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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 5, 1998
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-3128324
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2584 JUNCTION AVENUE, SAN JOSE, CA. 95134-1902
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code, is (408) 474-2900)
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 29,076,465 shares of the Company's Common Stock, par value $.0005,
outstanding on May 7, 1998.
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POLYCOM, INC.
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997............................................................................. 3
Condensed Consolidated Statements of Operations for the Three
Month Periods Ended March 31, 1998 and March 31, 1997......................................... 4
Condensed Consolidated Statements of Cash Flows for the Three
Month Periods Ended March 31, 1998 and March 31, 1997......................................... 5
Notes to Condensed Consolidated Financial Statements.......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 10
PART II OTHER INFORMATION
Item 1 - Legal Proceedings.................................................................... 20
Item 2 - Changes in Securities................................................................ 20
Item 3 - Defaults Upon Senior Securities...................................................... 20
Item 4 - Submission of Matters to a Vote of Security Holders.................................. 21
Item 5 - Other Information.................................................................... 21
Item 6 - Exhibits and Reports on Form 8-K..................................................... 21
SIGNATURE.......................................................................................................... 22
2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
1998 1997
---------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 14,163 $ 12,486
Short-term investments 6,466 5,184
Accounts receivable, net of allowance for doubtful
accounts of $438 at March 31, 1998 and
December 31, 1997 10,998 8,135
Inventories 10,630 9,915
Other current assets 3,359 2,930
-------- --------
Total current assets 45,616 38,650
Fixed assets, net 4,936 4,528
Other assets 412 351
-------- --------
Total assets $ 50,964 $ 43,529
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,365 $ 11,552
Accrued and other current liabilities 6,044 5,694
-------- --------
Total current liabilities 16,409 17,246
-------- --------
Stockholders' equity:
Common stock 19 17
Additional paid-in capital 60,578 52,602
Notes receivable from stockholders (24) (24)
Accumulated deficit (26,018) (26,312)
-------- --------
Total stockholders' equity 34,555 26,283
-------- --------
Total liabilities and stockholders' equity $ 50,964 $ 43,529
======== ========
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, December 31,
1998 1997
---------- ----------
Net revenues $ 18,031 $ 10,510
Cost of net revenues 9,182 5,653
-------- --------
Gross profit 8,849 4,857
-------- --------
Operating expenses:
Sales and marketing 4,025 2,879
Research and development 3,538 3,113
General and administrative 1,042 795
Acquisition expenses 185 --
-------- --------
Total operating expenses 8,790 6,787
-------- --------
Operating income/(loss) 59 (1,930)
Interest income, net 241 294
Other expense, net (6) (20)
-------- --------
Net income/(loss) $ 294 $ (1,656)
======== ========
Basic net income/(loss) per share $ 0.01 $ (0.08)
======== ========
Diluted net income/(loss) per share $ 0.01 $ (0.08)
======== ========
Weighted average shares outstanding for basic EPS 26,219 19,943
======== ========
Weighted average shares outstanding for diluted EPS 30,344 19,943
======== ========
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, December 31,
1998 1997
---------- ----------
Cash flows from operating activities:
Net income/(loss) $ 294 $ (1,656)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 638 434
Provision for excess and obsolete inventories 130 205
Value of stock options to outside consultants 3 --
Changes in assets & liabilities:
Accounts receivable (2,863) 1,153
Inventories (845) (466)
Prepaid expenses and other current assets (429) (784)
Deposits and other assets (61) --
Accounts payable (1,187) 1,690
Accrued and other liabilities 978 11
-------- --------
Net cash provided by/(used in) operating activities (3,342) 587
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets (1,046) (725)
Proceeds from sale and maturity of short term
investments 1,444 2,649
Purchases of short term investments (2,726) (1,002)
-------- --------
Net cash provided by/(used in) investing activities (2,328) 922
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
repurchases 7,975 265
Repayment of line of credit borrowings (628) (50)
-------- --------
Net cash provided by financing activities 7,347 215
-------- --------
Net increase in cash and cash equivalents 1,677 1,724
Cash and cash equivalents, beginning of year 12,486 11,253
-------- --------
Cash and cash equivalents, end of period $ 14,163 $ 12,977
======== ========
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, 1998, the condensed
consolidated statements of operations for the three month periods ending March
31, 1998 and 1997 and condensed consolidated statements of cash flows for the
three month periods ending March 31, 1998 and 1997 have been prepared by the
Company without audit.
The preparation of financial statements in conformity with United States'
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 1998 and for all periods presented have been made. The
condensed consolidated balance sheet at December 31, 1997 has been derived from
the audited financial statements at that date.
The Company uses a 52-53 week fiscal year. As a result, a fiscal year may not
end as of the same day as the calendar period. However, for convenience of
presentation, the accompanying consolidated financial statements have been shown
as ending on March 31 and December 31 of each applicable period. Due to
timing, 1998 is a 53 week fiscal year. Consequently, the first quarter of
1998 has 14 weeks rather than the usual 13 weeks.
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 13, 1998 and filed
with the Securities and Exchange Commission.
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 IP and the risks associated with this emerging
market; the market acceptance of ViewStation; the impact of competitive products
and pricing; the profitability of the videoconferencing and dataconferencing
product lines; the launch of the ViewStation 512 product; the schedule of and
costs associated with the manufacturing production ramp of the ShowStation IP
product; uncertainties relating to the integration of operations of ViaVideo
Communications, Inc.; effects of the acquisition on existing business
partnerships; the impact of the legal proceedings involving VTEL and Datapoint
and the other risks detailed from time to time in the Company's SEC reports,
including the Form 10-K dated March 13, 1998.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined in a
manner which approximates the first-in, first-out ("FIFO") method. Inventories
consisted of the following (in thousands):
March 31, Dec 31,
1998 1997
---- ----
Raw Materials $ 1,588 $2,526
Finished Goods 9,042 7,389
----- -----
$ 10,630 $ 9,915
======== =======
3. BANK LINE OF CREDIT
The Company has a $5.0 million bank revolving line of credit under an agreement
with Silicon Valley Bank. Borrowings under the line are unsecured and bear
interest at the bank's prime rate (8.5% at March 31, 1998). The agreement allows
for an additional facility of $5.0 million upon request of Polycom and
6
payment of associated fees. Borrowings under the line are subject to certain
financial covenants and restrictions on indebtedness, equity distributions,
financial guarantees, business combinations and other related items. The line
expires in October 1999. There were no borrowings under the line at March 31,
1998.
4. PER SHARE INFORMATION
The Company prepares earnings (loss) per share information using the guidelines
of the Statement of Financial Standards No. 128 (SFAS 128), "Earnings Per
Share". SFAS 128 requires net income (loss) per share to be presented under two
calculations, Basic EPS and Diluted EPS. Basic net income (loss) per share is
computed using the weighted average number of common shares outstanding during
the periods presented. Diluted net income (loss) per share is computed using
common and dilutive common equivalent shares outstanding during the periods
represented. Common equivalent shares, including shares issued under the Stock
Option Plan which are subject to repurchase, shares offered through the
Company's Stock Option Plan and warrants, are included in the computation of
diluted net income per share as their effect is dilutive for the quarter ending
March 31, 1998. Common equivalent shares are not included in the computation of
fully diluted net loss per share as their effect is antidilutive for the quarter
ending March 31, 1997.
In accordance with the disclosure requirements of SFAS 128, a reconciliation of
the numerator and denominator of basic and diluted EPS is provided as follows
(in thousands except per share amounts).
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
Numerator - basic and diluted EPS
Net income (loss) $ 294 $ (1,656)
======== ========
Denominator - Basic EPS
Common stock outstanding 26,219 19,943
-------- --------
Total Shares used in calculation of Basic EPS 26,219 19,943
-------- --------
Basic net income (loss) per share $ 0.01 $ (0.08)
======== ========
Denominator - Diluted EPS
Denominator - Basic EPS 26,219 19,943
Effect of Dilutive Securities:
Common stock options 2,287 --
Stock subject to repurchase 1,743 --
Warrants 95 --
-------- --------
Total Shares used in calculation of Diluted EPS 30,344 19,943
-------- --------
Diluted net income (loss) per share $ 0.01 $ (0.08)
======== ========
Stock options to purchase 2,638,225 shares of common stock and warrants to
purchase 2,000,000 shares of common stock were outstanding at March 31, 1997 but
were not included in the computation of diluted net income (loss) per share as
their effect was antidilutive.
5. FIRST AND SECOND AGREEMENTS WITH 3M
In March 1997, the Company entered into a joint marketing and development
agreement (The First Agreement) with Minnesota Mining and Manufacturing Company
("3M"). Under the terms of this agreement, 3M provided $3.0 million in funding
to Polycom for certain deliverables related to the development of
dataconferencing products and may also provide shared technology resources for
the development of future products. Additionally, Polycom granted 3M exclusive
private-label rights in certain distribution channels to the products developed
under this agreement subject to certain minimum volumes. In 1997, Polycom
recorded
7
the $3.0 million as revenue, $1.0 million in each of the first three quarters
of 1997, based on delivery of the items specified in the contract. Further,
3M received warrants to purchase up to 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 delivery of
Polycom's first product developed under the agreement. 3M also has certain
rights of first offer under its stock warrant agreement with Polycom which
gives 3M the right, for a period of 45 days after the Effective Time, to
purchase additional shares of Polycom Common Stock at a purchase price of
$7.50 per share. On February 19, 1998, 3M exercised this option and purchased
approximately one million shares of Polycom common stock for a consideration
of approximately $7.6 million. As a result of the purchase, 3M owns
approximately 3.5% of outstanding Polycom common stock.
In June 1997, the Company entered into a second joint marketing and development
agreement (The Second Agreement) with 3M. Under this agreement, 3M provides $2.5
million in funding to Polycom for certain deliverables related to the
development of videoconferencing products and may 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 the three months ended March 31, 1998, the
Company received, and recognized as revenue, $1.5 million under this agreement,
using the percentage of completion methodology. Polycom expects to receive the
final $1.0 million associated with this agreement in the second quarter of 1998.
6. ACQUISITION OF VIAVIDEO COMMUNICATIONS, INC.
On January 2, 1998, the Company completed the acquisition of ViaVideo
Communications, Inc., ("ViaVideo")' whereby a wholly owned subsidiary of
Polycom, Inc. was merged with and into ViaVideo. ViaVideo was a development
stage company that designs and develops high quality, low cost, easy to use,
group videoconferencing systems that utilize advanced video and audio
compression technologies along with Internet/Web-based features. Approximately
8.7 million shares of Polycom common stock were exchanged for all of the issued
and outstanding capital stock of ViaVideo. In addition, outstanding stock
options to purchase ViaVideo common stock were converted into options to
purchase approximately 1.1 million shares of Polycom common stock. The
transaction is being accounted for as a pooling of interests and, consequently,
all prior period figures have been restated as if the combined entity existed
for all periods presented. All intercompany transactions between the two
companies have been eliminated in consolidation. Polycom and ViaVideo
Communications had the same fiscal year ends of December 31 and activity from
the start of the current fiscal period to the merger date was not material.
Further, there were no adjustments required to conform accounting policies
between the two companies.
7. LEASE COMMITMENTS
On November 15, 1997, the Company entered into a two year operating lease for
23,248 square feet of a building in Austin, Texas. The space is being used
primarily as the offices for the engineering and marketing organization
associated with the videoconferencing product line. The lease associated with
this building will expire on December 31, 1999 and the minimum annual payments
under this lease are as follows: 1998 - $424,373; 1999 - $439,543.
8. LITIGATION
On September 3, 1997, VTEL Corporation ("VTEL") filed a lawsuit in the District
Court in Travis County, Texas against ViaVideo, a subsidiary of Polycom, and its
founders (who were formerly employed by VTEL). In the lawsuit, VTEL alleges
breach of contract, breach of confidential relationship, disclosure of
proprietary information, and related allegations. If ViaVideo were found to have
infringed upon the proprietary rights of VTEL or any other third party, Polycom
could be required to pay damages, cease sales of the infringing products,
discontinue such products or such other injunctive relief a court may determine,
any of which could have a material adverse effect on Polycom's business,
financial condition or results of operations. On April 22, 1998, Polycom filed a
declaratory relief action against VTEL in the Superior Court of Santa Clara
County, California seeking a declaration that Polycom has not infringed on any
8
proprietary rights of VTEL. VTEL has not yet responded to Polycom's complaint.
On October 2, 1997, Datapoint Corporation filed a complaint against Intel
Corporation for infringement of two U.S. patents related to videoconferencing
network technology in the U.S. District Court in Dallas, Texas. On November 25,
1997, the complaint was amended to include several additional defendants, and
Datapoint also filed a motion for certification of the action as a class action.
No ruling has occurred relative to the motion for class action certification.
Although neither Polycom nor its subsidiary ViaVideo has been served as a
defendant in any Datapoint complaints, both Polycom and ViaVideo were named as
putative class members in the Datapoint motion for class action certification
along with over 500 other companies.
The Company will vigorously defend against these claims and any related claims
for damages. While litigation is inherently uncertain, Polycom believes that the
ultimate resolution of these matters beyond that provided in its balance sheet
as of March 31, 1998 will not have a material adverse effect on the Company's
financial position.
9. COMPREHENSIVE INCOME
Effective March 31, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. As the components of
comprehensive income are not material, the Company has not reflected the
additional reporting and display provisions of SFAS No. 130 in the accompanying
financial statements.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company in 1998 and the Company is currently determining the
impact of adoption.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND OTHER SECTIONS OF THIS DOCUMENT CONTAIN FORWARD-
LOOKING STATEMENTS THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS, AND
ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," "TARGETS" AND
VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-
LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDING POTENTIAL
FLUCTUATIONS IN RESULTS AND FUTURE GROWTH RATES, IF AT ALL; THE SUCCESSFUL
LAUNCH AND MANUFACTURING RAMP OF THE VIEWSTATION, SHOWSTATION IP AND OTHER
NEW PRODUCTS; THE MARKET ACCEPTANCE OF VIEWSTATION, SHOWSTATION IP AND OTHER
NEW PRODUCTS; THE ACHIEVEMENT OF THE PRODUCT DEVELOPMENT DELIVERABLES
ASSOCIATED WITH THE SECOND 3M AGREEMENT AND THE SUCCESS OF 3M IN ESTABLISHING
AND MAINTAINING CHANNELS FOR THE VIEWSTATION 128, VIEWSTATION 512 AND
SHOWSTATION IP PRODUCTS; THE PROFITABILITY OF THE DATACONFERENCING AND
VIDEOCONFERENCING PRODUCT LINES; DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL
CHANGE; UNCERTAINTIES RELATING TO THE INTEGRATION OF OPERATIONS OF VIAVIDEO
COMMUNICATIONS, INC.; EFFECTS OF THE ACQUISITION ON EXISTING BUSINESS
PARTNERSHIPS; DEPENDENCE ON THIRD PARTY DISTRIBUTORS; RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS; DEPENDENCE ON RESEARCH AND DEVELOPMENT;
COMPETITION; DEPENDENCE ON THIRD PARTY MANUFACTURERS; DEPENDENCE ON
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS; DEPENDENCE ON THIRD-
PARTY LICENSES; DEPENDENCE ON PERSONNEL; THE IMPACT OF LEGAL PROCEEDINGS
INVOLVING VTEL AND DATAPOINT AND OTHER RISKS DETAILED FROM TIME TO TIME IN
THE COMPANY'S SEC REPORTS, INCLUDING THE COMPANY'S CURRENT REPORT ON FORM 8-K
FILED WITH THE COMMISSION JANUARY 16, 1998, AND ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997 UNDER "OTHER FACTORS AFFECTING FUTURE
OPERATIONS" ON PAGES 25 THROUGH 28 AND ELSEWHERE IN THE FORM 10-K. UNLESS
REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, INVESTORS SHOULD CAREFULLY REVIEW THE RISK
FACTORS AND OTHER INFORMATION SET FORTH IN THE REPORTS AND OTHER DOCUMENTS
THE COMPANY FILES FROM TIME TO TIME WITH THE COMMISSION.
OVERVIEW
Polycom was incorporated in December 1990 to develop, manufacture
and market audioconferencing, dataconferencing and videoconferencing products
that facilitate meetings at a distance. Polycom was engaged principally in
research and development from inception through September 1992, when it began
volume shipments of its first audioconferencing product, SoundStation. As of
March 31, 1998, Polycom's audioconferencing product line consisted
principally of the SoundStation, SoundStation EX, SoundStation Premier,
SoundStation Premier EX and SoundPoint. Polycom began shipping its first
dataconferencing product, ShowStation, in November 1995. In March 1998,
Polycom began shipments of its next generation ShowStation, the ShowStation
IP. On January 2, 1998, the Company completed the acquisition of ViaVideo
Communications, Inc., ("ViaVideo"), a development stage company that designs
and develops high quality, low cost, easy to use, group videoconferencing
systems that utilize advanced video and audio compression technologies along
with Internet/Web-based features. Polycom's ViewStation products (ViewStation
128kbps version and ViewStation 512kbps version) comes about as a
10
result of the merger. The Company commenced first customer shipments of the
ViewStation 128 in February 1998 and the ViewStation 512 in April 1998.
Polycom markets its products domestically and internationally
through a network of value-added resellers ("VARS"), original equipment
manufacturers ("OEMS"), and retailers and also sells its audioconferencing
products through its direct sales force. Through March 31, 1998, Polycom has
derived a majority of its net revenues from sales of its SoundStation
products. Polycom anticipates that sales of its SoundStation product line
will continue to account for a majority of net revenues at least through the
year ending December 31, 1998. Any factor adversely affecting the demand or
supply for the SoundStation product line could materially adversely affect
Polycom'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
net income in fiscal 1996. The Company incurred a quarterly operating loss in
each quarter of 1997 as a result of investments in the next generation
dataconferencing product, the videoconferencing product line and the sales
and marketing function. The Company intends to continue to invest
significantly in research and development and the Company's infrastructure in
1998. Although, Polycom plans to generate operating income, excluding
acquisition expenses, through 1998, there can be no assurance that the
Company will achieve its operating plans or achieve profitable operations in
any subsequent period.
In March 1997, Polycom entered into a joint marketing and
development agreement (the "FIRST AGREEMENT") with 3M. Under the agreement,
3M provided $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. Through December 31, 1997, Polycom recorded the $3.0 million
as revenue, $1.0 million in each of the first three quarters of 1997, based
on delivery of the items specified in the contract. The amounts were
recognized as revenue using the percentage of completion methodology.
Additionally, Polycom granted 3M exclusive private-label rights in certain
distribution channels to the products developed under this agreement subject
to certain minimum volumes. Further, 3M received warrants to purchase up to
2,000,000 shares of Polycom's common stock at an exercise price of $7.50 per
share. The warrants expire in March 1999. At the time of grant, the warrants
were valued using the Black-Scholes model and were determined to have a value
of $40,000. 3M also has certain rights of first offer under its stock warrant
agreement with Polycom which will give 3M the right, for a period of 45 days
after the Effective Time, to purchase additional shares of Polycom Common
Stock at a purchase price of $7.50 per share. In February 1998, 3M exercised
this option and purchased approximately one million shares of Polycom common
stock for a consideration of approximately $7.6 million. As a result of the
purchase, 3M owns approximately 3.5% of outstanding Polycom common stock.
In June 1997, Polycom entered into a second joint marketing and
development agreement (the "SECOND AGREEMENT") with 3M. Under this agreement,
3M is expected to provide $2.5 million in funding to Polycom for certain
deliverables related to the development of videoconferencing products and may
also provide shared technology resources for the development of future
products. However, in order to receive the funding, Polycom must meet certain
milestones as outlined in the agreement. In the first three months of 1998,
Polycom received, and recorded as revenue, $1.5 million under the terms of
the Second Agreement which has been recognized under the percentage of
completion method. Polycom will grant 3M exclusive private-label rights in
certain distribution channels to the products developed under this agreement.
Polycom is targeting to receive the final $1.0 million associated with this
agreement in the second quarter of 1998.
11
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,
--------------------
1998 1997
-------- --------
Net revenues 100% 100%
Cost of net revenues 51% 54%
-------- --------
Gross profit 49% 46%
-------- --------
Operating expenses:
Sales and marketing 22% 27%
Research and development 20% 30%
General and administrative 6% 7%
Acquisition expenses 1% 0%
-------- --------
Total operating expenses 49% 64%
-------- --------
Operating income/(loss) 0% (18%)
Interest income, net 2% 2%
Other expense, net 0% 0%
-------- --------
Net income/(loss) 2% (16%)
======== ========
NET REVENUES
Total net revenues were $18.0 million in the first quarter of 1998
compared to $10.5 million in the first quarter of 1997, an increase of 72%.
The increase was due, in large part, to the revenues generated from the sales
of the ViewStation product, which began shipping in February 1998, and also
to increases in the SoundStation and SoundStation Premier product lines. The
ViewStation sales were made primarily to resellers and the sell-through to
end-users is expected over the next several months, although there can be no
assurances that this will happen. These gains were offset somewhat by
decreases in sales of the dataconferencing product as the next generation
ShowStation began shipping in late March 1998. Further, Polycom recorded $1.5
million in revenue associated with the deliverables under the 3M agreement
compared to $1.0 million in the first quarter of 1997.
During the first quarter of 1998 and 1997, the Company derived a
majority of its net revenues from sales of its SoundStation product family.
In the first three months of 1998, 3M, after considering the revenue from the
Second Agreement and product sales, accounted for 12% of total net revenues.
No other customer or reseller accounted for more than 10% of the Company's
net revenues in the first three months of 1998. No customer or reseller
accounted for more than 10% of the Company's net revenues during the same
period for 1997.
International net revenues for the first quarter of 1998 accounted
for 22% of total net revenues for the Company, up from 21% in the first
quarter of 1997. This increase in international revenue as a percentage of
total net revenues was due to an increase in Premier and SoundPoint revenues
as these products were only beginning to sell internationally in early 1997.
This was offset slightly by the sales of the new dataconferencing and
videoconferencing products which were released initially in the North
American region. 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. Additionally, the recent economic
problems in the Asian market could adversely offset the Company's
profitability if it continues. 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
12
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 has been denominated in U.S. currency, however,
the Company expects that in the future more international sales may be
denominated in local currencies and, therefore, subject to currency
fluctuation risks.
COST OF NET REVENUES
Cost of net revenues consists primarily of the Company's
manufacturing organization, contract manufacturers, tooling depreciation,
warranty expense and an allocation of overhead expenses. The cost of net
revenues represented 51% and 54% of net revenues for the first quarters of
1998 and 1997, respectively. The decrease in the cost of net revenues
percentage is due to lower product costs associated with the
audioconferencing product line, offset slightly by unfavorable manufacturing
variances due mainly to the delay of the ShowStation IP product. In addition,
the cost of net revenues percentage was lower due to an increase in the
revenues from the 3M agreements which typically have very low associated
costs.
The Company has lowered product prices in the past which was driven
by the Company's desire to expand the market for its products, and the
Company may further reduce prices or introduce new products that carry higher
costs 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, the cost of net revenues
percentage may be affected by price competition and changes in unit volume
shipments, product cost and warranty expenses. The cost of net revenues
percentage 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 lower cost of net
revenue percentages on direct sales than on sales through indirect channels.
If sales through resellers, especially OEMs, increase as a percentage of
total revenues, the Company's cost of net revenues percentage will be
adversely impacted.
As discussed earlier, the Company began shipping the ShowStation IP
product in late March 1998. The delays in releasing this product created
unfavorable manufacturing variances and, if further delays occur, could
continue to negatively impact the cost of net revenues. If this happens, the
Company's profitability could be materially adversely affected.
In late 1997 and early 1998, the Company began using its contract
manufacturer in Thailand as its main source of refurbishing audioconferencing
and videoconferencing service inventory. Through the end of March 1998, the
transition had not been completed, thereby, increasing the cost of this
function. It is expected that improvements will be realized in the second or
third quarter of 1998; however, there can be no assurances that this will
occur. If the transition is not completed during this time period or if, when
complete, the transition does not produce the desired results, the Company
cost of net revenues could increase.
SALES AND MARKETING EXPENSES
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31, INCREASE/
$ IN THOUSANDS 1998 1997 (DECREASE)
- -------------- ---- ---- ----------
Expenses $ 4,025 $ 2,879 40 %
% of Net Revenues 22 % 27 % (5 %)
Sales and marketing expenses consist primarily of salaries and
commissions, advertising and promotional expenses, an allocation of overhead
expenses and customer service and support costs. The expense increase in the
first quarter of 1998 over the first quarter of 1997 was primarily related to
increased investment in the videoconferencing sales effort. As mentioned
previously, the Company only began
13
selling the ViewStation in the first quarter of 1998 and, consequently, had
little sales and marketing expense in the first quarter of 1997 associated
with the video products.
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, ShowStation IP and ViewStation products, the Company 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, ShowStation IP and ViewStation. Further, the
launch of a new Multipoint Conferencing Unit (MCU) product line, which assist
connections to existing videoconferencing bridging services, will cause an
increase in the Company's sales and marketing expenses.
RESEARCH AND DEVELOPMENT EXPENSES
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31, INCREASE/
$ IN THOUSANDS 1998 1997 (DECREASE)
- -------------- ---- ---- ----------
Expenses $ 3,538 $ 3,113 14 %
% of Net Revenues 20 % 30 % (10 %)
Research and development expenses consist primarily of compensation
costs, consulting fees, an allocation of overhead expense, supplies and
depreciation. The expense increase for the first quarter of 1998 over the
first quarter of 1997 were primarily attributable to development expenses for
the ViewStation products and, to a lesser extent, to increases in the
audioconferencing product line. These increases were offset somewhat by lower
expenses associated with the dataconferencing line as the large investments
in next generation ShowStation IP made in 1997 begin to normalize.
The Company believes that technological leadership is critical to
its success and is committed to continuing a high level of research and
development. Consequently, the Company intends to increase its research and
development expenses in absolute dollars in the future.
GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31, INCREASE/
$ IN THOUSANDS 1998 1997 (DECREASE)
- -------------- ---- ---- ----------
Expenses $ 1,042 $ 795 31 %
% of Net Revenues 6 % 7 % (1 %)
General and administrative expenses consist primarily of
compensation costs, an allocation of overhead expense, and outside legal and
accounting expenses. The increase in general and administrative expenses in
absolute dollars for the first quarter of 1998 over the same period of 1997
is primarily due to increased staffing and infrastructure to support the
Company's growth.
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
supporting a larger company, created by the completion of the acquisition of
ViaVideo.
ACQUISITION EXPENSES
14
For the first quarter of 1998, the Company incurred expenses
totaling $0.2 million related to the acquisition of ViaVideo Communications,
Inc. A significant portion of these charges were for outside legal,
accounting and consulting services. Management does not anticipate any
further acquisition related expenses throughout the remainder of this fiscal
year; however, there can be no assurances that this will happen or that the
future charges will not be material.
INTEREST INCOME, NET AND OTHER EXPENSES, NET
Interest income, net consists of interest earned on the Company's
cash equivalents and short-term investments net of any interest expense. For
the first quarter of 1998, interest income, net was $0.2 million, a decrease
of 18% from the first quarter of 1997. This decrease was due to a lower level
of cash available for investment.
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 current quarter's
profitable results generated minimal federal and state income taxes in the
first quarter of 1998. Throughout the remainder of 1998 and beyond, to the
extent the Company realizes profitable results, the Company will generate
higher federal and state income tax expense, although there can be no
assurance the Company will achieve profitable results. As of March 31, 1998,
the Company had approximately $6.1 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 has established a full 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, if it is determined that it is more likely than not that deferred tax
assets are realizable, the valuation allowance will be appropriately reduced.
OTHER FACTORS AFFECTING FUTURE OPERATIONS
Polycom's net revenues have grown primarily through increased market
acceptance of its established audioconferencing product line, new product
introductions and through the expansion of Polycom's North American and
International distribution networks. While Polycom has experienced growth in
net revenues in recent quarters, it does not believe that the historical
growth rates in net revenues will be sustainable nor are they indicative of
future operating results. For example, Polycom 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, and the 30% price reduction for SoundStation products sold
internationally effective April 1997, negatively impacted Polycom's net
revenues and profitability in 1997. Polycom believes that profitability could
continue to be negatively affected in the future as a result of several
factors including low to negative gross margins for Polycom's ShowStation and
ShowStation IP dataconferencing products, inventory value loss related to the
ShowStation inventory if it is determined that the units cannot be sold for
at least carrying cost, the reduction in the list prices of the SoundStation
product line and continuing competitive price pressure in the
audioconferencing, dataconferencing and videoconferencing markets. Although
price reductions have been driven by Polycom's desire to expand the market
for its products, and Polycom 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 Polycom will expand the market
for its products or be sufficient to meet competitive pricing pressures. In
addition, costs related to the merger with ViaVideo, and its integration into
Polycom, expense growth related to the activities of the combined entities
and costs related to the introduction of the new ShowStation IP, ViewStation,
and SoundStation Satellite products could negatively impact future
profitability. Also, the impacts of pending or future litigation against
Polycom or ViaVideo, including the suit filed by VTEL against ViaVideo as
mentioned in Polycom's Form 8-K filed on September 9, 1997 and the suit filed
by Datapoint, as discussed in Polycom's Form 8-K filed on January 2, 1998,
beyond that already provided in the Company's Balance Sheet as of March 31,
1998, are difficult to predict at this time. Further,
15
Polycom's limited operating history and limited resources, among other
factors, make the prediction of future operating results difficult if not
impossible.
In the past Polycom 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 nine 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 and ShowStation IP was
delayed from its original shipment target of September 1997 to its first
customer shipment date of March 1998 due to engineering and manufacturing
start-up issues. Any similar delays in the future could have a material adverse
effect on Polycom's results of operations.
Polycom'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 next generation of ShowStation products, the ViewStation,
and other new product introductions and product enhancements by Polycom or
its competitors, the prices of Polycom'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 and cost of
warranty claims, changes in Polycom'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 Polycom's operating results for such period, and such price pressure
over an extended period could materially adversely affect Polycom's long-term
profitability. Polycom'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,
the dataconferencing line of products, currently comprised of the ShowStation
products, its first videoconferencing product, ViewStation, and any new
products or product enhancements. There can be no assurance that Polycom 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.
Polycom typically ships products within a short time after receipt
of an order, and historically has not had a significant backlog; however,
backlog may fluctuate 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, Polycom's expectations for both short- and
long-term future net revenues are based almost exclusively on its own
estimate of future demand and not on firm customer orders. In addition,
Polycom 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 Polycom has from time to time provided
special incentives for distributors to purchase more than the minimum
quantities required under their agreements with Polycom. Additionally, a
majority of Polycom's net revenues are from sales to resellers who sell the
products through to end users. If these resellers are unable to sell through
their inventory of Polycom products in a given quarter, it could affect the
volume of Polycom's sales to these resellers in future quarters. This is
especially true for new product channel shipments, such as the ViewStation
shipments in the first quarter of 1998. Therefore, Polycom has been
uncertain, throughout most of each quarter, as to the level of revenues it
will achieve in the quarter and the impact that distributor stocking orders
will have on revenues and profitability 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, profitability is
difficult to predict. Further, there can be no guarantee that Polycom's
contract manufacturers will be able to meet product demand before a quarter
ends. Polycom anticipates that this pattern of sales may continue in the
future with the exception that the Company may reduce and ultimately
eliminate the end of quarter incentives offered to distributors. If the
Company chooses to eliminate or reduce stocking incentive programs,
particularly those associated with audioconferencing sales, quarterly revenue
may be materially adversely affected. Expense levels are based, in part, on
these estimates and, since Polycom 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 Polycom's products in the future.
Due to all of the foregoing factors, it is likely that in some future quarter
Polycom's operating results will be below the expectations of public market
analysts and
16
investors. In such event, the price of Polycom's Common Stock would likely be
materially adversely affected.
Polycom has a significant inventory of monochrome ShowStation
products which it plans to sell in Latin America over the next several
quarters. There can be no assurance that Polycom will be successful in the
sale of such products. The failure to successfully sell such inventory would
have a material adverse effect on Polycom's business, financial condition and
results of operations.
The markets for videoconferencing products are characterized by
changing technology, evolving industry standards and frequent new product
introductions. The success of Polycom's new videoconferencing products is
dependent on several factors, including proper new product definition,
product cost, timely completion and introduction of new products,
differentiation of new products from those of Polycom's competitors and
market acceptance of these products. Additionally, properly addressing the
complexities associated with ISDN compatibility, reseller training, technical
and sales support as well as field support are also factors affecting the
Company's success in the videoconferencing market. Polycom is attempting to
address the need to develop new products through its internal development
efforts and joint developments with other companies. There can be no
assurance that Polycom will successfully identify new videoconferencing
product opportunities and develop and bring new videoconferencing products to
market in a timely manner, or that videoconferencing products and
technologies developed by others will not render Polycom's videoconferencing
products or technologies obsolete or noncompetitive. The failure of Polycom's
new videoconferencing products development efforts would have a material
adverse effect on Polycom's business, financial condition and results of
operations.
Polycom completed the acquisition of ViaVideo Communications, Inc.
on January 2, 1998. Polycom acquired ViaVideo with the expectation that the
acquisition would result in operating and strategic benefits, including
operating cost reductions and product development, marketing and sales
synergies. If the operations of ViaVideo are not successfully combined with
those of Polycom in a coordinated, timely and efficient manner, Polycom's
business, financial condition and results of operations would be materially
adversely effected. The integration of ViaVideo's product offerings and
operations with Polycom's product offerings and operations and the
coordination of ViaVideo's sales and marketing efforts with those of Polycom
will require substantial attention from management. The diversion of the
attention of management and any difficulties encountered in the transition
process could have a material adverse affect on Polycom's business, financial
condition or results of operations. The difficulties of assimilation may be
increased by the necessity of integrating personnel with disparate business
backgrounds and combining two different corporate cultures. 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, Polycom's operating expenses will significantly
increase in absolute dollars. Should the expected revenues from ViaVideo
products not occur, or occur later or in an amount less than expected, the
higher operating expenses could have a material adverse affect on the
business, financial condition and results of operations of Polycom. Failure
to achieve the anticipated benefits of the acquisition or to successfully
integrate the operations of the companies could have a material adverse
effect upon the business, operating results or financial condition of
Polycom. Additionally, there can be no assurance that Polycom will not incur
additional material charges in future quarters to reflect additional costs
associated with the acquisition.
The acquisition could cause customers and potential customers of
Polycom or ViaVideo to delay or cancel orders for products as a result of
customer concerns and uncertainty over product evolution, integration and
support of ViaVideo's products with Polycom's products. Such a delay or
cancellation of orders could have a material adverse effect on the business,
financial condition or results of operations of Polycom.
Polycom and PictureTel have entered into an agreement whereby
PictureTel resells Polycom's ShowStation products and supplies Polycom's
SoundPoint products to other producers of videoconferencing products. Polycom
does not have any such agreements with PictureTel regarding the resale or
supply of any of Polycom's videoconferencing products. Polycom and PictureTel
are competitors in the teleconferencing market and, as such, there can be no
assurance that PictureTel will enter into future agreements to resell or
supply any of the Company's new or enhanced teleconferencing products.
Products
17
under development at ViaVideo are expected to be more directly competitive
with PictureTel products, and thus competition between PictureTel and Polycom
is likely to increase, resulting in a strain on the existing relationship
between the companies. If this occurs, it could limit the contribution that
this relationship could have on the financial results of operations of
Polycom.
Polycom's operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure and other events beyond
Polycom's control. Additionally, most of Polycom's operations are currently
located in the San Francisco Bay Area, an area that is susceptible to
earthquakes. Polycom does not carry sufficient business interruption
insurance to compensate Polycom for losses that may occur, and any losses or
damages incurred by Polycom could have a material adverse effect on its
business, financial condition or operating results.
Many existing computer systems and applications, and other control
devices, use only two digits to identify a year in the date field, without
considering the impact of the upcoming change in the century. They could fail
or create erroneous results unless corrected so that they can process data
related to the year 2000. The Company relies on its systems, applications and
devices in operating and monitoring all major aspects of its business,
including financial systems (such as general ledger, accounts payable and
payroll modules), customer services, infrastructure, embedded computer chips,
networks and telecommunications equipment and end products. The Company also
relies on external systems of business enterprises such as customers,
suppliers, creditors, financial organizations, and of governments, both
domestically and globally, directly for accurate exchange of data and
indirectly. The Company's current estimate is that the costs associated with
the Year 2000 issue, and the consequences of incomplete or untimely
resolution of the Year 2000 issue, will not have a material adverse affect on
the result of operations or financial position of the Company in any given
year. However, despite the Company's efforts to address the Year 2000 impact
on its internal systems, the Company is not sure that it has fully identified
such impact and that it can resolve it without disruption of its business and
without incurring significant expense. In addition, even if the internal
systems of the Company are not materially affected by the Year 2000 issue,
the Company could be affected through disruption in the operation of the
enterprises with which the Company interacts.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments of $20.6 million,
an increase of $3.0 million from December 31, 1997. Additionally, on October
17, 1997, the Company re-established a $5.0 million revolving bank line of
credit from Silicon Valley Bank which had previously expired on April 15,
1997. This line of credit allows for an additional facility of $5.0 million
available upon request by the Company and contingent upon payment of
associated fees.
The Company used $3.3 million in cash from operating activities for
the first three months of 1998 compared to a generation of $0.6 million in
cash from operating activities for the same period in 1997. The reduction in
cash from operating activities was due primarily to an increase in trade
accounts receivable, additional purchases of inventory and a larger reduction
in accounts payable balances. These cash uses were offset somewhat by an
improved net income before non-cash expenses in the first three months of
1998 over the same period in 1997.
The total net change in cash and cash equivalents for the first
three months of 1998 was an increase of $1.7 million. The primary source of
cash was proceeds totaling $7.6 million from the stock purchase from 3M. The
primary uses of cash during the first three months of 1998 were $3.3 million
from operating activities, purchases of property, plant and equipment of $1.0
million and net purchases in short term investments of $1.3 million. The use
of cash from operating activities was the result of an increase in trade
accounts receivable, an increase in inventories, an increase in current
assets (primarily related to receivables from contract manufacturers) and
lower accounts payable balances, offset by a positive net income before
non-cash expenses.
The Company's material commitments consist of obligations under its
revolving bank line of credit, operating leases and a $250,000 stand-by
letter of credit which has been issued to guarantee certain of the Company's
contractual obligations. The Company also maintains from time to time
commercial
18
letters of credit as payments for the importation of certain products. The
amounts do not exceed $100,000 and are outstanding less than 120 days. The
Company estimates that 1998 capital expenditures will total approximately
$7.0 million.
The Company believes that its available cash, cash equivalents and
bank line of credit will be sufficient to meet the Company's operating
expenses and capital requirements through at least June 30, 1998. Thereafter,
it cannot be determined with any degree of certainty how successful the
Company will be at growing the market for its products, if at all. If there
is substantial growth and, as a result, the Company goes beyond current
acceptable liquidity levels, Polycom 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.
19
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On September 3, 1997, VTEL Corporation ("VTEL") filed a lawsuit in
the U. S. District Court in Travis County, Texas against ViaVideo,
a subsidiary of Polycom, and its founders (who were formerly
employed by VTEL). In the lawsuit, VTEL alleges breach of
contract, breach of confidential relationship, disclosure of
proprietary information, and related allegations. If ViaVideo were
found to have infringed upon the proprietary rights of VTEL or any
other third party, Polycom could be required to pay damages, cease
sales of the infringing products, discontinue such products or
such other injunctive relief a court may determine, any of which
could have a material adverse effect on Polycom's business,
financial condition or results of operations. On April 22, 1998,
Polycom filed a declaratory relief action against VTEL in the
Superior Court of Santa Clara County, California seeking a
declaration that Polycom has not infringed on any proprietary
rights of VTEL. VTEL has not yet responded to Polycom's complaint.
On October 2, 1997, Datapoint Corporation filed a complaint
against Intel Corporation for infringement of two U.S. patents
related to videoconferencing network technology in the U.S.
District Court in Dallas, Texas. On November 25, 1997, the
complaint was amended to include several additional defendants,
and Datapoint also filed a motion for certification of the action
as a class action. No ruling has occurred relative to the motion
for class action certification. Although neither Polycom nor its
subsidiary ViaVideo has been served as a defendant in any
Datapoint complaints, both Polycom and ViaVideo were named as
putative class members in the Datapoint motion for class action
certification along with over 500 other companies.
The Company will vigorously defend against these claims and any
related claims for damages. While litigation is inherently
uncertain, Polycom believes that the ultimate resolution of these
matters beyond that provided in its balance sheet as of March 31,
1998 will not have a material adverse effect on the Company's
financial position.
Item 2. CHANGES IN SECURITIES
In connection with the acquisition of ViaVideo, the Company issued
approximately 8.7 million shares of the Company's Common Stock
(the "Merger Shares") to the existing stockholders of ViaVideo in
exchange for all of the outstanding shares of capital stock of
ViaVideo. In addition, outstanding stock options to purchase
ViaVideo common stock were converted into options to purchase
approximately 1.1 million shares of Polycom common stock. The Merger
Shares were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended (the
"Securities Act"), under Section 4(2) of the Securities Act. There
was no general solicitation or advertising involved in the
acquisition, and the Company used reasonable care to assure that the
stockholders of ViaVideo were not underwriters.
On February 19, 1998, 3M exercised rights of first offer granted
to it under its stock warrant agreement with the Company and
purchased approximately one million shares of Polycom common stock
for a consideration of approximately $7.6 million. Such shares
were issued pursuant to Section 4(2) under the Securities Act. The
Company determined that 3M was an "accredited investor" as such
term is defined under Rule 501 under the Securities Act. 3M had
access to all relevant information regarding the Company necessary
to evaluate the investment and the Company, after reasonable
inquiry, determined that the shares were being acquired for
investment purposes. There was no general solicitation or
advertising in connection with 3M's investment, and the Company
used reasonable care to assure that 3M was not deemed an
underwriter. In May 1998, these shares were registered under
Form S-3 in compliance with the demand rights given to 3M under the
agreement.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Effective January 5, 1998, Rose Rambo joined the Company as the
Vice President and General Manager, Audioconferencing.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
NUMBER EXHIBIT
- ------ ------------------------------------------------------------------
11.1 Statement of Computation of Earning (Loss) Per Share (contained in
Note 4 of Notes to Condensed Consolidated Financial Statements)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on January 16, 1998, regarding
Polycom's acquisition of ViaVideo Communications. Inc. effective
January 2, 1998. The Form 8-K also disclosed that Datapoint
Corporation filed a complaint contesting patent infringement of
its U.S. patents related to videoconferencing. Polycom, Inc. and
ViaVideo Communications, Inc. were named as putative class members
in the Datapoint motion for class action certification along with
over 500 other companies.
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 19, 1998 POLYCOM, INC.
/s/ Michael R. Kourey
---------------------
Michael R. Kourey
Chief Financial Officer
(Principal Financial and Accounting Officer)
22