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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 1997
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2584 JUNCTION AVENUE, SAN JOSE, CA 95134-1902
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 526-9000
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
There were 19,115,430 shares of the Company's Common Stock, par value
$.0005, outstanding on March 31, 1997.
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TABLE OF CONTENTS
PAGE
NO.
PART I FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996........................................ 3
Condensed Consolidated Statements of Operations for the Three
Month Periods Ended March 31, 1997 and March 31,1996......... 4
Condensed Consolidated Statements of Cash Flows for the Three
Month Periods Ended March 31, 1997 and March 31, 1996........ 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9
PART II OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K..................... 15
SIGNATURE............................................................... 16
2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYCOM, INC.
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
1997 1996
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,145 $ 9,548
Short-term investments 8,454 10,101
Accounts receivable, net 5,812 6,965
Inventories 7,719 7,458
Other current assets 889 384
--------- ---------
Total current assets 35,019 34,456
Fixed assets, net 3,393 3,164
Other assets 361 100
--------- ---------
Total assets $ 38,773 $ 37,720
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,598 $ 4,307
Other current liabilities 2,203 2,192
--------- ---------
Total current liabilities 7,801 6,499
--------- ---------
Stockholders' equity:
Common stock 10 10
Additional paid-in capital 42,746 42,521
Notes receivable from stockholders (29) (29)
Accumulated deficit (11,755) (11,281)
--------- ---------
Total stockholders' equity 30,972 31,221
--------- ---------
Total liabilities and stockholders'
equity $ 38,773 $ 37,720
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements.
3
POLYCOM, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
Three Months Ended
March 31, March 31,
1997 1996
--------- ---------
Net revenues $ 10,510 $ 8,238
Cost of net revenues 5,653 3,772
--------- --------
Gross profit 4,857 4,466
--------- --------
Operating expenses:
Sales and marketing 2,682 2,071
Research and development 2,221 1,770
General and administrative 690 498
--------- --------
Total operating expenses 5,593 4,339
--------- --------
Operating income (loss) (736) 127
Interest income, net 282 24
Other expense, net (20) (17)
--------- --------
Net income (loss) $ (474) $ 134
--------- --------
--------- --------
Net income (loss) per share $ (0.03) $ 0.01
--------- --------
--------- --------
Weighted average shares outstanding 18,958 17,164
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements.
4
POLYCOM, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
March 31, March 31,
1997 1996
--------- ----------
Cash flows from operating activities:
Net income (loss) $ (474) $ 134
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 424 352
Provision for excess and obsolete inventories 205 119
Changes in assets & liabilities:
Accounts receivable 1,153 (1,030)
Inventories (466) (414)
Prepaid expenses and other assets (766) (149)
Accounts payable 1,291 (451)
Accrued liabilities 11 30
--------- ---------
Net cash provided by (used in) operating activities 1,378 (1,409)
Cash flows from investing activities:
Acquisition of fixed assets (653) (34)
Proceeds from sale and maturity of short term investments 2,649 -
Purchases of short term investments (1,002) (1,286)
--------- ---------
Net cash provided by (used in) investing activities 994 (1,320)
Cash flows from financing activities:
Proceeds from issuance of notes payable - 1,224
Repayment of notes payable and capital leases - (1,632)
Proceeds from issuance of common stock, net of repurchases 225 (34)
Proceeds from repayment of notes receivable from stockholders - 60
--------- ---------
Net cash provided by (used in) financing activities 225 (382)
--------- ---------
Net increase (decrease) in cash 2,597 (3,111)
Cash and cash equivalents, beginning of year 9,548 3,539
--------- ---------
Cash and cash equivalents, end of period $ 12,145 $ 428
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 64
Supplemental schedule of noncash investing and financing:
Fixed assets financed by notes payable $ - $ 329
Common stock issued for notes from shareholders $ - $ 17
The accompanying notes are an integral part of these 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, 1997 and the
condensed consolidated statements of operations for the three month periods
ending March 31, 1997 and 1996 and condensed consolidated statements of cash
flows for the three month periods ending March 31, 1997 and 1996, have been
prepared by the Company without audit. 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, 1997 and for all periods presented have been made. The
condensed consolidated balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date.
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
dated March 26, 1997 and filed with the Securities and Exchange Commission.
The Company uses a 52-53 week fiscal year. Each reporting period ends on the
last Sunday of a month. As a result, a fiscal year may not end as of the
same day as the calendar period. For convenience of presentation, the
accompanying consolidated financial statements have been shown as ending on
March 31 and December 31 of each applicable period.
This Report on Form 10-Q contains forward looking statements that involve
risks and uncertainties, including possible fluctuations in quarterly
results; the market acceptance of ShowStation and the risks associated with
this emerging market; the acceptance of SoundPoint, SoundStation Premier and
other new products; the manufacturing transfer of the SoundStation product
line; the impact of competitive products and pricing; and the other risks
detailed from time to time in the Company's SEC reports, including the Form
10-K dated March 26, 1997.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
a standard cost basis which approximates the first-in, first-out ("FIFO")
method. Inventories consisted of the following (in thousands):
March 31, December 31,
1997 1996
-------- ------------
Raw materials $ 2,991 $ 3,252
Finished goods 4,728 4,206
-------- --------
$ 7,719 $ 7,458
-------- --------
-------- --------
6
3. BANK LINE OF CREDIT
On April 15, 1997, the Company's revolving line of credit with a bank
expired. The Company is currently negotiating with the bank to establish a
new line of credit; however, there can be no assurance that these
negotiations will be successful.
4. STOCK OPTION REPRICING
In March 1997, the Company implemented an option cancellation and regrant
program for employees (other than executive officers) holding stock options
with exercise prices per share in excess of $4.50. Outstanding options
covering an aggregate of 223,200 shares with exercise prices in excess of
$4.50 per share were canceled and new options for the same number of shares
were granted with an exercise price of $4.375 per share. The new options will
vest over a five-year period beginning on March 5, 1997.
5. PER SHARE INFORMATION
Net income (loss) per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of shares issuable upon the exercise of
stock options, using the treasury stock method. Common stock issued under a
stock option plan which are subject to repurchase are excluded from shares
issued in the computation of net loss per share as their effect is
antidilutive.
6. RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128). SFAS No. 128 establishes a different method of computing net income
(loss) per share than is currently required under Accounting Principles Board
Opinion No. 15. Under SFAS No. 128, the Company will be required to present
both basic net income (loss) per share and diluted net income (loss) per
share. Basic and diluted net loss per share is expected to approximate the
currently presented net loss per share. However, basic net income per share
is expected to be higher than net income per share as currently computed
because the effect of dilutive stock options will not be considered in
computing basic net income per share. Diluted net income per share is
expected to be comparable to the currently presented net income per share.
The Company will adopt SFAS No. 128 in its fiscal quarter ending December 31,
1997 and at that time all historical net income (loss) per share data will be
restated to conform to the provisions of SFAS No. 128.
7. AGREEMENT WITH 3M
In March 1997, the Company entered into a joint development and marketing
agreement with Minnesota Mining and Manufacturing Company (3M). Under the
agreement, 3M provides $3.0 million in funding to Polycom for certain
deliverables related to the development of dataconferencing products and will
also provide shared technology resources for the development of future
products. Polycom will grant 3M exclusive private-label rights in certain
distribution channels to the products developed under this agreement. In
addition, 3M received warrants to purchase 2,000,000 shares of the Company's
common stock at an exercise price of $7.50 per share. The warrants expire in
March 1999, which may be extended until March 2000 depending on the delivery
of Polycom's first product developed under the agreement.
7
8. RELATED PARTY TRANSACTION
In March 1997, the Company loaned $250,000 to an officer of the Company under
the terms of a note receivable which is due in March 2002. The note is
secured by shares of the Company's stock owned by the officer.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Polycom was incorporated in December 1990 to develop, manufacture and market
audioconferencing and dataconferencing products that facilitate meetings at a
distance. The Company was engaged principally in research and development
from inception through September 1992, when it began volume shipments of its
first audioconferencing product, SoundStation. The Company's
audioconferencing products include SoundStation, SoundStation EX,
SoundStation Premier (introduced in November 1996) and SoundPoint, a desktop
audioconferencing product introduced in September 1996. The Company began
shipping its first dataconferencing product, ShowStation, in November 1995.
The Company markets its products domestically and internationally through a
direct sales force and a network of value-added resellers (VARs) and original
equipment manufacturers (OEMs). Through March 31, 1997, the Company has
derived a substantial majority of its net revenues from sales of its
SoundStation products. The Company anticipates that sales of its SoundStation
product line will continue to account for a substantial majority of net
revenues at least through the year ending December 31, 1997. Any factor
adversely affecting the demand or supply for the SoundStation product line
could materially adversely affect the Company's business, financial
condition, cash flows or results of operations.
From inception through the nine month period ended September 30, 1995, the
Company incurred losses from operations, primarily as a result of its
investments in the development of its products and the expansion of its sales
and marketing, manufacturing and administrative organizations. The Company
achieved profitability in the fourth quarter of 1995 and generated a small
operating income in each quarter of fiscal 1996. The Company incurred an
operating loss in the first quarter of 1997. The Company intends to continue
to invest significantly in research and development, and plans to operate
with an operating loss or break-even results through the third quarter of
1997. There can be no assurance that the Company will achieve its operating
plans or achieve profitable operations in any subsequent period.
In January 1997, the Company announced plans to divisionalize the Company
along the two lines of business, audioconferencing and dataconferencing. The
Company named a general manager for each division and formally restructured
the Company's research and development organization into two separate
divisions, reporting to each business' general manager. Business unit
alignments were also made in the Company's sales, marketing and general and
administrative organizations.
In March 1997, the Company entered into a joint development and marketing
agreement with Minnesota Mining and Manufacturing Company (3M). Under the
agreement, 3M provides $3.0 million in funding to Polycom for certain
deliverables related to the development of the next generation
dataconferencing product and will also provide shared technology resources
for the development of future products. Polycom will grant 3M exclusive
private-label rights in certain distribution channels to the products
developed under this agreement. In addition, 3M received warrants to purchase
2,000,000 shares of the Company's common stock at an exercise price of $7.50
per share. The warrants expire in March 1999, which may be extended until
March 2000 depending on the delivery of Polycom's first product developed
under the agreement.
This Report on Form 10-Q contains forward looking statements that involve
risks and uncertainties, including possible fluctuations in quarterly
results; the market acceptance of ShowStation and the risks associated with
this emerging market; the acceptance of SoundPoint, SoundStation Premier and
other new products; the manufacturing transfer of the SoundStation product
line; the impact of competitive products and pricing; and the other risks
detailed from time to time in the Company's SEC reports, including the Form
10-K dated March 26, 1997.
9
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,
1997 1996
--------- ---------
Net revenues 100% 100%
Cost of net revenues 54% 46%
--------- ---------
Gross profit 46% 54%
--------- ---------
Operating expenses:
Sales and marketing 25% 25%
Research and development 21% 21%
General and administrative 7% 6%
--------- ---------
Total operating expenses 53% 52%
--------- ---------
Operating income (loss) (7%) 2%
Interest income, net 3% 0%
Other expense, net 0% 0%
--------- ---------
Net income (loss) (4%) 2%
--------- ---------
--------- ---------
The following table sets forth net revenues by line of business for the
periods indicated (amounts in thousands).
Three Months Ended
March 31, March 31,
1997 1996
--------- ---------
Audioconferencing:
Net revenues $ 8,345 $ 6,672
Cost of net revenues 4,247 2,542
--------- ---------
Gross profit $ 4,098 $ 4,130
--------- ---------
--------- ---------
Gross margin 49% 62%
Dataconferencing:
Net revenues $ 2,165 $ 1,566
Cost of net revenues 1,406 1,230
--------- ---------
Gross profit $ 759 $ 336
--------- ---------
--------- ---------
Gross margin 35% 21%
Total net revenues increased 28% from $8.2 million in the first quarter of
1996 to $10.5 million in the first quarter of 1997. Within the
audioconferencing product line, net revenues increased $1.7 million or 25% to
$8.3 million in the 1997 quarter. The increase is due to the impact of new
products introduced in the third and fourth quarters of 1996 partially offset
by the effect of the 37% price reduction on SoundStation products sold in
North America, effective January 1997. However, SoundStation unit sales
increased significantly in the 1997 quarter compared to the 1996 quarter,
partially mitigating the impact of the price reduction. Dataconferencing net
revenues increased $0.6 million or 38% from the first quarter of 1996.
10
Dataconferencing net revenues in 1997 include $1.0 million associated with
the joint development and marketing agreement with 3M. During the first
quarters of 1997 and 1996, the Company derived a substantial majority of its
net revenues from sales of its SoundStation product family. No customer or
reseller accounted for more than 10% of the Company's net revenues during the
1997 or 1996 periods.
International net revenues accounted for 21% of total net revenues for the
first quarters of both 1997 and 1996. The Company anticipates that
international sales will continue to account for a significant portion of
total net revenues for the foreseeable future. However, international net
revenues may fluctuate in the future as the Company introduces new products,
since the Company expects 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. In addition, the implementation of the international price reduction
for SoundStation products effective April 1997 will affect international
revenues in future quarters. To the extent the Company is unable to expand
international sales in a timely and cost-effective manner, the Company's
business, financial condition or results of operations could be adversely
affected. There can be no assurance that the Company will be able to maintain
or increase international market demand for the Company's products. To date,
a substantial majority of the Company's international sales have been
denominated in U.S. currency; however, the Company expects that in the
future more international sales may be denominated in local currencies.
Cost of net revenues consists primarily of manufacturing costs of the Company
and the Company's contract manufacturers, warranty expense and allocation of
overhead expenses. Gross margin represented 46% and 54% of net revenues for
the first quarters of 1997 and 1996, respectively. By product line,
audioconferencing gross margin declined from 62% in the 1996 quarter to 49%
in 1997, while dataconferencing gross margin increased from 21% in 1996 to
35% in 1997. The decrease in audioconferencing gross margin is primarily
attributable to the North American price reduction on SoundStation products
implemented in January 1997 combined with the impact of the lower margin
SoundPoint product. The dataconferencing gross margin increase is entirely
due to the revenue received under the 3M agreement, which had very low
associated costs.
The Company's historical price reductions have been driven by the Company's
desire to expand the market for its products, and the Company expects that in
the future it 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, although there can be no assurance that such
actions by the Company will expand the market for its products or be
sufficient to meet competitive pricing pressures. In the future, gross margin
may be affected by price competition and changes in unit volume, product cost
and warranty expenses. Gross margin may also be impacted by the mix of
distribution channels used by the Company, the mix of products sold and the
mix of international versus North American revenues. The Company typically
realizes higher gross margin on direct sales than on sales through indirect
channels and higher gross margin on international revenues than on North
American revenues. If sales through resellers, especially OEMs, increase as a
percentage of total revenues, the Company's gross margin will be adversely
impacted.
Sales and marketing expenses consist primarily of salaries and commissions,
advertising and promotional expenses, allocation of overhead expenses and
customer service and support costs. Sales and marketing expenses were $2.7
million and $2.1 million in the first quarters of 1997 and 1996,
respectively, an increase in absolute dollars of 30%. As a percent of net
revenues, sales and marketing expenses remained constant at 25% in each of
the quarters presented. The increase in absolute dollars was primarily
related to the expansion of the Company's sales and marketing organization,
particularly the increase in spending to generate direct and retail channel
sales. The Company expects to continue to increase its 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, due to the innovative nature of the
ShowStation products, the Company has incurred significant expenses to
develop a sales presence for the ShowStation product and believes it will be
required to incur significant additional expenses for sales and marketing,
including advertising, to educate potential customers as to the desirability
of ShowStation. In addition, the Company is continuing to invest in the
market launch of its
11
new SoundPoint and SoundStation Premier product lines and expects to make a
significant investment in advertising and product promotion for all product
lines.
Research and development expenses consist primarily of compensation costs,
consulting fees, allocation of overhead expense, supplies, depreciation of
equipment and product marketing expenses. Research and development expenses
were $2.2 million and $1.8 million for the first quarters of 1997 and 1996,
respectively, representing 21% of net revenues in each period. The increase
in the dollar amount of research and development expenses was primarily
attributable to increased staffing and associated support to expand and
enhance the Company's product lines. The Company believes that technological
leadership is critical to its success and is committed to continuing a high
level of research and development, especially in the development of the
planned next generation ShowStation product. Consequently, the Company
intends to increase its research and development expenses in absolute dollars
in the future.
General and administrative expenses consist of compensation costs, allocation
of overhead expense and outside legal and accounting expenses. General and
administrative expenses were $0.7 million and $0.5 million for the first
quarters of 1997 and 1996, respectively, representing 7% and 6% of net
revenues for each respective period. The increase in dollar amount was
primarily due to increased staffing, including the hiring of a president, to
support the Company's growth and increased focus in both the
audioconferencing and dataconferencing divisions. The Company believes that
its general and administrative expenses will increase in absolute dollar
amounts in the future primarily as a result of expansion of the Company's
administrative staff and costs related to being a public company.
Interest income consists of interest earned on the Company's cash equivalents
and short-term investments. In the first quarter of 1996, interest income is
reported net of interest expense on the Company's bank debt facilities. The
increase in interest income, net, in the first quarter of 1997 over the same
period of 1996 is primarily due to the increase in the Company's cash
equivalents and short-term investments as a result of its initial public
offering in the second quarter of 1996. In addition, no interest expense was
incurred in the first quarter of 1997.
The Company accounts for income taxes in accordance with the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes." The Company expects to incur operating
losses or break-even results through the third quarter of 1997 and
consequently expects to incur minimal federal and state income taxes in 1997.
As of December 31, 1996, the Company had approximately $6.4 million in
federal net operating loss carryforwards and $790,000 in tax credit
carryforwards. The future utilization of the Company's net operating loss
carryforwards may be subject to certain limitations upon certain changes in
ownership. The Company believes that its initial public offering on April
29, 1996 triggered a change in ownership pursuant to the Internal Revenue
Code of 1986, as amended, such that the annual limitation for utilization of
federal net operating loss carryforwards will be approximately $7.1 million.
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluates the recoverability of the deferred tax assets and the
level of the valuation allowance on a quarterly basis. At such time it is
determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced.
12
OTHER FACTORS AFFECTING FUTURE OPERATIONS
The Company's net revenues have grown primarily through increased market
acceptance of its established audioconferencing product line, new product
introductions and, to a lesser extent, through the expansion of the Company's
North American and international distribution networks. While the Company has
experienced growth in net revenues in recent quarters, it does not believe
that the historical growth rates in net revenues will be sustainable or
indicative of future operating results. For example, the Company believes
that the 37% price reduction in the North American list price of its
SoundStation product line, effective December 1996 for resellers and January
1997 for end user customers, negatively impacted the Company's net revenues
and gross margins in the first quarter of 1997 and will continue to
negatively impact net revenues and gross margins throughout 1997. In
addition, the Company reduced its international list prices for the
SoundStation products by approximately 30% effective in April 1997. The
Company expects that gross margins will continue to be negatively affected in
the future as a result of several factors, including low to negative gross
margins for the Company's first-generation ShowStation dataconferencing
products, the reduction in the list prices of the SoundStation product line,
the introduction of the lower margin SoundPoint desktop product line and
continuing competitive price pressure in the audioconferencing and
dataconferencing markets. Although price reductions have been driven by the
Company's desire to expand the market for its products, and the Company
expects that in the future it 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, there can be no assurance that such
actions by the Company will expand the market for its products or be
sufficient to meet competitive pricing pressures. In addition, the Company's
limited operating history and limited resources, among other factors, make
the prediction of future operating results difficult if not impossible.
In the past the Company has experienced delays from time to time in the
introduction of certain new products and enhancements and expects that such
delays may occur in the future. For instance, the introduction of
ShowStation was delayed by approximately eighteen months from the originally
anticipated date of introduction because of unforeseen technical challenges
and difficulties in building core technologies and, for approximately six
weeks in the first quarter of 1996, shipments were interrupted in order to
correct software and other technical problems identified by initial
customers. In addition, SoundStation Premier first customer shipments were
delayed from its original shipment target of September 1996 to November 1996
due to engineering issues. Any similar delays could have a material adverse
effect on the Company's results of operations.
The Company's 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 the ShowStation products and other new product introductions and product
enhancements by the Company or its competitors, the prices of the Company's
or its competitors' 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 of warranty claims, changes in the Company's distribution
network, the level of royalties to third parties and changes in general
economic conditions. In addition, competitive pressure on pricing in a given
quarter could adversely affect the Company's operating results for such
period, and such price pressure over an extended period could materially
adversely affect the Company's long-term profitability. The Company's ability
to maintain or increase net revenues will depend upon its ability to increase
unit sales volumes of its SoundStation, SoundStation Premier and SoundPoint
families of audioconferencing products and the dataconferencing line of
products, currently comprised of the ShowStation product, and any new
products or product enhancements. There can be no assurance that the Company
will be able to increase unit sales volumes of existing products, introduce
and sell new products or reduce its costs as a percentage of net revenues.
The Company typically ships products within a short time after receipt of an
order, does not usually have a significant backlog and backlog fluctuates
significantly from period to period. 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.
Accordingly, the Company's expectations for both short-
13
and long-term future net revenues are based in large part on its own estimate
of future demand and not on firm customer orders. In addition, the Company
has in the past received orders and shipped a substantial percentage of the
total products sold during a particular quarter in the last several weeks of
the quarter. In some cases, these orders have consisted of distributor
stocking orders and the Company has from time to time provided special
incentives for distributors to purchase more than the minimum quantities
required under their agreements with the Company. Therefore, the Company has
been uncertain, even during most of the quarter, what level of revenues it
will achieve in the quarter and the impact that distributor stocking orders
will have on revenues and gross margins in that quarter and subsequent
quarters. In addition, because a substantial percentage of product sales
occur at the end of the quarter, product mix and therefore gross margins are
difficult to predict. The Company anticipates that this pattern of sales will
continue in the future. Expense levels are based, in part, on these estimates
and, since the Company is limited in its ability to reduce expenses quickly
if orders and net revenues do not meet expectations in a particular period,
operating results would be adversely affected. In addition, a seasonal demand
may develop for the Company's products in the future. Due to all of the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts
and investors. In such event, the price of the Company's Common Stock would
likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company's principal sources of liquidity included
cash, cash equivalents and short-term investments of $20.6 million.
Additionally, as of March 31, 1997, the Company had a $4.0 million revolving
bank line of credit from Silicon Valley Bank which expired on April 15, 1997.
The Company is currently negotiating with the bank to establish a new line of
credit; however, there can be no assurance that these negotiations will be
successful.
The Company generated $1.4 million in cash from operating activities for the
three months ending March 31, 1997. Cash was generated primarily from the
reduction of accounts receivable through increased collection efforts and
higher accounts payable levels, partially offset by increases in inventories,
prepaid expenses and deposits.
Investing activities generated $1.0 million of net cash for the first quarter
of 1997. Net proceeds of $1.6 million from the sale and maturity of
short-term investments were partially offset by fixed asset acquisitions of
$653,000. Financing activities in the first quarter of 1997 provided $225,000
of net cash from the issuance of common stock under employee stock plans.
The Company's material commitments consist of obligations under its revolving
bank line of credit, operating leases and a $100,000 stand-by letter of
credit which has been issued to guarantee certain of the Company's
contractual obligations. The Company estimates that 1997 capital expenditures
will total approximately $4.5 million.
The Company believes that its available cash will be sufficient to meet the
Company's operating expenses and capital requirements though at least
December 31, 1997. Thereafter, the Company may require additional funds to
support its working capital requirements or for other purposes and may seek
to raise such additional funds through public or private equity financing or
from other sources. There can be no assurance that additional financing will
be available at all or that, if available, such financing will be obtainable
on terms favorable to the Company and would not be dilutive. The Company's
future liquidity and cash requirements will depend on numerous factors,
including introduction of new products and potential product family or
technology acquisitions.
14
PART II OTHER INFORMATION
Item 5. OTHER INFORMATION
Robert Lien, Vice President, Worldwide Sales and Service,
resigned his position with the Company effective March 31, 1997.
The Company has begun a search for a new Vice President,
Worldwide Sales and Service.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
NUMBER EXHIBIT
- ------ -------------------------------------------------------------------
10.1 (1) Stock Pledge Agreement and Note Secured by Stock Pledge Agreement,
each dated March 17, 1997
10.2 (1) Joint Marketing and Development Agreement dated March 28, 1997, by and
between Polycom, Inc. and Minnesota Mining and Manufacturing Company
11.1 Computation of Net Income (Loss) per Common and Common Equivalent
Share
27 Financial Data Schedule
(1) Confidential treatment requested as to certain portions of these documents.
(b) Report on Form 8-K: No reports on Form 8-K were filed during the
quarter ended March 30, 1997.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1394, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 13, 1997 POLYCOM, INC.
/s/ Michael R. Kourey
---------------------
Michael R. Kourey
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
16