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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 SEPTEMBER 30, 1996
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 333-2296
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 19,317,425 shares of the Company's Common Stock, par value $.0005,
outstanding on September 30, 1996
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2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C> <C>
PART 1 FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995................................................... 3
Condensed Consolidated Statements of Operations for the Three and
Nine Month Periods Ended September 30, 1996 and September 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1996 and September 30, 1995............. 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8
PART II OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K.......................... 15
SIGNATURE................................................................... 16
</TABLE>
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3
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYCOM, INC.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 1,276 $ 3,539
Short-term investments ............................. 19,389 2,722
Accounts receivable, net ........................... 5,840 3,171
Inventories ........................................ 7,030 5,308
Other current assets ............................... 413 191
-------- --------
Total current assets ............................. 33,948 14,931
Fixed assets, net .................................... 3,231 2,970
Other assets ......................................... 75 99
-------- --------
Total assets ................................... $ 37,254 $ 18,000
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ...................................... $ - $ 1,485
Accounts payable ................................... 4,414 3,852
Other current liabilities .......................... 2,192 1,765
-------- --------
Total current liabilities ........................ 6,606 7,102
Notes payable, less current portion .................. - 1,178
-------- --------
Total liabilities .............................. 6,606 8,280
Convertible redeemable preferred stock ............... - 22,360
Stockholders' equity:
Common stock ....................................... 10 2
Additional paid-in capital ......................... 42,574 285
Notes receivable from stockholders ................. (120) (163)
Accumulated deficit ................................ (11,816) (12,764)
-------- --------
Total stockholders' equity (deficit): ............ 30,648 (12,640)
Total liabilities and stockholders' equity ..... $ 37,254 $ 18,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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4
POLYCOM, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
------------------- -------------------
<S> <C> <C> <C> <C>
Net revenues ....................... $ 9,502 $ 6,319 $ 26,990 $ 17,045
Cost of net revenues ............... 4,619 2,659 12,678 7,421
-------- -------- -------- --------
Gross profit ................... 4,883 3,660 14,312 9,624
-------- -------- -------- --------
Operating expenses:
Sales and marketing .............. 2,245 1,813 6,515 4,945
Research and development ......... 1,930 1,788 5,723 4,998
General and administrative ....... 552 499 1,590 1,420
-------- -------- -------- --------
Total operating expenses ....... 4,727 4,100 13,828 11,363
-------- -------- -------- --------
Operating income (loss) ............ 156 (440) 484 (1,739)
Interest income, net ............... 292 52 516 179
Other expense, net ................. (23) (24) (52) (122)
-------- -------- -------- --------
Net income (loss) .................. $ 425 ($ 412) $ 948 ($ 1,682)
======== ======= ======== ========
Net income (loss) per share ........ $ 0.02 ($ 0.10) $ 0.05 ($ 0.39)
======== ======= ======== ========
Weighted average shares outstanding 19,833 4,317 18,657 4,322
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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5
POLYCOM, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30, Sept. 30,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows provided by (used in) operating
activities:
Net income (loss) ........................................ $ 948 $(1,682)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization .......................... 1,112 608
Provision for doubtful accounts ........................ - 132
Provision for inventory ................................ 205 411
Changes in assets & liabilities:
Accounts receivable ................................... (2,669) (967)
Inventories ........................................... (1,927) (3,043)
Other current assets .................................. (198) (41)
Accounts payable ...................................... 562 1,500
Other current liabilities ............................. 427 1,085
-------- -------
Net Cash used in operating activities .................... (1,540) (1,997)
Cash flows used in investing activities:
Acquisition of PPE .................................... (1,044) (474)
Proceeds from sale and maturity of short
term investments ...................................... 116,027 -
Purchase of short term investments .................... (132,694) -
-------- -------
Net cash used in investing activities .................... (17,711) (474)
Cash flows provided by financing activities:
Proceeds from issuance of notes payable ............... 2,974 1,260
Repayment of notes payable and capital leases ......... (5,966) (1,736)
Proceeds from sale/(repurchase) of common stock ....... 19,920 -
Proceeds from sale of convertible preferred stock ..... - 5,028
Proceeds from repayment of notes receivable from
stockholders .......................................... 60 -
-------- -------
Net cash provided by financing activities ................ 16,988 4,552
-------- -------
Net increase (decrease)in cash ........................... (2,263) 2,081
Cash and cash equivalents, beginning of year ............. 3,539 5,792
--------- -------
Cash and cash equivalents, end of period ................. $ 1,276 $ 7,873
========= =======
Cash paid for interest ................................... 108 69
PPE purchased with debt .................................. 329 1,563
Common stock issued for notes from shareholders .......... 17 154
</TABLE>
The accompanying notes are an integral part of these financial statements.
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6
Polycom, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1996 and
the condensed consolidated statements of operations for the three and nine month
periods ending September 30, 1996 and 1995 and condensed consolidated statements
of cash flows for the nine month periods ending September 30, 1996 and 1995,
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
September 30, 1996 and for all periods presented have been made. The condensed
consolidated balance sheet at December 31, 1995 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 Form S-1 Registration Statement dated April
29, 1996 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 year. For convenience of presentation, the accompanying
consolidated financial statements have been shown as ending on September 30 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 timely availability and acceptance of SoundPoint,
SoundStation Premier and other new products; 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 S-1 dated April 29, 1996 and subsequent Form 10-Q
filings.
2. INITIAL PUBLIC OFFERING
On April 29, 1996, the Company completed its initial offering of stock
to the public. A total of 2,500,000 shares of Common Stock was sold by the
Company, for net proceeds to the Company of approximately $20.0 million, after
deducting expenses of the offering of approximately $975,000 and underwriters'
discounts and commissions. Upon completion of the offering, all outstanding
shares of Preferred Stock (a total of 13,069,857 shares) were converted into
shares of Common Stock on a one-for-one basis.
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7
3. 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):
September 30, December 31,
1996 1995
------------ ------------
Raw Materials $ 3,125 $ 2,355
Work in process 343 650
Finished goods 3,562 2,303
------------ -------------
$ 7,030 $ 5,308
============ =============
4. 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. Dilutive 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.
<PAGE>
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Polycom, Inc. (the "Company") 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 began selling SoundStation internationally in January 1993. The Company
commenced shipments domestically of an enhanced version of this product,
SoundStation EX, in March 1994 and commenced international shipments in November
1994. Through September 30, 1996, the Company derived substantially all of its
net revenues from sales of its SoundStation products. The Company began customer
shipments of its first dataconferencing product, ShowStation, in November 1995.
The Company recently began shipments of its SoundPoint product in September
1996. The Company announced the SoundStation Premier in September 1996 and
anticipates shipments within the calendar year. 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, 1996. Any factor adversely affecting the demand or supply for the
SoundStation, SoundStation Premier or SoundPoint product lines could materially
adversely affect the Company's business, financial condition or results of
operations.
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 timely availability and acceptance of SoundPoint,
SoundStation Premier and other new products; 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 S-1 dated April 29, 1996 and subsequent Form 10-Q
filings.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues,
condensed consolidated statement of operations data for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept.30,
1996 1995 1996 1995
------------------ -----------------
<S> <C> <C> <C> <C>
Net revenues ....................... 100% 100% 100% 100%
Cost of net revenues ............... 49% 42% 47% 44%
---- ---- ---- ----
Gross profit ................... 51% 58% 53% 56%
---- ---- ---- ----
Operating expenses:
Sales and marketing .............. 24% 29% 24% 29%
Research and development ......... 20% 28% 21% 29%
General and administrative ....... 6% 8% 6% 8%
---- ---- ---- ----
Total operating expenses ....... 50% 65% 51% 66%
---- ---- ---- ----
Operating income (loss) ............ 1% (7%) 2% (10%)
Interest income, net ............... 3% 1% 2% 1%
Other expense, net ................. 0% 0% 0% (1%)
---- ---- ---- ----
Net income (loss) .................. 4% (6%) 4% (10%)
==== ==== ==== ====
</TABLE>
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9
Net revenues. The Company's net revenues increased 50% from $6.3 million in the
third quarter of 1995 to $9.5 million in the third quarter of 1996. Net revenues
increased 58% from $17.0 million in the first nine months of 1995 to $27.0
million in the first nine months of 1996. Net revenues increased in each period
primarily due to increased unit sales, resulting primarily from increased market
acceptance of the Company's audioconferencing product line, and to a lesser
extent, through the expansion of the Company's North American and international
distribution networks, offset in part by a decline in the list price of its
SoundStation products. In addition, net revenues for the first nine months of
1996 included revenues attributable to ShowStation, which was not introduced
until November 1995. The Company has twice reduced the list price for its
SoundStation products, effective July 1, 1994 and January 1, 1996, and expects
that it will lower prices again in the future. Such lower prices could
materially adversely affect the Company's net revenues and gross margins.
Through September 30, 1996, the Company derived substantially all of its net
revenues from sales of its SoundStation products. The Company expects that in
the future, its net revenues may grow at a slower rate than has been experienced
in previous periods and that on a quarter-to-quarter basis, the Company's
growth, if any, in net revenues may be significantly lower than its historical
quarterly growth rate. The Company expects that newer audioconferencing products
such as the SoundPoint and SoundStation Premier will reduce the sales volumes of
the SoundStation product line. To the extent that this mix of products has a
lower average unit price than previously experienced, this could have a material
adverse affect on net revenues. International net revenues accounted for 27% of
total net revenues in the third quarter of 1995 and 24% of total net revenues in
the third quarter of 1996. The reduction in the percentage of international net
revenues for the third quarter of 1996 from the third quarter of 1995 resulted
from the growth in the North American distribution network and large direct
procurements by large domestic National Account customers. 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. 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, substantially all of the Company's international sales have
been denominated in U.S. currency; however, the Company expects that in the
future some international sales may be denominated in local currencies. See
"Risk Factors--International Operations" and "--Distribution Risks" in the
Company's SEC reports, including the Form S-1 dated April 29, 1996.
Gross profit. Cost of net revenues consists primarily of manufacturing
costs of the Company and the Company's contract manufacturer, warranty expense
and allocation of overhead expenses. Gross margin represented 58% and 51% of net
revenues in the third quarter of 1995 and 1996 and 56% and 53% of net revenues
in the first nine months of 1995 and 1996, respectively. The decrease in gross
margins for the third quarter and first nine months of 1996 was principally due
to a reduction in the price of the Company's SoundStation product line to
resellers in the fourth quarter of 1995 and to end users in the first quarter of
1996 and to the lower margins on the first version of the Company's ShowStation
product, which was introduced in November 1995. The Company expects that gross
margin will decline significantly as a result of reductions in the North
American list price of the Company's SoundStation product line and continuing
competitive price pressure in the audioconferencing market. 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 addition, gross margins of the SoundPoint product line are
lower than that of the SoundStation product line. Thus, shipments of this
product will lower the aggregate gross margin for the Company. The Company also
expects gross margins to decline due to the lower gross margin for the Company's
initial ShowStation dataconferencing product. The Company's historical product
life cycle has been for initial product versions to have higher product costs
than the Company's targeted gross margin objectives, with product costs
declining over time as the Company introduces follow on versions which
incorporate cost savings from design and material changes. There can be no
assurance, however, that the Company will be successful in introducing lower
cost versions of its current products. In addition, as a result of the
introduction of several new products, each with significantly different gross
margins, product mix during a particular quarter will substantially impact the
overall gross margin achieved during that quarter. Because the mix of product
sales during any particular quarter is extremely difficult to predict or manage,
the gross margin the Company can anticipate achieving in any particular quarter
is difficult to predict and may fluctuate substantially from quarter to quarter.
<PAGE>
10
In the future, gross margin may be affected by severe 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. 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 $1.8 million and $2.2 million in the third quarter of 1995 and
1996, respectively, representing 29% and 24% of net revenues for each respective
period. Sales and marketing expenses were $5.0 million and $6.5 million in the
first nine months of 1995 and 1996, respectively, representing 29% and 24% of
net revenues for each respective period. The increase in absolute dollars in
each of these periods was primarily related to the expansion of the Company's
sales and marketing organization, particularly the increase in spending to
generate direct sales, and increased commission expenses related to higher sales
volumes. 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 including SoundStation Premier and
SoundPoint and establish and expand distribution channels. In particular, due to
the innovative nature of the ShowStation products, the Company incurred
significant expenses during the first nine months of 1996 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. However,
there can be no assurance that the Company will be successful in establishing an
improved market for its ShowStation product. In addition, the Company currently
expects to incur aggregate costs of approximately $350,000 to implement a new
sales and service information system during the next three months, although
there can be no assurance that such costs will not exceed this amount.
Research and development. 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 $1.8 million and $1.9 million for third
quarter of 1995 and 1996, respectively, representing 28% and 20% of net revenues
for each respective period. Research and development expenses were $5.0 million
and $5.7 million for the fist nine months of 1995 and 1996, respectively,
representing 29% and 21% of net revenues for each respective period. The
increase in dollar amount in research and development expenses in each of these
periods was primarily attributable to increased staffing and associated support
to expand and enhance the Company's product lines. During the 1996 nine month
period, the Company changed the classification of certain test development
expenses which had been included in cost of net revenues in prior periods to
research and development expense. Prior periods have not been restated as the
amounts are not material. As of September 30, 1996, all research and development
costs have been expensed as incurred. The Company believes that technological
leadership is critical to its success. The inability of the Company to develop
and introduce new audioconferencing or dataconferencing products or enhancements
on a timely and cost-effective basis that contributes to net revenues could have
a material adverse effect on the Company's business, financial condition or
results of operations. Therefore, the Company is committed to continuing a high
level of research and development and expects to increase the absolute amount of
its research and development expenses in the future. In addition, 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 have been delayed from its original shipment
target of September 1996 due to engineering issues. Any such delays could have a
material adverse effect on the Company's results of operations. See "Risk
Factors -- Rapid Technological Change; Dependence on New Products" in the
Company's SEC reports, including the Form S-1 dated April 29, 1996.
<PAGE>
11
General and administrative. General and administrative expenses consist
of compensation costs, allocation of overhead expense and outside legal and
accounting expenses. General and administrative expenses were $499,000 and
$552,000 for the third quarter of 1995 and 1996, respectively, representing 8%
and 6% of net revenues for each respective period. General and administrative
expenses were $1.4 million and $1.6 million in the first nine months of 1995 and
1996, respectively, representing 8% and 6% of net revenues for each respective
period. The increase in dollar amount in each period was primarily due to
increased staffing to support the Company's growth and, during the first nine
months of 1996, to costs related to the patent litigation. 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, the cost of continuing patent litigation and costs related
to being a public company. The cost of the continuing patent litigation also may
vary from quarter to quarter depending upon the activity level associated with
this litigation and therefore may cause the Company's operating results to
fluctuate on a quarterly basis.
Provision for income taxes. 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 incurred a net loss and consequently paid no federal or state income
taxes in 1995 and expects to pay minimal federal and state income taxes in 1996.
As of December 31, 1995, the Company had approximately $8.3 million in federal
net operating loss carryforwards and $943,000 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 on a quarterly basis the recoverability of the deferred tax
assets and the level of the valuation allowance. 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. See Note 11 of Notes to
Consolidated Financial Statements in the Company's SEC reports, including the
Form S-1 dated April 29, 1996.
<PAGE>
12
OTHER FACTORS EFFECTING FUTURE OPERATIONS
The Company's operating results have fluctuated in the past and will
fluctuate in the future as a result of a number of factors, including market
demand for the Company's audioconferencing products, market acceptance of the
ShowStation products, SoundPoint, SoundStation Premier and other new products,
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
also expects that gross margin will continue to decline significantly due to
several factors, including lower gross margin for the Company's dataconferencing
products, as well as continuing competitive price pressure in the
audioconferencing market. The Company's ability to maintain or increase net
revenues will depend upon its ability to increase unit sales volumes of its
SoundPoint, SoundStation, SoundStation EX, SoundStation Premier, ShowStation and
any new products or product enhancements. To the extent that the Company ships a
large, one-time order during a given quarter, as it did during the second
quarter of 1996, which does not reoccur in subsequent quarters, the Company's
net revenues could fluctuate between such periods, resulting in a material
adverse effect on the Company's operating results. 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- 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. Also, the Company
has from time to time provided incentives for distributors to purchase more than
the minimum quantities required under their agreements with the Company. In
addition, because a substantial percentage of product sales occur at the end of
the quarter, product mix and therefore gross margins for the quarter are
difficult to predict. The Company anticipates that this pattern of sales will
continue in the future. Expense levels are based, in part, on the Company's
estimates of net revenues 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,
any slippage in the planned introduction of new products or enhancements to
existing products, as the Company has experienced in the past, or any seasonal
demand that may develop for the Company's products in the future will make it
more difficult for the Company to estimate expected revenues in any particular
period. The Company has also been expanding the distribution channels for its
audioconferencing products and working to optimize the distribution channels for
its dataconferencing products. Until the Company has developed the best
distribution channels for these new products, its revenues will be difficult to
predict and may fluctuate from period to period. 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. See "Risk Factors-Limited Operating History;
History of Losses" in the Company's SEC reports, including the Form S-1 dated
April 29, 1996.
<PAGE>
13
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and met its
capital expenditure requirements primarily from proceeds from the private sale
of Preferred and Common Stock. From inception through March 31, 1996, the
Company raised approximately $22.6 million from the sale of Preferred and Common
Stock.
On April 29, 1996, the Company completed its initial offering of stock
to the public. A total of 2,500,000 shares of Common Stock was sold by the
Company, for net proceeds to the Company of approximately $20.0 million, after
deducting expenses of the offering of approximately $975,000 and underwriters'
discounts and commissions. Upon completion of the offering, all outstanding
shares of Preferred Stock (a total of 13,069,857 shares) were converted into
shares of Common Stock on a one-for-one basis.
As of September 30, 1996, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments of $20.7 million, and
a $4.0 million revolving bank line of credit from Silicon Valley Bank (of which
$3.3 million was available as of September 30, 1996) which expires on April 15,
1997. The Company has in the past negotiated an extension of the line of credit
annually, although there can be no assurance that the Company will be successful
in extending the term of the line of credit beyond April 15, 1997. The line of
credit was modified in December 1995 and currently provides for borrowings up to
the lesser of (i) $4.0 million, or (ii) the sum of 80% of eligible domestic and
government accounts receivable and 50% of eligible foreign accounts receivable
minus the sum of the aggregate outstanding face amount of all letters of credit
issued under the line. Eligible accounts receivable are defined as receivables
outstanding less than 90 days. Borrowings under the line bear interest at the
bank's prime rate plus 1.0% (8.25% at September 30, 1996), and are
collateralized by substantially all of the Company's assets. The line of credit
facility contains provisions that require the maintenance of certain financial
ratios and profitability requirements. As of September 30, 1996, the Company was
in compliance with these convenants. See "Use of Proceeds" and Note 7 of Notes
to Consolidated Financial Statements in the Company's SEC reports, including the
Form S-1 dated April 29, 1996.
The Company used $2.0 million and $1.5 million in cash from operating
activities in the nine month periods ending September 30, 1995 and 1996
respectively. The use of cash was primarily attributable to increased levels of
accounts receivables and inventories, partially offset by an increase in
accounts payable and accrued liabilities. The increase in accounts receivable
was primarily due to the increase in net revenues. Inventories increased as the
Company increased raw materials and work-in-process materials in support of the
ShowStation launch. The increase in provision for excess and obsolete
inventories was directly related to increased inventory levels.
The Company used $474,000 and $17.7 million of net cash in investing
activities in the nine months ended September 30, 1995 and 1996, respectively,
to purchase property and equipment and in the nine months ended September 30,
1996, to purchase short-term investments. Financing activities provided $4.5
million and $17 million of net cash in the nine months ended September 30, 1995
and 1996, due primarily to the issuance of Preferred Stock in 1995 and common
stock issued as part of the Company's initial public offering in 1996, net of
the repayment of the Company's outstanding bank debt.
The Company has no material commitments other than obligations under
its revolving bank line of credit and operating leases. The Company's revolving
bank line of credit secures three stand-by letters of credit, totaling $688,000,
which have been issued to guarantee certain of the Company's contractual
obligations. The stand-by letters of credit expire on April 15, 1997. The
Company estimates that 1996 capital expenditures will be approximately $2.2
million. See Notes 6 and 7 of Notes to Consolidated Financial Statements in the
Company's SEC reports, including the Form S-1 dated April 29, 1996.
<PAGE>
14
The Company used approximately $2.4 million of the net proceeds from
its initial public offering on April 29, 1996 for the repayment of all amounts
outstanding under a revolving bank line of credit and a term loan agreement with
Silicon Valley Bank. The Company expects that it will use the balance of the net
proceeds for general corporate purposes, including working capital. The Company
believes that the net proceeds from this offering, together with available cash,
will be sufficient to meet the Company's operating expenses and capital
requirements for at least the next twelve months. 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. A portion of the net proceeds may also be
used for the acquisition of, or investments in, businesses, products or
technologies. The Company has no present plans, agreements or commitments and is
not currently engaged in any negotiations with respect to any such transaction.
<PAGE>
15
PART II OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
NUMBER EXHIBIT
- ---------- ------------------------------------------------------------
11.1 Computation of Net Income (Loss) per Common and Common
Equivalent Share
27 Financial data Schedule
99 Report on Form 8-K: Form 8-K filed on October 22, 1996
regarding changes in engineering
management.
<PAGE>
16
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
Dated: November 12, 1996 POLYCOM, INC.
/S/ Michael R. Kourey
--------------------------------------
Michael R. Kourey
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
<PAGE>
EXHIBIT 11.1
POLYCOM, INC.
COMPUTATION OF NET INCOME (LOSS)
PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
Sept. 30 Sept. 30
------------------ ----------------
1996 1995 1996 1995
------ ------ ------- ------
<S> <C> <C> <C> <C>
PRIMARY & FULLY DILUTIVE
Weighted average common shares
outstanding ..................... 18,831 2,635 11,676 2,640
Common equivalent shares from
options and warrants ............ 514 341
Common equivalent shares from
common stock subject to
repurchase (2) .................. 488 564
Common equivalent shares from
convertible redeemable
preferred stock and warrants .... 0 5,329
Common equivalent shares from
options and convertable
redeemable preferred stock (1) .. 0 1,682 747 1,682
------ ------ ------ ------
Total shares .................. 19,833 4,317 18,657 4,322
====== ====== ====== ======
Net income (loss):
Amount ............................. 425 (411) 948 (1,680)
Per share .......................... $ 0.02 $(0.10) $ 0.05 $(0.39)
</TABLE>
(1) Pursuant to the requirements of the Securities and Exchange Commission,
common equivalent shares relating to stock options, using the treasury stock
method and the initial public offering price of $9.00 per share, and common
equivalent shares from convertible redeemable preferred stock using the
if-converted method issued during the twelve months period prior to the initial
public offering are included in the computation for the three and nine month
periods ended September 30, 1995 and 1996.
(2) Commons stock issued under 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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed financial statements included in the Company's Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,276
<SECURITIES> 19,389
<RECEIVABLES> 5,840
<ALLOWANCES> 445
<INVENTORY> 7,030
<CURRENT-ASSETS> 33,948
<PP&E> 3,231
<DEPRECIATION> 384
<TOTAL-ASSETS> 37,254
<CURRENT-LIABILITIES> 6,606
<BONDS> 0
0
0
<COMMON> 42,583
<OTHER-SE> (11,935)
<TOTAL-LIABILITY-AND-EQUITY> 37,254
<SALES> 9,502
<TOTAL-REVENUES> 9,502
<CGS> 4,619
<TOTAL-COSTS> 4,619
<OTHER-EXPENSES> 4,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 425
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
<PAGE>
EXHIBIT 99
POLYCOM, INC.
REPORT ON FORM 8-K
DATE OF EARLIEST EVENT REPORTED: October 22, 1996
ITEM 5 OTHER EVENTS
Effective November 11, 1996, the Company will divide engineering
management between dataconferencing and audioconferencing products. Patrick P.
Day, Vice President, Engineering, resigned effective November 8, 1996, to return
to Texas and his prior employer, and Ardeshir Falaki will now report directly to
the President of the Company as Vice President of Dataconferencing Engineering.
The Company has begun a search for a Vice President of Audioconferencing
Engineering.
ITEM 7 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
Not Applicable
