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EXCEL - IDEA: XBRL DOCUMENT - POLYCOM INCFinancial_Report.xls
EX-31.2 - EX-31.2 - POLYCOM INCplcm-ex312_201503319.htm
EX-31.1 - EX-31.1 - POLYCOM INCplcm-ex311_201503318.htm
EX-32.1 - EX-32.1 - POLYCOM INCplcm-ex321_2015033110.htm
EX-10.1 - EX-10.1 - POLYCOM INCplcm-ex101_20150331420.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission File Number: 000-27978

 

POLYCOM, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-3128324

(State or other jurisdiction of

incorporation or organization)

 

(IRS employer

identification number)

 

6001 America Center Drive, San Jose, CA

 

 

95002

(Address of principal executive offices)

 

(Zip Code)

(408) 586-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 in Exchange Act).    Yes  ¨    No   x

There were 135,055,276 shares of the Company’s Common Stock, par value $.0005, outstanding on April 24, 2015.

 

 

 

 

 


 

POLYCOM, INC.

INDEX

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED March 31, 2015

PART I FINANCIAL INFORMATION

 

Item 1 Financial Statements (unaudited):

  

3

 

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

  

3

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014

  

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014

  

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014

  

6

 

Notes to Condensed Consolidated Financial Statements

  

7

 

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

25

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk

  

38

 

Item 4 Controls and Procedures

  

39

 

PART II OTHER INFORMATION

 

Item 1—Legal Proceedings

  

40

 

Item 1A—Risk Factors

  

41

 

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds

  

58

 

Item 3—Defaults Upon Senior Securities

  

58

 

Item 4—Mine Safety Disclosures

  

58

 

Item 5—Other Information

  

58

 

Item 6—Exhibits

  

59

 

SIGNATURES

  

60

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

 

Item 1. FINANCIAL STATEMENTS

POLYCOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

 

 

March 31,

2015

 

 

December 31,

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

421,512

 

 

$

443,132

 

Short-term investments

 

206,085

 

 

 

185,783

 

Trade receivables, net of allowance for doubtful accounts of $2,968 and $3,040

   at March 31, 2015 and December 31, 2014, respectively

 

169,096

 

 

 

169,400

 

Inventories

 

93,942

 

 

 

100,328

 

Deferred taxes

 

38,768

 

 

 

38,805

 

Prepaid expenses and other current assets

 

70,255

 

 

 

61,072

 

Total current assets

 

999,658

 

 

 

998,520

 

Property and equipment, net

 

107,134

 

 

 

109,195

 

Long-term investments

 

41,158

 

 

 

59,197

 

Goodwill

 

559,248

 

 

 

559,231

 

Purchased intangibles, net

 

21,474

 

 

 

24,567

 

Deferred taxes

 

49,091

 

 

 

54,019

 

Other assets

 

24,918

 

 

 

26,493

 

Total assets

$

1,802,681

 

 

$

1,831,222

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

107,118

 

 

$

108,172

 

Accrued payroll and related liabilities

 

31,616

 

 

 

42,901

 

Taxes payable

 

3,254

 

 

 

4,056

 

Deferred revenue

 

177,983

 

 

 

173,532

 

Current portion of long-term debt

 

6,250

 

 

 

6,250

 

Other accrued liabilities

 

81,961

 

 

 

86,193

 

Total current liabilities

 

408,182

 

 

 

421,104

 

Long-term deferred revenue

 

86,734

 

 

 

89,366

 

Taxes payable

 

11,846

 

 

 

11,719

 

Deferred taxes

 

164

 

 

 

173

 

Long-term debt

 

234,375

 

 

 

235,938

 

Other non-current liabilities

 

38,927

 

 

 

49,189

 

Total liabilities

 

780,228

 

 

 

807,489

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock, $0.0005 par value; Authorized: 350,000,000 shares; Issued and outstanding:

   135,054,538 shares at March 31, 2015 and 135,204,948 shares at December 31, 2014

 

68

 

 

 

68

 

Additional paid-in capital

 

1,151,324

 

 

 

1,155,829

 

Accumulated deficit

 

(137,059

)

 

 

(136,275

)

Accumulated other comprehensive income

 

8,120

 

 

 

4,111

 

Total stockholders' equity

 

1,022,453

 

 

 

1,023,733

 

Total liabilities and stockholders' equity

$

1,802,681

 

 

$

1,831,222

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

3


 

POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

Three Months Ended

 

 

March 31,

2015

 

 

March 31,

2014

 

Revenues:

 

 

 

 

 

 

 

Product revenues

$

233,687

 

 

$

231,509

 

Service revenues

 

97,013

 

 

 

97,015

 

Total revenues

 

330,700

 

 

 

328,524

 

Cost of revenues:

 

 

 

 

 

 

 

Cost of product revenues

 

101,269

 

 

 

97,636

 

Cost of service revenues

 

36,611

 

 

 

38,903

 

Total cost of revenues

 

137,880

 

 

 

136,539

 

Gross profit

 

192,820

 

 

 

191,985

 

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing

 

90,859

 

 

 

93,968

 

Research and development

 

49,337

 

 

 

48,147

 

General and administrative

 

21,167

 

 

 

23,793

 

Amortization of purchased intangibles

 

2,417

 

 

 

2,492

 

Restructuring costs

 

24

 

 

 

30,343

 

Transaction-related costs

 

 

 

156

 

Total operating expenses

 

163,804

 

 

 

198,899

 

Operating income (loss)

 

29,016

 

 

 

(6,914

)

Interest and other income (expense), net:

 

 

 

 

 

 

 

Interest expense

 

(1,484

)

 

 

(1,474

)

Other income (expense), net

 

22

 

 

 

779

 

Interest and other income (expense), net

 

(1,462

)

 

 

(695

)

Income (loss) before provision for (benefit from) income taxes

 

27,554

 

 

 

(7,609

)

Provision for (benefit from) income taxes

 

6,356

 

 

 

(3,618

)

Net income (loss)

$

21,198

 

 

$

(3,991

)

 

 

 

 

 

 

 

 

Basic net income (loss) per share:

$

0.16

 

 

$

(0.03

)

 

 

 

 

 

 

 

 

Diluted net income (loss) per share:

$

0.15

 

 

$

(0.03

)

 

 

 

 

 

 

 

 

Number of shares used in computation of net income (loss) per share:

 

 

 

 

 

 

 

Basic

 

134,777

 

 

 

136,795

 

Diluted

 

139,233

 

 

 

136,795

 

 

As a result of the net loss in the three months ended March 31, 2014, all potentially issuable common shares for that period have been excluded from the diluted shares used in the computation of earnings per share as their effect is anti-dilutive.

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


 

POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

Three Months Ended

 

 

March 31,

2015

 

 

March 31,

2014

 

Net income (loss)

$

21,198

 

 

$

(3,991

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

183

 

 

 

(1,203

)

Unrealized gains/losses on investments:

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

89

 

 

 

(7

)

Net losses reclassified into earnings

 

(3

)

 

 

(1

)

Net unrealized gains (losses) on investments

 

86

 

 

 

(8

)

Unrealized gains/losses on hedging securities:

 

 

 

 

 

 

 

Unrealized hedge gains (losses) arising during the period

 

6,298

 

 

 

(421

)

Net (gains) losses reclassified into earnings for revenue hedges

 

(6,636

)

 

 

2,865

 

Net (gains) losses reclassified into earnings for expense hedges

 

4,078

 

 

 

(2,199

)

Net unrealized gains/losses on hedging securities

 

3,740

 

 

 

245

 

Other comprehensive income (loss)

 

4,009

 

 

 

(966

)

Comprehensive income (loss)

$

25,207

 

 

$

(4,957

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

5


 

POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

Three Months Ended

 

 

March 31,

2015

 

 

March 31,

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

21,198

 

 

$

(3,991

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

14,104

 

 

 

14,533

 

Amortization of purchased intangibles

 

3,093

 

 

 

3,352

 

Amortization of capitalized software development costs for products to be sold

 

685

 

 

 

288

 

Amortization of debt issuance costs

 

133

 

 

 

134

 

Amortization of discounts and premiums on investments, net

 

527

 

 

 

442

 

Provision for doubtful accounts

 

 

 

 

 

Write-down of excess and obsolete inventories

 

4,530

 

 

 

1,781

 

Stock-based compensation expense

 

9,232

 

 

 

5,647

 

Excess tax benefits from stock-based compensation expense

 

(3,120

)

 

 

(1,695

)

Loss on disposal of property and equipment

 

541

 

 

 

3,685

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Trade receivables

 

304

 

 

 

(870

)

Inventories

 

1,856

 

 

 

(1,752

)

Deferred taxes

 

(1,469

)

 

 

(1,762

)

Prepaid expenses and other assets

 

(4,651

)

 

 

(8,623

)

Accounts payable

 

(1,120

)

 

 

6,750

 

Taxes payable

 

8,498

 

 

 

4,936

 

Other accrued liabilities and deferred revenue

 

(23,969

)

 

 

(3,761

)

Net cash provided by operating activities

 

30,372

 

 

 

19,094

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(11,748

)

 

 

(10,929

)

Capitalized software development costs for products to be sold

 

(606

)

 

 

(1,073

)

Purchases of investments

 

(50,669

)

 

 

(90,663

)

Proceeds from sales of investments

 

5,185

 

 

 

30,114

 

Proceeds from maturities of investments

 

42,796

 

 

 

35,430

 

Net cash used in investing activities

 

(15,042

)

 

 

(37,121

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock under employee option and stock

   purchase plans

 

12,408

 

 

 

13,295

 

Payments on debt

 

(1,563

)

 

 

(1,562

)

Purchase and retirement of common stock under share repurchase plan

 

(39,993

)

 

 

 

Purchase and retirement of common stock for tax withholdings on vesting of employee

   stock-based awards

 

(10,922

)

 

 

(7,816

)

Excess tax benefits from stock-based compensation expense

 

3,120

 

 

 

1,695

 

Net cash provided by (used in) financing activities

 

(36,950

)

 

 

5,612

 

Net decrease in cash and cash equivalents

 

(21,620

)

 

 

(12,415

)

Cash and cash equivalents, beginning of period

 

443,132

 

 

 

392,629

 

Cash and cash equivalents, end of period

$

421,512

 

 

$

380,214

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

6


 

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. BASIS OF PRESENTATION

The accompanying unaudited financial statements, consisting of the condensed consolidated balance sheet as of March 31, 2015, the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014, the condensed consolidated statements of comprehensive income (loss) for the three months ended Mach 31, 2015 and 2014, and the condensed consolidated statements of cash flows for the three months ended March 31, 2015 and 2014, have been prepared in accordance with accounting principles generally accepted in the United States of America in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. In addition, the condensed consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements as of that date. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes typically found in the audited consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K of Polycom, Inc. and its subsidiaries (the “Company”). In the opinion of management, the accompanying unaudited financial statements have been prepared on a basis consistent with the Company’s December 31, 2014 audited financial statements and all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported period. Actual results could differ from those estimates and operating results for the three months ended March 31, 2015 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update which provides guidance on whether a cloud computing arrangement includes a software license to a customer of such an arrangement. If a cloud computing arrangement includes a software license, a customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses, otherwise the customer should account for the arrangement as a service contract. The standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted. The standard can be applied prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively. The Company is evaluating the impact of adopting this standard on its consolidated financial statements and disclosures.

In April 2015, the FASB issued an accounting standard update which requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. The standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted. The standard will be applied retrospectively to each prior period presented.  The Company is evaluating the impact of adopting this standard on its consolidated balance sheets.

In February 2015, the FASB issued an amendment to the accounting standard regarding the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The amendments in this update are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this update is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

In May 2014, the FASB issued an accounting standard update which provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In April 2015, the FASB voted to defer the effective date to fiscal years beginning after December 15, 2017. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company has not yet selected a transition method nor has it determined the impact of adoption on its consolidated financial statements.

 

7


 

3. DISCONTINUED OPERATIONS

On December 4, 2012, the Company completed the disposition of the net assets of its enterprise wireless voice solutions (“EWS”) business to Mobile Devices Holdings, LLC, a Delaware limited liability corporation. Additional cash consideration of up to $25.0 million is payable to Polycom over the next two years subject to certain conditions, including meeting certain agreed-upon EBITDA-based milestones for the fiscal years ending December 31, 2015 and 2016. These conditions were not met for the fiscal years ended December 31, 2014 and 2013. Such additional cash consideration will be accounted for as a gain on sale of discontinued operations, net of taxes, when it is realized or realizable. For the three months ended March 31, 2015 and 2014, there were no realized gains on sale of discontinued operations.

 

4. ACCOUNTS RECEIVABLE FINANCING

The Company has a financing agreement with an unrelated third party financing company (the “Financing Agreement”) whereby it offers distributors and resellers direct or indirect financing on their purchases of the Company’s products and services. In return, the Company agrees to pay the financing company a fee based on a pre-defined percentage of the transaction amount financed. In certain instances, these financing arrangements result in a transfer of its receivables, without recourse, to the financing company. If the transaction meets the applicable criteria under Accounting Standards Codification (“ASC”) 860 and is accounted for as a sale of financial assets, the accounts receivable are excluded from the balance sheet upon the third party financing company’s payment remittance to the Company. In certain legal jurisdictions, the arrangement fees that involve maintenance services or products bundled with maintenance at one price do not qualify as a sale of financial assets in accordance with the authoritative guidance. Accordingly, accounts receivable related to these arrangements are accounted for as a secured borrowing in accordance with ASC 860, and the Company records a liability for any cash received, while maintaining the associated accounts receivable balance until the distributor or reseller remits payment to the third-party financing company.

In the three months ended March 31, 2015, total transactions entered pursuant to the terms of the Financing Agreement were approximately $64.6 million, of which $39.2 million were related to the transfer of the financial assets arrangement. In the three months ended March 31, 2014, total transactions entered were approximately $32.0 million, of which $31.1 million were related to the transfer of the financial assets arrangement. The financing of these receivables accelerated the collection of the Company’s cash and reduced its credit exposure. The amount due from the financing company as of March 31, 2015 and December 31, 2014 was approximately $35.7 million and $28.5 million, respectively, of which $21.3 million and $20.2 million, respectively, was related to the accounts receivable transferred, and is included in “Trade receivables” in the Company’s condensed consolidated balance sheets. Fees incurred pursuant to the Financing Agreement were approximately $0.9 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively. Those fees were recorded as reductions to revenues.

 

5. GOODWILL, PURCHASED INTANGIBLES, AND SOFTWARE DEVELOPMENT COSTS

Goodwill

The following table presents the changes to the Company’s goodwill by segment during the three months ended March 31, 2015 (in thousands):

 

 

Americas

 

 

EMEA

 

 

APAC

 

 

Total

 

Balance at December 31, 2014

$

308,159

 

 

$

101,882

 

 

$

149,190

 

 

$

559,231

 

Foreign currency translation

 

 

 

 

 

 

 

17

 

 

 

17

 

Balance at March 31, 2015

$

308,159

 

 

$

101,882

 

 

$

149,207

 

 

$

559,248

 

 

8


 

Purchased Intangible Assets and Software Development Costs

The following table presents details of the Company’s total purchased intangible assets and capitalized software development costs for products to be sold as of the following periods (in thousands):

 

 

March 31, 2015

 

 

December 31, 2014

 

 

Gross

Value

 

 

Accumulated

Amortization

& Impairment

 

 

Net Value

 

 

Gross

Value

 

 

Accumulated

Amortization

& Impairment

 

 

Net Value

 

Core and developed technology

$

81,178

 

 

$

(80,645

)

 

$

533

 

 

$

81,178

 

 

$

(79,986

)

 

$

1,192

 

Customer and partner relationships

 

79,525

 

 

 

(60,213

)

 

 

19,312

 

 

 

79,525

 

 

 

(57,983

)

 

 

21,542

 

Non-compete agreements

 

1,800

 

 

 

(1,250

)

 

 

550

 

 

 

1,800

 

 

 

(1,100

)

 

 

700

 

Trade name

 

3,400

 

 

 

(3,264

)

 

 

136

 

 

 

3,400

 

 

 

(3,229

)

 

 

171

 

Other

 

4,462

 

 

 

(4,437

)

 

 

25

 

 

 

4,462

 

 

 

(4,418

)

 

 

44

 

Finite-lived intangible assets

 

170,365

 

 

 

(149,809

)

 

 

20,556

 

 

 

170,365

 

 

 

(146,716

)

 

 

23,649

 

Indefinite-lived trade name

 

918

 

 

 

 

 

 

918

 

 

 

918

 

 

 

 

 

 

918

 

Total acquired intangible assets

$

171,283

 

 

$

(149,809

)

 

$

21,474

 

 

$

171,283

 

 

$

(146,716

)

 

$

24,567

 

Capitalized software development costs for

   products to be sold

$

8,069

 

 

$

(2,585

)

 

$

5,484

 

 

$

7,416

 

 

$

(1,900

)

 

$

5,516

 

 

Purchased intangibles include a purchased trade name of $0.9 million with an indefinite life as the Company expects to generate cash flows related to this asset indefinitely. Consequently, this trade name is not amortized but is reviewed for impairment annually or sooner when indicators of potential impairment exist.

The following table summarizes the amortization expenses recorded in the following periods (in thousands):

 

 

Three Months Ended

 

 

March 31,

2015

 

 

March 31,

2014

 

Amortization of purchased intangibles in revenues

$

19

 

 

$

19

 

Amortization of purchased intangibles in cost of product revenues

 

657

 

 

 

841

 

Amortization of purchased intangibles in operating expenses

 

2,417

 

 

 

2,492

 

Total amortization expenses of purchased intangibles

$

3,093

 

 

$

3,352

 

 

Amortization of purchased intangibles is not allocated to the Company’s segments.

The estimated future amortization expense as of March 31, 2015 is as follows (in thousands):

 

Year ending December 31,

 

Amount

 

Remainder of 2015

 

$

7,403

 

2016

 

 

8,484

 

2017

 

 

4,669

 

Total

 

$

20,556

 

In the three months ended March 31, 2015 and 2014, the Company capitalized approximately $0.7 million and $1.1 million of software development costs, respectively, for internally developed software products to be marketed and sold to customers after the point that technological feasibility has been reached and before the products are available for general release. The capitalized costs are being amortized over the estimated product useful life, generally three years, beginning when the products are available for general release. Management expects that the capitalized software development costs are recoverable from future gross profits generated by these products and services.

 

6. RESTRUCTURING COSTS

The Company recorded net restructuring costs of $0.02 million and $30.3 million during the three months ended March 31, 2015 and 2014, respectively. Pursuant to the announcement in January 2014, and certain discrete follow-on actions that were not material, management completed certain actions designed to better align expenses to the Company’s revenue and gross margin profile and position the Company for improved operating performance.  These actions included the elimination of approximately six percent

9


 

of the global workforce and the reduction or elimination of certain leased facilities. The Company has recorded a cumulative amount of $40.4 million in restructuring costs (net of adjustments related to the assumptions used in the estimate of the related liabilities reserves) as of March 31, 2015 in connection with these actions, and does not expect any remaining charges to be material.

The following table summarizes the changes in the Company’s restructuring reserves during the three months ended March 31, 2015 (in thousands):

 

 

Severance/Other

 

 

Facilities

 

 

Total

 

Balance at December 31, 2014

$

664

 

 

$

40,909

 

 

$

41,573

 

Additions to the reserve, net

 

2,652

 

 

 

(3,184

)

 

 

(532

)

Interest accretion

 

 

 

 

547

 

 

 

547

 

Non-cash write-offs

 

 

 

 

(201

)

 

 

(201

)

Cash payments and other usage

 

(2,203

)

 

 

(5,413

)

 

 

(7,616

)

Balance at March 31, 2015

$

1,113

 

 

$

32,658

 

 

$

33,771

 

 

As of March 31, 2015, the restructuring reserve was primarily comprised of facilities-related liabilities. The Company calculated the fair value of its facilities-related liabilities based on the discounted future lease payments less sublease assumptions. This fair value measurement is classified as a Level 3 measurement under ASC 820. The key assumptions used in the valuation model include discount rates, cash flow projections, and estimated sublease income. These assumptions involve significant judgment, are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change.

 

7. BALANCE SHEET DETAILS

Trade receivables, net consist of the following (in thousands):

 

 

March 31,

2015

 

 

December 31,

2014

 

Gross accounts receivables

$

214,707

 

 

$

214,664

 

Returns and related reserves

 

(42,643

)

 

 

(42,224

)

Allowance for doubtful accounts

 

(2,968

)

 

 

(3,040

)

Total

$

169,096

 

 

$

169,400

 

Inventories consist of the following (in thousands):

 

 

March 31,

2015

 

 

December 31,

2014

 

Raw materials

$

1,203

 

 

$

1,496

 

Work in process

 

1,048

 

 

 

545

 

Finished goods

 

91,691

 

 

 

98,287

 

Total

$

93,942

 

 

$

100,328

 

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

March 31,

2015

 

 

December 31,

2014

 

Non-trade receivables

$

7,212

 

 

$

6,547

 

Prepaid expenses

 

37,303

 

 

 

37,385

 

Derivative assets

 

22,808

 

 

 

14,342

 

Other current assets

 

2,932

 

 

 

2,798

 

Total

$

70,255

 

 

$

61,072

 

 

10


 

Deferred revenue consists of the following (in thousands):

 

 

March 31,

2015

 

 

December 31,

2014

 

Short-term:

 

 

 

 

 

 

 

Service

$

175,509

 

 

$

171,355

 

Product

 

19

 

 

 

94

 

License

 

2,455

 

 

 

2,083

 

Total

$

177,983

 

 

$

173,532

 

Long-term:

 

 

 

 

 

 

 

Service

$

83,433

 

 

$

85,925

 

License

 

3,301

 

 

 

3,441

 

Total

$

86,734

 

 

$

89,366

 

 

Changes in the deferred service revenue are as follows (in thousands):

 

 

Three Months Ended

 

 

March 31,

2015

 

 

March 31,

2014

 

Balance at beginning of period

$

257,280

 

 

$

253,793

 

Additions to deferred service revenue

 

87,848

 

 

 

85,894

 

Amortization of deferred service revenue

 

(86,186

)

 

 

(86,643

)

Balance at end of period

$

258,942

 

 

$

253,044

 

Other accrued liabilities consist of the following (in thousands):

 

 

March 31,

2015

 

 

December 31,

2014

 

Accrued expenses

$

22,902

 

 

$

27,523

 

Accrued co-op expenses

 

3,106

 

 

 

4,102

 

Restructuring reserves

 

13,320

 

 

 

12,207

 

Warranty obligations

 

11,304

 

 

 

11,613

 

Derivative liabilities

 

12,651

 

 

 

8,175

 

Employee stock purchase plan withholdings

 

4,302

 

 

 

10,658

 

Other accrued liabilities

 

14,376

 

 

 

11,915

 

Total

$

81,961

 

 

$

86,193

 

 

Changes in the warranty obligation are as follows (in thousands):

 

 

Three Months Ended

 

 

March 31,

2015

 

 

March 31,

2014

 

Balance at beginning of period

$

11,613

 

 

$

9,475

 

Accruals for warranties issued during the period

 

3,341

 

 

 

4,165

 

Actual charges against warranty reserve during the period

 

(3,650

)

 

 

(3,634

)

Balance at end of period

$

11,304

 

 

$

10,006

 

 

 

8. COMMITMENTS AND CONTINGENCIES

Litigation and SEC Investigation

From time to time, the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company expects that the number and significance of these matters will increase as business expands. In particular, the Company faces an increasing number of patent and other intellectual property claims as the number of products and competitors in Polycom’s industry grows and the functionality of video, voice, data and web conferencing products overlap. Any claims or proceedings against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require the Company to enter into royalty or licensing

11


 

agreements which, if required, may not be available on terms favorable to the Company or at all. If management believes that a loss arising from these matters is probable and can be reasonably estimated, the Company will record a reserve for the loss. As additional information becomes available, any potential liability related to these matters is assessed and the estimates revised. Based on currently available information, management does not believe that the ultimate outcomes of these unresolved matters, individually and in the aggregate, are likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations. However, litigation is subject to inherent uncertainties, and the Company’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position and results of operations or liquidity for the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.

On July 23, 2013, the Company announced that Andrew M. Miller had resigned from the positions of Chief Executive Officer and President of Polycom and from Polycom’s Board of Directors. The Company disclosed that Mr. Miller’s resignation came after a review by the Audit Committee of certain expense submissions by Mr. Miller, where the Audit Committee found certain irregularities in the submissions, for which Mr. Miller had accepted responsibility. Specifically, the Audit Committee determined that Mr. Miller improperly submitted personal expenses to Polycom for payment as business expenses and, in doing so, submitted to Polycom false information about the nature and purpose of expenses.

SEC Investigation. As previously disclosed, the Company has been cooperating with the Enforcement Staff of the Securities and Exchange Commission (“SEC”) in connection with its investigation focused on Mr. Miller's expenses and his resignation. On March 31, 2015 the Company entered into a settlement with the SEC. Under the terms of the settlement in which the Company did not admit or deny the SEC’s findings, the Company paid $750,000 in a civil penalty, which was previously fully reserved for in its consolidated financial statements, and agreed not to commit or cause any violations of certain provisions of the Securities Exchange Act of 1934 and related rules.  

Class Action Lawsuit. On July 26, 2013, a purported shareholder class action, initially captioned Neal v. Polycom Inc., et al., Case No. 3:13-cv-03476-SC, and presently captioned Nathanson v. Polycom, Inc., et al., Case No. 3:13-cv-03476-SC, was filed in the United States District Court for the Northern District of California against the Company and certain of its current and former officers and directors. On December 13, 2013, the Court appointed a lead plaintiff and approved lead and liaison counsel. On February 24, 2014, the lead plaintiff filed a first amended complaint. The amended complaint alleged that, between January 20, 2011 and July 23, 2013, the Company issued materially false and misleading statements or failed to disclose information regarding the Company’s business, operational and compliance policies, including with respect to its former Chief Executive Officer’s expense submissions and the Company’s internal controls. The lawsuit further alleged that the Company’s financial statements were materially false and misleading. The amended complaint alleged violations of the federal securities laws and sought unspecified compensatory damages and other relief. On April 3, 2015, the Court dismissed all claims against Polycom and granted plaintiffs leave to amend. At this time, the Company is unable to estimate any range of reasonably possible loss relating to the securities class action.

Derivative Lawsuits. On August 21, 2013 and October 16, 2013, two purported shareholder derivative suits, captioned Saraceni v. Miller, et al., Case No. 5:13-cv-03880, and Donnelly v. Miller, et al., Case No. 5:13-cv-04810, respectively, were filed in the United States District Court for the Northern District of California against certain of the Company’s current and former officers and directors. On October 31, 2013, these two federal derivative actions were consolidated into In re Polycom, Inc. Derivative Litigation, Lead Case No. 3:13-cv-03880. On January 13, 2015, the Court dismissed the operative complaint and granted plaintiffs leave to amend. On April 3, 2015, the Court approved a stipulation dismissing the action with prejudice and entering judgment in favor of defendants.

On November 22, 2013 and December 13, 2013, two purported shareholder derivative suits, captioned Ware v. Miller, et al., Case No. 1-13-cv-256608, and Clem v. Miller, et al., Case No. 1-13-cv-257664, respectively, were filed in the Superior Court of California, County of Santa Clara, against certain of the Company’s current and former officers and directors. On January 31, 2014, these two California state derivative actions were consolidated into In re Polycom, Inc. Derivative Shareholder Litigation, Lead Case No. 1-13-cv-256608. The Court has stayed the California state derivative litigation pending resolution of both the federal derivative lawsuit and the federal securities class action.

The California state consolidated derivative lawsuit purports to assert claims on behalf of the Company, which is named as a nominal defendant in the actions. The original California state complaints allege claims for breach of fiduciary duty, unjust enrichment, and corporate waste, and allege certain defendants failed to maintain adequate internal controls and issued, or authorized the issuance of, materially false and misleading statements, including with respect to the Company’s former Chief Executive Officer’s expense submissions and the Company’s internal controls. The complaints further allege that certain defendants approved an unjustified separation agreement and caused the Company to repurchase its own stock at artificially inflated prices. The complaints seek unspecified compensatory damages, corporate governance reforms, and other relief. At this time, the Company is unable to estimate any range of reasonably possible loss relating to the derivative actions.

12


 

Officer and Director Indemnifications

As permitted or required under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company has a director and officer insurance policy that mitigates the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is not material.

Other Indemnifications

As is customary in the Company’s industry, as provided for in local law in the United States. and other jurisdictions, the Company’s standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of its products. From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various trigger events related to the sale and the use of its products and services. In addition, from time to time, the Company also provides protection to customers against claims related to undiscovered liabilities, additional product liability or environmental obligations.

 

9. DEBT

In September 2013, the Company entered into a Credit Agreement (the “Credit Agreement”) that provides for a $250.0 million term loan (the “Term Loan”) maturing on September 13, 2018 (the “Maturity Date”), which bears interest at the Company’s option at either a base rate plus a spread of 0.50% to 1.00%, or a reserve adjusted LIBOR rate plus a spread of 1.50% to 2.00% based on the Company’s consolidated leverage ratio for the preceding four fiscal quarters.

The Company entered into the Credit Agreement in conjunction with and for purposes of funding purchases of the Company’s common stock pursuant to a $250.0 million modified “Dutch Auction” self-tender offer announced in September 2013. The Term Loan is payable in quarterly installments of principal equal to $1.6 million which began on December 31, 2013, with the remaining outstanding principal amount of the Term Loan being due and payable on the Maturity Date. The Company may prepay the Term Loan, in whole or in part, at any time without premium or penalty. Amounts repaid or prepaid may not be reborrowed. The Term Loan is secured by substantially all the assets of the Company and of certain domestic subsidiaries of the Company that are guarantors under the Credit Agreement, subject to certain exceptions and limitations.

The Credit Agreement contains customary affirmative and negative covenants, and financial covenants consisting of a consolidated fixed charge coverage ratio and a consolidated secured leverage ratio. The Company was in compliance with these covenants as of March 31, 2015. The Credit Agreement also includes customary events of default, the occurrence of which could result in the acceleration of the obligations under the Credit Agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts.

 

At March 31, 2015, the weighted average interest rate on the Term Loan was 2.11%, the accrued interest on the Term Loan was $0.5 million, and the current and noncurrent portion of the outstanding Term Loan was $6.3 million and $234.4 million, respectively.

The following table sets forth total interest expense recognized on the Term Loan (in thousands):

 

 

Three Months Ended

 

 

March 31,

2015

 

 

March 31,

2014

 

Contractual interest expense

$

1,258

 

 

$

1,229

 

Amortization of debt issuance costs

 

133

 

 

 

134

 

Total

$

1,391

 

 

$

1,363

 

 

 

10. INVESTMENTS

The Company had cash and cash equivalents of $421.5 million and $443.10 million at March 31, 2015 and December 31, 2014, respectively. Cash and cash equivalents generally consist of cash in banks, as well as highly liquid investments in money market funds, time deposits, savings accounts, commercial paper, and corporate debt securities.

13


 

The Company’s U.S. government securities are mostly comprised of direct U.S. Treasury obligations that are guaranteed by the U.S. government and U.S. government agency securities are mostly comprised of U.S. government agency instruments, including mortgage-backed securities. The Company’s non-U.S. government securities are mostly comprised of non-U.S. government instruments, mainly municipal and foreign government securities. To ensure that the investment portfolio is sufficiently diversified, the Company’s investment policy requires that a certain percentage of the Company’s portfolio be invested in these types of securities.

The Company’s corporate debt securities are comprised of publicly-traded domestic and foreign corporate debt securities. The Company does not purchase auction rate securities, and investments are in instruments that meet high quality credit rating standards, as specified in the Company’s investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issuer or type of instrument.

At March 31, 2015, the Company’s long-term investments had contractual maturities of one to two years.

In addition, the Company has short-term and long-term investments in debt securities which are summarized as follows (in thousands):

 

 

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Balances at March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments-Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

$

32,183

 

 

$

18

 

 

$

 

 

$

32,201

 

U.S. government agency securities

 

66,737

 

 

 

12

 

 

 

(5

)

 

 

66,744

 

Non-U.S. government securities

 

9,556

 

 

 

 

 

 

(1

)

 

 

9,555

 

Corporate debt securities

 

97,602

 

 

 

17

 

 

 

(34

)

 

 

97,585

 

Total investments - short-term

$

206,078

 

 

$

47

 

 

$

(40

)

 

$

206,085

 

Investments-Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

$

15,140

 

 

$

23

 

 

$

 

 

$

15,163

 

U.S. government agency securities

 

14,040

 

 

 

13

 

 

 

 

 

 

14,053

 

Corporate debt securities

 

11,944

 

 

 

9

 

 

 

(11

)

 

 

11,942

 

Total investments - long-term

$

41,124

 

 

$

45

 

 

$

(11

)

 

$

41,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments-Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

$

26,930

 

 

$

7

 

 

$

(2

)

 

$

26,935

 

U.S. government agency securities

 

59,336

 

 

 

7

 

 

 

(6

)

 

 

59,337

 

Non-U.S. government securities

 

8,764

 

 

 

2

 

 

 

 

 

 

8,766

 

Corporate debt securities

 

90,782

 

 

 

10

 

 

 

(47

)

 

 

90,745

 

Total investments - short-term

$

185,812

 

 

$

26

 

 

$

(55

)

 

$

185,783

 

Investments-Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

$

25,320

 

 

$

4

 

 

$

(10

)

 

$

25,314

 

U.S. government agency securities

 

17,369

 

 

 

1

 

 

 

(14

)

 

 

17,356

 

Corporate debt securities

 

16,540

 

 

 

2

 

 

 

(15

)

 

 

16,527

 

Total investments - long-term

$

59,229

 

 

$

7

 

 

$

(39

)

 

$

59,197

 

14


 

Unrealized Losses

The following table summarizes the fair value and gross unrealized losses of the Company’s investments, including investments categorized as cash equivalents, with unrealized losses aggregated by type of investment instrument and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

Total