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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 JULY 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 000-27978
POLYCOM, INC.
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(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) 526-9000)
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 35,468,690 shares of the Company's Common Stock, par value $.0005,
outstanding on July 28, 2000.
POLYCOM, INC.
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited for periods ended June 30, 2000 and 1999):
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999................................................................... 3
Condensed Consolidated Statements of Income for the Three and Six
Month Periods Ended June 30, 2000 and June 30, 1999................................. 4
Condensed Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 30, 2000 and June 30, 1999................................. 5
Notes to Condensed Consolidated Financial Statements................................ 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......................... 24
PART II OTHER INFORMATION
Item 1 - Legal Proceedings.......................................................... 25
Item 2 - Changes in Securities...................................................... 25
Item 3 - Defaults Upon Senior Securities............................................ 25
Item 4 - Submission of Matters to a Vote of Security Holders........................ 25
Item 5 - Other Information.......................................................... 26
Item 6 - Exhibits and Reports on Form 8-K........................................... 26
SIGNATURE............................................................................................. 27
2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
2000 1999
------------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 55,197 $ 35,952
Short-term investments 8,294 24,815
Accounts receivable, net of allowance for doubtful
accounts of $1,689 at June 30, 2000 and
$1,304 at December 31, 1999 58,498 47,445
Inventories 26,218 18,136
Deferred and refundable taxes 13,318 9,059
Non-trade receivables 8,375 1,787
Other current assets 1,189 581
------------------- ----------------
Total current assets 171,089 137,775
Fixed assets, net 14,087 9,795
Long-term investments 20,147 15,050
Other investments 5,000 -
Licenses 7,766 -
Noncurrent deferred taxes 1,546 1,546
Other assets 717 555
------------------- ----------------
Total assets $ 220,352 $ 164,721
=================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,894 $ 26,433
Taxes payable 12,606 9,633
Accrued and other current liabilities 16,639 15,385
------------------- ----------------
Total current liabilities 65,139 51,451
------------------- ----------------
Stockholders' equity:
Common stock 18 17
Additional paid-in capital 115,675 97,594
Unrealized loss on marketable securities (14) (85)
Unearned stock-based compensation (1,393) (1,953)
Accumulated earnings 40,927 17,697
------------------- ----------------
Total stockholders' equity 155,213 113,270
------------------- ----------------
Total liabilities and stockholders' equity $ 220,352 $ 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 Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------------- ------------- -------------- --------------
Net revenues $ 77,488 $ 45,981 $144,783 $ 87,295
Cost of net revenues 34,170 20,833 63,907 40,366
-------------- ------------- -------------- --------------
Gross profit 43,318 25,148 80,876 46,929
-------------- ------------- -------------- --------------
Operating expenses:
Sales and marketing 14,822 8,369 26,982 15,780
Research and development 8,483 5,045 15,932 8,971
General and administrative 3,514 1,942 6,810 3,494
Litigation reserve release - - (1,843) -
-------------- ------------- -------------- --------------
Total operating expenses 26,819 15,356 47,881 28,245
-------------- ------------- -------------- --------------
Operating income 16,499 9,792 32,995 18,684
Interest income, net 843 392 1,633 695
Other income (expense) (35) (13) 36 (19)
-------------- ------------- -------------- --------------
Income before provision for income taxes 17,307 10,171 34,664 19,360
Provision for income taxes 5,706 3,667 11,434 5,116
-------------- ------------- -------------- --------------
Net income $ 11,601 $ 6,504 $ 23,230 $ 14,244
============== ============= ============== ==============
Basic net income per share $ 0.33 $ 0.20 $ 0.67 $ 0.45
============== ============= ============== ==============
Diluted net income per share $ 0.31 $ 0.18 $ 0.61 $ 0.40
============== ============= ============== ==============
Weighted average shares outstanding for basic EPS 35,002 32,594 34,730 31,760
============== ============= ============== ==============
Weighted average shares outstanding for diluted EPS 37,849 36,295 37,817 35,960
============== ============= ============== ==============
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)
Six Months Ended
---------------------------------------
June 30, June 30,
2000 1999
------------------ -----------------
Cash flows from operating activities:
Net income $ 23,230 $ 14,244
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,414 1,877
Provision for doubtful accounts 439 170
Provision for excess and obsolete inventories 1,319 1,819
Tax benefit from exercise of stock options 12,560 3,820
Amortization of stock-based compensation 560 49
Changes in assets and liabilities:
Accounts receivable (11,492) (8,535)
Inventories (9,401) (4,098)
Deferred and refundable taxes (4,259) (3,157)
Non-trade receivables (6,588) (826)
Other assets (631) (1,042)
Accounts payable 9,461 11,635
Taxes payable 2,973 984
Accrued and other liabilities 1,254 710
------------------ -----------------
Net cash provided by operating activities 22,839 17,650
------------------ -----------------
Cash flows from investing activities:
Acquisition of fixed assets (7,290) (3,527)
Purchase of licenses (8,321) ---
Proceeds from sale and maturity of investments 28,676 3,251
Purchases of investments (22,181) (16,054)
Other --- 250
------------------ -----------------
Net cash used in investing activities (9,116) (16,080)
------------------ -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,522 2,532
Proceeds from exercise of warrants --- 15,000
Distribution to owners of Atlas --- (103)
------------------ -----------------
Net cash provided by financing activities 5,522 17,429
------------------ -----------------
Net increase in cash and cash equivalents 19,245 18,999
Cash and cash equivalents, beginning of period 35,952 18,006
------------------ -----------------
Cash and cash equivalents, end of period $ 55,197 $ 37,005
================== =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 180 $ 2,155
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 June 30, 2000, the condensed
consolidated statements of income for the three and six month periods ended June
30, 2000 and 1999 and condensed consolidated statements of cash flows for the
six month periods ended June 30, 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 June 30, 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 June 30 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):
June 30, Dec. 31,
2000 1999
---- ----
Raw Materials $ 3,735 $ 1,542
Finished Goods 22,483 16,594
-------- --------
$ 26,218 $ 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 (9.5% at June 30, 2000) or at an offshore interbank
offered rate (IBOR) plus 0.65% (approximately 7.20% to 7.86%, depending on the
term of the borrowings at June 30, 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 Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
2000 1999 2000 1999
-------------- ----------- ----------- -----------
Numerator - basic and diluted EPS
Net income $ 11,601 $ 6,504 $ 23,230 $ 14,244
============== =========== =========== ===========
Denominator - basic EPS
Weighted average common stock outstanding 35,367 33,608 35,162 32,865
Shares subject to repurchase (365) (1,014) (432) (1,105)
-------------- ----------- ----------- -----------
Total shares used in calculation of basic EPS 35,002 32,594 34,730 31,760
============== =========== =========== ===========
Basic net income per share $ 0.33 $ 0.20 $ 0.67 $ 0.45
============== =========== =========== ===========
Denominator - diluted EPS
Denominator - basic EPS 35,002 32,594 34,730 31,760
Effect of dilutive securities:
Common stock options 2,482 2,687 2,655 2,672
Shares subject to repurchase 365 1,014 432 1,105
Convertible warrants and preferred --- --- --- 423
-------------- ----------- ----------- -----------
Total shares used in calculation of diluted EPS 37,849 36,295 37,817 35,960
============== =========== =========== ===========
Diluted net income per share $ 0.31 $ 0.18 $ 0.61 $ 0.40
============== =========== =========== ===========
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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
----------- -------- ---------- ---------
Video communications 67% 62% 65% 58%
Voice communications 28% 36% 31% 39%
Network access products 5% 2% 4% 3%
----------- -------- ---------- ---------
Total net revenues 100% 100% 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 Six Months Ended
June 30, June 30,
--------------------------- --------------------------
(in thousands) 2000 1999 2000 1999
--------------------------- --------------------------
Net income $ 11,601 $ 6,504 $ 23,230 $ 14,244
Decrease in unrealized loss on marketable securities 69 --- 71 ---
--------------------------- --------------------------
Comprehensive income $ 11,670 $ 6,504 $ 23,301 $ 14,244
=========== =========== =========== ===========
8. 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.
9. INVESTMENTS
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 three 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,
2000 and 1999, 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 an investment in a private company. This investment is
included in "Other Investments" in the Company's balance sheet and is carried at
cost. The Company monitors this investment for impairment and makes appropriate
reductions in carrying value when necessary.
10. 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 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 fourth 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, or 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
8
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 provisions cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The adoption of certain other provisions
of FIN 44 did not have a material effect on our financial statements. We do not
expect that the adoption of the remaining provisions will have a material impact
on our financial statements.
11. SUBSEQUENT EVENTS
PUBLIC STOCK OFFERING
On August 2, 2000, the Company completed a public offering of 2,600,000 shares
of its common stock. The Company sold 1,600,000 of the shares and the remaining
1,000,000 shares were sold by a selling stockholder. The underwriters have an
option to purchase up to 390,000 additional shares from the Company and the
selling stockholder for the purpose of covering overallotments, if any. The
offering was completed at a price of $90.875 per share for net proceeds to the
Company of approximately $137.6 million.
STOCK SPLIT
On August 2, 2000, the Company announced that its Board of Directors approved a
two-for-one split of the Company's common stock. The stock split will be
effected as a dividend on August 31, 2000, and will apply to all stockholders of
record as of August 15, 2000. All references to share and per share amounts for
all periods presented have not been adjusted to give effect to this stock split.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS DOCUMENT.
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 PRODUCT OFFERINGS, 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" AND ELSEWHERE IN THIS DOCUMENT AS WELL AS OTHER INFORMATION SET
FORTH IN POLYCOM'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999, POLYCOM'S
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000, POLYCOM'S PROSPECTUS FILED
PURSUANT TO RULE 424 OF THE SECURITIES ACT ON JULY 28, 2000 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 communications product, the SoundStation.
Currently, our voice communications 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, 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 product family, our video
communications equipment product line. Currently, our video communications
product line consists principally of the ViewStation 128, ViewStation 512,
ViewStation V.35, ViewStation MP, ViewStation SP, ViewStation FX, VS 4000,
StreamStation, WebStation, ShowStation IP and the MeetingSite 5000. In December
1999, we acquired Atlas Communication Engines, Inc., a privately-held, OEM
supplier of IADs, and an emerging supplier of DSL routers. In addition, Atlas
also sold non-DSL custom communications products under OEM arrangements. Atlas'
line of IADs and DSL routers, which have become our network access product line,
provides voice and data over the rapidly-growing DSL network.
Through June 30, 2000, we derived a majority of our net revenues from
sales of our ViewStation and SoundStation products. Although we expect IADs and
DSL routers to become an increasingly important revenue contributor, we
anticipate that the ViewStation and SoundStation product lines will continue to
account for a significant portion of our net revenues at least through the year
ending December 31, 2000. Any factor adversely affecting the demand or supply
for these products would harm our business, financial condition, cash flows and
results of operations.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues,
condensed consolidated statements of income data for the periods indicated.
10
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ -------------
Net revenues 100% 100% 100% 100%
Cost of net revenues 44% 46% 44% 46%
------------ ------------ ------------ -------------
Gross profit 56% 54% 56% 54%
------------ ------------ ------------ -------------
Operating expenses:
Sales and marketing 19% 18% 18% 18%
Research and development 11% 11% 11% 11%
General and administrative 5% 4% 5% 4%
Litigation reserve release 0% 0% (1%) 0%
------------ ------------ ------------ -------------
Total operating expenses 35% 33% 33% 33%
------------ ------------ ------------ -------------
Operating income 21% 21% 23% 21%
Interest income, net 1% 1% 1% 1%
Other income (expense) 0% 0% 0% 0%
------------ ------------ ------------ -------------
Income before provision for income taxes 22% 22% 24% 22%
Provision for income taxes 7% 8% 8% 6%
------------ ------------ ------------ -------------
Net income 15% 14% 16% 16%
============ ============ ============ =============
NET REVENUES
Net revenues for the three months ended June 30, 2000 were $77.5
million, an increase of $31.5 million, or 69%, as compared to the same period of
1999. For the six months ended June 30, 2000, total net revenues were $144.8
million, an increase of 66% over the comparable period of 1999. These increases
were 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 and six months ended June 30, 2000 and 1999, we derived a
substantial majority of our net revenues from sales of our video communication
and voice communication products. See note 5 of the notes to the consolidated
financial statements (unaudited) for business segment information. No customer
accounted for more than 10% of our net revenues in the three and six month
periods ended June 30, 2000. Lucent Technologies accounted for 11% of net
revenues in the three and six month periods ended June 30, 1999. No other
customer or reseller accounted for more than 10% of our net revenues during the
three or six month periods ended June 30, 1999.
International net revenues, or revenues outside of North America,
accounted for 33% and 31% of net revenues for the three months ended June 30,
2000 and 1999, respectively. For the six months ended June 30, 2000 and 1999,
international net revenues accounted for 35% and 28%, 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 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 any new products
in North America and also because of the additional time required to make our
products ready for sale globally 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
11
substantial majority of our international sales has been denominated in U.S.
currency; however, if international sales were denominated in local currencies
in the future, these transactions would be subject to currency fluctuation
risks. Further, beginning January 1, 1999, the participating member countries of
the European Union agreed to adopt the European Currency Unit, or euro, as the
common legal currency. On that same date they established fixed conversion rates
between their existing sovereign currencies and the euro. The establishment of
the euro has not had any significant impact on us to date and should not in the
future since a substantial majority of our international sales are denominated
in U.S. currency.
COST OF NET REVENUES
Cost of net revenues consists primarily of contract manufacturer costs
including material and direct labor, Polycom's manufacturing organization,
tooling depreciation, warranty expense and an allocation of overhead expenses.
The cost of net revenues as a percentage of net revenues for the three months
ended June 30, 2000 and 1999 were 44% and 46%, respectively. For the six months
ended June 30, 2000 and 1999, the cost of net revenues as a percentage of net
revenues were 44% and 46%, 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 in the
first quarter of 2000 and due to a higher volume of the lower margin network
access products for both the three and six month periods of 2000.
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, our IAD and DSL equipment products, VoIP products and other
desktop products have a significantly higher cost of net revenue percentage than
our ViewStation and SoundStation product lines. If the IAD, DSL, VoIP and other
desktop products grow to be become a significant revenue stream, this will have
a negative effect on 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, 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 NetEngine, ViewStation 4000 and ViewStation FX
or any other new product, could occur which would increase our cost of net
revenues percentage. Further, gross margins associated with the ShowStation IP,
ViewStation SP and the SoundPoint Pro are lower than the targeted gross margins
of our product portfolio, yet the gross margins for the WebStation are closer to
the targeted gross margins. The contribution of these products can have a
significant impact on our overall gross margins.
In addition to the uncertainties listed above, 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. We had realized lower cost of net revenues as a percentage of net
revenues on our direct sales than on sales through indirect channels. Because we
no longer sell our products through a direct sales force, profit margins have
been and will continue to be negatively impacted.
SALES AND MARKETING EXPENSES
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, Increase June 30, June 30, Increase
$ in Thousands 2000 1999 (Decrease) 2000 1999 (Decrease)
- -------------- ---- ---- ---------- ---- ---- ----------
Expenses $ 14,822 $ 8,369 77 % $ 26,982 $ 15,780 71 %
% of Net Revenues 19 % 18 % 1 % 18 % 18 % 0 %
Sales and marketing expenses consist primarily of salaries, commissions,
advertising, promotional expenses, product marketing, an allocation of overhead
expenses and customer service and support costs. The
12
increases in sales and marketing expenses in absolute dollars in the three and
six month periods ended June 30, 2000 over the same periods of 1999 were
primarily related to increased advertising and promotional expenditures for our
video and network access products. Additionally, an increase in our investment
in our worldwide sales effort also contributed to the increases 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 expanded our product portfolio into the DSL
access market which will require significant additional marketing expenditures
to communicate the value of our new product offerings as well as significant
additional sales expenditures to develop a new sales organization for this
market. In addition, due to the innovative nature of our ViewStation,
StreamStation and upcoming video desktop 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, increasing the absolute dollars spent in this area. Also, the
launch of the StreamStation product, a product that streams point-to-point or
multipoint video communications using the ViewStation to the Web, as well as
VoIP and other potential desktop products, will cause an increase in our sales
and marketing expenses. 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 Six Months Ended
------------------ ----------------
June 30, June 30, Increase June 30, June 30, Increase
$ in Thousands 2000 1999 (Decrease) 2000 1999 (Decrease)
- -------------- ---- ---- ---------- ---- ---- ----------
Expenses $ 8,483 $ 5,045 68 % $ 15,932 $ 8,971 78 %
% of Net Revenues 11 % 11 % 0 % 11 % 11 % 0 %
Research and development expenses consist primarily of compensation
costs, consulting fees, depreciation and an allocation of overhead expenses.
Expense increases in video, voice and network access product development
contributed to the total increase for the three and six month periods ended June
30, 2000 over the respective comparable periods of 1999. As of June 30, 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 Six Months Ended
------------------ ----------------
June 30, June 30, Increase June 30, June 30, Increase
$ in Thousands 2000 1999 (Decrease) 2000 1999 (Decrease)
- -------------- ---- ---- ---------- ---- ---- ----------
Expenses $ 3,514 $ 1,942 81 % $ 6,810 $ 3,494 95 %
% of Net Revenues 5 % 4 % 1 % 5 % 4 % 1 %
General and administrative expenses consist primarily of compensation
costs, an allocation of overhead expenses, bad debt write-offs, legal expenses
and accounting expenses. The increases in general and administrative expenses in
the three and six month periods ended June 30, 2000 over the respective
13
comparable periods of 1999 were due to increased staffing and infrastructure
costs to support our growth, including the conversion of our management
information system, expansions in Europe and Asia, and 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.
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 in the first quarter of 2000, 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.
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
Polycom's bank accounts and interest expense from Polycom's credit facilities.
Interest income, net of interest expense was $0.8 million and $0.4 million for
the three months ended June 30, 2000 and 1999, respectively. For the six months
ended June 30, 2000 and 1999, interest income, net of interest expense was $1.6
million and $0.7 million, 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
For the three months ended June 30, 2000 and 1999, the provision for
income taxes was $5.7 million and $3.7 million, respectively. For the six months
ended June 30, 2000 and 1999, the provision for income taxes was $11.4 million
and $5.1 million, respectively. The increase in income taxes for the current
three and six period over the same periods 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 June 30, 2000, our principal sources of liquidity included cash
and cash equivalents of $55.2 million, short-term investments of $8.3 million
and long-term investments of $20.1 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 June 30, 2000, we were in compliance with
these covenants.
We generated cash from operating activities totaling $22.8 million and
$17.7 million for the six month periods ended June 30, 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 (including the tax benefit from the exercise of
stock options) and an increase in taxes payable, offset somewhat by higher
growth in inventories, trade receivables, non-trade receivables and other assets
and a lower increase in accounts payable.
14
The total net change in cash and cash equivalents for the six months
ended June 30, 2000 was an increase of $19.2 million. The primary sources of
cash were $22.8 million from operating activities, $6.5 million from net sales
and maturities of investments and $5.5 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 $7.3 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. 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 $200,000 and are secured by our credit
facilities or cash deposits with our banks.
On August 2, 2000, we completed the public offering of 2,600,000 shares
of common stock at a price of $90.875 per share. Of the shares sold, 1,600,000
shares were sold by us for net proceeds of approximately $137.6 million and the
balance of shares were sold by a selling stockholder. The underwriters of this
offering have an option to purchase up to an additional 390,000 shares of common
stock solely to cover over-allotments. We intend to use the net proceeds from
this sale primarily for general corporate purposes, including working capital
and capital expenditures. A portion of the proceeds may also be used to acquire
or invest in complementary businesses or products or to obtain the right to use
complementary technologies. However, we have no present agreements or
commitments with respect to any such transactions. Pending such uses, we intend
to invest the net proceeds from this sale in short-term and long-term,
interest-bearing, investment grade obligations.
We believe that our available cash, cash equivalents, investments, the
proceeds from the recent stock offering and our bank line of credit will be
sufficient to meet our operating expenses and capital requirements through at
least the next twelve months. 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 technologies.
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 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 fourth 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, or 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
15
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
provisions cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The adoption of certain other provisions of FIN 44 did not
have a material effect on our financial statements. We do not expect that the
adoption of the remaining provisions will have a material impact on our
financial statements.
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 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. IN ASSESSING THESE RISKS, INVESTORS
SHOULD ALSO REFER TO THE INFORMATION SET FORTH IN POLYCOM'S FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1999, POLYCOM'S FORM 10-Q FOR THE THREE MONTHS ENDED
MARCH 31, 2000, POLYCOM'S PROSPECTUS DATED JULY 27, 2000 AND OTHER DOCUMENTS
POLYCOM FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE
TO MAINTAIN OUR EXISTING 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 market acceptance of new product introductions
and product enhancements by us or our competitors; our prices and those of our
competitors' products; the timing and size of the orders for our products; the
mix of products sold; 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.
Although we have had significant revenue growth in recent quarters,
fluctuations in our quarterly operating results due to these or other factors
could prevent us from sustaining these growth rates, and you should not use
these past results to predict future operating margins and results. In
particular, 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 recognize as revenue during each
quarter, each of which is difficult to forecast. In addition, the majority of
our revenues in a given quarter historically has been recorded 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.
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 may decline.
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
16
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 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 an adequate amount of their inventory
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 and also negatively affect our net revenues. 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 sales reports that the
resellers provide to us on a monthly basis. This data has been generally
accurate in North America but is less reliable outside of this region. To the
extent that this sales 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 are inaccurate.
Many of our distributors and resellers that carry multiple Polycom
product lines, 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. The loss of distributors or resellers could harm our
business. Lucent Technologies, one of our larger resellers, has announced it
will spin off its business equipment division, known as Avaya Communication. We
do not yet know how this spin-off will affect us. In connection with this
restructuring, if the combined business from Lucent and Avaya yields a
significant reduction in the amount of orders to us, it could 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 first quarter 2000 sales-in to resellers and sales-out to
end-users. We cannot assure you that a similar situation will not happen again.
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 product introductions in the video communications product line.
Although we are continuing to introduce new products, such as the recently
announced ViaVideo, 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 any new or existing product
introductions will be free from defects or 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 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. Any
similar delays in the future for other new product offerings such as VoIP,
desktop or
17
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 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 product lines 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, if we encounter development delays or
component shortages relating to our network access products, 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 market, which may adversely affect our ability to obtain
necessary components. The failure to obtain adequate supplies could prevent or
delay product shipments, which could harm our business. 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, 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, communication software from DataBeam, digitizer and pen software
from Scriptel 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
18
negatively impact our net revenues and profitability. Further, through the
end of 1999, growth rates of voice and video product sales from our sales
channels to end-users have been significant. Future growth rates for these and
our other products may not achieve these levels of growth. For example, sales of
our video products were down slightly in the first quarter of 2000 from the
fourth quarter of 1999.
Our profitability could also be negatively affected in the future as a
result of continuing competitive price pressure in the conferencing equipment
and network access device markets. 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 OF OUR NET
REVENUES, 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 net revenues in the
future as we introduce new products, since 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 BUSINESS COULD SUFFER AS A RESULT OF OUR INTEGRATION OF ATLAS COMMUNICATION
ENGINES OR OTHER ACQUIRED COMPANIES.
We completed the acquisition of Atlas Communications Engines, or Atlas,
in December 1999. The integration of Atlas' product offerings and operations
with our product offerings and operations and the coordination of the two
companies' sales and marketing efforts have required 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'
products not occur, or occur later or in an amount less than expected, the
higher operating expenses could harm our business. We may make additional
acquisitions in the future. Failure to achieve the anticipated benefits of any
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 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.
19
Because many of our distributors also sell equipment that competes with our
product lines, the distributors could devote more attention to the other product
lines, 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 conferencing 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 us and these
suppliers 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.
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 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 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 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 and network
access product opportunities and develop and bring new voice, video and network
access products to market in a timely manner. Further, 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 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 DISRUPTIONS OR CAPACITY CONSTRAINTS WOULD HARM OUR BUSINESS.
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, 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 and 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 product lines, 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.
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PRODUCT OBSOLESCENCE CAN NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
We operate in a high technology market which is subject to rapid and
frequent technology changes. These technology changes can and do often render
existing technologies obsolete. These obsolescence issues can require
write-downs in inventory value when it is determined that the existing inventory
cannot 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. 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. We cannot assure you that future inventory or other asset
writedowns will not happen. If future writedowns do occur, they could harm our
business.
OUR RECENT TRANSITION TO A NEW ENTERPRISE RESOURCE PLANNING SYSTEM COULD
ADVERSELY AFFECT OUR OPERATIONS.
We recently migrated our operations to a new enterprise resource
planning system which affects almost every facet of our business operations.
Typically, these conversions negatively affect a company's ability to conduct
business initially due to problems such as historical data conversion errors,
the required personnel training time associated with the new system, delays in
implementation or unforeseen technical problems during conversion. If problems
arise during this transition, we could experience 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.
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
product lines with more complex technologies and protocols, including our
recently introduced network access 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.
In 1999 and through the first six 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 net revenues, as
happened in 1999 and through the first six months of 2000, accounts receivable
balances will likely increase over previous years. Additionally, sales in the
network access and video communications markets typically have longer payment
periods over our traditional experience in the voice communications market.
Therefore, if network access 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.
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; the
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announcement of new products or product enhancements by us or our competitors;
technological innovations by us or our competitors; quarterly variations in our
results of operations; general market conditions or market conditions specific
to particular industries; and international macroeconomic factors.
In addition, in recent years 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. 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. 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 IN OUR MARKETS, OUR BUSINESS AND RESULTS OF
OPERATIONS WOULD BE SIGNIFICANTLY HARMED.
In the video communications market, our major competitors include
PictureTel, Tandberg, Sony, VCON and VTEL. 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. In addition, our
video streaming products employ technology from Microsoft and Real Networks who
both have solutions competitive with our products. The market for voice
communications equipment, particularly voiceconferencing, is highly competitive
and subject to rapid technological change, regulatory developments and emerging
industry standards. We expect competition to persist and increase in the future.
In the voice communications equipment market segment, our major competitors
include ClearOne, 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 a lower cost than our voice communications products.
Our network access products have significant competition from Efficient
Networks, Netopia, 3Com and Cisco Systems.
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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 recently been named
(along with approximately 90 manufacturers or distributors of electronic or
semiconductor products) but not served in a complaint filed by the Lemelson
Medical, Education and Research Foundation alleging patent infringement by us.
If any litigation were to occur as a result of such allegations in the future,
and we do not prevail in any such litigation, our business may be adversely
affected.
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. We cannot
assure you 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.
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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 primarily 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 cash, debt investment portfolio
and debt obligations:
As of June 30, 2000:
Expected Maturity
2000 2001 2002 TOTAL
---- ---- ---- -----
(in thousands, except interest rates)
ASSETS
Cash and cash equivalents $ 55,197 --- --- $ 55,197
Average interest rates 4.19% --- --- 4.19%
Investments (debt securities) $ 12,612 $ 11,957 2,871 $ 27,440
Average interest rates 5.54% 5.05% 5.20% 5.29%
LIABILITIES
Bank line of credit --- --- --- ---
Average interest rates 9.50% --- --- 9.50%
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. The Company also holds a $1.0 million investment in publicly traded
equity securities. The market risk for this investment is driven by movements in
the market price of this investment.
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PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable.
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
The Company distributed its Definitive Proxy Statement, Proxy
and Annual Report to Stockholders on or about April 7, 2000 to
each stockholder of record on March 24, 2000, for its Annual
Meeting of Stockholders held May 18, 2000 (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, 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:
Votes Votes Votes Broker
Name For Against Abstaining Non-votes
---- --- ------- ---------- ---------
Robert C. Hagerty 26,714,894 123,095 0 0
Michael R. Kourey 26,703,394 134,595 0 0
Betsy S. Atkins 26,716,311 121,678 0 0
John Seely Brown 26,716,061 121,928 0 0
Stanley J. Meresman 26,705,456 132,533 0 0
John A. Kelley 26,715,839 122,150 0 0
William A. Owens 26,705,456 132,533 0 0
The second proposal was to amend the Company's Amended and
Restated Certificate of Incorporation to increase the number
of authorized shares of Common Stock of the Company from
50,000,000 to 175,000,000. The results were:
For: 22,663,267
Against: 4,164,297
Abstentions: 10,425
Broker Non-Votes: 0
The third proposal was to amend the Company's 1996 Stock
Incentive Plan changing the amount and characteristics of
options granted to non-employee directors under the automatic
option grant program, and to ratify and approve the material
terms of the Company's 1996 Stock Incentive Plan. The results
were:
For: 25,705,039
Against: 1,089,436
Abstentions: 43,514
Broker Non-Votes: 0
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The fourth proposal was to amend the Company's 1996 Stock
Incentive Plan increasing the number of shares of Common Stock
reserved for issuance thereunder from 5,625,000 to 7,375,000
shares.
The results were:
For: 23,274,010
Against: 3,528,266
Abstentions: 35,713
Broker Non-Votes: 0
The fifth and final proposal concerned the ratification of the
Company's independent accountants (PricewaterhouseCoopers LLP)
for the fiscal year ending December 31, 2000. The results
were:
For: 26,822,861
Against: 6,580
Abstentions: 8,548
Broker Non-Votes: 0
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
NUMBER EXHIBIT
- ------ -----------------------------------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on July 24, 2000, to announce
that the Company issued a press release dated July 19, 2000
reporting its operating results for the second quarter ending
June 30, 2000.
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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 4, 2000 POLYCOM, INC.
/s/ Michael R. Kourey
-------------------------
Michael R. Kourey
Chief Financial Officer
(Principal Financial and Accounting Officer)
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