 164,721 $ 78,305
============= =============
The accompanying notes are an integral part of these consolidated
financial statements
F-3
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- -------------- -------------
Net revenues $ 200,067 $ 116,886 $ 50,394
Cost of net revenues 91,257 57,906 27,583
-------------- -------------- -------------
Gross profit 108,810 58,980 22,811
Operating expenses:
Sales and marketing 36,047 22,156 13,247
Research and development 21,615 14,719 17,038
General and administrative 8,269 5,518 7,019
Acquisition costs 1,650 185 597
-------------- -------------- -------------
Total operating expenses 67,581 42,578 37,901
-------------- -------------- -------------
Operating income (loss) 41,229 16,402 (15,090)
Interest income, net 1,771 957 1,154
Other income (expense) (31) (9) 12
-------------- -------------- -------------
Income (loss) before provision for
income taxes 42,969 17,350 (13,924)
Provision for income taxes 13,616 1,749 171
-------------- -------------- -------------
Net income (loss) $ 29,353 $ 15,601 $ (14,095)
============== ============== =============
Basic net income (loss) per share $ 0.90 $ 0.54 $ (0.66)
============== ============== =============
Diluted net income (loss) per share $ 0.81 $ 0.46 $ (0.66)
============== ============== =============
Shares used in Basic per share calculation 32,536 28,810 21,489
Shares used in Diluted per share calculation 36,458 33,847 21,489
The accompanying notes are an integral part of these consolidated
financial statements
F-4
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Preferred Stock Common Stock Additional
----------------------- ------------------------ Paid-In
Shares Amount Shares Amount Capital
----------------------- ----------- -------- -----------
Balances, January 1, 1997 2,390,388 $ 2 23,056,585 $ 12 $ 44,685
Issuance of preferred stock 3,418,706 3 --- --- 7,517
Exercise of stock options under stock option plan --- --- 361,378 --- 127
Shares purchased under ESPP --- --- 92,731 --- 396
Repurchase of common stock --- --- (113,831) --- (18)
Interest on stockholder notes --- --- --- --- ---
Payment of stockholder notes receivable --- --- --- --- ---
Valuation of warrants --- --- --- --- 40
Valuation of options granted to outside
consultants --- --- --- --- 76
Dividend to S-Corporation shareholders --- --- --- --- ---
Capital contribution by S-Corporation
shareholders --- --- --- --- 423
Net loss --- --- --- --- ---
----------- -------- ----------- -------- -----------
Balances, December 31, 1997 5,809,094 $ 5 23,396,863 $ 12 $ 53,246
----------- -------- ----------- -------- -----------
Conversion of preferred stock into common stock (5,809,094) (5) 5,809,094 3 2
Issuance of common stock --- --- 1,020,476 1 7,629
Exercise of stock options under stock option plan --- --- 791,180 --- 1,651
Shares purchased under ESPP --- --- 79,970 --- 495
Cost of Stockholders' Rights Plan --- --- --- --- (26)
Payment of stockholder notes receivable --- --- --- --- ---
Valuation of options granted to outside
consultants --- --- --- --- 122
Tax benefit from stock option activity --- --- --- --- 2,121
Dividend to S-Corporation shareholders --- --- --- --- ---
Capital contribution by S-Corporation
shareholders --- --- --- --- 225
Net income --- --- --- --- ---
----------- -------- ----------- -------- -----------
Balances, December 31, 1998 --- $ --- 31,097,583 $ 16 $ 65,465
----------- -------- ----------- -------- -----------
Issuance of stock through exercise of warrants --- --- 2,000,000 1 14,999
Exercise of stock options under stock option plan --- --- 1,108,136 --- 4,592
Shares purchased under ESPP --- --- 137,155 --- 1,039
Cost of registration statements --- --- --- --- (31)
Valuation of options granted to outside consultants --- --- --- --- 26
Unearned stock compensation --- --- --- --- 2,400
Amortization of stock-based compensation --- --- --- --- ---
Tax benefit from stock option activity --- --- --- --- 9,104
Unrealized loss on investments --- --- --- --- ---
Dividend to S-Corporation shareholders --- --- --- --- ---
Net income --- --- --- --- ---
----------- -------- ----------- -------- -----------
Balances, December 31, 1999 --- $ --- 34,342,874 $ 17 $ 97,594
=========== ======== =========== ======== ===========
Unearned Retained
Stock-based Earnings
Compensation Other (Deficit) Total
------------- --------- ------------ -----------
Balances, January 1, 1997 $ --- $ (29) $ (11,637) $ 33,033
Issuance of preferred stock --- --- --- 7,520
Exercise of stock options under stock option plan --- --- --- 127
Shares purchased under ESPP --- --- --- 396
Repurchase of common stock --- --- --- (18)
Interest on stockholder notes --- (8) --- (8)
Payment of stockholder notes receivable --- 13 --- 13
Valuation of warrants --- --- -- 40
Valuation of options granted --- --- -- 76
Dividend to S-Corporation shareholders --- --- (157) (157)
Capital contribution by S-Corporation
shareholders --- --- (423) ---
Net loss --- --- (14,095) (14,095)
------------- --------- ------------ -----------
Balances, December 31, 1997 $ --- $ (24) $ (26,312) $ 26,927
------------- --------- ------------ -----------
Conversion of preferred stock into common stock --- --- --- ---
Issuance of common stock --- --- --- 7,630
Exercise of stock options under stock option plan --- --- --- 1,651
Shares purchased under ESPP --- --- --- 495
Cost of Stockholders' Rights Plan --- --- --- (26)
Payment of stockholder notes receivable --- 24 --- 24
Valuation of options granted to outside
consultants --- --- --- 122
Tax benefit from stock option activity --- --- --- 2,121
Dividend to S-Corporation shareholders --- --- (617) (617)
Capital contribution by S-Corporation
shareholders --- --- (225) ---
Net income --- --- 15,601 15,601
------------- --------- ------------ -----------
Balances, December 31, 1998 $ --- $ --- $ (11,553) $ 53,928
------------- --------- ------------ -----------
Issuance of stock through exercise of warrants --- --- --- 15,000
Exercise of stock options under stock option plan --- --- --- 4,592
Shares purchased under ESPP --- --- --- 1,039
Cost of registration statements --- --- --- (31)
Valuation of options granted to outside consultants --- --- --- 26
Unearned stock compensation (2,400) --- --- ---
Amortization of stock-based compensation 447 --- --- 447
Tax benefit from stock option activity --- --- --- 9,104
Unrealized loss on investments --- (85) --- (85)
Dividend to S-Corporation shareholders --- --- (103) (103)
Net income --- --- 29,353 29,353
------------- --------- ------------ -----------
Balances, December 31, 1999 $ (1,953) $ (85) $ 17,697 $ 113,270
============= ========= ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements
F-5
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $ 29,353 $ 15,601 $ (14,095)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,263 3,314 2,031
Provision for doubtful accounts 433 400 30
Provision for excess and obsolete inventories 4,958 2,799 1,302
Tax benefit from exercise of stock options 9,104 2,121 ---
Value of stock-based compensation 475 121 76
Loss on asset dispositions --- 6 308
Other non-cash adjustments --- --- 48
Changes in assets and liabilities:
Accounts receivable (22,710) (16,895) (2,427)
Inventories (5,768) (9,910) (3,977)
Deferred taxes (8,011) (2,594) ---
Prepaid expenses and other current assets (497) 357 (2,055)
Accounts payable 13,750 856 7,338
Taxes payable 8,228 1,292 25
Accrued liabilities 5,062 5,199 2,811
-------------- -------------- --------------
Net cash provided by (used in) operating activities 38,640 2,667 (8,585)
-------------- -------------- --------------
Cash flows from investing activities:
Acquisition of fixed assets (7,222) (5,486) (3,623)
Purchase of investments (44,735) (9,686) (7,154)
Proceeds from sale of investments 10,268 9,387 12,071
Other 500 27 ---
-------------- -------------- --------------
Net cash provided by (used in) investing activities (41,189) (5,758) 1,294
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of repurchases and
issuance costs 5,598 9,752 504
Proceeds from exercise of warrants 15,000 --- ---
Dividends paid to S-Corporation shareholders (103) (617) (157)
Proceeds from line of credit borrowings --- 9,601 2,558
Repayment of line of credit borrowings --- (10,226) (1,983)
Proceeds from issuance of preferred stock, net of issuance costs --- --- 7,521
Repayment of stockholder notes receivable, net --- 24 5
-------------- -------------- --------------
Net cash provided by financing activities 20,495 8,534 8,448
-------------- -------------- --------------
Net increase in cash and cash equivalents 17,946 5,443 1,157
Cash and cash equivalents, beginning of period 18,006 12,563 11,406
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 35,952 $ 18,006 $ 12,563
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 77 $ 16 $ 141
Income taxes paid $ 4,289 $ 399 $ 40
Advertising barter trade credits $ (770) $ 770 $ ---
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING:
Capital leases $ 34 $ 113 $ 20
Capital contribution of S-Corp shareholders $ --- $ 225 $ 423
Conversion of preferred shares to common stock $ --- $ 9,496 $ ---
The accompanying notes are an integral part of these consolidated
financial statements
F-6
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Polycom, Inc. and subsidiaries (the Company), a Delaware
corporation, develops, manufactures and markets a full range of
premium-quality, media-rich communication tools and network
solutions. The Company's products are distributed and serviced
globally. The Company sells its products through marketing and
sales relationships with a wide network of value-added resellers,
telecommunications equipment distributors, wireline equipment
manufacturers, telecommunication service providers, and retailers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR:
The Company uses a 52-53 week fiscal year. As a result, a fiscal
year may not end as of the same day as the calendar year. For
convenience of presentation, the accompanying consolidated
financial statements have been shown as ending on December 31 of
each applicable period. Due to timing, 1998 was a 53 week fiscal
year. Consequently, the first quarter of 1998 had 14 weeks rather
than the usual 13 weeks.
RECLASSIFICATIONS:
Certain items in prior year's financial statements have been
reclassified to conform to current year's format.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with original
or remaining maturities of 90 days or less at the time of purchase
to be cash equivalents.
INVESTMENTS:
Investments are classified as available for sale securities and are
carried at fair value. Unrealized holding gains and losses on such
securities are reported net of related taxes as a separate
component of stockholders' equity. Realized gains and losses on
sales of all such securities are reported in earnings and computed
using the specific identification cost method.
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is
determined on a standard cost basis which approximates the
first-in, first-out (FIFO) method. Appropriate consideration is
given to obsolescence, excessive levels, deterioration and other
factors in evaluating net realizable value.
F-7
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIXED ASSETS:
Fixed assets are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on a straight-line basis
over the estimated useful lives of the assets, which is one to
three years. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the remaining
lease term or the estimated useful life of the related assets,
typically three to five years. Disposals of capital equipment are
recorded by removing the costs and accumulated depreciation from
the accounts and gains or losses on disposals are included in the
results of operations.
CARRYING VALUE OF LONG-LIVED ASSETS:
The Company writes down the carrying value of long-lived assets to
fair market value if the carrying value is considered to be
impaired. The value is considered to be impaired if the carrying
amount exceeds the undiscounted future net cash flows generated by
the assets.
REVENUE RECOGNITION:
The Company recognizes revenue from gross product sales, less a
provision for estimated future customer returns, upon shipment to
the customer, upon fulfillment of acceptance terms, if any, when no
significant contractual obligations remain outstanding and
collection is considered probable. Additionally, the Company
recognizes extended service revenue over the life of the service
contract. During 1998, the Company recognized $2.5 million in
revenue related to certain deliverables detailed in the joint
development and marketing agreement with 3M concerning the
ViewStation product line. In 1997, the Company recognized $3.0
million in revenue related to certain deliverables detailed in
the joint development and marketing agreement with 3M concerning
the ShowStation IP. The amounts recognized as revenue from these
agreements approximate the amounts that would have been recognized
using the percentage of completion methodology.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are charged to operations as
incurred.
ADVERTISING:
The Company expenses the production costs of advertising as the
expenses are incurred. The production costs of advertising consist
primarily of magazine advertisements, agency fees and other direct
production costs. The advertising expense for the years ended
December 31, 1999, 1998 and 1997 was $9.2 million, $5.2 million,
$1.8 million, respectively. In 1998, the Company traded inventory
for advertising barter trade credits which were reflected in
prepaid assets and stated at a net book value of $770,000 as of
December 31, 1998. No revenue was recognized on this transaction.
In 1999, the inventory was returned in exchange for the return of
the barter credits. Therefore, the net book value of the
advertising barter trade credits was zero as of December 31, 1999.
INCOME TAXES:
Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized.
TRANSLATION OF FOREIGN CURRENCIES:
For all of the Company's foreign subsidiaries, the functional
currency is the U.S. dollar. Accordingly, monetary assets and
liabilities are translated at year-end exchange rates while
nonmonetary items are translated at historical rates. Income and
expense accounts are translated at the average rates in effect
during the year, except for depreciation and cost of revenue which
are translated at historical rates. Foreign exchange gains and
losses have not been significant to date and have been recorded in
results of operations.
F-8
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the periods
represented. Diluted net income (loss) per share is computed using
common and dilutive common equivalent shares outstanding during the
periods represented. Common equivalent shares (including shares
issued under the Stock Option Plan which are subject to repurchase)
are excluded from the computation of fully diluted net loss per
share when their effect is antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts
payable and other accrued liabilities approximate fair value due to
their short maturities. Estimated fair values of investments, which
are disclosed elsewhere, are based on quoted market prices for the
same or similar instruments.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-based Compensation," encourages, but
does not require, companies to record compensation cost for
stock-based compensation plans at fair value. The Company has
chosen to continue to account for employee stock options using the
intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of SFAS No. 123. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock and is
recognized over the vesting period which is generally three to five
years.
The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues
Task Force Issue No. 96-18,"Accounting for Equity Instruments That
are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services."
SOFTWARE FOR INTERNAL USE:
In March 1998, American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 98-1, "Software for
Internal Use," which provides guidance on accounting for the cost
of computer software developed or obtained for internal use. The
Company adopted SOP 98-1 in 1999 and the adoption did not have a
material impact on the Company's financial position and results of
operations.
ACQUISITIONS:
On December 1, 1999, the Company completed the acquisition of Atlas
Communication Engines, Inc., (Atlas) whereby a wholly owned
subsidiary of Polycom, Inc. was merged with and into Atlas. Atlas
designed, developed, marketed and sold high quality DSL customer
premise equipment and internet access devices primarily on an OEM
basis. Approximately 1.3 million shares of Polycom common stock
were exchanged for all of the issued and outstanding capital stock
of Atlas. In addition, outstanding stock options to purchase Atlas
common stock were converted into options to purchase approximately
0.5 million shares of Polycom common stock. The transaction was
treated as a pooling of interests for financial reporting purposes
and, consequently, all prior period figures have been restated as
if the combined entity existed for all periods presented. All
intercompany transactions between the two companies have been
eliminated in consolidation. Polycom and Atlas had the same fiscal
year end of December 31. Adjustments, related primarily to fixed
asset capitalization, depreciation and inventory accounting, have
been made to conform and align accounting policies between the two
companies.
On January 2, 1998, the Company completed the acquisition of
ViaVideo Communications, Inc., (ViaVideo) whereby a wholly-owned
subsidiary of Polycom, Inc. was merged with and into ViaVideo.
ViaVideo was a development stage company that designed and
developed high quality, low cost, easy to use, group
F-9
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
videoconferencing systems that utilize advanced video and audio
compression technologies along with Internet/Web-based features.
Approximately 8.7 million shares of Polycom common stock were
exchanged for all of the issued and outstanding capital stock of
ViaVideo. In addition, outstanding stock options to purchase
ViaVideo common stock were converted into options to purchase
approximately 1.1 million shares of Polycom common stock. The
transaction was treated as a pooling of interests for financial
reporting purposes and, consequently, all prior period figures were
restated as if the combined entity existed for all periods
presented. All intercompany transactions between the two companies
have been eliminated in consolidation. Polycom and ViaVideo had the
same fiscal year end of December 31 and activity from the start of
fiscal 1998 to the merger date was not material. Further, there
were no adjustments required to conform accounting policies between
the two companies.
The following table reconciles Polycom's previously reported
revenue and earnings to the restated amounts ($ in thousands):
Nine months
ended Year ended Year ended
Sept. 30, 1999 Dec. 31, 1998 Dec. 31, 1997
---------------- ---------------- -----------------
Net revenues:
Polycom previously reported $ 136,113 $ 111,696 $ 46,630
Atlas 3,466 5,190 3,764
---------------- ---------------- -----------------
Restated net revenues $ 139,579 $ 116,886 $ 50,394
================ ================ =================
Net income (loss):
Polycom previously reported $ 22,459 $ 14,759 $ (14,675)
Atlas (993) 842 580
---------------- ---------------- -----------------
Restated net income (loss) $ 21,466 $ 15,601 $ (14,095)
================ ================ =================
Basic net income (loss) per share:
Polycom previously reported $ 0.73 $ 0.54 $ (0.73)
Atlas (0.06) --- 0.07
---------------- ---------------- -----------------
Restated basic net income (loss) per share $ 0.67 $ 0.54 $ (0.66)
================ ================ =================
Diluted net income (loss) per share:
Polycom previously reported $ 0.65 $ 0.46 $ (0.73)
Atlas (0.06) --- 0.07
---------------- ---------------- -----------------
Restated diluted net income (loss) per share $ 0.59 $ 0.46 $ (0.66)
================ ================ =================
COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, (SFAS No.
130), "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes
all changes in equity (net assets) during a period from non-owner
sources. The components of comprehensive income are as follows:
December 31,
------------------------------------
1999 1998
---------------- --------------
Net Income $ 29,353 $ 15,601
Unrealized loss on investments (85) -
---------------- --------------
Comprehensive income $ 29,268 $ 15,601
================ ==============
F-10
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT PRONOUNCEMENTS:
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 established
methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other
hedging activities, and is effective for fiscal years beginning
after June 15, 2000, as amended by SFAS No. 137. Although the
Company does not believe SFAS 133 will have a material effect on
its operations and financial position, the Company has not yet
fully determined this statement's impact.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) 101, "Revenue Recognition," which
outlines the basic criteria that must be met to recognize revenue
and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial
statements filed with the Securities and Exchange Commission. The
effective date of this pronouncement is the second quarter of the
fiscal year beginning after December 15, 1999. The Company believes
that adopting SAB 101 will not have a material impact on the
Company's financial position and results of operations.
3. INVESTMENTS:
Investments at December 31, 1999 and 1998 comprise (in thousands):
Fair Cost
Value Basis
-----------------------------
INVESTMENTS - CURRENT:
US government securities $ 7,718 $ 7,743
State and local governments 5,520 5,520
Corporate debt securities 11,577 11,577
-----------------------------
Total $ 24,815 $ 24,840
INVESTMENTS - NONCURRENT:
US government securities $ 3,762 $ 3,777
State and local governments 7,976 8,013
Corporate debt securities 3,312 3,320
-----------------------------
$ 15,050 $ 15,110
-----------------------------
Balances at December 31, 1999 $ 39,865 $ 39,950
=============================
INVESTMENTS - CURRENT:
US government securities $2,611 $2,611
Foreign Government Securities 504 504
Corporate debt securities 2,368 2,368
-----------------------------
Balances at December 31, 1998 $ 5,483 $ 5,483
=============================
All current investments as of December 31, 1999 and 1998 mature
within one year. Noncurrent investments mature within two years.
During 1999 and 1998, there were no realized gains or losses on the
disposal of investments.
F-11
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES:
Inventories consist of the following (in thousands)
December 31,
-----------------------------------
1999 1998
--------------- ---------------
Raw materials $ 1,542 $ 1,601
Finished goods 16,594 15,725
--------------- ---------------
Total inventories $18,136 $ 17,326
=============== ===============
5. FIXED ASSETS:
Fixed assets, net, consist of the following (in thousands):
December 31,
------------------------------------
1999 1998
--------------- ---------------
Computer equipment and software $ 12,777 $6,507
Equipment, furniture and fixtures 4,456 3,866
Tooling equipment 4,732 4,700
Leasehold improvements 687 567
------------ ------------
22,652 15,640
Less accumulated depreciation and amortization 12,857 8,838
------------ ------------
$ 9,795 $6,802
============ ============
6. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following (in thousands):
December 31,
------------------------------------
1999 1998
--------------- ---------------
Accrued expenses and legal fees $ 5,202 $ 3,127
Warranty reserve 2,814 1,721
Deferred service revenue 1,247 270
Sales tax payable 661 579
Employee stock purchase plan withholding 663 391
Other accrued liabilities 767 696
------------ ------------
$11,354 $ 6,784
============ ============
7. BUSINESS RISKS AND CREDIT CONCENTRATION:
The Company sells a limited number of products which serve the
communications equipment market. A substantial majority of the
Company's net revenues are derived from sales of the SoundStation
and ViewStation products. Any factor adversely affecting demand or
supply for the SoundStation and ViewStation products could
materially adversely affect the Company's business and financial
performance.
F-12
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Currently, the Company subcontracts the manufacturing of a majority
of its products through one subcontractor in Asia. The Company
believes that there are a number of alternative contract
manufacturers that could produce the Company's products, but in the
event of a reduction or interruption of supply, it could take a
significant period of time to qualify an alternative subcontractor
and commence manufacturing. The effect of such reduction or
interruption in supply on results of operations would be material.
Additionally, the Asian economy has gone through some recent
problems which, as yet, have not had a material impact on the
supply of Polycom product from the subcontractor used in this
region. However, should the economic problems in Asia persist, it
could create an interruption in supply which could materially
adversely affect the results of operations.
The Company's cash, cash equivalents and investments are maintained
with three international investment management companies and five
commercial banks and their international affiliates, and are
invested in the form of demand deposit accounts, money market
accounts, corporate debt securities and government securities.
Deposits in these institutions may exceed the amount of insurance
provided on such deposits.
The Company markets its products to distributors and end-users
throughout the world. Management performs ongoing credit
evaluations of the Company's customers and maintains an allowance
for potential credit losses. The expansion of Polycom's product
offerings may increase the Company's credit risk as customers place
larger orders for the new products. There can be no assurance that
the Company's credit loss experience will remain at or near
historic levels.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
On September 3, 1997, VTEL Corporation ("VTEL") filed a lawsuit in
the State District Court in Travis County, Texas against ViaVideo
Communications, Inc., a subsidiary of Polycom, and its founders
(who were formerly employed by VTEL). On May 27, 1998, VTEL amended
its suit to add Polycom as a defendant. In the lawsuit, VTEL
alleged breach of contract, breach of confidential relationship,
disclosure of proprietary information and related allegations.
ViaVideo, its founders and Polycom answered the suit, denying in
their entirety VTEL's allegations (see Note 15 Subsequent Events).
STANDBY LETTER OF CREDIT:
The Company has several standby letters of credit totaling
approximately $200,000 which have been issued to guarantee certain
of the Company's foreign office lease obligations and other
contractual obligations. The Company also maintains, from time to
time, commercial letters of credit as payments for the importation
of certain products. The amounts do not exceed $300,000 and are
outstanding less than 120 days.
The Company had a $300,000 standby letter of credit that was issued
in 1997 to guarantee certain of the Company's contractual
obligation. This letter of credit was canceled in October 1999.
During May 1997, a bank issued a standby letter of credit to one of
ViaVideo's major suppliers for $335,000. The letter of credit
expired in April 1998 and was secured by ViaVideo's certificate of
deposit for a similar amount deposited with the bank.
During August 1997, a bank issued a standby letter of credit to one
of ViaVideo's major suppliers for $75,000. The letter of credit
expired in July 1998 and was secured by ViaVideo's certificate of
deposit for a similar amount deposited with the bank.
LICENSE AGREEMENT:
The Company entered into an agreement to license software to be
incorporated into its web-based products. Under the agreement, the
Company was obligated to pay annual minimum license fees, ranging
from $15,000 to
F-13
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$35,000 through the year 2001 and the Company could cancel the
agreement at any time, provided it had paid a minimum of $200,000
in connection with the agreement. As of December 31, 1998, the
Company had paid $275,000 of the minimum license fees. In February
1999, the Company re-negotiated the terms of the contract and paid
a lump sum figure of $195,000. Under the terms of this new
contract, the Company has no further obligation regarding any fees
associated with this licensed software.
LEASES:
The Company leases certain office facilities and equipment under
noncancelable operating leases expiring between 2000 and 2007.
Future minimum lease payments are as follows (in thousands):
YEAR ENDING DECEMBER 31, Leases
------------------------ --------------------
2000 $ 2,514
2001 2,751
2002 2,682
2003 2,781
2004 2,895
Thereafter 5,929
-------------------
Minimum future lease payments $ 19,552
===================
In November 1999, the Company leased 102,240 square feet of office
space for its headquarters location in Milpitas, California. This
lease is due to expire in January 2007. Under the terms of the
lease, the Company is responsible for related maintenance, taxes
and insurance. In all other material facility leases, the Company
is responsible for related maintenance, taxes and insurance.
Rent expense for the years ended December 31, 1999, 1998 and 1997
was $ 2.3 million, $1.3 million and $692,000, respectively.
9. CREDIT ARRANGEMENTS:
The Company has available a $15.0 million bank revolving line of
credit under an agreement with a bank. Borrowings under the line
are unsecured and bear interest at the bank's prime rate (8.50% at
December 31, 1999) or at an offshore interbank offered rate (IBOR)
plus 0.65% (approximately 6.3% to 7.1%, depending on the term of
the borrowings at December 31, 1999). Borrowings under the line are
subject to certain financial covenants and restrictions on
liquidity, indebtedness, financial guarantees, business
combinations, profitability levels, and other related items. The
line expires on October 31, 2000 but may be renewed by the Company
for an additional year so long as certain liquidity measures are
met at the time of renewal. The weighted average interest rates for
the years ended December 31, 1999, 1998 and 1997 were 8.1%, 8.4%
and 9.3%, respectively.
Prior to October 1999, the Company had a revolving line of credit
with a bank for the lesser of $5,000,000 or the sum of 80% of
eligible domestic trade accounts receivable and 50% of foreign
trade accounts receivable, as defined, less the sum of the
aggregate outstanding face amount of all letters of credit issued
under the line. The line of credit expired in October 1999.
Borrowings under the line were subject to certain financial
covenants and restrictions on indebtedness, equity distributions,
financial guarantees, business combinations and other related items
and were collateralized by substantially all of the Company's
assets.
As of December 31, 1997, ViaVideo Communications had a bank credit
agreement which provided for a revolving line of credit of up to
$750,000. The outstanding balance on the line of credit at December
31, 1997 was $625,000 with an interest rate equal to the bank's
prime rate plus 0.75% (9.25% at December 31, 1997). The line was
collateralized by substantially all of the assets of ViaVideo. The
outstanding balance was paid in full during 1998 and the line was
closed.
F-14
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no balances outstanding for the above mentioned lines of
credit for the periods presented.
10. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
In March 1996, the Company authorized 18,095,690 shares of
preferred stock. In May 1998, the Company reduced the authorized
shares of preferred stock to 5,000,000. As of December 31, 1997,
the Company had 7,102,104 authorized shares of convertible
preferred stock, of which, 5,809,094 shares were outstanding.
During 1998, the outstanding convertible preferred shares were
converted to common stock before the merger between Polycom and
ViaVideo Communications. As of December 31, 1999, the Company has
no shares of preferred stock outstanding.
COMMON STOCK:
As of December 31, 1999, 539,941 shares of common stock, stemming
primarily from the founder stock of ViaVideo Communications, Inc.,
were outstanding but subject to repurchase.
STOCK OPTION PLAN:
In 1996, the Board of Directors reserved 3,125,000 shares of common
stock under its 1996 Stock Option Plan (the Plan) for issuance to
employees and directors of the Company. In 1997 and 1999, an
additional 1,000,000 shares and 1,500,000 shares, respectively,
were reserved through a shareholder vote. The Plan supersedes the
1991 Stock Option Plan (91 Plan).
In 1996, ViaVideo Communications, Inc. reserved 887,763 shares of
common stock under the 1996 ViaVideo Communications, Inc. Stock
Option Plan (ViaVideo Plan) for issuance to employees of
ViaVideo. In 1997, an additional 710,210 shares were reserved
through a shareholder vote. The ViaVideo Plan was assumed by
Polycom pursuant to the Merger Agreement on January 2, 1998. All
remaining option shares available for grant and subsequent
cancellations of option shares under the ViaVideo Plan expired or
will expire as no additional option shares can be granted from the
ViaVideo Plan subsequent to the merger.
In 1996, Atlas Communication Engines, Inc. reserved 439,868 shares
of common stock under the 1996 Stock Incentive Plan (Atlas Plan)
for issuance to employees of Atlas. In 1997, an additional 175,947
shares were reserved through a shareholder vote. The Atlas Plan was
assumed by Polycom pursuant to the Merger Agreement on December 1,
1999. All remaining option shares available for grant and
subsequent cancellations of option shares under the Atlas Plan
expired or will expire as no additional option shares can be
granted from the Atlas Plan subsequent to the merger.
Under the terms of the Plan, the 91 Plan, the ViaVideo Plan, and
the Atlas Plan, options may be granted at prices not lower than
fair market value at date of grant as determined by the Board of
Directors. The options granted under the ViaVideo Plan and the 91
Plan are immediately exercisable, expire in ten years from the date
of grant, and the unvested shares issued upon exercise of the
options are generally subject to a right of repurchase by the
Company upon termination of employment with the Company. Options
granted under the Plan and the Atlas Plan expire ten years from the
date of grant and generally are only exercisable upon vesting.
Options granted under the Plan prior to December 1998 and under the
91 Plan normally vest at 20% after completing one year of service
to the Company and the remaining amount equally over 48 months
until fully vested after five years. Options granted under the
ViaVideo Plan normally vest monthly for each month of service to
the Company until fully vested after four years. Options granted
under the Atlas Plan normally vest at 33% after completing one year
of service to the Company and the remaining amount in equal
quarterly installments over the next eight quarters until fully
vested after three years. For new options granted under the Plan
beginning in December 1998, the options normally vest at 25% after
completing one year of service to the Company and the remaining
amount equally over 36 months until fully vested after four years.
In addition, as a special bonus to employees, option grants that
become fully vested after one year of service to the Company
F-15
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
have been made under the Plan and the Atlas Plan. While there are
many option grants with vesting schedules different than those
described, generally vesting of options is consistent within each
of the plans.
Activity under the Plan is as follows (in thousands, except share
and per share data):
Shares Outstanding Options
---------------- ----------------- -------------- ----------------
Available Number Exercise Aggregate Weighted Avg
for Grant of Shares Price Price Exercise Price
-----------------------------------------------------------------------------------
Balances, December 31, 1996 2,783,521 1,589,803 $ 0.15-$ 9.00 $ 7,267 $ 4.57
Options reserved 1,710,210 --- --- --- ---
Options granted (4,103,422) 4,103,422 $ 0.08-$ 6.06 12,190 $ 2.97
Options exercised --- (361,378) $ 0.08-$ 4.75 (127) $ 0.35
Options canceled 802,561 (802,561) $ 0.08-$ 9.00 (4,343) $ 5.41
Shares repurchased 12,091 --- --- --- ---
-----------------------------------------------------------------------------------
Balances, December 31, 1997 1,204,961 4,529,286 $ 0.08-$ 9.00 $ 14,987 $ 3.31
Options reserved 175,947 --- --- --- ---
Options granted (1,031,694) 1,031,694 $ 2.85-$20.56 13,803 $ 13.38
Options exercised --- (791,180) $ 0.08-$ 9.00 (1,651) $ 2.09
Options canceled 389,405 (389,405) $ 0.15-$15.13 (1,996) $ 5.13
Options expired (227,768) --- --- --- ---
-----------------------------------------------------------------------------------
Balances, December 31, 1998 510,851 4,380,395 $ 0.08-$20.56 $ 25,143 $ 5.74
Options reserved 1,500,000 --- --- --- ---
Options granted (1,812,034) 1,812,034 $ 5.69-$63.88 61,682 $ 34.04
Options exercised --- (1,108,136) $ 0.08-$32.00 (4,572) $ 4.13
Options canceled 293,479 (293,479) $ 2.00-$45.00 (4,514) $ 15.38
Options expired (139,096) --- --- --- ---
-----------------------------------------------------------------------------------
Balances, December 31, 1999 353,200 4,790,814 $ 0.08-$63.88 $ 77,739 $ 16.23
As of December 31, 1999, 1998 and 1997, 1,173,731, 1,841,971,
1,894,287 outstanding options were exercisable at an aggregate
average exercise price of $3.62, $2.33, and $1.43, respectively. Of
these options that were exercisable, 369,319, 677,066 and 1,174,149
as of December 31, 1999, 1998 and 1997, respectively, were unvested
and, the shares received on exercise would be subject to
repurchase. In addition, as of December 31, 1999, 60,541 shares of
common stock acquired under the Plan, the 91 Plan and ViaVideo Plan
("the Plans") were subject to repurchase.
In March 1997, the Company implemented an option cancellation and
regrant program for employees (other than executive officers)
holding stock options with exercise prices per share in excess of
$4.50. Outstanding options covering an aggregate of 223,200 shares
with exercise prices in excess of $4.50 per share were canceled and
new options for the same number of shares were granted with an
exercise price of $4.38 per share. The new options vest over a
five-year period beginning on March 5, 1997.
F-16
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The options outstanding and currently exercisable by exercise price
at December 31, 1999 are as follows:
Options Outstanding Options Currently Exercisable
------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Yrs) Price Exercisable Price
--------------------------------------------------------------------- -----------------------------------
$0.08 - $0.21 406,460 7.18 $0.15 406,460 $0.15
$0.23 - $0.57 107,676 6.13 $0.51 107,676 $0.51
$1.00 - $2.56 96,418 7.33 $2.21 96,418 $2.21
$2.56 - $6.38 1,842,994 7.45 $4.54 372,897 $3.82
$7.20 - $13.63 360,152 8.28 $10.49 136,129 $11.34
$15.13 - $25.00 531,019 8.96 $20.89 49,307 $16.62
$25.13 - $29.56 104,625 8.37 $26.95 4,844 $26.75
$32.00 - $34.94 994,770 9.40 $34.83 --- $0.00
$35.75 - $62.50 330,450 9.08 $47.49 --- $0.00
$63.88 - $63.88 16,250 9.92 $63.88 --- $0.00
------------------------------------------------- ------------------------------------
4,790,814 8.17 $16.23 1,173,731 $3.62
=============== ==================
Consistent with the disclosure provisions of SFAS No. 123, the
Company's net income or loss and basic and diluted net income or
loss per share would have been adjusted to the pro forma amounts
indicated below (in thousands, except per share amounts):
Year ended Year ended Year ended
1999 1998 1997
------------- ------------ ------------
Net income/(loss) - as reported $29,353 $15,601 $(14,095)
Net income/(loss) - pro forma $17,238 $9,578 $(18,828)
Basic net income/(loss) per share - as reported $0.90 $0.54 $(0.66)
Basic net income/(loss) per share - pro forma $0.53 $0.33 $(0.88)
Diluted net income/(loss) per share - as reported $0.81 $0.46 $(0.66)
Diluted net income/(loss) per share - pro forma $0.47 $0.28 $(0.88)
The impact on pro forma net income (loss) per share and net income
(loss) in the table above may not be indicative of the effect in
future years as options vest over several years and the Company
continues to grant stock options to new employees. This policy may
or may not continue.
The fair value of each option grant is estimated on the date of
grant using the multiple options approach with the Black-Scholes
model with the following weighted average assumptions:
Risk-free interest rate 5.09% - 5.66%
Expected life (yrs) 0.5
Expected dividends ---
Expected volatility 0.6 - 0.8
The weighted average fair value of options granted pursuant to the
Plans were $19.06, $6.40 and $3.06 in 1999, 1998 and 1997,
respectively.
The weighted average expected life was calculated based on the
vesting period and an aggregate exercise behavior. This exercise
behavior was based on historical exercise patterns. The risk-free
interest rate was calculated in accordance with the grant date and
expected life.
F-17
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has also estimated the fair value of purchase rights
issued under the Employee Stock Purchase Plan. Rights under this
plan were also evaluated using the Black-Scholes option-pricing
model. The Company's plan is described in Note 11. Purchase periods
occur twice yearly and each effectively contains a 6-month option.
January 1999 July 1999
---------------- ----------------
Risk free interest rate 5.09% 5.09%
Expected life (yrs) 0.5 0.5
Expected dividend yield --- ---
Expected volatility 0.8 0.8
The weighted average fair value of purchase rights granted pursuant
to the Employee Stock Purchase Plan in 1999 and 1998 was $5.55 and
$3.38, respectively.
UNEARNED STOCK-BASED COMPENSATION:
In connection with certain stock option grants during 1999, the
Company recorded unearned stock-based compensation cost totaling
$2.4 million which is being recognized over the vesting period of
the related options of three years. Amortization expense associated
with unearned stock compensation totaled $447,000 for 1999.
WARRANTS:
In connection with a joint marketing and development agreement,
dated March 28, 1997, for the ShowStation IP, Polycom granted 3M
warrants to purchase up to 2,000,000 shares of the Company's common
stock at an exercise price of $7.50 per share. The warrants were
due to expire in March 1999 and were exercised on March 1, 1999.
The warrants were valued at approximately $40,000 on the date of
grant using the Black-Scholes model. As of December 31, 1999, the
Company had no warrants outstanding.
PREFERRED SHARE PURCHASE RIGHTS PLAN:
On July 15, 1998, pursuant to a Preferred Shares Rights Agreement
between Polycom, Inc. and BankBoston N.A., as Rights Agent, the
Company's Board of Directors declared a dividend of one right to
purchase one one-thousandth of a share of the Company's Series A
Preferred Stock for each outstanding share of Common Stock, par
value of $0.0005 per share, of the Company. The dividend was
payable on July 31, 1998 to stockholders of record as of the close
of business on that day. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share of
Series A Preferred at an exercise price of $90.00, subject to
adjustment. The Rights become exercisable (the Distribution Date)
upon the earlier of: (i) fifteen days following the first date a
public announcement by the Company or an Acquiring Person that
an Acquiring Person has become such (the Shares Acquisition
Date) and (ii) fifteen days (or such later date as may be
determined by the Board of Directors) following the commencement
of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in a
person or group becoming an Acquiring Person. A person or group
of affiliated or associated persons that beneficially owns, or
has the right to acquire beneficial ownership of, 20% or more of
the outstanding Common Shares is referred to as an "Acquiring
Person." The Rights will expire on the earliest of (i) July 15,
2008 (the Final Expiration Date) or (ii) redemption or exchange
of the Rights as described below.
Unless the Rights are earlier redeemed, in the event that a person
becomes an Acquiring Person (a Triggering Event), each holder of
a Right which has not theretofore been exercised (other than Rights
beneficially owned by the Acquiring Person or any affiliate of the
Acquiring Person, which will thereafter be void) will thereafter
have the right to receive, upon exercise, Common Shares having a
value equal to two times the Purchase Price. The Company may
instead substitute cash, assets or other securities for the Common
Shares for which the Rights would have been exercisable.
F-18
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Similarly, unless the Rights are earlier redeemed, in the event
that, after a Triggering Event, (i) the Company is acquired in a
merger or other business combination transaction, or (ii) 50% or
more of the Company's assets or earning power are sold (other than
in transactions in the ordinary course of business), proper
provision must be made so that each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by
the Acquiring Person or any affiliate of the Acquiring Person,
which will thereafter be void) will thereafter have the right to
receive, upon exercise, shares of common stock of the acquiring
company having a value equal to two times the Purchase Price.
At any time after a Triggering Event and prior to the acquisition
by any person or entity of beneficial ownership of 50% or more of
the Company's outstanding Common Shares, the Board of Directors of
the Company may exchange the Rights (other than Rights owned by the
Acquiring Person), in whole or in part, at an exchange ratio of one
Common Share per Right.
At any time on or prior to the close of business on the earlier of
(i) the Shares Acquisition Date and (ii) the Final Expiration Date
of the Rights, the Company may redeem the Rights in whole, but not
in part, at a price of $0.005 per Right.
11. EMPLOYEE BENEFITS PLANS:
401 (k) PLAN:
The Company has a 401 (k) Plan (the 401(k) Plan), which covers
substantially all employees. Each eligible employee may elect to
contribute to the 401(k) Plan, through payroll deductions, up to
20% of their compensation, subject to current statutory
limitations. The Company, at the discretion of the Board of
Directors, may make matching contributions to the 401(k) Plan but
has not done so through 1999. Beginning with fiscal year 2000,
however, the Company will match 50% of the first 3% of compensation
employees contribute to the 401(k) Plan, up to a maximum of $500
per participating employee per year.
EMPLOYEE STOCK PURCHASE PLAN:
Under the Employee Qualified Stock Purchase Plan, the Company can
grant stock purchase rights to all eligible employees during
offering periods of up to a maximum of 24 months with purchase
dates approximately every six months (beginning each February and
August). The Company has reserved 1,000,000 shares of common stock
for issuance under the plan. Shares are purchased through
employees' payroll deductions, up to a maximum of 15% of employees'
compensation, at purchase prices equal to 85% of the lesser of the
fair market value of the Company's common stock at either the date
of the employee's entrance to the offering period or the purchase
date. No participant may purchase more than 1,500 shares or $25,000
worth of common stock in any one calendar year.
F-19
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES:
Income tax expense consists of the following (in thousands):
Year ended December 31,
---------------------------------------------------------
1999 1998 1997
------------------ ---------------- ---------------
CURRENT
U. S. Federal $ 20,460 $ 3,415 $ 171
Foreign 337 35 ---
State and local 817 893 ---
------------------ ---------------- ---------------
Total current $ 21,614 $ 4,343 $ 171
DEFERRED
U. S. Federal $ (6,538) $ (2,594) $ ---
Foreign (130) --- ---
State and local (1,330) --- ---
------------------ ---------------- ---------------
Total deferred $ (7,998) $ (2,594) $ ---
------------------ ---------------- ---------------
Income tax expense $ 13,616 $ 1,749 $ 171
================== ================ ===============
The sources of income (loss) before the provision for income taxes
are as follows (in thousands):
Year ended December 31,
---------------------------------------------------------
1999 1998 1997
------------------ ---------------- ---------------
United States $ 49,765 $ 17,262 $ (13,924)
Foreign (6,796) 88 ---
------------------ ---------------- ---------------
Income (loss) before provision for income taxes $ 42,969 $ 17,350 $ (13,924)
================== ================ ===============
The Company's tax provision differs from the provision computed
using statutory tax rates as follow (in thousands):
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
------------ ------------- --------------
Federal tax at statutory rate $ 15,039 $5,778 $(4,931)
State taxes, net of federal benefit 1,719 1,007 (51)
Nondeductible expenses 1,603 83 117
Alternative Minimum Tax - - 38
Foreign losses at tax rates different than U.S. 2,586 - -
Change in valuation allowance (7,679) (3,863) 6,094
Current NOL and credit utilization (2,183) (1,256) (837)
Other 2,531 - (259)
------------ ------------- --------------
Tax provision $ 13,616 $1,749 $ 171
============ ============= ==============
F-20
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to the
deferred tax assets are presented below (in thousands):
1999 1998 1997
--------------- ------------- ------------
Fixed assets, principally due to differences in
depreciation $ 739 $ 1,998 $ 552
Other accrued liabilities 7,938 5,123 3,627
Capitalized research expenditures --- 246 334
Net operating loss carryforwards 1,681 2,553 4,746
Tax credit carryforwards 247 353 2,283
Other --- --- ---
Valuation allowance --- (7,679) (11,542)
--------------- ------------- ------------
Net deferred tax asset $ 10,605 $ 2,594 $ ---
=============== ============= ============
The valuation allowance established in prior years was reversed in
1999 due to the Company's belief that the deferred tax assets will
more likely than not be realized.
As of December 31, 1999, the Company has tax net operating loss
carryforwards for tax purposes of approximately $4,799,000 and tax
credit carryforwards of $247,000. These net operating loss
carryforwards expire in the years 2007 through 2015 and the tax
credit carryforwards have an unlimited carryover. The future
utilization of the Company's net operating loss and credit
carryforwards are subject to a certain limitation due to changes in
ownership that occurred in 1998.
13. BUSINESS SEGMENT INFORMATION:
The Company operates in one business segment, named Communications,
and markets its products in the United States and in foreign
countries through resellers. Assets outside the United States are
insignificant.
The Company's net revenues are all denominated in U.S. dollars and
are summarized as follows (in thousands):
Year Ended December 31,
--------------------------------------------
1999 1998 1997
-------------- --------------- -------------
United States $ 133,691 $ 89,217 $ 39,057
Canada 4,583 927 545
----------- ------------ ----------
North America 138,274 90,144 39,602
Europe, Middle East & Africa 38,891 15,578 5,446
Asia 18,029 8,138 4,148
Caribbean & Latin America 4,873 3,026 1,198
-------------- --------------- -------------
Total International 61,793 26,742 10,792
-------------- --------------- -------------
$ 200,067 $ 116,886 $ 50,394
============== =============== =============
F-21
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The percentage of total net revenues for the Video Communications,
Voice Communications and Network Access product lines were as
follows:
Year Ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
Video communications 63% 48% 11%
Voice communications 34% 48% 81%
Network access products 3% 4% 8%
--------------------------------------
Total net revenues 100% 100% 100%
======================================
Lucent Technologies, Inc. accounted for 11%, 11% and 10% of net
revenue in 1999, 1998 and 1997, respectively.
14. EARNINGS PER SHARE (EPS) DISCLOSURES:
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and
diluted EPS is provided as follows (in thousands except per share
amounts).
Year Ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
Numerator - basic and diluted EPS
Net income (loss) $29,353 $ 15,601 $ (14,095)
======================================
Denominator - Basic EPS
Weighted average common stock outstanding 33,452 30,382 21,489
Shares subject to repurchase (916) (1,572) ---
--------------------------------------
Total Shares used in calculation of Basic EPS 32,536 28,810 21,489
--------------------------------------
Basic net income (loss) per share $ 0.90 $ 0.54 $ (0.66)
======================================
Denominator - Diluted EPS
Denominator - Basic EPS 32,536 28,810 21,489
Effect of Dilutive Securities:
Common stock options 2,795 2,694 ---
Shares subject to repurchase 916 1,572 ---
Convertible warrants and preferred 211 771 ---
--------------------------------------
Total Shares used in calculation of Diluted EPS 36,458 33,847 21,489
--------------------------------------
Diluted net income (loss) per share $ 0.81 $ 0.46 $ (0.66)
======================================
Stock options to purchase 4,529,286 shares of common stock at
prices ranging from $0.08 to $9.00 and 5,809,094 shares of
preferred stock were outstanding at December 31, 1997 but were not
included in the computation of diluted net loss per share as they
were antidilutive.
Associated with the joint marketing and development agreement
concerning the ShowStation IP with Minnesota, Mining and
Manufacturing Company ("3M"), 3M was granted 2,000,000 warrants
to purchase common stock at $7.50 per share. These warrants were
antidilutive at December 31, 1997 and, therefore, were not
considered in the Diluted EPS figure.
F-22
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENT:
On September 3, 1997, VTEL Corporation (VTEL) filed a lawsuit in
the State District Court in Travis County, Texas against ViaVideo
Communications, Inc., a subsidiary of Polycom, and its founders
(who were formerly employed by VTEL). On May 27, 1998, VTEL amended
its suit to add Polycom as a defendant. In the lawsuit, VTEL
alleged breach of contract, breach of confidential relationship,
disclosure of proprietary information and related allegations.
ViaVideo, its founders and Polycom answered the suit, denying in
their entirety VTEL's allegations. On March 3, 2000, VTEL
voluntarily dismissed the allegations against Polycom and ViaVideo
with prejudice for no consideration.
F-23
POLYCOM, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
Page
Report of PricewaterhouseCoopers LLP, Independent Accountants, on the
Financial Statement Schedule S-2
Schedule II - Valuation and Qualifying Accounts. S-3
S-1
REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENTS SCHEDULE
To the Board of Directors
of Polycom, Inc
Our audits of the consolidated financial statements referred to in our report
dated January 28, 2000, except for note 15, which is as of March 3, 2000,
appearing on page F-2 of this Annual Report on Form 10-K also included an audit
of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
January 28, 2000
S-2
SCHEDULE II
POLYCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Balance at
Beginning End of
Description of Period Additions Deductions Period
Year ended December 31, 1999
Allowance for Doubtful Accounts $ 871 $ 433 $ --- $ 1,304
Provision for Obsolete Inventory $ 2,378 $ 4,958 $ (594) $ 6,742
Tax Valuation Allowance $ 7,679 $ --- $ (7,679) $ ---
Year ended December 31, 1998
Allowance for Doubtful Accounts $ 471 $ 400 $ --- $ 871
Provision for Obsolete Inventory $ 2,419 $ 2,799 $ (2,840) $ 2,378
Tax Valuation Allowance $ 11,542 $ --- $ (3,863) $ 7,679
Year ended December 31, 1997
Allowance for Doubtful Accounts $ 436 $ 30 $ (5) $ 471
Provision for Obsolete Inventory $ 1,074 $ 1,368 $ (23) $ 2,419
Tax Valuation Allowance $ 5,448 $ 6,094 $ --- $11,542
S-3