In accordance with the disclosure requirements of SFAS No. 130, “Reporting Comprehensive Income”, the components of comprehensive income are as follows:
The Company’s investments are comprised of U.S., state and municipal government obligations and foreign and domestic public corporate equity and debt securities. Investments with maturities of less than one year are considered short-term and are carried at fair value. Nearly all investments are held in the Company’s name at five major financial institutions. The specific identification method is used to determine the cost of securities disposed of, with realized gains and loses reflected in interest income, net. At June 30, 2001 and 2000, all of the Company’s investments were classified as available for sale. Unrealized gains and losses on these investments are included as a separate component of stockholders’ equity.
The Company also has investments in private companies. These investments are included in “Other Investments” in the Company’s condensed consolidated balance sheets and are carried at cost. The Company monitors these investments for impairment and makes appropriate reductions in carrying value when necessary. During the three months ended June 30, 2001, we determined that the value of these investments became impaired and we reduced the carrying amount by $1.5 million.
The following table reconciles Polycom’s original revenue and earnings to the combined amounts ($ in thousands, except per share data):
Circa Communications Ltd.
On April 2, 2001 the Company completed the acquisition of privately-held Circa Communications Ltd. (Circa), a leading developer of voice over internet protocol (VoIP) telephony products, in exchange for 665,884 shares of common stock and assumption of outstanding options exercisable into 248,597 shares of Polycom common stock, with an aggregate value of $9.8 million, and $4.0 million cash for preferred stock plus acquisition costs of approximately $0.8 million. An additional 421,555 shares of Polycom common stock are issuable upon the successful completion of certain revenue based earn-out thresholds. The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.
Since April 2, 2001, the results of operations of Circa have been included in the Company’s consolidated statements of income. The Company recorded deferred stock-based compensation of approximately $780,000 associated with unvested stock options issued to employees in conjunction with the acquisition. This amount is included as a component of stockholders’ equity and is being amortized over the vesting period of options consistent with the guidance stated in FASB Interpretation No. 44 (FIN 44) Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25.
The following is a summary of the allocation of purchase price in the acquisition of Circa (in thousands):
The amount allocated to purchased research and development was determined through established valuation techniques in the high-technology communications industry and were expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed. It is reasonably possible that the development of this technology could fail because of either prohibitive cost, inability to perform the required efforts to complete the technology or other factors outside of our control such as a change in the market for the resulting developed products. In addition, at such time that the project is completed it is reasonably possible that the completed products do not receive market acceptance or that we are unable to produce and market the product cost effectively.
Goodwill and acquired intangible assets, primarily representing existing partnerships and acquired workforce, are being amortized over the estimated useful lives of three years. At June 30, 2001, amortization of goodwill, deferred stock-based compensation and other intangible assets associated with this acquisition totaled $ 1.0 million.
The following unaudited pro forma financial information reflects the results of operations for the three and six months ended June 30, 2001 and 2000 as if the acquisition had occurred on January 1, 2000. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on January 1, 2000, and may not be indicative of future operating results, (in thousands, except per share amounts):
| | Three Months Ended
June 30, | | Six Months Ended
June 30, | |
| |
| |
| |
| | 2001 | | 2000 | | 2001 | | 2000 | |
| |
| |
| |
| |
| |
| | | | | | | | | |
| Net revenues | $ | 84,470 | | $ | 87,059 | | $ | 180,687 | | $ | 162,613 | |
| Net income | $ | 6,335 | | $ | 5,030 | | $ | 10,990 | | $ | 16,569 | |
| | | | | | | | | |
| Net income per share: | | | | | | | | |
| | Basic | $ | 0.08 | | $ | 0.07 | | $ | 0.13 | | $ | 0.23 | |
| | Diluted | $ | 0.07 | | $ | 0.06 | | $ | 0.13 | | $ | 0.20 | |
| | | | | | | | | |
| Weighted average shares: | | | | | | | | |
| | Basic | 83,020 | | 71,260 | | 83,055 | | 70,707 | |
| | Diluted | 86,492 | | 82,185 | | 86,583 | | 82,033 | |
Definitive Agreement to Acquire PictureTel Corporation
In May 2001, the Company signed a definitive agreement to acquire PictureTel Corporation (PictureTel), a leader in integrated collaboration. Under the terms of the agreement, the Company has commenced an offer to purchase all of the outstanding shares of PictureTel for a combination of 0.1177 shares of Polycom common stock and $3.11 in cash to be exchanged for each share of PictureTel. In total, if the acquisition is completed, approximately 6.4 million shares of the Company’s common stock and $179 million in cash will be exchanged for all outstanding shares of PictureTel and the Company will assume PictureTel’s outstanding stock options, issued under PictureTel’s employee stock option plans, exercisable into approximately 1.3 million shares of the Company’s common stock. The estimated purchase price for the transaction is approximately $393 million. The completion of the acquisition, which has been approved by the boards of directors of both companies, is subject to the tender of a majority of the outstanding fully-diluted shares of PictureTel common stock and other customary closing conditions, including obtaining applicable regulatory approval. In addition, this transaction is intended to be accounted for as a purchase business combination and is a taxable transaction. The company anticipates that this acquisition will be completed by the end of 2001, subject to the timing of obtaining applicable regulatory approvals. On July 13, 2001, the Department of Justice requested additional information and documentary material in connection with its review of the proposed transaction, which request has extended the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act.
9. ACQUISITION-RELATED CHARGES
In the six months ended June 30, 2001, related to the completion of the acquisitions of Accord Networks Ltd. and Circa Communications Ltd., the Company recognized a charge of $11,044,000 for the acquisition-related costs including cost of actions designed to improve our combined competitiveness, productivity and future profitability. These acquisition-related actions included the elimination of redundant and excess facilities and workforce in our combined businesses and the elimination of redundant assets. The components of this charge included facilities charges of $841,000, severance costs of $328,000, asset impairments of $1,108,000, asset write-offs of $771,000, other exit costs of $309,000 and merger-related transaction and period expenses of $7,687,000. Planned workforce reductions were completed in July 2001. Facility charges were primarily comprised of lease termination costs and are scheduled to be complete by March 2002. Asset write-offs and asset impairments were principally related to the elimination of redundant or excess equipment. Other exit costs were related to payment obligations that carry no future benefit to the combined operations and are scheduled to be complete by March 2002. Merger-related transaction and period expenses principally consisted of financial advisory, accounting and legal fees, and other direct merger-related expenses incurred in the period.
The following table summarizes the status of the Company’s acquisition-related costs in thousands:
| | Facilities Charges | | Severance Cost | | Asset Impairment | | Asset
Write-off | | Other Exit Costs | | Merger Fees & Exp | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| 2000 Charges | $ | --- | | $ | --- | | $ | --- | | $ | --- | | $ | --- | | $ | 4,768 | |
| 2000 Usage | --- | | --- | | --- | | --- | | --- | | (301 | ) |
| |
| |
| |
| |
| |
| |
| |
| Balance at 12/31/2000 | --- | | --- | | --- | | --- | | --- | | 4,467 | |
| | | | | | | | | | | | | |
| Charges in six months ended 6/30/2001 | 841 | | 328 | | 1,108 | | 771 | | 309 | | 7,687 | |
| Usage in six months ended 6/30/2001 | --- | | (100 | ) | (1,108 | ) | (771 | ) | (45 | ) | (11,417 | ) |
| |
| |
| |
| |
| |
| |
| |
| Balance at 6/30/2001 | $ | 841 | | $ | 228 | | $ | --- | | $ | --- | | $ | 264 | | $ | 737 | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
10. INCOME TAXES
The provision for income taxes was $2.6 million for the three months ended June 30, 2001 and $5.7 million for the same period of 2000. For the six month period ended June 30, 2001, the provision for income taxes was $8.3 million compared to $11.4 million for the same period last year. The decreases in the provision for income taxes for both the three month and six month periods were due to our lower profitability and a decrease in our effective tax rate from 31% in 2000 to 29% for 2001. This decrease was offset by an unfavorable impact of nondeductible expenses from a tax perspective associated with the acquisition-related activities and litigation settlement expenses.
11. STOCK OPTION EXCHANGE PROGRAM
On May 21, 2001, the Company commenced a voluntary stock option exchange program to certain eligible employees and consultants of the Company. Under the program, eligible employees and consultants were given the option to cancel each outstanding stock option previously granted to them at an exercise price greater than or equal to $23.55 per share, in exchange for 0.85 new options to buy shares of the Company’s common stock to be granted on December 26, 2001, six months and one day from June 25, 2001, the date the old options were cancelled. The exercise price of these new options will be equal to the fair market value of the Company’s common stock on the date of grant. In total, 1.1 million stock options were cancelled as a result of this program. The exchange program is not expected to result in any additional compensation charges or variable plan accounting.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 133, as amended by SFAS 138, 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. We adopted this pronouncement on January 1, 2001. This adoption did not have a material impact on our consolidated financial position, results of operations and cash flows.
In June 2001, the FASB Emerging Issues Task Force (“EITF”) issued EITF Issue No. 00-25 (“EITF 00-25”), “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products.” EITF 00-25 established the treatment in the income statement of vendor consideration to resellers of a vendor’s products. EITF 00-25 is effective for the interim and year end periods beginning after December 15, 2001. The Company has not yet determined the impact that adoption of this issue will have on the Company’s consolidated financial position, results of operations and cash flows.
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.” SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company believes that the adoption of SFAS 141 will not have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effective for fiscal years beginning after March 15, 2001. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment only approach. In addition, the standard includes provisions, upon adoption, for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. The Company has not yet determined the impact of SFAS 142 on the Company’s consolidated financial position, results of operations and cash flows.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, AMONG OTHER THINGS, STATEMENTS REGARDING OUR ANTICIPATED PRODUCTS, CUSTOMER AND GEOGRAPHIC REVENUE MIX, GROSS MARGINS AND OPERATING COSTS AND EXPENSES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "OTHER FACTORS AFFECTING FUTURE OPERATIONS" IN THIS DOCUMENT AS WELL AS OTHER INFORMATION FOUND IN THE DOCUMENTS POLYCOM FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 AND OUR SUBSEQUENT REPORTS ON FORM 10-Q.
Overview
We were incorporated in December 1990. We were engaged principally in research and development from inception through September 1992, when we began volume shipments of our first voice communications product, the SoundStation. Currently, our voice communications products consist principally of the SoundStation, SoundStation EX, SoundStation Premier, SoundStation Premier EX, SoundStation IP, VoiceStation 100, SoundPoint, SoundPoint Pro and SoundPoint IP. In January 1998, we completed the acquisition of ViaVideo, a development stage company that designed and developed high-quality, low-cost, easy-to-use, group video communications systems. In February 1998, we began customer shipments of the ViewStation products. Currently, our video communications products consist principally of the ViewStation 128, ViewStation 512, ViewStation V.35, ViewStation MP, ViewStation SP, ViewStation FX, VS 4000, Visual Concert PC and ViaVideo. In December 1999, we acquired Atlas Communication Engines, Inc., a privately-held, OEM supplier of integrated access devices (IADs), and an emerging supplier of digital subscriber line (DSL) routers. Polycom’s NetEngine line of IADs and DSL routers, which comprise our network access product family, provides voice and data over DSL networks. In February 2001, we acquired Accord Networks Ltd., a leading provider of next-generation, rich-media network products that enable Internet Protocol and other network voice and video communications in both the customer premises and service provider markets. Accord’s product line has become our network systems product family.
We anticipate that our ViewStation, Network Systems, SoundStation and NetEngine products will continue to account for substantially all of our net revenues for at least the next twelve months. See Note 5 to the condensed consolidated financial statements. Any factor adversely affecting the demand or supply for these products would harm our business, financial condition, cash flows and results of operations.
Results of Operations
The following table sets forth, as a percentage of net revenues, consolidated statement of income data for the periods indicated.
| | Three Months Ended | | Six Months Ended | |
| |
| |
| |
| | June 30,
2001 | | June 30,
2000 | | June 30,
2001 | | June 30,
2000 | |
| |
| |
| |
| |
| |
| | | | | | | | | |
| Net revenues | 100 | % | 100 | % | 100 | % | 100 | % |
| Cost of net revenues | 43 | | 43 | | 43 | | 43 | |
| |
| |
| |
| |
| |
| | Gross profit | 57 | | 57 | | 57 | | 57 | |
| |
| |
| |
| |
| |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| | Sales and marketing | 21 | | 20 | | 20 | | 20 | |
| | Research and development | 16 | | 12 | | 15 | | 11 | |
| | General and administrative | 5 | | 6 | | 5 | | 6 | |
| | Acquisition-related costs | 2 | | 0 | | 6 | | 0 | |
| | Purchased in-process research and development | 3 | | 0 | | 1 | | 0 | |
| | Amortization of goodwill and purchased intangibles | 1 | | 0 | | 1 | | 0 | |
| | Litigation settlement costs | 0 | | 7 | | 0 | | 4 | |
| | Litigation reserve release | 0 | | 0 | | 0 | | (1 | ) |
| |
| |
| |
| |
| |
| | Total operating expenses | 48 | | 45 | | 48 | | 40 | |
| |
| |
| |
| |
| |
| | | | | | | | | |
| Operating income | 9 | | 12 | | 9 | | 17 | |
| | | | | | | | | |
| Interest income, net | 4 | | 1 | | 4 | | 1 | |
| Other investments adjustment | (2 | ) | 0 | | (1 | ) | 0 | |
| Other income (expense) | (1 | ) | 0 | | 0 | | 0 | |
| |
| |
| |
| |
| |
| | | | | | | | | |
| Income before provision for income taxes | 10 | | 13 | | 12 | | 18 | |
| Provision for income taxes | 3 | | 7 | | 5 | | 7 | |
| |
| |
| |
| |
| |
| Net income | 7 | % | 6 | % | 7 | % | 11 | % |
| |
| |
| |
| |
| |
| | | | | | | | | | |
Net Revenues
Net revenues for the three months ended June 30, 2001 decreased 3% over the same period of 2000. This decrease was due primarily to lower volume shipments of video and voice communication products particularly in the North America region. This decrease was largely offset by an increase in shipments of the network systems product line. We believe the lower sales of video and voice products were due principally to a reduction in capital spending in the United States due to the slowdown in economic activity over last year. Overall, we experienced a decrease in shipments in North America and Latin America, which was largely offset by increases in Europe and Asia.
Net revenues for the six months ended June 30, 2001 increased 11% over the same period last year. This growth was due primarily to growth in the network systems products and, to a lesser extent, network access products. This growth was offset by decreases in the video and voice communication product lines. The lower sales of video and voice products were due to a reduction in capital spending in the United States due to the slowdown in economic activity over last year.
A major contributor to the expected growth of the broadband market has been the deployment of DSL. Beginning in the second half of 2000 and continuing through the first half of 2001, most DSL providers experienced delays in delivering their service, which caused financial difficulty for these companies. These DSL providers are customers of our network access products both directly and through OEM providers we use as resellers. These service delays slowed the expected growth in this market which in turn slowed sales of our network access products. These conditions limited the sales growth of our network access products in the three and six month periods ending June 30, 2001, with revenues decreasing significantly in the first and second quarters, and will likely negatively affect sales of our access products the remainder of the year.
In the three and six months ended June 30, 2001 and 2000, we derived all of our net revenues from sales of our video communication, voice communication, network systems and network access products. No customer accounted for more than 10% of our net revenues for the three or six month periods ended June 30, 2001 or for the comparable period last year. See Note 5 of the notes to the condensed consolidated financial statements (unaudited).
Our business is subject to the risks arising from domestic and global economic conditions. Recently, economic growth in the United States has slowed to the point where industries are delaying or reducing technology purchases. The impact of this slowdown on us is difficult to predict. If our customers delay ordering our products, we will experience decreased revenue and profitability for any given quarter in 2001 or for the entire year and beyond. For example, we experienced a revenue decrease in the three month period ended June 30, 2001 when compared to the three month period ended June 30, 2000, and a profitability decrease in the six month period ended June 30, 2001 when compared to the six month period ended June 30, 2000. These conditions have negatively affected our business and profitability in the first half of 2001 and will in the future if these conditions persist. In addition, weakness in the end-user market could negatively affect the cash flow of our reseller customers who could, in turn, delay paying their obligations to us which we believe occurred in the first half of 2001. If these conditions continue, our credit risk exposure would increase which could harm our profitability and financial condition.
International net revenues (revenues outside of North America) accounted for 41% of total net revenues for the three months ended June 30, 2001 and 31% of total net revenues for the three months ended June 30, 2000. For the six months ended June 30, 2001, international net revenues accounted for 40% of total net revenues compared to 34% for the comparable period last year. The improvement in the international component of our revenue was due to reductions in North America sales and to growth in Asia and Europe of sales of our video communications and network systems products.
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 further expand our operations in Europe, Asia and Latin America during the second half of 2001. 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. To date, the establishment of the European Currency Unit (the "Euro") by the European Union as the common legal currency in Europe has not had any significant impact on us because a substantial majority of our international sales are denominated in U.S. currency. However, there may be an impact in the future due to the recent weakening of the Euro against the dollar as this requires customers to convert a greater number Euros into dollars to settle their outstanding debts to us.
Cost of Net Revenues
Cost of net revenues consists primarily of contract manufacturer costs including material and direct labor, our manufacturing organization, tooling depreciation, warranty expense and an allocation of overhead expenses. The cost of net revenues as a percentage of total net revenues for the three and six month periods ended June 30, 2001 was 43% which was consistent with the same period of 2000. In this area, gross margin improvements due to an increased contribution of the higher margin products such as our network systems products were offset by increased sales from our lower margin network access products. In addition, we reduced production levels in the three months ended June 30, 2001 from levels in earlier periods due to the slowdown in purchasing in the North American market. This reduction created unfavorable manufacturing variances, which negatively impacted our cost of net revenues. Further, in the three and six month periods ended June 30, 2001, we recorded provisions for inventory value loss associated with our network access products, which also negatively impacted our cost of net revenues as a percentage of net revenues.
Forecasting future gross margin percentages is difficult. While we expect that our future 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 revenue levels and related production level variances, 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, our IAD and DSL equipment products, VoIP products and other desktop products have a significantly higher cost of net revenue percentage than our network systems, ViewStation and SoundStation products. If our IAD, DSL, VoIP and other desktop products grow to become a significant portion of our revenue stream, this will have a negative effect on our future cost of net revenues 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, we cannot assure you that any of these potential price reductions would offset competitive pressures or stimulate demand. In addition, cost variances associated with the manufacturing ramp of new products, such as the NetEngine, VoiceStation 100, SoundPoint IP or any other new product, could occur which would increase our cost of net revenues percentage. Further, gross margins associated with the ViaVideo, ViewStation SP and the SoundPoint Pro are lower than the targeted gross margins of our product portfolio, while the gross margins for the network systems products are higher than or closer to our targeted gross margins. The proportional contribution of these products to our product mix can have a significant impact on our overall gross margins as it did in the three and six month periods ended June 30, 2001. In addition to the uncertainties listed above, cost of net revenues as a percentage of net revenues may increase due to a change in the mix of distribution channels and the mix of international versus North American revenues.
Sales and Marketing Expenses
| | Three Months Ended | | | | Six Months Ended | | | |
| |
| | | |
| | | |
| $ in thousands | June 30,
2001 | | June 30,
2000 | | Increase
(Decrease) | | June 30,
2001 | | June 30,
2000 | | Increase
(Decrease) | |
| | | | | | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | |
| Expenses | $ | 17,436 | | $ | 17,742 | | (2 | )% | $ | 36,049 | | $ | 32,369 | | 11 | % |
| | | | | | | | | | | | | |
| % of Net Revenues | 21 | % | 20 | % | 1 | % | 20 | % | 20 | % | 0 | % |
| | | | | | | | | | | | | | | | | | | |
Sales and marketing expenses consist primarily of salaries and commissions for our sales force, advertising and promotional expenses, product marketing, an allocation of overhead expenses and customer service and support costs. The decrease in sales and marketing expenses in absolute dollars in the three months ended June 30, 2001 over the comparable period of 2000 was primarily related to decreased advertising and promotional expenditures for our video communication and network access products. This was offset by increases in advertising for our network systems products and an increase in our investment in our worldwide sales effort.
For the six month period ended June 30, 2001, sales and marketing expenditures increased 11% over the same period of 2000. This increase was primarily attributable to increased advertising and selling expenses associated with our network systems and network access product lines. This increase was offset by reduced expenditures for our video and voice communication products.
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, establish and expand distribution channels and significantly increase end user sales focus. In addition, due to the innovative nature of our ViaVideo, ViewStation, network systems and VoIP 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 and technologies. Also, we will further invest in the international markets, increasing the absolute dollars spent in this area.
Research and Development Expenses
| | Three Months Ended | | | | Six Months Ended | | | |
| |
| | | |
| | | |
| | June 30,
2001 | | June 30,
2000 | | Increase
(Decrease) | | June 30,
2001 | | June 30,
2000 | | Increase
(Decrease) | |
| $ in thousands | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| Expenses | $ | 13,671 | | $ | 10,219 | | 34 | % | $ | 27,861 | | $ | 19,185 | | 45 | % |
| | | | | | | | | | | | | |
| % of Net Revenues | 16 | % | 12 | % | 4 | % | 15 | % | 11 | % | 4 | % |
| | | | | | | | | | | | | | | | |
Research and development expenses consist primarily of compensation costs, consulting fees, depreciation and an allocation of overhead expenses. Expense increases in network systems, video, and voice product development all contributed to the total increase in research and development expense for the three months ended June 30, 2001 over the same period of 2000. This was offset slightly by a decrease in spending associated with the network access product line. Individually, the increase in network systems product development expenditures accounted for 50% of the total change, video communication product development expenditures accounted for 45% of the total change, voice communications accounted for 12% of the total change while the negative impact from network access accounted for 7% of the total change.
For the six months ended June 30, 2001, increases in research and development expenses for all product lines contributed to the overall increase over the same period last year. Individually, the increase in network systems product development expenditures accounted for 42% of the total increase, video communication product development expenditures accounted for 37% of the total increase, network access development expenditures accounted for 13% of the total increase and the increase in voice communications accounted for the remaining 8% of the total increase. In all periods presented, all research and development costs have been expensed as incurred.
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 network systems products, DSL access, 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 high-technology industries, we may not be able to find or hire qualified personnel in a timely manner or at all.
General and Administrative Expenses
| | Three Months Ended | | | | Six Months Ended | | | |
| |
| | | |
| | | |
| | June 30,
2001 | | June 30,
2000 | | Increase
(Decrease) | | June 30,
2001 | | June 30,
2000 | | Increase
(Decrease) | |
| $ in thousands | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
| Expenses | $ | 4,407 | | $ | 4,789 | | (8 | )% | $ | 9,162 | | $ | 9,364 | | (2 | )% |
| | | | | | | | | | | | | |
| % of Net Revenues | 5 | % | 6 | % | (1 | )% | 5 | % | 6 | % | (1 | )% |
| | | | | | | | | | | | | | | | | | | |
General and administrative expenses consist primarily of compensation costs, allocation of overhead expenses, bad debt write-offs, legal expenses and accounting expenses. The decrease in general and administrative expenses in the three and six month periods ended June 30, 2001 over the same periods of 2000 was due to lower expenditures associated with the implementation of the enterprise resource planning system implemented in 2000 offset by costs associated with increased staffing and other infrastructure costs.
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 other costs to support a larger company. These additional charges include expenses related to integrating acquired companies, expansions of our information systems and infrastructure charges related to the significant investments being made in the international regions. Additionally, write-offs associated with bad debt are difficult, if not impossible, to predict and material write-offs could increase general and administrative costs significantly.
Acquisition-related Expenses
We incurred acquisition-related expenses totaling $1.4 million in the three months ended June 30, 2001 and $11.0 million in the six months ended June 30, 2001. These costs were associated with the acquisitions of Accord Networks Ltd and Circa Communications Ltd. For the six months ended June 30, 2001, these expenses consisted of $2.3 million of restructuring charges, $1.1 million of asset impairment charges, and $7.6 million of other acquisition costs including outside financial advisory, legal and accounting services. We expect further material acquisitions related expenses associated with the acquisition of Accord Networks Ltd. and Circa Communications Ltd, as well as the pending acquisition of PictureTel Corporation.
Purchased In-process Research and Development
In the three and six month periods ending June 30, 2001, we incurred charges totaling $2.5 million for in-process research and development. This research and development was acquired as part of the acquisition of Circa Communication Ltd. The amount allocated to purchased research and development was determined through established valuation techniques in the high-technology communications industry and were expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed.
Amortization of Goodwill and Other Purchased Intangibles
In the three and six month periods ending June 30, 2001, we recorded $1.0 million for the amortization of goodwill and intangibles related to the acquisition of Circa Communications Ltd. Goodwill and other intangible assets are being amortized to expense over their estimated useful lives of three years.
Litigation Settlement Costs
In the three months ended June 30, 2000, Accord Networks Ltd. recorded a charge for $6.5 million resulting from the settlement of a patent infringement lawsuit on June 16, 2000.
Litigation Reserve Release
In the first quarter of 2000, we released a $1.8 million accrual associated with expenses we estimated we would incur in connection with a specific lawsuit. The liability no longer existed so the estimated expense accrual was released to the statement of income.
Interest Income, Net
Interest income, net consists of interest earned on our cash, cash equivalents and investments less bank charges resulting from the use of our bank accounts and interest expense from our credit facilities. Interest income, net of interest expense, was $3.2 million in the three months ended June 30, 2001 and $7.2 million for the six months ended June 30, 2001. This compares to $0.8 million and $1.6 million for the comparable periods last year, respectively. The increase in interest income, net was due primarily to changes in average cash and investment balances throughout the year, the most significant of which was our secondary stock offering which raised $148.3 million in the third quarter of 2000 and the initial public offering of Accord Networks in mid-2000, which raised $54.9 million.
Other Investments Adjustment
Throughout the year ended December 31, 2000, we made various investments in private companies that are included in “Other investments” in our balance sheet. In accordance with Generally Accepted Accounting Principles (GAAP), we monitor the value of these investments for impairment and make appropriate reductions in carrying value when necessary. During the three months ended June 30, 2001, we determined that the value of these investments became impaired and we reduced the carrying amount by $1.5 million.
Provision for Income Taxes
The provision for income taxes was $2.6 million for the three months ended June 30, 2001 and $5.7 million for the same period of 2000. For the six month period ended June 30, 2001, the provision for income taxes was $8.3 million compared to $11.4 million for the same period last year. The decreases in the provision for income taxes for both the three month and six month periods were due to our lower profitability and a decrease in our effective tax rate from 31% in 2000 to 29% for 2001. This decrease was offset by an unfavorable impact of nondeductible expenses from a tax perspective associated with the acquisition-related activities and litigation settlement expenses.
Liquidity and Capital Resources
As of June 30, 2001, our principal sources of liquidity included cash and cash equivalents of $116.4 million, short-term investments of $84.9 million and long-term investments of $79.3 million. Additionally, we have a $15.0 million line of credit with a bank and $4.6 million in other investments related to non-marketable equity securities. The line of credit facility contains provisions that require the maintenance of certain financial ratios and profitability requirements. As of June 30, 2001, we were in compliance with these covenants.
We generated cash from operating activities totaling $22.8 million in the first six months of 2001 compared to $21.8 million in the same period of 2000. The improvement in cash from operating activities when comparing these two periods was due primarily to a reduction in trade receivables and deferred taxes and slower growth in inventories and prepaid expenses and other current assets. This improvement was offset by a decrease in net income before non-cash items, a net reduction in liabilities in the current six month period compared to an increase in liabilities for the same period in 2000.
The total net change in cash and cash equivalents for the six months ended June 30, 2001 was a decrease of $73.0 million. The primary uses of cash during this period were $57.4 million for net purchases of investments, $41.5 million for the purchase of convertible notes receivable from PictureTel and $5.1 million for purchases of property, plant and equipment. The primary sources of cash were $22.8 million from operating activities, $1.4 million assumed in the purchase of Circa Communications Ltd. and $6.9 million associated with the exercise of stock options and purchases under the employee stock purchase plan. The positive cash from operating activities was primarily the result of net income before considering non-cash expenses (such as depreciation, amortization, the provision for doubtful accounts, other investments adjustment, the write-off of in-process research and development and the tax benefits from the exercise of employee stock options), lower trade receivables and lower deferred taxes, offset by a net decrease in total current liabilities (including accounts payable), an increase in inventories, and an increase in prepaid and other assets.
In connection with Polycom’s announced agreement to acquire PictureTel, we have issued letters of credit under our bank credit facility, totaling $8.4 million, to guarantee certain obligations of PictureTel. Other material commitments consist of obligations under our operating leases. We also maintain, from time to time, commercial letters of credit as payments for the importation of certain products. These amounts do not exceed $100,000 and are outstanding less than 120 days. In addition, our bank has issued letters of credit to secure the leases on some of our offices. These letters of credit total less than $100,000 and are secured by our credit facilities or cash deposits with our banks.
We believe that our available cash, cash equivalents, investments and our bank line of credit will be sufficient to meet our operating expenses and capital requirements through at least the next eighteen months. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technologies.
Recent Developments
In May 2001, we signed a definitive agreement to acquire PictureTel Corporation (PictureTel), a leader in integrated collaboration. Under the terms of the agreement, we have commenced an offer to purchase all of the outstanding shares of PictureTel for a combination of 0.1177 shares of our common stock and $3.11 in cash to be exchanged for each share of PictureTel. In total, if the acquisition is completed, approximately 6.4 million shares of our common stock and $179 million in cash will be exchanged for all outstanding shares of PictureTel and we will assume PictureTel’s outstanding stock options, issued under PictureTel’s employee stock option plans, exercisable into approximately 1.3 million shares of our common stock. The estimated purchase price for the transaction is approximately $393 million. The completion of the acquisition, which has been approved by the boards of directors of both companies, is subject to the tender of a majority of the outstanding fully-diluted shares of PictureTel common stock and other customary closing conditions, including obtaining applicable regulatory approval. In addition, this transaction is intended to be accounted for as a purchase business combination and is a taxable transaction. We anticipate that this acquisition will be completed by the end of 2001, subject to the timing of obtaining applicable regulatory approvals. On July 13, 2001, the Department of Justice requested additional information and documentary material in connection with its review of the proposed transaction, which request has extended the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 133, as amended by SFAS 138, 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. We adopted this pronouncement on January 1, 2001. This adoption did not have a material impact on our consolidated financial position, results of operations and cash flows.
In June 2001, the FASB Emerging Issues Task Force (“EITF”) issued EITF Issue No. 00-25 (“EITF 00-25”), “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products.” EITF 00-25 established the treatment in the income statement of vendor consideration to resellers of a vendor’s products. EITF 00-25 is effective for the interim and year end periods beginning after December 15, 2001. We have not yet determined the impact that adoption of this issue will have on the Company’s consolidated financial position, results of operations and cash flows.
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.” SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. We believe that the adoption of SFAS 141 will not have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effective for fiscal years beginning after March 15, 2001. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment only approach. In addition, the standard includes provisions, upon adoption, for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. We have not yet determined the impact of SFAS 142 on the Company’s consolidated financial position, results of operations and cash flows.
Other Factors Affecting Future Operations
INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. IN ADDITION, THESE RISKS ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS WE ARE NOT PRESENTLY AWARE OF 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 OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.
Our quarterly operating results fluctuate significantly and we may not be able to maintain our historical growth rates.
Our quarterly operating results have fluctuated significantly in the past and may vary significantly in the future as a result of a number of factors. These factors include:
| | • | changes in general economic conditions, as has been the case recently, and specific economic conditions prevailing in the broadband communications industry and other technology industries; |
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| | • | market acceptance of new product introductions and product enhancements by us or our competitors; |
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| | • | our prices and those of our competitors' products; |
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| | • | the timing and size of the orders for our products; |
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| | • | the mix of products sold; |
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| | • | fluctuations in the level of international sales; |
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| | • | the delay in the rollout of digital subscriber line, or DSL, technology; |
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| | • | the cost and availability of components; |
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| | • | manufacturing costs; |
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| | • | the level and cost of warranty claims; |
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| | • | changes in our distribution network; |
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| | • | fluctuations in demand for our products; |
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| | • | the levels of inventory of our products that resellers are willing to maintain; |
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| | • | our distribution channels reducing their inventory levels; |
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| | • | slowing sales by our resellers to their customers, placing further pressure on our resellers to minimize inventory levels and reduce purchases of our products; |
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| | • | the impact of seasonality; and |
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| | • | the level of royalties to third parties. |
Although we have had significant sequential revenue growth in the recent quarters prior to the quarter ended March 31, 2001, fluctuations in our quarterly operating results due to these or other factors could prevent us from sustaining these growth rates or meeting our expectations, and you should not use these past results to predict future operating margins and results. For example, we experienced a revenue decrease in the three month period ended June 30, 2001 when compared to the three month period ended June 30, 2000, and a profitability decrease in the six month period ended June 30, 2001 when compared to the six month period ended June 30, 2000. The third quarter of 2001 is subject to similar risks, particularly if the economic slowdown continues. Further, our quarterly revenues and operating results depend upon the volume and timing of customer orders received during a given quarter, and the percentage of each order which we are able to ship and recognize as revenue during each quarter, each of which is difficult to forecast. In addition, the majority of our orders in a given quarter historically have been shipped in the third month of that quarter. If this trend continues, any failure or delay in the closing of orders during the last part of a quarter will seriously harm our business.
Some of our products have experienced seasonal fluctuations which have affected sequential growth rates for these products. For example, there appears to be a slow down in the summer quarter for our products in the European region. In addition, sales of our video communications products appear to decline in the first quarter of the year compared to the fourth quarter of the prior year. These fluctuations negatively affect our business during those quarters which could cause operating results to fall short of anticipated results and would have a negative impact on our stock price.
As a result of these and other factors, we believe that period-to-period comparisons of our historical results of operations are not a good predictor of our future performance. If our future operating results are below the expectations of stock market analysts, our stock price will decline.
General economic conditions may reduce our revenues and harm our business.
As our business has grown, we have become increasingly subject to adverse changes in general economic conditions, which can result in reductions in capital expenditures by our end-user customers, longer sales cycles, deferral or delay of purchase commitments for our products, and increased price competition. These factors adversely impacted our operating results in the first and second quarters of 2001, and, if the current economic slowdown continues or worsens, these factors will continue to adversely affect our business and results of operations. In addition, we also face the risk that our resellers have built up inventories in anticipation of a growth in sales. If such sales growth does not occur as anticipated by these resellers for any reason, including the current slowdown in economic growth that began in the fourth quarter of 2000 and is expected to continue for the remainder of 2001, these resellers may substantially decrease the amount of product ordered in subsequent periods or product returns may exceed historical or predicted levels, which would harm our business. As such, sales to end users by our channel partners in the first half of 2001 thus far have not been strong, and therefore, we believe our channel partners will reduce their inventory levels substantially in the future, including in the third quarter of 2001.
Difficulty in estimating customer orders could harm our operating results.
We typically ship products within a short time after we receive an order and historically have had 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 end-user demand means that any quarter could be significantly negatively impacted by lower end-user orders, which could in turn 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 reseller orders. Expense levels are based, in part, on these estimates. Since a majority of our customer orders are received in the last month of a quarter, we are limited in our ability to reduce expenses quickly if for any reason orders and net revenues do not meet our expectations in a particular period. In addition, we have historically experienced a lag in demand during the summer months, which adds to the level of difficulty in predicting revenue levels.
We depend on distributors and resellers to sell our products, and we are subject to risks associated with their inventories of our products, their product sell-through and the success of their businesses.
We sell a significant amount of our products to distributors and resellers who 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 consists of distributor and reseller stocking orders. We typically provide special cost or early payment incentives for distributors and resellers to purchase the minimum or more than the minimum quantities contemplated under their agreements with us. If these distributors and resellers are unable to sell an adequate amount of their inventory of our products in a given quarter to dealers and end-users or if distributors and resellers decide to decrease their inventories for numerous reasons, including the current slowdown in economic growth that began in the fourth quarter of 2000 and is expected to continue for most of the remainder of 2001, it would negatively affect the volume of our sales to these distributors and resellers and also negatively affect our net revenues which could harm our business. These conditions negatively affected our business and operating results in the first and second quarters of 2001, and we are uncertain about how long these conditions will impact our business for the remainder of 2001. Also, if we choose to eliminate or reduce stocking incentive programs, quarterly revenues may fail to meet our expectations or be lower than historical levels.
Our revenue estimates are based largely on end-user sales reports that our distributors and resellers provide to us on a monthly basis. To date, we believe this data has been generally accurate in North America but less reliable outside of this region. To the extent that this sales–out and channel inventory data is inaccurate in either North America or outside of North America, we may not be able to make revenue estimates or may find that our previous estimates were inaccurate.
Many of our distributors and resellers that carry multiple Polycom products, and from whom we derive significant revenues, are undercapitalized. The failure of these businesses to establish and sustain profitability or obtain financing could have a significant negative effect on our future revenue levels and profitability. The economic slowdown in the United States, and its potential negative economic impact on the rest of the world, could cause more of our customers' businesses to fail which would harm our business.
Lucent Technologies, one of our larger resellers, accounted for 11% of our net revenues in the three months ended December 31, 2000, primarily related to Lucent's purchases of our network access products during that period. In addition, Lucent accounted for 10% of net revenues in both 1999 and 1998. In the three and six months ended June 30, 2001, the amount of orders we received from Lucent dropped significantly which had a negative effect on our revenues and profitability. If Lucent Technologies continues to limit its purchases of our products due to the current economic slowdown or any other factor, it will continue to harm our business.
Late in the first quarter of 2000, we began shipping the ViewStation FX product. The timing of this delivery date likely created confusion in our reseller customer base and end-user customer market as these groups waited to see if this new ViewStation product was more desirable than the existing products. Therefore, the timing of this new product release likely had a negative effect on our 2000 first quarter sales-in to resellers and sales-out to end-users. We cannot assure you that a similar situation will not happen again.
A major contributor to the expected growth of the broadband distribution market has been the deployment of digital subscriber lines, or DSL. Beginning in the second half of 2000 and continuing into the first half of 2001, some DSL providers experienced delays in delivering their service which caused financial troubles for these companies. These DSL providers are customers of our network access products through original equipment manufacturers we use as resellers. These service delays slowed the expected growth in this market, which in turn slowed sales of our network access products. If these conditions persist, they will negatively impact revenues from our network access products.
The announced transaction with PictureTel could create confusion among our reseller customers due to the potential uncertainties concerning our and PictureTel's product offerings. This confusion may lead to delays in ordering our existing products, which would negatively affect our revenues, which would harm our business.
We may experience delays in product introductions and our products may contain defects which could adversely affect market acceptance for these products and our reputation and seriously harm our results of operations.
Since the beginning of 1998, our revenue growth has been due in large part to new video communications product introductions. Although we are continuing to introduce new products, such as the ViaVideo, ViewStation 4000, ViewStation FX, SoundPoint Pro 3.0, Visual Concert PC, SoundStation IP, Voice Station 100 and our new voice over internet protocol, or VoIP, products, we cannot assure you that new product releases will be timely or that they will be made at all. In fact, the ViewStation FX and ViaVideo were delayed from their original release dates, which we believe negatively affected our net revenues in 2000. Additionally, we cannot assure you that any new or existing product introductions will be free from defects or produce the revenue growth experienced in 1999 and 2000.
In the past we have experienced other 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 ramping issues. Similar delays occurred during the introduction of the ShowStation IP, SoundStation Premier and ShowStation, affecting the first customer ship dates of these products. We also had delays in introducing our SoundStation IP product, which we believe negatively impacted our sales revenue in the first quarter of 2001. Any similar delays in the future for other new product offerings such as VoIP, desktop or other product line extensions could adversely affect market acceptance for these products and our reputation and seriously harm our results of operations. Further, due to the dynamic nature of the network access market sector, any delays in enhancements to our NetEngine product line extensions would seriously harm our business.
We have limited supply sources for some key components of our products, and our operations could be harmed by supply interruptions, component defects or unavailability of these components.
Some 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 some 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 these supplies. We have no supply commitments from our suppliers and generally purchase components on a purchase order basis either directly or through our contract manufacturers. We and our contract manufacturers have had limited experience purchasing volume supplies of various components for our products and some of the components included in our 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 seriously harmed. In particular, in 2000, we encountered some development delays and component shortages relating to our network access products, and if such conditions continue, our business will suffer. Moreover, our operating results would be seriously harmed 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 communications products are designed based on integrated circuits produced by Philips and video equipment produced by Sony. If we could no longer obtain integrated circuits or video equipment from these suppliers, we would incur substantial expense and take substantial time in redesigning our products to be compatible with components from other manufacturers, and we cannot assure you that we would be successful in obtaining these components from alternative sources in a timely or cost-effective manner. Additionally, both Sony and Philips are our competitors in the video communications industry, 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. We also rely on the introduction schedules of some key components in the development or launch of new products, in particular, our network access products. Any delays in the availability of these key components could harm our business.
We rely on third-party license agreements and termination or impairment of these agreements may cause delays or reductions in product introductions or shipments which would harm our business.
We have licensing agreements with various suppliers for software incorporated into our products. For example, we license video communications source code from RADVision, VTEL, Telesoft, Omnitel, Adtran and EBSNet, video algorithm protocols from Real Networks and Ezenia!, development source code from Digital Equipment and Philips Semiconductor, audio algorithms from Lucent Technologies and Nortel Networks, communication software from DataBeam and Windows software from Microsoft. In addition, for our new network access products, we have interoperability agreements with Jetstream Communications and Tollbridge Technologies, and we depend significantly on these agreements and our ability to secure similar licenses from other 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.
Lower than expected market acceptance of our products and price competition would negatively impact our business.
If our products are not accepted by the market, our profitability could be harmed. For example, we lowered the price of the ShowStation IP by 23% effective March 1999 due to market acceptance issues for this product. Similar price reductions and demand issues could occur for any of our products which could negatively impact our net revenues and profitability. Further, through the end of 2000, growth rates of voice and video product sales from our sales channels to end-users were significant. Future growth rates for these and our other products may not achieve these levels of growth.
Our profitability could also be negatively affected in the future as a result of continuing competitive price pressures in the sale of conferencing equipment, network systems and network access devices. Although past 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 have the desired impact.
International sales are accounting for an increasing portion or our net revenue, and risks inherent in international sales could harm our business.
International sales are accounting for an increasing portion of our net revenues, and we anticipate that international sales will continue to account for a significant portion of our net revenues for the foreseeable future. International sales 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 total net revenues in the future as we introduce new products. This is because we expect to initially introduce any new 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.
Our recent acquisitions of Accord Networks and Circa Communications could adversely impact our business, and our business could suffer as a result of future aquisitions, such as PictureTel Corporation.
We completed the acquisition of Accord Networks Ltd., or Accord, on February 28, 2001 and completed the acquisition of Circa Communications Ltd., or Circa, on April 2, 2001. As a result of the completion of the Accord acquisition, we face additional risks that are set forth in the section entitled "Risk Factors," on pages 13-22 of the proxy statement/prospectus dated January 29, 2001, and filed with the Securities and Exchange Commission on January 29, 2001. These risks relate to the impact of the merger on our business, risks related to the operation of the combined company, and risks related to the business of Accord, including its operations in Israel. We face similar risks in the integration of Circa. Failure to achieve the anticipated benefits of these acquisitions or to successfully integrate the operations of Accord and Circa could also harm our business and results of operations.
We may make additional acquisitions in the future. For example, as described above, we currently anticipate completing the acquisition of PictureTel Corporation by the end of 2001. Failure to achieve the anticipated benefits of this or any future acquisition or to successfully integrate the operations of PictureTel could also harm our business and results of operations. We face a number of additional risks relating to the potential PictureTel acquisition which are set forth on pages 14-18 of the preliminary prospectus dated August 2, 2001, and filed as a part of Amendment No. 1 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on June 18, 2001. Further, we cannot assure you that we will not incur material charges in future quarters to reflect additional costs associated with any future acquisitions we may make.
Conflicts with our channel partners could hurt sales of our products.
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. These relationships can create channel conflicts with our other distributors who directly compete with the OEM partner, which could adversely affect revenue from non-OEM channels. Because many of our distributors also sell equipment that competes with our products, the distributors could devote more attention to the other products, which could harm our business. For example, a significant amount of our network systems revenues are generated from sales to Tandberg and VCON which compete with us in the video communications product market. Due to this conflict, they may significantly reduce their orders to us for network systems products which could harm our business. Further, other channel conflicts could arise which cause distributors to devote resources to other non-Polycom communications equipment, which would negatively affect our business or results of operations.
We currently have agreements with video communications equipment suppliers under which these equipment suppliers resell our SoundPoint PC voice products along with their video communications products. We compete with these equipment suppliers in the voice conferencing market and, as such, we cannot assure you that they will enter into future agreements to resell or supply any of our new or enhanced communication products. Further, some of our current video products and video products under development are directly competitive with the products of these suppliers. As a consequence, competition between these suppliers and us is likely to increase, resulting in a strain on the existing relationship between the companies. Any such strain could limit the potential contribution of these relationships to our business.
We also have an agreement with Siemens under which Siemens resells our video communications products. We compete with Siemens in the network access products market, and we consequently cannot assure you that they will enter into future agreements with us to resell any of our new or enhanced video communications products. Further, some of our network access products currently under development are directly competitive with Siemens products. As a consequence, competition between Siemens and us is likely to increase, resulting in a strain on our relationship with Siemens. Any such strain could limit the potential contribution of our relationship with Siemens to our business.
In addition, we depend on several key agreements, including our agreement with Jetstream Communications in the network access products market. Conflicts may occur in this evolving market as we seek other relationships. These conflicts could harm our business.
Our success depends on our ability to assimilate new technologies in our products and to properly train our resellers in the use of those products.
The markets for voice and video communications products, network systems and network access products are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. The success of our new products depends 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 integrated services digital network, or 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 circuit-switched to IP-based wired and wireless technologies 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, network systems and network access product opportunities and develop and bring new voice, video, network systems and network access products to market in a timely manner. Additionally, we cannot assure you that competing technologies developed by others will not render our products or technologies obsolete or noncompetitive. The failure of our new voice, video, network systems and network access product development efforts and any inability to service or maintain the necessary third-party interoperability licenses would harm our business and results of operations.
Manufacturing disruption or capacity constraints would harm our business.
We subcontract the manufacture of our SoundStation, SoundStation Premier, SoundPoint Pro, ViewStation, ViaVideo and our NetEngine access products to Celestica, a third-party contract manufacturer. We use Celestica's Thailand facilities, and should there be any disruption in services due to natural disaster or economic or political difficulties in Thailand or Asia, or for any other reason, such disruption would harm our business and results of operations. Also, Celestica is currently the sole source manufacturer of these products, and if this subcontractor experiences an interruption in operations or otherwise suffers from capacity constraints, we would experience a delay in shipping these products and we may not be able to meet any demand for our products, either of which could negatively affect revenues in the quarter of the disruption and harm our reputation. 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. Further, our network systems products are manufactured in Israel which is currently experiencing internal and external conflicts that include terrorist and military action. We could experience a manufacturing disruption due to acts associated with this conflict which could harm our business. In addition, certain technology used in our network systems products was developed through grants from the Office of the Chief Scientist in Israel. Under Israeli law, it is prohibited to transfer technology developed pursuant to these grants to any person without the prior written consent of the Office of the Chief Scientist. The grants also contain restrictions on the ability to manufacture products developed with these grants outside of Israel. Approval to manufacture such products outside of Israel, if granted, is generally subject to an increase in the total amount to be repaid to the Office of the Chief Scientist to between 120% to 300% of the amount granted, depending on the extent of the manufacturing to be conducted outside of Israel. These restrictions on the ability to transfer technology to third parties or manufacture products outside Israel may adversely affect our operating results and significantly reduce the value of the technology developed under these grants.
Product obsolescence and other asset impairment can negatively affect our results of operation.
We operate in a high technology industry 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 cannot be sold at or above net realizable value. This situation occurred in the first and second quarters of 2001 when we recorded additional material excess and obsolescence charges associated with our inventory of network access products. This situation also occurred during the first quarter of 2000 for the ShowStation IP. In addition, if the introduction of our SoundPoint Pro product has a materially negative effect on the future sales of our SoundPoint product, our net revenues could be reduced and an excess and obsolescence issue concerning our SoundPoint inventory could result, which could lower our profitability. The potential for new products to render existing products obsolete or reduce the demand for existing products exists for every one of our products. In addition, we have made investments in private companies which we classify as "Other Investments" in our balance sheet. The value of these investments is influenced by many factors, including the operating effectiveness of these companies, the overall health of these companies' industries and general market conditions. In the second quarter of 2001, we recorded a charge of $1.5 million against earnings associated with the impairment of some of these investments. Due to these and other factors, we have previously determined and may in the future determine that the value of these investments is impaired, which has caused and would cause us to write down the stated value of these investments. Further, we cannot assure you that future inventory, investment, license, fixed asset or other asset write-downs will not happen. If future write-downs do occur, they could harm our business.
Failure to adequately service and support our products could harm our results of operations.
Our recent growth has been due in large part to an expansion into products with more complex technologies and protocols, including our recently introduced network access products and our network systems products. This has increased the need for increased product warranty and service capabilities. If we cannot develop and train our internal support organization or maintain our relationship with our outside technical support, it could harm our business.
Our cash flow could fluctuate due to our ability to collect receivables.
Over the past several quarters, we initiated significant investments in Europe and Asia to expand our business in these regions. 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 net revenues, as happened in 1999 and 2000, and in the first half of 2001, accounts receivable balances will likely increase over previous years. Additionally, sales in the network access, network systems and video communications industries typically have longer payment periods over our traditional experience in the voice communications market. Therefore, if network access, network systems and video products constitute a greater percentage of net revenues, accounts receivable balances will likely increase. These increases would cause our days sales outstanding to increase over prior years and will negatively affect future cash flows. Although we have been able to offset the effects of these influences through additional incentives offered to resellers at the end of the quarter in the form of prepaid discounts, these additional incentives have lowered our profitability and, given the slow down in the economy of the United States, many companies are opting to not take advantage of our incentives and instead preserve their liquidity. In addition, the economic slowdown in the U.S. may restrict the availability of capital which may delay our collections from our resellers beyond our historical experience, which would further harm our cash flow and days sales outstanding performance.
Our stock price fluctuates as a result of the conduct of our business and stock market fluctuations.
The market price of our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price of our common stock may be significantly affected by a variety of factors, including:
| | • | statements or changes in opinions, ratings or earnings estimates made by brokerage firms or industry analysts relating to the market in which we do business or relating to us specifically; |
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| | • | the announcement of new products or product enhancements by us or our competitors; |
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| | • | technological innovations by us or our competitors; |
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| | • | quarterly variations in our results of operations; |
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| | • | general market conditions or market conditions specific to particular industries; and |
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| | • | domestic and international macroeconomic factors. |
In addition, recently the stock market has experienced extreme price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many high technology companies, such as Polycom. These fluctuations are often unrelated to the operating performance of the specific companies.
Business interruptions could adversely affect our business.
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. Our facilities in the State of California are currently subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event these blackouts continue or increase in severity, they could disrupt the operations of our affected facilities. 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.
Our reseller customer contracts are typically short-term and early terminations of our contracts may harm our results of operations.
We do not typically enter into long-term contracts with our reseller customers, and we cannot be certain as to future order levels from our reseller customers. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. In the event of an early termination by one of our major customers, it is unlikely that we will be able to rapidly replace that revenue source, which would harm our results of operations.
Failure to manage our growth may harm our business.
Our business has grown in recent years through both internal expansion and acquisitions, and continued growth may cause a significant strain on our infrastructure and internal systems. To manage our growth effectively, we must continue to improve and expand our management information systems and continue resource additions such as headcount, capital and processes in a timely and efficient manner. We cannot assure you that resources will be available when we need them or that we will have sufficient capital to fund these resource needs. In addition, our success depends to a significant extent on the management skills of our executive officers and other members of our senior management. If we are unable to manage growth effectively, or we experience a shortfall in resources, our results of operations will be harmed.
If we fail to successfully compete, our business and results of operations would be significantly harmed.
We have significant competition in the broadband communications industry, which is subject to rapid technological change. In video communications, our major competitors include NEC, PictureTel, RSI, Sony, Sun Microsystems, Tandberg, VCON, Gentner, Aethra and VTEL, as well as various smaller or new entrants such as Zydachron, Ivron, Imagecom, Videra, Broadband Networks and Motion Media Technology. Many of these companies have substantial financial resources and production, marketing, engineering and other capabilities 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 communications products. We believe we will face increasing competition from alternative video communications solutions that employ new technologies or new combinations of technologies from companies such as Cisco, MeetingOne, Microsoft, Nortel, 3Com, RealNetworks, Dell, Compaq or WebEx, that enable web-based or network-based video communications with low-cost digital camera systems. The market for voice communications equipment, particularly voiceconferencing products, is highly competitive and also subject to rapid technological change, regulatory developments and emerging industry standards. We expect competition to persist and increase in the future in this area. In voice communications, our major competitors include SoundGear, NEC, Gentner and other companies that offer lower cost, full-duplex speakerphones such as Lucent Technologies and Hello Direct. Hello Direct, one of our resellers, offers a competitive product under the Hello Direct name through an OEM relationship with Gentner. Most of these companies have substantial financial resources and production, marketing, engineering and other capabilities with which to develop, manufacture, market and sell their products. In addition, all major telephony manufacturers produce hands-free speakerphone units that are lower cost than our voice communications products. Our network access products have significant competition from Adtran, Netopia, 3Com, Siemens and Cisco Systems and our network systems business has significant competition from Radvision, Avaya and Ezenia. Our network systems revenue is heavily dependent on purchases by our video product competitors. If these network systems' customers decide to reduce their purchases due to this or other potential competition, it will harm our business.
We cannot assure you that we will be able to compete successfully against our current or future competitors. 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 significantly harm our results of operations.
We rely on patents, trademarks, copyrights and trade secrets to protect our proprietary rights, which may not be sufficient to protect our intellectual property.
We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary rights. Others may independently develop similar proprietary information and techniques or gain access to our intellectual property rights or disclose such technology. In addition, we cannot assure you that any patent or registered trademark owned by us 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 us, if at all. Furthermore, others may develop similar products, duplicate our products or design around our patents. 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. Litigation could result in substantial costs and diversion of resources and could harm our business.
We face and might in the future face intellectual property infringement claims that might be costly to resolve.
We have from time to time received, and may in the future receive, communications from third parties asserting patent or other intellectual property rights covering our products. For example, we have been named in (along with approximately 90 manufacturers or distributors of electronic or semiconductor products) and served with a complaint filed by the Lemelson Medical, Education and Research Foundation alleging patent infringement by us.
In addition, our industry is characterized by uncertain and conflicting intellectual property claims and vigorous protection and pursuit of intellectual property rights or positions, which have on occasion resulted in significant and often protracted and expensive litigation. In the past, we have been involved in such litigation, which adversely affected our operating results. For example, in November 1998, Videoserver, Inc., now known as Ezenia! Inc., filed a patent infringement claim against Accord's U.S. subsidiary, and Accord was subsequently added as a defendant. In June 2000, Accord and its U.S. subsidiary entered into a settlement agreement with Ezenia! under which the case was dismissed and Accord paid $6.5 million to Ezenia! We cannot assure you that we will prevail in any such litigation, that intellectual property claims will not be made against us in the future or that we will not be prohibited from using the technologies subject to any such claims or be required to obtain licenses and make corresponding royalty payments. In addition, the necessary management attention to and legal costs associated with litigation can have a significant adverse effect on operating results.
If we fail to successfully attract and retain qualified personnel, our business will be harmed.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and bank borrowings. We do not use derivative financial instruments and our investment portfolio only includes highly liquid, high quality instruments.
We are subject to fluctuating interest rates that may impact, adversely or otherwise, our results of operations or cash flows for our 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 our investment portfolio and debt obligations:
As of June 30, 2001:
| | | | Expected Maturity | | | |
| | 2001 | | 2002 | | 2003 and beyond | | Total | |
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| | (in thousands, except interest rates) | |
| Assets | | | | | | | | |
| Cash and cash equivalents | 116,388 | | --- | | --- | | 116,388 | |
| | Average interest rates | 2.67 | % | --- | | --- | | 2.67 | % |
| Short-term and long-term investments | 72,649 | | 63,356 | | 27,134 | | 163,139 | |
| | Average interest rates | 4.66 | % | 5.11 | % | 4.80 | % | 4.86 | % |
| Convertible notes receivable | --- | | --- | | 41,500 | | 41,500 | |
| | Average interest rates | --- | | --- | | 8.00 | % | 8.00 | % |
| Liabilities | | | | | | | | |
| Bank line of credit | --- | | --- | | --- | | --- | |
| | Average interest rates | 4.68 | % | --- | | --- | | 4.68 | % |
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The estimated fair value of our cash and cash equivalents approximates the principal amounts reflected above based on the short maturities of these financial instruments. We also hold a $1.1 million investment in publicly traded equity securities which was marked to market from our original $1.0 million investment value. The market risk for this investment is driven by movements in the market price of this investment.
We have made investments in private companies. These investments are included in “Other Investments” in our balance sheet and are carried at cost less any impairment loss. We monitor these investments for impairment and make appropriate reductions in carrying value when necessary. Impairment losses are evaluated regularly and are driven by movements in the current valuations of these companies, which are influenced by general securities market conditions, the general business market in which these companies operate and the specific operational capabilities of these companies. For all of these investments, our ownership is less than 20% of the company and we do not have the ability to exercise significant influence over their operations.
All of our sales are denominated in US dollars. Only a small amount of foreign bills are paid in currencies other than the US dollar and these bills are funded at the time of payment; therefore, our foreign exchange risk is considered immaterial to our consolidated financial position, results of operations and cash flows.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable.
Item 2. CHANGES IN SECURITIES
In connection with the completion of the acquisition of Circa Communications Ltd. completed on April 2, 2001, the Company issued an aggregate of 1,087,439 exchangeable shares in exchange for the outstanding shares of Circa capital stock, which holders may exchange for shares of Polycom common stock on a one-for-one basis at any time. 520,013 of these exchangeable shares have been placed into escrow, some of which are held as security for losses incurred by the Company in the event of certain breaches of the representations and warranties covered in the Share Purchase Agreement entered into between Polycom and Circa or certain other events, and the remainder of which would be released upon the satisfaction of certain revenue targets by the Company. The Polycom common stock for which the exchangeable shares may be exchanged was not registered under the Securities Act of 1933, as amended (the “Securities Act”), and was issued pursuant to an exemption from the registration requirements of the Securities Act afforded by Rule 506 under Regulation D of the Securities Act.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company distributed its Definitive Proxy Statement, Proxy and Annual Report to Stockholders on or about April 17, 2001 to each stockholder of record on March 26, 2001, for its Annual Meeting of Stockholders held May 17, 2001 at the close of business (the “Annual Meeting”). At the Company’s Annual Meeting, the Stockholders were asked to consider five proposals.
The first proposal involved the election of directors. The existing Board of Directors selected seven nominees nominated by the Nominating Committee of the Board of Direcvtors, all of whom ran unopposed and all of whom were then serving as directors of the Company. The nominees of the Board, and the voting results with respect thereto, were:
| Name | | Votes
For | | Votes
Against | | Votes
Abstaining | | Broker
Non-Votes | |
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| Robert C. Hagerty | | 49,256,482 | | 50,109 | | 0 | | 0 | |
| Michael R. Kourey | | 49,256,082 | | 50,509 | | 0 | | 0 | |
| Betsy S. Atkins | | 49,249,803 | | 56,788 | | 0 | | 0 | |
| John Seely Brown | | 49,254,321 | | 52,270 | | 0 | | 0 | |
| John A. Kelley | | 49,252,329 | | 54,262 | | 0 | | 0 | |
| Stanley J. Meresman | | 49,255,421 | | 51,170 | | 0 | | 0 | |
| William A. Owens | | 49,255,229 | | 51,362 | | 0 | | 0 | |
The second proposal was to amend the Company's 1996 Stock Incentive Plan to change the amount and characteristics of options granted to non-employee directors under the automatic grant program. The results were:
| For: | 46,736,893 |
| Against: | 1,114,756 |
| Abstentions: | 1,454,942 |
| Broker Non-Votes: | 0 |
The third proposal was to amend the Company's 1996 Stock Incentive Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 2,500,000 shares. The results were:
| For: | 34,008,613 |
| Against: | 2,421,627 |
| Abstentions: | 1,443,705 |
| Broker Non-Votes: | 11,432,646 |
The fourth proposal was to amend the Company's 1996 Stock Incentive Plan to permit the Company to undertake an exchange offer pursuant to which holders of options to purchase a maximum of 6,500,000 shares of the Company's Common Stock could elect to cancel such options in exchange for the grant of replacement options to purchase 0.85 shares of the Company's Common Stock for each cancelled option, with the replacement options to be granted no earlier than six (6) months and one (1) day following the cancellation date of the cancelled options. The results were:
| For: | 33,751,226 |
| Against: | 3,955,765 |
| Abstentions: | 166,954 |
| Broker Non-Votes: | 11,432,646 |
The fifth and final proposal concerned the ratification of the Company’s independent accountants (PricewaterhouseCoopers LLP) for the fiscal year ending December 31, 2001. The results were:
| For: | 48,791,521 |
| Against: | 494,169 |
| Abstentions: | 20,901 |
| Broker Non-Votes: | 0 |
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
Not Applicable
(b) Reports on Form 8-K:
A report on Form 8-K was filed on June 15, 2001, to report the restatement of the consolidated financial statements of Polycom, Inc. ("Polycom") as of December 31, 2000 and 1999, and for each of the years in the three-year period ended December 31, 2000 together with accompanying notes, and the related financial statement schedule, supplementary financial data and management's discussion and analysis of financial condition and results of operations, which were filed with the Form 8-K as Exhibit 99.1, to include the accounts and results of operations of Accord Networks Ltd. ("Accord") for all periods presented. Polycom completed its acquisition of Accord in February 2001, which transaction was treated as a pooling of interests for financial reporting purposes.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: August 10, 2001 | POLYCOM, INC. |
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| | /s/ Michael R. Kourey |
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| | Michael R. Kourey |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
