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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 2, 2000
or
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from to
COMMISSION FILE NUMBER 0-27130
POLYCOM, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3128324
- -------------------------------- -----------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
1565 BARBER LANE, MILPITAS, CA. 95035
- ---------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code, is (408) 474-2904)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
There were 35,356,134 shares of the Company's Common Stock, par value $.0005,
outstanding on May 5, 2000.
1
POLYCOM, INC.
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
Page
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited for periods ending March 31, 2000 and 1999):
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999............................................................. 3
Condensed Consolidated Statements of Income for the Three
Month Periods Ended March 31, 2000 and March 31, 1999......................... 4
Condensed Consolidated Statements of Cash Flows for the Three
Month Periods Ended March 31, 2000 and March 31, 1999......................... 5
Notes to Condensed Consolidated Financial Statements.......................... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk.................... 20
PART II OTHER INFORMATION
Item 1 - Legal Proceedings.................................................... 21
Item 2 - Changes in Securities................................................ 21
Item 3 - Defaults Upon Senior Securities...................................... 21
Item 4 - Submission of Matters to a Vote of Security Holders.................. 21
Item 5 - Other Information.................................................... 21
Item 6 - Exhibits and Reports on Form 8-K..................................... 21
SIGNATURE....................................................................................... 22
2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYCOM, INC.
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2000 1999
---------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 49,091 $ 35,952
Short-term investments 14,477 24,815
Accounts receivable, net of allowance for doubtful
accounts of $1,439 at March 31, 2000 and
$1,304 at December 31, 1999 52,758 47,445
Inventories 24,698 18,136
Deferred and refundable taxes 11,715 9,059
Other current assets 4,640 2,368
------------- -------------
Total current assets 157,379 137,775
Fixed assets, net 12,143 9,795
Long-term investments 15,269 15,050
Licenses 8,182 -
Other assets 2,085 2,101
------------- -------------
Total assets $ 195,058 $ 164,721
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,829 $ 26,433
Taxes payable 13,481 9,633
Accrued and other current liabilities 14,068 15,385
------------- -------------
Total current liabilities 61,378 51,451
------------- -------------
Stockholders' equity:
Common stock 18 17
Additional paid-in capital 106,080 97,594
Unrealized loss on marketable securities (83) (85)
Unearned stock-based compensation (1,661) (1,953)
Accumulated earnings 29,326 17,697
------------- -------------
Total stockholders' equity 133,680 113,270
------------- -------------
Total liabilities and stockholders' equity $ 195,058 $ 164,721
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
POLYCOM, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
Three Months Ended
March 31, March 31,
2000 1999
-------------- ------------
Net revenues $ 67,295 $ 41,314
Cost of net revenues 29,737 19,533
------------ ------------
Gross profit 37,558 21,781
------------ ------------
Operating expenses:
Sales and marketing 12,160 7,411
Research and development 7,449 3,926
General and administrative 3,296 1,552
Litigation reserve release (1,843) -
------------ ------------
Total operating expenses 21,062 12,889
------------ ------------
Operating income 16,496 8,892
Interest income, net 790 303
Other income (expense) 71 (6)
------------ ------------
Income before taxes 17,357 9,189
Provision for income taxes 5,728 1,449
------------ ------------
Net income $ 11,629 $ 7,740
============ ============
Basic net income per share $ 0.34 $ 0.25
============ ============
Diluted net income per share $ 0.31 $ 0.22
============ ============
Weighted average shares outstanding for basic EPS 34,459 30,925
============ ============
Weighted average shares outstanding for diluted EPS 37,785 35,626
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
POLYCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
------------------------------------
March 31, March 31,
2000 1999
--------------- --------------
Cash flows from operating activities:
Net income $ 11,629 $ 7,740
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,487 901
Provision for doubtful accounts 189 ---
Provision for excess and obsolete inventories 1,044 1,301
Tax benefit from exercise of stock options 4,530 1,466
Amortization of stock-based compensation 292 7
Changes in assets and liabilities:
Accounts receivable (5,502) (4,653)
Inventories (7,606) 285
Deferred taxes (2,656) (3,157)
Other assets (2,117) (676)
Accounts payable 7,396 4,312
Taxes payables 3,848 1,943
Accrued and other liabilities (1,317) (349)
--------------- --------------
Net cash provided by operating activities 11,217 9,120
--------------- --------------
Cash flows from investing activities:
Acquisition of fixed assets (3,835) (1,673)
Purchase of licenses (8,321) ---
Proceeds from sale and maturity of investments 18,045 1,700
Purchases of investments (7,924) (3,518)
Other --- 250
--------------- --------------
Net cash used in investing activities (2,035) (3,241)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,957 1,613
Proceeds from exercise of warrants --- 15,000
--------------- --------------
Net cash provided by financing activities 3,957 16,613
--------------- --------------
Net increase in cash and cash equivalents 13,139 22,492
Cash and cash equivalents, beginning of period 35,952 18,006
--------------- --------------
Cash and cash equivalents, end of period $ 49,091 $ 40,498
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 13 $ 1,107
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
POLYCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 2000, the condensed
consolidated statements of income for the three month periods ended March 31,
2000 and 1999 and condensed consolidated statements of cash flows for the three
month periods ended March 31, 2000 and 1999 have been prepared by the Company
without audit. The condensed consolidated balance sheet at December 31, 1999 has
been derived from the audited financial statements as of that date.
The preparation of financial statements in conformity with United States'
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 2000 and for all periods presented have been made.
The Company uses a 52-53 week fiscal year. As a result, a fiscal year may not
end as of the same day as the calendar period. However, for convenience of
presentation, the accompanying consolidated financial statements have been shown
as ending on March 31 and December 31 of each applicable period.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. These condensed financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Report on Form 10-K for the year ended December 31,
1999 filed with the Securities and Exchange Commission.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined in a
manner which approximates the first-in, first-out ("FIFO") method. Inventories
consisted of the following (in thousands):
March 31, Dec. 31,
2000 1999
---- ----
Raw Materials $ 1,511 $ 1,542
Finished Goods 23,187 16,594
-------- --------
$ 24,698 $ 18,136
======== ========
3. BANK LINE OF CREDIT
The Company has available a $15.0 million revolving line of credit under an
agreement with a bank. Borrowings under the line are unsecured and bear interest
at the bank's prime rate (9.0% at March 31, 2000) or at an offshore interbank
offered rate (IBOR) plus 0.65% (approximately 6.5% to 7.2%, depending on the
term of the borrowings at March 31, 2000). Borrowings under the line are subject
to certain financial covenants and restrictions on liquidity, indebtedness,
financial guarantees, business combinations, profitability levels, and other
related items. The line expires on October 31, 2000 but may be renewed by the
Company for an additional year so long as certain liquidity measures are met at
the time of renewal.
6
4. PER SHARE INFORMATION
In accordance with the disclosure requirements of the Statement of Financial
Standards (SFAS) No. 128, a reconciliation of the numerator and denominator of
basic and diluted EPS is provided as follows (in thousands except per share
amounts).
Three Months Ended
March 31,
2000 1999
---------------------------------
Numerator - basic and diluted EPS
Net income $ 11,629 $ 7,740
============ ============
Denominator - Basic EPS
Weighted average common stock outstanding 34,958 32,120
Shares subject to repurchase (499) (1,195)
------------ ------------
Total shares used in calculation of Basic EPS 34,459 30,925
============ ============
Basic net income per share $ 0.34 $ 0.25
Denominator - Diluted EPS
Denominator - Basic EPS 34,459 30,925
Effect of Dilutive Securities:
Common stock options 2,827 2,661
Shares subject to repurchase 499 1,195
Convertible warrants and preferred --- 845
------------ ------------
Total Shares used in calculation of Diluted EPS 37,785 35,626
============ ============
Diluted net income per share $ 0.31 $ 0.22
5. BUSINESS SEGMENT INFORMATION:
The Company operates in one business segment, named Communications, and markets
its products in the United States and in foreign countries through resellers.
The percentage of total net revenues for the Video Communications, Voice
Communications and Network Access product lines were as follows:
Three Months Ended
March 31,
--------------------------
2000 1999
------------- ------------
Video communications 61% 54%
Voice communications 35% 43%
Network access products 4% 3%
============= ============
Total net revenues 100% 100%
============= ============
6. LITIGATION
On September 3, 1997, VTEL Corporation (VTEL) filed a lawsuit in the State
District Court in Travis County, Texas against ViaVideo Communications, Inc., a
subsidiary of Polycom, and its founders (who were formerly employed by VTEL). On
May 27, 1998, VTEL amended its suit to add Polycom as a defendant. In the
lawsuit, VTEL alleged breach of contract, breach of confidential relationship,
disclosure of proprietary information and related allegations. ViaVideo, its
founders and Polycom answered the suit, denying in their entirety VTEL's
allegations. On March 3, 2000, VTEL voluntarily dismissed the allegations
against Polycom and ViaVideo with prejudice for no consideration. The remaining
balance of the accrual associated with the expenses estimated to be incurred in
connection with this lawsuit, totaling $1.8 million, was released to income
since no further material expenses will be incurred.
7
7. COMPREHENSIVE INCOME
In accordance with the disclosure requirements of SFAS No. 130, "Reporting
Comprehensive Income", the components of comprehensive income are as follows:
Three Months Ended
March 31,
(in thousands) 2000 1999
---------------------------
Net income $ 11,629 $ 7,740
Decrease in unrealized loss on marketable securities 2 ---
-------------- ------------
Comprehensive income $ 11,631 $ 7,740
============== ============
8. 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 established methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities, and is effective for the fiscal years beginning after June 15, 2000,
as amended by SFAS No. 137. We believe that adoption of this pronouncement will
not have a material impact on our financial position and results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition," which outlines the basic criteria
that must be met to recognize revenue and provide guidance for presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the Securities and Exchange Commission. The effective date
of this pronouncement is the second quarter of the fiscal year beginning after
December 15, 1999. We believe that adopting SAB 101 will not have a material
impact on our financial position and results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44) Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. We believe that
the impact of FIN 44 will not have a material effect on Polycom's financial
position or results of operations.
9. LICENSES
On March 3, 2000, Polycom entered into a patent licensing agreement with VTEL
Corporation (VTEL). VTEL provided a fully-paid up, royalty-free license to three
patents related to various videoconferencing technologies. In exchange for these
licenses, Polycom paid VTEL approximately $8.3 million and sublicensed to VTEL a
royalty-bearing patent for videoconferencing technology. The royalty, if any,
under the sublicense is payable to the patent holder not Polycom.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND OTHER SECTIONS OF THIS FORM 10-Q CONTAIN FORWARD LOOKING
STATEMENTS, INCLUDING STATEMENTS CONCERNING FUTURE REVENUES OF THE NETENGINE,
VIEWSTATION, STREAMSTATION AND SOUNDSTATION PRODUCT FAMILIES, FUTURE
INTERNATIONAL SALES, EXPECTATIONS FOR THE COST OF NET REVENUES PERCENTAGE, AND
EXPECTED EXPENSES IN ABSOLUTE DOLLARS AND AS A PERCENTAGE OF NET REVENUES. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT, IF NOT IMPOSSIBLE, TO
PREDICT. THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE THE SUCCESSFUL LAUNCH OF NEW PRODUCTS AND MANUFACTURING RAMP OF THE
NETENGINE PRODUCT LINE, VIEWSTATION FX, VIEWSTATION 4000, MEETINGSITE AND OTHER
NEW PRODUCTS; LEVEL OF SALES TO KEY CUSTOMERS, INCLUDING LUCENT AND ITS NEW
SPIN-OFF COMPANY; POSSIBLE PRICE COMPETITION; DEMAND FOR VIEWSTATION, NETENGINE,
MEETINGSITE, AND OTHER NEW PRODUCTS; POTENTIAL DIFFICULTIES ASSOCIATED WITH
TRANSITIONING TO THE NEW MANAGEMENT INFORMATION SYSTEM; UNCERTAINTIES RELATING
TO THE INTEGRATION OF OPERATIONS OF ATLAS COMMUNICATION ENGINES, INC. AND
RETENTION OF KEY STAFF; EFFECTS OF THE ACQUISITION ON EXISTING BUSINESS
PARTNERSHIPS; DEPENDENCE ON THIRD PARTY DISTRIBUTORS; THE PROFITABILITY OF THE
MEDIA SERVER PRODUCT LINE; THE SUCCESS OF THE RECENTLY ANNOUNCED BUSINESS
RELATIONSHIPS SUCH AS JETSTREAM COMMUNICATION INC., LUCENT TECHNOLOGIES, CISCO
SYSTEMS AND NORTEL NETWORKS; RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS;
DEPENDENCE ON THIRD PARTY MANUFACTURERS AND SOLE-SOURCE SUPPLIERS; RECRUITING
AND RETENTION OF KEY TECHNICAL AND MANAGEMENT PERSONNEL; AND OTHER RISKS
DETAILED IN THIS REPORT AND POLYCOM'S OTHER SEC REPORTS. POLYCOM UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. FURTHERMORE, INVESTORS
SHOULD CAREFULLY REVIEW THE RISK FACTORS AND OTHER INFORMATION SET FORTH IN
POLYCOM'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND OTHER DOCUMENTS
POLYCOM FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.
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 communication product, the SoundStation.
Currently, our voice communication product line consists principally of the
SoundStation, SoundStation EX, SoundStation Premier, SoundStation Premier EX,
SoundPoint and SoundPoint Pro. In January 1998, we completed the acquisition of
ViaVideo Communications, Inc., (ViaVideo), a development stage company that
designed and developed high quality, low cost, easy-to-use, group video
communication systems. In February 1998, we began customer shipments of the
ViewStation product family, our video communication equipment product line.
Currently, our video communication product line consists principally of the
ViewStation 128, ViewStation 512, ViewStation V.35, ViewStation MP, ViewStation
SP, StreamStation, WebStation, ShowStation IP and the MeetingSite 5000. In
December 1999, we acquired Atlas Communication Engines, Inc. (Atlas), a
privately-held, OEM supplier of Integrated Access Devices (IADs) and an emerging
supplier of Digital Subscriber Line (DSL) routers. In addition, Atlas also sold
non-DSL custom communication products under OEM arrangements. Atlas's line of
IADs and DSL routers, which will become our network access product line,
provides voice and data over the rapidly-growing DSL network.
Through March 31, 2000, we derived a majority of our net revenues from
sales of our ViewStation and SoundStation products. Although the IAD and DSL
routers are expected to become an increasingly important revenue contributor, we
anticipate that the ViewStation and SoundStation product lines will continue to
account for a significant portion of our net revenues at least through the year
ending December
9
31, 2000. Any factor adversely affecting the demand or supply for these products
would harm our business, financial condition, cash flows and results of
operations.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues, condensed
consolidated statements of operations data for the periods indicated.
Three Months Ended
March 31, March 31,
2000 1999
------------- ------------
Net revenues 100% 100%
Cost of net revenues 44% 47%
------------- ------------
Gross profit 56% 53%
------------- ------------
Operating expenses:
Sales and marketing 18% 18%
Research and development 11% 9%
General and administrative 5% 4%
Litigation reserve release (3%) 0%
------------- ------------
Total operating expenses 31% 31%
------------- ------------
Operating income 25% 22%
Interest income, net 1% 1%
Other income (expense) 0% 0%
------------- ------------
Income before taxes 26% 23%
Provision for income taxes 9% 4%
------------- ------------
Net income 17% 19%
============= ============
NET REVENUES
Total net revenues for the three months ended March 31, 2000 were $67.3
million, an increase of $26.0 million, or 63%, as compared to the same period of
1999. The increase was due primarily to an increased sales volume of video
communication products. In addition, sales volume increases in the voice
communication and network access product lines also contributed to the
improvement over 1999.
In the three months ended March 31, 2000 and 1999, we derived a
substantial majority of our net revenues from sales of our video communication
and voice communication products. No customer accounted for more than 10% of our
net revenues in the period ended March 31, 2000. Lucent Technologies accounted
for 10% of net revenues in the three months ended March 31, 1999. No other
customer or reseller accounted for more than 10% of our net revenues during the
three months ended March 31, 1999.
International net revenues (revenues outside of North America)
accounted for 37% and 25% of total net revenues for the three months ended March
31, 2000 and 1999, respectively. The increase in the international percentage of
our net revenues was due primarily to increased sales in the European region as
we continue to invest capital and headcount resources in this region. We
anticipate that international sales will continue to account for a significant
portion of total net revenues for the foreseeable future, and we plan to
continue our expansion in Europe and Asia in 2000. International sales, however,
are subject to certain inherent risks, including unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable and potentially adverse tax consequences. Additionally, international
net revenues may fluctuate as a percentage of net revenues in the future as we
introduce new products, since we expect to initially introduce such products in
North America and also because of the additional time required for product
homologation and regulatory approvals of new products in international markets.
To the extent we are unable to expand international sales in a timely and
cost-effective manner, our business could be harmed.
10
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.
COST OF NET REVENUES
Cost of net revenues consists primarily of contract manufacturer costs
including material and direct labor, Polycom's manufacturing organization,
tooling depreciation, warranty expense and an allocation of overhead expenses.
The cost of net revenues as a percentage of net revenues for the three months
ended March 31, 2000 and 1999 was 44% and 47%, respectively. The decrease in
cost as a percentage of net revenues is attributable to a more favorable product
mix from increased shipments of higher margin video products, and favorable
material price improvements. These cost decreases were offset by a write-down of
certain media server inventory, including the ShowStation IP, to net realizable
value.
Forecasting future gross margin percentages is difficult. While we
expect that the overall cost of net revenues percentage will be within a few
percentage points of the current level, there are a number of risks associated
with maintaining our current gross margin levels. For example, uncertainties
surrounding competition, changes in technology, changes in product mix,
manufacturing efficiencies of subcontractors, manufacturing and purchased part
variances, warranty costs, and timing of sales over the next few quarters can
cause our cost of net revenues percentage to fluctuate significantly.
Additionally, the IAD and DSL equipment products, Voice-over-IP (VoIP) products
and other desktop products such as SoundPoint Pro have a significantly higher
cost of net revenue percentage than the ViewStation and SoundStation product
lines. If the IAD, DSL, VoIP and other desktop products grow to be become a
significant revenue stream, this will have an unfavorable effect on future cost
of net revenue percentages. Also, we may reduce prices of our products in the
future for competitive reasons or to stimulate demand which could increase our
cost of net revenues percentage; however, these possible price reductions may
not offset competitive pressures or stimulate demand. In addition, cost
variances associated with the manufacturing ramp of new products, such as the
ViewStation 4000 and ViewStation FX or any other new product, could occur which
would increase our cost of net revenues percentage.
In addition to the uncertainties listed above, the cost of net revenues
percentage may increase due to a change in the mix of distribution channels and
the mix of international versus North American revenues. We had previously
realized lower cost of net revenue percentages on our direct sales than on sales
through indirect channels. Now that we no longer sell our products through a
direct sales force, profit margins will be negatively impacted.
SALES AND MARKETING EXPENSES
Three Months Ended
March 31, March 31, Increase/
$ in Thousands 2000 1999 (Decrease)
- -------------- ---- ---- ----------
Expenses $ 12,160 $ 7,411 64 %
% of Net Revenues 18 % 18 % 0 %
Sales and marketing expenses consist primarily of salaries and
commissions, advertising and promotional expenses, product marketing, an
allocation of overhead expenses and customer service and support costs. The
increase in sales and marketing expenses in absolute dollars in the three months
ended March 31, 2000 over the same period of 1999 was primarily related to
increased advertising and promotional expenditures for the video and network
access products. Additionally, an increase in our investment in our worldwide
sales effort also contributed to the increase over 1999.
We expect to continue to increase our sales and marketing expenses in
absolute dollar amounts in an effort to expand North American and international
markets, market new products and establish and expand distribution channels. In
particular, our acquisition of Atlas Communication Engines, Inc. expands our
product portfolio into the DSL access market which will require significant
additional marketing
11
expenditures to communicate the value of our new product offerings as well as
significant additional sales expenditures to develop a new sales organization
for this market. In addition, due to the innovative nature of the ViewStation,
StreamStation and upcoming desktop video 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. In addition, we will further invest in the European and
Asian markets, thereby, increasing the absolute dollars spent in these areas.
Further, we are currently expanding our service organization to provide expanded
and improved support for our products which will increase our sales and
marketing expenses.
RESEARCH AND DEVELOPMENT EXPENSES
Three Months Ended
March 31, March 31, Increase/
$ in Thousands 2000 1999 (Decrease)
- -------------- ---- ---- ----------
Expenses $ 7,449 $ 3,926 90 %
% of Net Revenues 11 % 9 % 2 %
Research and development expenses consist primarily of compensation
costs, consulting fees, depreciation and an allocation of overhead expense.
Expense increases in video, voice and network access product development
contributed to the total increase for the three months ended March 31, 2000 over
the respective comparable period of 1999. As of March 31, 2000, 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 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 the high-technology industries, we
may not be able to find or hire qualified personnel in a timely manner or at
all. In fact, we established a development office in Boston, Massachusetts in
1999 in an attempt to broaden our recruiting of top technical talent.
GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended
March 31, March 31, Increase/
$ in Thousands 2000 1999 (Decrease)
- -------------- ---- ---- ----------
Expenses $ 3,296 $ 1,552 112 %
% of Net Revenues 5 % 4 % 1 %
General and administrative expenses consist primarily of compensation
costs, an allocation of overhead expense, bad debt write-offs, legal expenses
and accounting expenses. The increase in general and administrative expenses
in the three months ended March 31, 2000 over the respective comparable
period of 1999 is due to increased staffing and infrastructure costs to
support Polycom's growth including the conversion of the management
information system as well as higher bad debt expense.
We believe that our general and administrative expenses will increase in
absolute dollar amounts in the future primarily as a result of expansion of our
administrative staff and costs related to supporting a larger company. These
additional charges include expenses related to a new information system, a new
tax deferral strategy and infrastructure charges related to the significant
investments being made in Europe and Asia. Additionally, write-offs associated
with bad debt are difficult to predict and material write-offs could negatively
affect our profitability in the quarter they are realized.
12
LITIGATION RESERVE RELEASE
On September 3, 1997, VTEL Corporation (VTEL) filed a lawsuit in the
State District Court in Travis County, Texas against ViaVideo Communications,
Inc., a subsidiary of Polycom, and its founders (who were formerly employed by
VTEL). On May 27, 1998, VTEL amended its suit to add Polycom as a defendant. In
the lawsuit, VTEL alleged breach of contract, breach of confidential
relationship, disclosure of proprietary information and related allegations.
ViaVideo, its founders and Polycom answered the suit, denying in their entirety
VTEL's allegations. On March 3, 2000, VTEL voluntarily dismissed the allegations
against Polycom and ViaVideo with prejudice for no consideration. As a one-time
item, the excess accrual associated with the expenses we estimated we would
incur in connection with this lawsuit, totaling $1.8 million, was released to
income since no further material expenses will be incurred.
OTHER INCOME AND EXPENSE
Interest income consists of interest earned on Polycom's cash, cash
equivalents and investments. Interest expense is from Polycom's bank debt
facilities. Interest income, net of interest expense was $0.8 million and $0.3
million for the three months ended March 31, 2000 and 1999, respectively. The
fluctuations in interest income, net are due primarily to changes in average
cash and investment balances throughout the year.
PROVISION FOR INCOME TAXES
In the three months ended March 31, 2000 and 1999, the provision for
income taxes was $5.7 million and $1.4 million, respectively. The increase in
income taxes for the current period over the same period last year was due to
the increased profitability of Polycom offset by a reduction in the tax
provision rate associated with the recent development and implementation of our
international structure. Additionally, the valuation allowance established in
prior years was reversed in the three months ended March 31, 1999 due to our
belief that the deferred tax assets will more likely than not be realized.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, our principal sources of liquidity included cash
and cash equivalents of $49.1 million, short-term investments of $14.5 million
and long-term investments of $15.3 million. Additionally, we have a $15.0
million line of credit with a bank. The line of credit facility contains
provisions that require the maintenance of certain financial ratios and
profitability requirements. As of March 31, 2000, we were in compliance with
these covenants.
We generated cash from operating activities totaling $11.2 million and
$9.1 million for the three months ended March 31, 2000 and 1999, respectively.
The improvement in cash from operating activities in the 2000 period over the
same period of 1999 was due primarily to the improvements in net income before
non-cash items and increases in accounts and taxes payable, offset somewhat by
higher growth in inventories, receivables and other assets.
The total net change in cash and cash equivalents for the three months
ended March 31, 2000 was an increase of $13.1 million. The primary sources of
cash were $11.2 million from operating activities, $10.1 million from net sales
and maturities of investments and $4.0 million associated with the exercise of
stock options and purchases under the employee stock purchase plan. The primary
uses of cash during this same period were purchases of licenses of $8.3 million
and purchases of property, plant and equipment of $3.8 million. The positive
cash from operating activities was primarily the result of positive net income
before considering non-cash expenses such as depreciation and amortization and
higher total current liabilities (including accounts payable and taxes payable),
offset by an increase in inventories, accounts receivable, deferred taxes and
other assets.
Our 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
$300,000 and are outstanding less than 120 days.
We believe that our available cash, cash equivalents, investments and
bank line of credit will be sufficient to meet our operating expenses and
capital requirements through at least December 31, 2000.
13
However, we cannot determine with any degree of certainty how successful we will
be at growing the market for our products, if at all. If we experience
substantial growth and, as a result, we go beyond current acceptable liquidity
levels, or if our financial results were to violate the financial covenants of
the bank line of credit, we may require or desire additional funds to support
our working capital requirements or for other purposes, such as acquisitions or
competitive reasons, and may seek to raise such additional funds through public
or private equity financing or from other sources. We cannot assure you that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to Polycom and would not be
dilutive. Our future liquidity and cash requirements will depend on numerous
factors, including the introduction of new products and potential acquisitions
of related businesses or technology.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). SFAS 133 established methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities, and is effective for the fiscal years beginning after June
15, 2000, as amended by SFAS No. 137. We believe that adoption of this
pronouncement will not have a material impact on our financial position and
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provide guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the second quarter of
the fiscal year beginning after December 15, 1999. We believe that adopting SAB
101 will not have a material impact on our financial position and results of
operations.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44)
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
We believe that the impact of FIN 44 will not have a material effect on
Polycom's financial position or results of operations.
OTHER FACTORS AFFECTING FUTURE OPERATIONS
INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE
MAKING AN INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING OUR COMPANY. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR
BUSINESS COULD BE HARMED BY ANY OF THESE RISKS. THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND INVESTORS MAY LOSE ALL OR
PART OF THEIR INVESTMENT. IN ASSESSING THESE RISKS, INVESTORS SHOULD ALSO REFER
TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS FORM
10-Q REPORT, INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES, AND IN THE
FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 31, 1999 FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
CHANNEL SALES AND INVENTORY. We sell a significant amount of our products to
distributors and resellers which maintain their own inventory of products for
sale to dealers and end-users. A substantial percentage of the total products
sold during a particular quarter consist of distributor stocking orders. We
typically provide special cost or early payment incentives for distributors to
purchase the minimum or more than the minimum quantities required under their
agreements with us. If these resellers are unable to sell through an adequate
amount of their inventory, as determined by these resellers, of our products in
a given quarter to dealers and end-users or if resellers decide to decrease
their inventories, it would negatively affect the volume of our sales to these
resellers in the current or future quarters and also
14
negatively affect our total revenues. Also, if we choose to eliminate or reduce
stocking incentive programs, quarterly revenue may be lower than historical
levels or under the capital market expectations.
Our revenue estimates are based largely on the sell-through reporting
that the resellers provide to us on a monthly basis. The accuracy of this data
has been good in North America but is questionable outside of this region. To
the extent that this sell-through and channel inventory data is inaccurate in
either North America or outside of North America, we may not be able to make
reseller estimates or may find that our previous estimates are entirely
inaccurate.
Many of our distributors and resellers, on whom our revenues depend
significantly, are undercapitalized yet carry multiple Polycom product lines.
Failure of these businesses to establish and sustain profitability or obtain
financing could significantly affect future revenue levels for Polycom. The loss
of distributors or resellers could harm our business. In addition, the effect of
the spin-off of Lucent Technologies' business equipment segment on Polycom is
not yet known. In light of the restructure, if Lucent decides to significantly
reduce the amount of the orders to Polycom, it could harm our financial
condition.
Further, late in the first quarter of 2000, we began shipping the
ViewStation FX product. This late delivery date likely created confusion in the
reseller customer base and the 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 the current quarter's sales-in and sales-out to end-users. We
can not assure you that this situation will not happen again.
CHANNEL AND CUSTOMER ORDERS. We typically ship products within a short time
after receipt of 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 such end-user
demand means that any quarter could be significantly negatively impacted by
lower end-user orders which could negatively affect orders we receive from our
resellers. Accordingly, our expectations for both short- and long-term future
net revenues are based almost exclusively on our own estimate of future demand
and not on firm customer orders. Expense levels are based, in part, on these
estimates and, since we are limited in our ability to reduce expenses quickly if
orders and net revenues do not meet expectations in a particular period,
operating results would be lower than expected. In addition, a seasonal demand
appears to be evident in a lag in demand during the summer months. This
seasonality can make predicting revenues levels difficult, if not impossible.
A substantial portion of our orders are received and shipped within the
last few weeks of a quarter, therefore, should Polycom, its suppliers or major
customers be subject to a business interruption, for example, a natural
disaster, during the last few weeks of a quarter, it would negatively affect our
business. Further, we cannot assure you that our contract manufacturers will be
able to meet product demand before any given quarter ends.
UNCERTAINTY OF FUTURE REVENUES AND RESULTS. As a result of several factors,
including reliance on channel sales and the timing of orders and shipments
during each quarter, throughout most of each quarter, we are uncertain as to the
level of revenues we will achieve in the quarter and the impact distributor
stocking orders will have on revenues and profitability in that quarter. In
addition, because a substantial percentage of product sales occur at the end of
the quarter, product mix and, therefore, profitability is difficult, if not
impossible, to predict. Due to these factors, it is likely that in a future
quarter our operating results will be materially below the expectations of
public market analysts and investors. In such event, the price of our common
stock would likely decrease significantly.
Our net revenues have grown primarily through increased market
acceptance of our ViewStation and SoundStation product lines and through the
expansion of our North American and international distribution networks. While
we have experienced growth in net revenues in recent quarters, we do not believe
that the historical growth rates in net revenues will be sustainable nor are
they indicative of future operating results. For example, we lowered the price
of the ShowStation IP 23% effective March 1999 due to market acceptance issues
for this product; similar price reductions and demand issues could occur for
this and other products which could negatively impact our net revenues and
profitability. Further, through the end of 1999,
15
growth rates of voice and video product sales out from the sales channels to
end-users have been significant. Future growth rates for these and other Polycom
products may not achieve these levels of success. In fact, the sales out for the
video product line was flat to negative in the first quarter of 2000.
We believe that profitability could be negatively affected in the
future as a result of several factors including continuing competitive price
pressure in the conferencing equipment and DSL access device markets. Although
price reductions have been driven by our desire to expand the market for our
products, and we expect that in the future we may further reduce prices or
introduce new products that carry lower margins in order to further expand the
market or to respond to competitive pricing pressures, such actions may not
expand the market for our products or be sufficient to meet competitive pricing
pressures. If the SoundPoint Pro product materially negatively affects the
future sales of the SoundPoint product, Polycom's total revenue could be lower
and it could create an excess and obsolescence issue concerning the SoundPoint
inventory which could lower our profitability. For example, during the first
quarter of 2000, we recorded a charge for excess and obsolete inventory concerns
for the ShowStation IP product line which negatively impacted our cost of net
revenues percentage. 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, costs related to the introduction of our new products
such as NetEngine, ViewStation 4000, ViewStation FX, ViewStation SP, SoundPoint
Pro and StreamStation could also negatively impact future profitability.
Our operating results have fluctuated in the past and may fluctuate in the
future as a result of a number of factors, including market acceptance of
ViewStation, SoundPoint Pro, NetEngine, WebStation, ShowStation IP, MeetingSite,
StreamStation and other new product introductions and product enhancements by us
or our competitors, the prices of our or the competition's products, the mix of
products sold, the mix of products sold directly and through resellers,
fluctuations in the level of international sales, the cost and availability of
components, manufacturing costs, the level and cost of warranty claims, changes
in our distribution network, the level of royalties to third parties and changes
in general economic conditions. For example, beginning in November 1999, we
eliminated our direct sales force and moved our direct customers to resellers in
our VAR channel. This sales channel shift negatively impacted our cost of net
revenues percentage and will continue to negatively impact gross margins in the
year 2000. In addition, competitive pressure on pricing or demand levels in a
given quarter could adversely affect our operating results for such period, and
such price pressure over an extended period could materially adversely affect
our near and long-term profitability. Our ability to maintain or increase net
revenues will depend upon our ability to increase unit sales volumes of the
ViewStation product line, SoundStation, SoundStation Premier and SoundPoint
families of products, the StreamStation, upcoming desktop video and VoIP line of
products, our new network access products and any new products or product
enhancements. We cannot assure you that we will be able to increase unit sales
volumes of existing products, introduce and sell new products or reduce our
costs as a percentage of net revenues.
PRODUCT INTRODUCTIONS. Our revenue growth since the beginning of 1998 was due in
large part to new product introductions in the video communication product line.
Although we are continuing to introduce new product releases, such as the
recently announced ViewStation 4000 and ViewStation FX, we cannot assure you
that new product releases will be timely or that they will be made at all. In
fact, the ViewStation FX was delayed from its original release date which we
believe negatively affected our net revenues in the first quarter of 2000.
Additionally, we cannot assure you that these or any new product introductions
in 2000 will produce the revenue growth experienced in 1998 and 1999.
In the past we have experienced 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 ramp issues. Similar delays occurred
during the introduction of the ShowStation IP, SoundStation Premier and the
ShowStation affecting the first customer ship dates of these products. Any
similar delays in the future for other new product offerings such as VoIP,
desktop or NetEngine product line extensions could have a material adverse
effect on our results of operations.
ATLAS INTEGRATION. We completed the acquisition of Atlas Communication Engines,
Inc. in December 1999. We acquired Atlas with the expectation that the
acquisition would result in operating and strategic benefits, including product
development and marketing and sales synergies. If outstanding merger
16
related issues are not successfully addressed in a coordinated, timely and
efficient manner, our business and results of operations could be harmed. The
integration of Atlas's product offerings and operations with our product
offerings and operations and the coordination of the two companies' sales and
marketing efforts may require substantial attention from management. The
diversion of the attention of management and any difficulties encountered in the
transition process could harm our business. The difficulties of assimilation may
be increased by the necessity of integrating personnel with disparate business
backgrounds and combining two different corporate cultures which may result in
problems with employee retention. In addition, the process of combining the two
organizations could cause the interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses, which could have an
adverse effect on the combined operations. As a result of the acquisition, our
operating expenses will likely increase in absolute dollars. In fact, we are
currently recruiting both management and technical staff to be added to this
group. Should future expected revenues from Atlas's products not occur, or occur
later or in an amount less than expected, the higher operating expenses could
harm our business. Failure to achieve the anticipated benefits of the
acquisition or to successfully integrate the operations of the companies could
also harm our business and results of operations. Additionally, we cannot assure
you that we will not incur additional material charges in future quarters to
reflect additional costs associated with the acquisition.
CHANNEL CONFLICTS. We have various OEM agreements with some major
telecommunications equipment manufacturers such as Lucent Technologies whereby
we manufacture our products to work with the equipment of the OEM partner. These
partnerships can create channel conflicts with other Polycom distributors who
directly compete with our OEM partner, which could adversely affect revenue from
such non-OEM channels. Because many of our distributors also sell equipment that
compete with the Polycom product lines, the distributors could devote more
attention to the other product lines which could materially adversely affect our
profitability. Further, other channel conflicts could arise which cause
distributors to devote resources to other non-Polycom conferencing equipment
thereby negatively affecting our business or results of operations.
We currently have agreements with certain video communication equipment
providers whereby these equipment suppliers resell our SoundPoint PC products
along with their video communication products. Polycom and these equipment
suppliers are competitors in the conferencing market and, as such, there can be
no assurance that they will enter into future agreements to resell or supply any
of our new or enhanced conferencing products. Further, certain current Polycom
video products and other video products under development are directly
competitive with the products of these suppliers, and thus competition between
us and the other suppliers is likely to increase, resulting in a strain on the
existing relationship between the companies. If this occurs, it could limit the
potential contribution of these relationships on our results of operations.
In addition, we are dependent on certain agreements with critical
partners, such as Jetstream Communications, in the network access arena.
Conflicts may occur in this evolving market as we seek other relationships with
partners competitive to our current relationships. If this occurs, it could harm
our business.
TECHNOLOGY AND TRAINING. The markets for voice and video communication products
and network access products are characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. The success
of our new ViewStation and NetEngine is dependent on several factors, including
proper new product definition, product cost, timely completion and introduction
of new products, differentiation of new products from those of our competitors
and market acceptance of these products. Additionally, properly addressing the
complexities associated with DSL and ISDN compatibility, reseller training,
technical and sales support as well as field support are also factors that may
affect our success in this market. Further, the shift of communications from the
circuit-switched to IP network over time may require us to add new resellers and
gain new core technological competencies. We are attempting to address these
needs and the need to develop new products through our internal development
efforts and joint developments with other companies. We cannot assure you that
we will successfully identify new voice, video and network access product
opportunities and develop and bring new voice, video and network access products
to market in a timely manner, or that competing and technologies developed by
others will not render our ViewStation and SoundStation products or technologies
obsolete or noncompetitive. The failure of our new voice, video and network
access product development efforts on our ability to service or maintain the
necessary third party interoperability licenses
17
would harm our business and results of operations.
MANUFACTURING DISRUPTIONS. We subcontract the manufacture of our SoundStation,
SoundStation Premier, SoundPoint Pro and ViewStation product families and are
currently migrating the production of our new network access products to
Celestica, Inc., a global third-party contract manufacturer. We use Celestica's
Thailand facilities and should there be any disruption in supply due to economic
and political difficulties in Thailand and Asia, such disruption would harm our
business and results of operations. Also, Celestica is currently the sole source
provider of these product lines and if the supply from this subcontractor
experiences an interruption in operations, we would experience a delay in
shipping these products which could negatively affect revenues in the quarter of
the disruption. In addition, operating in the international environment exposes
us to certain inherent risks, including unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations and potentially adverse tax consequences all of which could harm our
business and results of operations.
MANAGEMENT INFORMATION SYSTEM TRANSITION. We recently migrated our operations to
a new enterprise resource planning system which affects almost every facet of
our business operations. This conversion is expected to bring new process
efficiencies which should improve our business operations. However, typically,
these conversions negatively affect a company's ability to conduct business
initially due to problems such as historical data conversion errors, the
learning curve associated with the new system, delays in implementation or
unforeseen technical problems during conversion. If such problems arise during
this transition, we could experience, for a period of time, delays in or lack of
shipping, an inability to support our existing customer base, delays in paying
vendors, delays in collecting from customers, an inability to place or receive
product orders or other operational problems. If this were to occur, our
profitability or financial position could be negatively impacted.
INFRASTRUCTURE GROWTH. Our recent overall growth has and will likely continue to
cause strains on our normal business processes and infrastructure. If we do not
manage this growth through resource additions such as headcount, capital and
processes, in a timely and efficient manner, future growth and profitability
will likely be significantly negatively affected. We cannot assure you that
resources will be available when we need them or that capital will be available
to fund these resource needs.
SERVICE AND SUPPORT. Our recent growth has been due in large part to an
expansion into product lines with more complex technologies and protocols.
This shift, as well as the acquisition of Atlas Communication Engines and its
network products has increased the need for increased product warranty and
service capabilities. In addition, increased international competition has
forced companies in the conferencing market to provide a complete service and
support package. We maintain an in-house hotline support group and
subcontract on-site technician support functions. If we cannot develop and
train our internal support organization, maintain our relationship with our
outside technical support or efficiently transition to a new service
contractor, it could negatively affect future sales of the higher technology
products like video, DSL access and VoIP equipment and network access
products which would have a material negative effect on our results from
operations.
CASH FLOW FLUCTUATIONS DUE TO RECEIVABLE COLLECTIONS. In 1999 and through the
first three months of 2000, we initiated a significant investment 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 total net revenues, as has happened in 1999 and
through the first three months of 2000, accounts receivable balances will
likely increase over previous years. Additionally, sales in the video
communication product market typically have longer payment periods over our
traditional experience in the voice communication market. Therefore, as we
sell more video products as a percentage of net revenues, accounts receivable
balances will increase. These increases will cause our days sales outstanding
to increase over prior years and will negatively affect future cash flows. In
addition, we have been able to offset the effect of these influences through
the additional incentives offered to resellers at the end of the quarter in
the form of prepay discounts. These additional incentives have lowered
profitability and improved days sales outstanding performance.
POTENTIAL ASSET IMPAIRMENT CONCERNS. We operate in a high technology market
which is subject to rapid and frequent technology changes. These technology
changes can and do often render
18
existing technologies obsolete. These obsolescence issues can require
write-downs in inventory value when it is determined that the existing inventory
can not be sold at or above net realizable value. This situation occurred during
the first quarter of 2000 for the ShowStation IP when we recorded additional
excess and obsolescence charges. This has also occurred in previous quarters for
other products in our inventory.
STOCK PRICE FLUCUATIONS. Our stock price has varied greatly as has the trading
volume of our common shares. We expect these fluctuations to continue due to
factors such as announcements of new products, services or technological
innovations by us or our competitors, announcements of major restructurings by
us or our competitors, quarterly variations in our results of operations,
changes in revenue or earnings estimates by the investment community,
speculation in the press or investment community, general conditions in the
communications industry, changes in our revenue growth rates or the growth rates
of our competitors, and sales of large blocks of our stock.
The stock market will likely experience extreme price and volume
fluctuations from time to time. Many technology companies, such as Polycom, have
experienced such fluctuations. In addition, our stock price may be affected by
general market conditions and domestic and international macroeconomic factors
unrelated to our performance. Often such fluctuations have been unrelated to the
operating performance of the specific companies.
BUSINESS INTERRUPTION. Our operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure and other events beyond our
control. We do not have a detailed disaster recovery plan. In addition, we do
not carry sufficient business interruption insurance to compensate us for losses
that may occur and any losses or damages incurred by us could have a material
adverse effect on our business, financial condition or operating results.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Polycom's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and bank borrowings. Polycom does not use
derivative financial instruments in its investment portfolio, and its investment
portfolio only includes highly liquid instruments with a maturity of no more
than two years.
Polycom is subject to fluctuating interest rates that may impact, adversely or
otherwise, its results of operations or cash flows for its variable rate bank
borrowings, available-for-sale securities and cash and cash equivalents.
The table below presents principal amounts and related weighted average interest
rates by year of maturity for Polycom's investment portfolio and debt
obligations:
As of March 31, 2000:
Expected Maturity
2000 2001 2002 Total
---- ---- ---- -----
(in thousands, except interest rates)
ASSETS
Cash and cash equivalents $ 49,091 --- --- $ 49,091
Average interest rates 2.79% --- --- 2.79%
Investments $ 18,789 $ 10,957 --- $ 29,746
Average interest rates 4.98% 4.91% --- 4.95%
LIABILITIES
Bank line of credit --- --- --- ---
Average interest rates 9.00% --- --- 9.00%
The estimated fair value of Polycom's cash and cash equivalents approximates
the principal amounts reflected above based on the short maturities of these
financial instruments. The estimated fair value of Polycom's debt obligations
approximates the principal amounts reflected above based on rates currently
available to Polycom for debt with similar terms and remaining maturities.
20
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On September 3, 1997, VTEL Corporation (VTEL) filed a lawsuit
in the State District Court in Travis County, Texas against
ViaVideo Communications, Inc., a subsidiary of Polycom, and
its founders (who were formerly employed by VTEL). On May 27,
1998, VTEL amended its suit to add Polycom as a defendant. In
the lawsuit, VTEL alleged breach of contract, breach of
confidential relationship, disclosure of proprietary
information and related allegations. ViaVideo, its founders
and Polycom answered the suit, denying in their entirety
VTEL's allegations. On March 3, 2000, VTEL voluntarily
dismissed the allegations against Polycom and ViaVideo with
prejudice for no consideration.
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
NUMBER EXHIBIT
- ------ -----------------------------------------------------
27 Financial Data Schedule
Reports on Form 8-K:
A report on Form 8-K/A was filed on February 11, 2000,
providing an update concerning Polycom's acquisition of Atlas
Communication Engines. Inc. effective December 1, 1999. This
update clarified that the financial statements of Atlas and
the pro forma financial information relating to the Merger
specified in Items 7(a) and (b) of Form 8-K are not required
to be filed because the Merger does not the meet the
conditions specified in Sections 210.3-05(b)(2)(i) and
210.11-01, respectively, of Regulation S-X.
21
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: May 17, 2000 POLYCOM, INC.
/s/ Michael R. Kourey
-------------------------
Michael R. Kourey
Chief Financial Officer
(Principal Financial and Accounting Officer)
22