<PAGE>
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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 SEPTEMBER 28, 1997
or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------ ------
COMMISSION FILE NUMBER 0-27130
POLYCOM, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3128324
- -------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2584 JUNCTION AVENUE, SAN JOSE, CA. 95134-1902
- -------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(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 19,189,370 shares of the Company's Common Stock, par value $.0005,
outstanding on October 28, 1997.
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POLYCOM, INC.
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Page
Number
------
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996....................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine
Month Periods Ended September 30, 1997 and September 30, 1996........... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 30, 1997 and September 30, 1996........... 5
Notes to Condensed Consolidated Financial Statements.................... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 9
PART II OTHER INFORMATION
Item 1 - Legal Proceedings.............................................. 19
Item 2 - Changes in Securities.......................................... 19
Item 3 - Defaults Upon Senior Securities................................ 19
Item 4 - Submission of Matters to a Vote of Security Holders............ 19
Item 5 - Other Information.............................................. 19
Item 6 - Exhibits and Reports on Form 8-K............................... 19
SIGNATURE............................................................................. 20
</TABLE>
2
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
Sept. 30, December 31,
1997 1996
--------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,664 $ 9,548
Short-term investments 1,752 10,101
Accounts receivable, net of allowance for doubtful
accounts of $438 at Sept. 30, 1997 and $443 at
December 31, 1996 7,395 6,965
Inventories 9,023 7,458
Other current assets 1,180 384
--------- ----------
Total current assets 36,014 34,456
Fixed assets, net 3,647 3,164
Other assets 359 100
--------- ----------
Total assets $ 40,020 $ 37,720
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,900 $ 4,307
Accrued and other current liabilities 2,657 2,192
--------- ----------
Total current liabilities 9,557 6,499
--------- ----------
Stockholders' equity:
Common stock 10 10
Additional paid-in capital 42,828 42,521
Notes receivable from stockholders (22) (29)
Accumulated deficit (12,353) (11,281)
--------- ----------
Total stockholders' equity 30,463 31,221
--------- ----------
Total liabilities and stockholders' equity $ 40,020 $ 37,720
--------- ----------
--------- ----------
The accompanying notes are an integral part of these financial statements.
3
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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,
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $12,507 $ 9,502 $34,517 $26,990
Cost of net revenues 6,755 4,619 18,556 12,678
-------- ------- ------- -------
Gross profit 5,752 4,883 15,961 14,312
-------- ------- ------- -------
Operating expenses:
Sales and marketing 2,724 2,245 8,110 6,515
Research and development 2,167 1,930 6,768 5,723
General and administrative 917 552 2,370 1,590
Acquisition expenses 133 - 473 -
-------- ------- ------- -------
Total operating expenses 5,941 4,727 17,721 13,828
-------- ------- ------- -------
Operating income/(loss) (189) 156 (1,760) 484
Interest income, net 233 292 785 516
Other expense, net 30 23 97 52
-------- ------- ------- -------
Net income/(loss) $ 14 $ 425 $(1,072) $ 948
-------- ------- ------- -------
-------- ------- ------- -------
Net income/(loss) per share $ 0.00 $ 0.02 $ (0.06) $ 0.05
-------- ------- ------- -------
-------- ------- ------- -------
Weighted average shares outstanding 19,783 19,833 19,053 18,657
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
POLYCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30, Sept. 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ (1,072) $ 948
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 1,354 1,112
Provision for excess and obsolete inventories 493 205
Changes in assets & liabilities:
Accounts receivable (430) (2,669)
Inventories (2,058) (1,927)
Prepaid expenses and other assets (1,055) (198)
Accounts payable 2,593 562
Accrued and other liabilities 465 427
--------- ---------
Net cash provided by/(used in) operating activities 290 (1,540)
--------- ---------
Cash flows from investing activities:
Acquisition of fixed assets (1,837) (1,044)
Proceeds from sale and maturity of short term investments 11,154 116,027
Purchases of short term investments (2,805) (132,694)
--------- ---------
Net cash provided by/(used in) investing activities 6,512 (17,711)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable - 2,974
Repayment of notes payable and capital leases - (5,966)
Proceeds from issuance of common stock, net of repurchases 307 19,920
Proceeds from repayment of notes receivable from stockholders 7 60
--------- ---------
Net cash provided by financing activities 314 16,988
--------- ---------
Net increase/(decrease) in cash and cash equivalents 7,116 (2,263)
Cash and cash equivalents, beginning of year 9,548 3,539
--------- ---------
Cash and cash equivalents, end of period $ 16,664 $ 1,276
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 108
Supplemental schedule of noncash investing and financing:
Fixed assets financed by notes payable $ - $ 329
Common stock issued for notes from shareholders $ - $ 17
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
POLYCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1997 and the
condensed consolidated statements of operations for the three and nine month
periods ending September 30, 1997 and 1996 and condensed consolidated
statements of cash flows for the nine month periods ending September 30, 1997
and 1996, 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 September 30, 1997 and for all
periods presented have been made. The condensed consolidated balance sheet
at December 31, 1996 has been derived from the audited financial statements
at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. These condensed financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Report on Form 10-K
dated March 26, 1997, as amended on May 6, 1997, and filed with the
Securities and Exchange Commission.
The Company uses a 52-53 week fiscal year. Each reporting period ends on the
last Sunday of a month. As a result, a fiscal year may not end as of the
same day as the calendar period. For convenience of presentation, the
accompanying consolidated financial statements have been shown as ending on
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 market acceptance of ViewStation, a
videoconferencing product by ViaVideo Communications, Inc.; the acceptance of
SoundPoint, SoundStation Premier and other new products; the timely launch of
the ShowStation IP product; the success of the manufacturing transfer of the
SoundStation Premier product line; the impact of competitive products and
pricing; the completion of the potential merger with ViaVideo Communications,
Inc. and the risks associated with integrating the two companies; the
profitability of the videoconferencing division; and the other risks detailed
from time to time in the Company's SEC reports, including the Form 10-K dated
March 26, 1997, as amended May 6, 1997, and the Form 10-Q's.
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):
Sept. 30, Dec 31,
1997 1996
--------- ---------
Raw Materials $ 4,471 $ 3,252
Finished Goods 4,552 4,206
-------- --------
$ 9,023 $ 7,458
-------- --------
-------- --------
6
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3. BANK LINE OF CREDIT
On October 31, 1997, the Company completed an agreement with Silicon Valley
Bank for a $5.0 million bank revolving line of credit. Borrowings under the
line are unsecured and bear interest at the bank's prime rate (currently
8.5%). The agreement allows for an additional facility of $5.0 million upon
request of Polycom and 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.
4. STOCK OPTION REPRICING
In March 1997, the Company implemented an option cancellation and regrant
program for employees (other than executive officers) holding stock options
with exercise prices per share in excess of $4.50. Outstanding options
covering an aggregate of 223,200 shares with exercise prices in excess of
$4.50 per share were canceled and new options for the same number of shares
were granted with an exercise price of $4.375 per share. The new options will
vest over a five-year period beginning on March 5, 1997.
5. PER SHARE INFORMATION
Net income/(loss) per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of shares issuable upon the exercise of
stock options, using the treasury stock method. Common stock issued under a
stock option plan which are subject to repurchase are excluded from shares
issued in the year-to-date computation of net loss per share as their effect
is antidilutive.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128). SFAS No. 128 establishes a different method of computing net
income/(loss) per share than is currently required under Accounting
Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be
required to present both basic net income/(loss) per share and diluted net
income/(loss) per share. Basic and diluted net loss per share are expected
to approximate the currently presented net loss per share. However, basic
net income per share is expected to be higher than net income per share as
currently computed because the effect of dilutive stock options will not be
considered in computing basic net income per share. Diluted net income per
share is expected to be comparable to the currently presented net income per
share. The Company will adopt SFAS No. 128 in its fiscal quarter ending
December 31, 1997 and at that time all historical net income/(loss) per share
data will be restated to conform to the provisions of SFAS No. 128.
In June 1997, the FASB issued 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. The impact of adopting SFAS
No. 130, which is effective for the Company in 1998, has not been determined.
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
impact of adoption has not been determined.
7
<PAGE>
7. FIRST AGREEMENT WITH 3M
In March 1997, the Company entered into a joint marketing and development
agreement with Minnesota Mining and Manufacturing Company ("3M"). Under the
agreement, 3M provides $3.0 million in funding to Polycom for certain
deliverables related to the development of dataconferencing products and may
also provide shared technology resources for the development of future
products. Through September 30, 1997, the Company 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 recognized
as revenue approximates the amount that would have been recognized using the
percentage of completion methodology. Additionally, Polycom will grant 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 the
Company's common stock at an exercise price of $7.50 per share. The warrants
expire in March 1999, which may be extended until March 2000 depending on the
delivery of Polycom's first product developed under the agreement. The
warrants were valued using the Black-Scholes model and were determined to
have an insignificant impact for financial reporting purposes.
SECOND AGREEMENT WITH 3M
In June 1997, the Company entered into a second joint marketing and
development agreement with Minnesota Mining and Manufacturing Company. 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. As of
September 30, 1997, the Company has not recognized any revenue under this
agreement.
9. RELATED PARTY TRANSACTION
In March 1997, the Company loaned $250,000 to an officer of the Company under
the terms of a note receivable which is due in March 2002. The note is
secured by shares of the Company's stock owned by the officer.
10. LEASE COMMITMENTS
On May 12, 1997, the Company entered into a three year operating lease for
19,890 square feet of a building in Livermore, California. The space is being
used as the Company's distribution and repair center. The lease associated with
this building will expire on May 31, 2000 and the minimum annual payments under
this lease are as follows: 1997 - $69,615; 1998 - $126,302; 1999 - $138,235;
2000 - $59,670.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Polycom Inc. ( "Polycom" or "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. As of September 30, 1997, the Company's
audioconferencing product line consisted of the SoundStation, SoundStation
EX, SoundStation Premier and SoundPoint. The Company began shipping its first
dataconferencing product, ShowStation, in November 1995. In October 1997,
Polycom announced enhancements to its audio and dataconferencing product
lines and its first videoconferencing product, the ViewStation, a
videoconferencing product by ViaVideo Communications, Inc., which are
discussed later in this section. The Company markets its products
domestically and internationally through a direct sales force and a network
of value-added resellers (VARs), original equipment manufacturers (OEMs) and
retail channels. Through September 30, 1997, the Company has derived a
substantial majority of its net revenues from sales of its SoundStation
products. The Company anticipates that sales of its SoundStation product line
will continue to account for a substantial majority of net revenues at least
through the year ending December 31, 1997. Any factor adversely affecting the
demand or supply for the SoundStation product line could materially adversely
affect the Company's business, financial condition, cash flows or results of
operations.
From inception through the nine month period ended September 30, 1995,
the Company incurred losses from operations, primarily as a result of its
investments in the development of its products and the expansion of its sales
and marketing, manufacturing and administrative organizations. The Company
achieved profitability in the fourth quarter of 1995 and generated a small
operating income in each quarter of fiscal 1996. Although the Company
incurred operating losses in the first, second and third quarters of 1997 and
intends to continue to invest significantly in research and development,
Polycom plans to generate operating income, excluding acquisition expenses,
in the fourth quarter of 1997 assuming that the proposed acquisition of
ViaVideo Communications, Inc. does not close in that quarter. If the
proposed acquisition of ViaVideo Communications, Inc. does close in the
fourth quarter of 1997, Polycom will have a significant net loss for the
period due to the expected impact of ViaVideo's operating expenses, offset
only marginally, if at all, by small initial net video revenues at the end of
the period. There can be no assurance that the Company will achieve its
operating plans or achieve profitable operations in the fourth quarter or in
any subsequent period.
In January 1997, the Company announced plans to divisionalize the Company
along its two lines of business: audioconferencing and dataconferencing. The
Company named a general manager for each division and formally restructured
the Company's research and development organization into two separate
divisions, reporting to each business' general manager. Business unit
alignments were also made in the Company's sales, marketing and general and
administrative organizations. In the second quarter of 1997, business unit
alignments were also made in the manufacturing organization. In June 1997,
the Company announced an agreement to acquire ViaVideo Communications Inc.
("ViaVideo"), a company based in Austin, Texas, dedicated to the development
of videoconferencing equipment. This acquisition, if completed, is expected
to establish the Company in the videoconferencing market and will form the
Company's third division. As of this date, the merger is still pending. See
the discussion below for further details on this transaction.
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 agreement, 3M provides $3.0 million in funding to
Polycom for certain deliverables related to the development of the next
generation dataconferencing product and will also provide shared technology
resources for the development of future products. Through September 30, 1997,
the Company 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 recognized as revenue approximates the amount that would
have been recognized using the percentage of completion methodology.
Additionally, Polycom will grant 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 the Company's common stock
9
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at an exercise price of $7.50 per share. The warrants expire in March 1999,
which may be extended until March 2000 depending on the delivery of Polycom's
first product developed under the agreement. The warrants were valued using
the Black-Scholes model and were determined to have an insignificant impact
for financial reporting purposes.
In June 1997, the Company entered into a second joint marketing and
development agreement (the "Second Agreement") with Minnesota Mining and
Manufacturing Company. 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. As of September 30, 1997, the Company has not
recognized any revenue under this agreement.
As mentioned above, in June 1997 the Company signed an agreement under
which Polycom may acquire ViaVideo Communications, Inc. This acquisition of
ViaVideo, a development stage company with its initial videoconferencing
product targeted to be released by the end of 1997, is intended to add a
videoconferencing product and engineering team to Polycom's audioconferencing
and dataconferencing product portfolio.
Under the terms of the agreement with ViaVideo, 9.7 million shares of
Polycom common stock, plus up to an additional 300,000 shares based on future
option grants by ViaVideo, will be exchanged for all outstanding shares and
options of ViaVideo. Depending on the average price of Polycom's shares
during a specified period preceding the acquisition, the total number of
Polycom shares to be issued may be reduced so in no event will the total
acquisition consideration exceed $90 million. It is expected that the
transaction will be accounted for as a pooling of interests and will qualify
as a tax-free reorganization. The transaction is expected to be completed
during the fourth quarter of 1997 or the first quarter of 1998 and is subject
to various conditions which include first customer shipment by ViaVideo of
its initial videoconferencing system no later than March 31, 1998 and
Polycom's share price preceding the acquisition to be at or above $3.00 per
share. There can be no guarantee that ViaVideo will meet the required
milestones, that the shareholders will approve the merger, that there will be
market acceptance of the ViaVideo videoconferencing product, that the
transaction will be accounted for as a pooling of interests, that the
products, technology and personnel of ViaVideo can be successfully integrated
into the Company, or that the future of the business will be profitable.
In October 1997, the Company announced a new set of data, video and
audioconferencing products to add to its existing line. In the
dataconferencing market, Polycom announced its new ShowStation IP product
which is its next generation conference room projector. The ShowStation IP
is targeted to be available in North America in December 1997 and in Europe
and Asia Pacific on a country-by-country basis over the following several
months. Attaining operating profitability in the fourth quarter of 1997 and
beyond is dependent on meeting these targeted release dates for the
ShowStation IP product. In the videoconferencing arena, Polycom introduced
the new ViewStation, a videoconferencing product by ViaVideo Communications,
Inc. ViewStation is targeted to be available in North America at the end of
1997 and its availability through Polycom is entirely dependent on the
closing of the expected merger between Polycom and ViaVideo Communications,
Inc. In the audioconferencing market, Polycom introduced the SoundStation
Premier Satellite which is a unique enhanced system that works in conjunction
with Polycom's SoundStation Premier conference phone. The SoundStation
Premier satellite is targeted to be available in North America in December
1997. There can be no assurance that any products not yet commercially
available will be available by the Company's targeted dates and the lack of
availability of these products will materially affect Polycom's financial
results.
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 market acceptance of ViewStation, a videoconferencing product by
ViaVideo Communications, Inc.; the acceptance of SoundPoint, SoundStation
Premier and other new products; the timely launch of the ShowStation IP product;
the success of the manufacturing transfer of the SoundStation Premier product
line; the impact of competitive products and pricing; the completion of the
planned merger with ViaVideo Communications, Inc. and the risks associated with
integrating the
10
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companies; the profitability of the videoconferencing division; and the other
risks detailed from time to time in the Company's SEC reports, including the
Form 10-K dated March 26, 1997, as amended on May 6, 1997, and the Form
10-Q's.
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 Nine Months Ended
Sept. 30 Sept. 30 Sept. 30, Sept. 30,
1997 1996 1997 1996
-------- -------- --------- ---------
Net revenues 100% 100% 100% 100%
Cost of net revenues 54% 49% 54% 47%
----- ----- ----- ----
Gross profit 46% 51% 46% 53%
----- ----- ----- ----
Operating expenses:
Sales and marketing 22% 24% 23% 24%
Research and development 17% 20% 20% 21%
General and administrative 8% 6% 7% 6%
Acquisition expenses 1% 0% 1% 0%
----- ----- ----- ----
Total operating expenses 48% 50% 51% 51%
----- ----- ----- ----
Operating income/(loss) (2%) 1% (5%) 2%
Interest income, net 2% 3% 2% 2%
Other expense, net 0% 0% 0% 0%
----- ----- ----- ----
Net income/(loss) 0% 4% (3%) 4%
----- ----- ----- ----
----- ----- ----- ----
The following table sets forth net revenues by line of business for the
periods indicated (amounts in thousands).
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
--------- -------- -------- --------
Audioconferencing:
Net revenues $ 11,082 $ 8,051 $ 28,848 $ 23,308
Cost of net revenues 5,897 2,902 14,901 8,792
--------- -------- -------- --------
Gross profit $ 5,185 $ 5,149 $ 13,947 $ 14,516
--------- -------- -------- --------
--------- -------- -------- --------
Gross margin % 47% 64% 48% 62%
Dataconferencing:
Net revenues $ 1,425 $ 1,451 $ 5,669 $ 3,682
Cost of net revenues 858 1,717 3,655 3,886
--------- -------- -------- --------
Gross profit $ 567 $ (266) $ 2,014 $ (204)
--------- -------- -------- --------
--------- -------- -------- --------
Gross margin % 40% (18%) 36% (6%)
NET REVENUES
Total net revenues were $12.5 million in the third quarter of 1997 compared
to $9.5 million in the third quarter of 1996, an increase of 32%. Within the
audioconferencing product line, net revenues were $11.1 million in the third
quarter of 1997, an increase of $3.0 million or 38%, when compared to the same
period for 1996. The increase was due to the impact of unit sales growth of the
SoundStation product as
11
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well as the SoundPoint product and SoundStation Premier introduced in the
third and fourth quarters of 1996, respectively. This was partially offset
by a 37% price reduction on SoundStation product sold in North America
effective January 1997 and a 30% price reduction on international
SoundStation sales effective April 1997. Dataconferencing net revenues in
the third quarter of 1997 were $1.4 million compared to $1.5 million for the
same period of 1996, a decrease of 2%. The decrease was due to a significant
unit volume decrease which was almost entirely offset by the $1.0 million
payment associated with the First Agreement with 3M which did not occur in
the third quarter of 1996. No such payment will occur in the fourth quarter
of 1997, or any subsequent quarter, under the First Agreement with 3M as
Polycom has completed the deliverables related to this agreement.
For the first nine months of 1997, total net revenues were $34.5 million,
an increase of $7.5 million or 28%, compared to the same period in 1996. The
audioconferencing net revenues for the first nine months of 1997 were up $5.5
million, or 24%, when compared to the first nine months of 1996. This
increase was due to the introduction of the new product lines in this
division, which was partially offset by the price reductions for the
SoundStation product line. For the first nine months of 1997, SoundStation
unit sales increased over the same period in 1996, offsetting the impact of
the price reduction. Additionally, although the SoundPoint product revenue
was up over the same period in 1996, revenue for this product was down in
comparison to the second quarter of 1997 due to lower unit sales and the
market mix. Specifically, sales to the adjunct PBX market performed well in
the current quarter, but sales of the SoundPoint were off in the desktop
videoconferencing market. Dataconferencing revenues were $5.7 million for
the first nine months of 1997 versus $3.7 million in the first nine months of
1996. This increase was due entirely to the revenue associated with the
First Agreement with 3M which offset ShowStation unit volume decreases. The
Company will not recognize any further revenue from the First Agreement with
3M.
During the third quarters of 1997 and 1996 and for the first nine months
of 1997 and 1996, the Company derived a majority of its net revenues from
sales of its SoundStation product family. However, no customer or reseller
accounted for more than 10% of the Company's net revenues during these same
periods for either 1997 or 1996. Further, the Company received, and recorded
as revenue, $3.0 million under the First Agreement with 3M during the first
nine months of 1997.
International net revenues for the third quarter of 1997 accounted for
25% of total net revenues for the Company, up slightly from 24% in the third
quarter of 1996. This increase was due to a significant increase in the
Europe and Asia-Pacific regions for the audioconferencing business which was
offset by a reduction in the dataconferencing business. The decline in the
dataconferencing business was attributable to significant international OEM
sales in the third quarter of 1996 which did not occur in the third quarter
of 1997. For the first nine months of 1997, international net revenues were
23% of total net revenues compared to 22% in the same period of 1996. Again,
increases in the audioconferencing business were offset by decreases in the
dataconferencing business. The Company anticipates that international sales
will continue to account for a significant portion of total net revenues for
the foreseeable future. However, international net revenues may fluctuate in
the future as the Company introduces new products, since the Company expects
to initially introduce such products in North America and also because of the
additional time required for product homologation and regulatory approvals of
new products in international markets. In addition, the implementation of
the international price reduction for SoundStation products effective April
1997 will affect international revenues in future quarters. To the extent
the Company is unable to expand international sales in a timely and
cost-effective manner, the Company's business, financial condition or results
of operations could be adversely affected. There can be no assurance that the
Company will be able to maintain or increase international market demand for
the Company's products. To date, a substantial majority of the Company's
international sales has been denominated in U.S. currency, however, the
Company expects that in the future more international sales may be
denominated in local currencies.
12
<PAGE>
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
54% and 49% of net revenues for the third quarters of 1997 and 1996,
respectively. By division, audioconferencing cost of net revenues was 53% in
the third quarter of 1997 versus 36% in the 1996 third quarter, while
dataconferencing cost of net revenues was 60% in the third quarter of 1997
compared to 118% in the third quarter of 1996. The increase in
audioconferencing cost of net revenue percentage is primarily attributable to
the SoundStation price reduction implemented in North America in January 1997
and in the International regions in April 1997. Also, the costs associated
with the transition to a manufacturer in Thailand and the introduction of a
lower margin audio product contributed to the higher cost of net revenues
percentage. It is expected that the transition costs associated with the
transition to the Thailand manufacturer will not recur in the future.
Additionally, the Company offered deeper discounts in the third quarter of
1997 than in previous quarters in its quarter-end distributor incentive
program which negatively affected the cost of net revenues percentage. These
discounts were particularly significant in the SoundStation Premier product
line as the Company strives to increase the market mix of this product. In
the dataconferencing division, the decrease in the cost of net revenues
percentage was primarily due to the revenue received under the First
Agreement with 3M, which had very low associated costs. Because Polycom will
not receive revenue from the First Agreement with 3M in the fourth quarter of
1997, the dataconferencing cost of net revenues are expected to increase
leading to a low to negative gross margin percentage for the dataconferencing
business in the fourth quarter.
For the first nine months of 1997 the cost of net revenues percentage was
54%, compared to 47% for the same period in 1996. The audioconferencing cost
of net revenues was 52% in the first nine months of 1997 versus 38% in the
first nine months of 1996. This increase was due to the price reductions in
the SoundStation product family mentioned above as well as the introduction
of a lower margin audio product in the third quarter of 1996. The
dataconferencing cost of net revenues was 64% in the first nine months of
1997 versus 106% in the same period of 1996. This decrease was due primarily
to the revenues received under the First Agreement with 3M.
The Company's historical price reductions have been 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 revenue
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
and lower cost of net revenues percentage on International revenues than on
North American revenues. 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.
In June 1997, the Company began manufacturing the SoundStation products
at a manufacturing contractor based in Thailand. During the third quarter of
1997, this same manufacturer also began producing the Premier product family.
Although the transition of the manufacturing process to the Thailand
manufacturer caused an unfavorable cost variance in the third quarter of
1997, the Company expects that this change will lower audioconferencing cost
of net revenues in the fourth quarter of 1997 and beyond, although there can
be no assurances that this will occur. In July 1997, the Company moved its
distribution and product repair center to a new location in Livermore,
California. This move is expected to provide the Company with better control
over its distribution and repair activities and may improve overall warranty
and service costs, although there are no assurances that this will happen.
13
<PAGE>
SALES AND MARKETING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- ----------------------------------
SEPT. 30, SEPT. 30, INCREASE/ SEPT. 30, SEPT. 30, INCREASE/
$ IN THOUSANDS 1997 1996 (DECREASE) 1997 1996 (DECREASE)
- --------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Expenses $ 2,724 $ 2,245 21.3% $ 8,110 $ 6,515 24.5%
% of Net Revenues 21.8% 23.6% (1.8%) 23.5% 24.1% (0.6%)
</TABLE>
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 increase in expenses of
the third quarter of 1997 compared to the third quarter of 1996 was primarily
related to the expansion of the Company's sales and marketing organizations,
particularly in the international and retail sales channels. An increase in
advertising and promotions also contributed to the overall increase. For the
first nine months of 1997 compared to the same period for 1996, the increase
was due to the expansion of the marketing organization and the sales effort
in the international regions, particularly Europe and Asia Pacific.
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, a videoconferencing product by
ViaVideo Communications, Inc., 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. Also, compensation and
benefits for the new Vice President of Marketing will cause an increase in
Marketing and Sales expense in the future. Further, although sales and
marketing expenses will likely increase in absolute dollars, the effects the
proposed merger with ViaVideo Communications, Inc. will have on its
percentage of net revenues and on the profitability of the Company are
difficult to predict, if not impossible, at this time.
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- ----------------------------------
SEPT. 30, SEPT. 30, INCREASE/ SEPT. 30, SEPT. 30, INCREASE/
$ IN THOUSANDS 1997 1996 (DECREASE) 1997 1996 (DECREASE)
- --------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Expenses $ 2,167 $ 1,930 12.2% $ 6,768 $ 5,723 18.3%
% of Net Revenues 17.3% 20.3% (3.0%) 19.6% 21.2% (1.6%)
</TABLE>
Research and development expenses consist primarily of compensation
costs, consulting fees, an allocation of overhead expense, supplies and
depreciation. The expense increases for the third quarter of 1997 versus the
third quarter of 1996 and for the first nine months of 1997 compared to the
same period of 1996 were primarily attributable to increased staffing and
associated support to expand and enhance the Company's product lines,
particularly in the dataconferencing division. Also, in compliance with a
joint services agreement with ViaVideo Communications, Inc., Polycom incurred
and billed out, as a credit to its expense, charges related to development
work done on behalf of ViaVideo Communications, Inc.
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. Further, although
research and development expenses will likely increase in absolute dollars,
the effects the proposed merger with ViaVideo Communications, Inc. will have
on its percentage of net revenues and on the profitability of the Company are
difficult to predict, if not impossible, at this time.
14
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- -----------------------------------
SEPT. 30 SEPT. 30, INCREASE/ SEPT. 30, SEPT. 30, INCREASE/
$ IN THOUSANDS 1997 1996 (DECREASE) 1997 1996 (DECREASE)
- --------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Expenses $ 917 $ 552 66.1% $ 2,370 $ 1,590 49.1%
% of Net Revenues 7.3% 5.8% 1.5% 6.9% 5.9% 1.0%
</TABLE>
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, both in
absolute dollars and as a percentage of net revenues, for the third quarter
of 1997 when compared to the same period of 1996 was primarily due to
increased staffing, including the hiring of a president, to support the
Company's growth and an increased focus in both the audioconferencing and
dataconferencing divisions. The increase in expenses for the first nine
months of 1997 over the first nine months of 1996 was due again to increased
staffing to support the growth of the Company.
The Company believes that its general and administrative expenses will
increase in absolute dollar amounts in the future primarily as a result of
expansion of the Company's administrative staff and costs related to being a
public company. Further, although general and administrative expenses will
likely increase in absolute dollars, the effects the proposed merger with
ViaVideo Communications, Inc. will have on its percentage of net revenues and
on the profitability of the Company are difficult to predict, if not
impossible, at this time.
ACQUISITION EXPENSES
For the third quarter of 1997, the Company incurred expenses totaling
$0.1 million related to the pending acquisition of ViaVideo Communications,
Inc. For the first nine months of 1997, these acquisition expenses were $0.5
million. A significant portion of these charges were for outside legal,
accounting and consulting services. Management believes the acquisition
related expenses will be less throughout the remainder of this fiscal year;
however, there can be no assurances that this will happen, that the future
charges will not be material or that the merger will ever be completed.
There can be no assurances that Polycom will complete the proposed merger
or that the Company will not incur additional charges in subsequent quarters
associated with the merger or that management will be successful in its
efforts to integrate the operations of the acquired company. Although the
Company believes the proposed acquisition described above is in the best
interest of the Company and its stockholders, there are significant risks
associated with this transaction, including but not limited to: (i)
difficulties in integration of the companies, (ii) difficulties in
maintaining revenue levels during product transitions, (iii) difficulties or
delays in achieving product and technology integration benefits, and (iv)
increased competition from other videoconferencing companies. Further, the
proposed acquisition described above relates to a company that is in its
early stage of development. As a result, the Company believes that the
increases in costs of net revenues and in operating expenses associated with
the development and integration of these technologies will, in the near term,
greatly exceed any associated increases in net revenues, which will have an
adverse impact on operating results.
15
<PAGE>
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
third quarter of 1997, interest income, net was $0.2 million, a decrease of
20% from the third quarter of 1996. This decrease was due to a lower level
of cash available for investment. For the first nine months of 1997,
interest income, net was $0.8 million compared to $0.5 million in the same
period of 1996. This increase was due to the increase in the Company's cash
equivalents and short-term investments as a result of its initial public
offering in the second quarter of 1996. In addition, interest expense
recorded in 1997 is insignificant due to the reduction in debt after the
initial public offering.
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 break-even results
generated minimal federal and state income taxes in 1997. In the fourth
quarter of 1997 and beyond, the Company expects to realize increasingly
profitable results which will generate higher federal and state income tax
expense, although there can be no assurance the Company will achieve
profitable results. As of December 31, 1996, the Company had approximately
$6.4 million in federal net operating loss carryforwards and $790,000 in tax
credit carryforwards. The future utilization of the Company's net operating
loss carryforwards may be subject to certain limitations upon certain changes
in ownership.
The Company has established a valuation allowance against its deferred
tax assets due to the uncertainty surrounding the realization of such assets.
Management evaluates the recoverability of the deferred tax assets and the
level of the valuation allowance on a quarterly basis. At such time it is
determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced.
OTHER FACTORS AFFECTING FUTURE OPERATIONS
The Company's net revenues have grown primarily through increased market
acceptance of its established audioconferencing product line, new product
introductions and, to a lesser extent, through the expansion of the Company's
North American and International distribution networks. While the Company
has experienced growth in net revenues in recent quarters, it does not
believe that the historical growth rates in net revenues will be sustainable
nor are they indicative of future operating results. For example, the Company
believes that the 37% price reduction in the North American list price of its
SoundStation product line, effective December 1996 for resellers and January
1997 for end user customers, and the 30% price reduction for SoundStation
products sold internationally effective April 1997, negatively impacted the
Company's net revenues and gross margins in the third quarter and first nine
months of 1997 and will continue to negatively impact net revenues and gross
margins throughout 1997. The Company believes that gross margins could
continue to be negatively affected in the future as a result of several
factors including low to negative gross margins for the Company'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, the introduction of the lower margin SoundPoint
desktop product line and continuing competitive price pressure in the
audioconferencing and dataconferencing markets. Although price reductions
have been driven by the Company's desire to expand the market for its
products, and the Company expects that in the future it may further reduce
prices or introduce new products that carry lower margins in order to further
expand the market or to respond to competitive pricing pressures, there can
be no assurance that such actions by the Company will expand the market for
its products or be sufficient to meet competitive pricing pressures. In
addition, costs related to the merger with ViaVideo Communications, Inc.,
expense growth related to the activities of the combined entities and costs
related to the introduction of the new ShowStation IP, ViewStation, a
videoconferencing product by ViaVideo Communications, Inc., and SoundStation
Satellite products could negatively impact future profitability. Also, the
impact of pending or future litigation against Polycom or ViaVideo
Communications, Inc., including the suit filed by VTEL Corporation against
ViaVideo Communications, Inc. as mentioned in the Company's Form 8-K filed on
September 9, 1997, is difficult to predict at this time. Further, the
Company's limited
16
<PAGE>
operating history and limited resources, among other factors, make the
prediction of future operating results difficult if not impossible.
In the past the Company has experienced delays from time to time in the
introduction of certain new products and enhancements and expects that such
delays may occur in the future. For instance, the introduction of
ShowStation was delayed by approximately eighteen months from the originally
anticipated date of introduction because of unforeseen technical challenges
and difficulties in building core technologies and, for approximately 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 September 1997 to its targeted first
customer shipment date of December 1997 due to engineering issues. Any
similar delays could have a material adverse effect on the Company's results
of operations.
The Company's operating results have fluctuated in the past and may
fluctuate in the future as a result of a number of factors, including market
acceptance of the ShowStation, ShowStation IP and ViewStation, a
videoconferencing product by ViaVideo Communications, Inc., products and
other new product introductions and product enhancements by the Company or
its competitors, the prices of the Company's or its competitors' products,
the mix of products sold, the mix of products sold directly and through
resellers, fluctuations in the level of international sales, the cost and
availability of components, manufacturing costs, the level of warranty
claims, changes in the Company's distribution network, the level of royalties
to third parties and changes in general economic conditions. In addition,
competitive pressure on pricing in a given quarter could adversely affect the
Company's operating results for such period, and such price pressure over an
extended period could materially adversely affect the Company's long-term
profitability. The Company's ability to maintain or increase net revenues
will depend upon its ability to increase unit sales volumes of its
SoundStation, SoundStation Premier and SoundPoint families of
audioconferencing products, the dataconferencing line of products, comprised
of the ShowStation and ShowStation IP products, and the videoconferencing
line of products, currently comprised of ViewStation, a videoconferencing
product by ViaVideo Communications, Inc., and any new products or product
enhancements. There can be no assurance that the Company will be able to
increase unit sales volumes of existing products, introduce and sell new
products or reduce its costs as a percentage of net revenues.
The Company typically ships products within a short time after receipt of
an order, does not usually have a significant backlog and backlog fluctuates
significantly from period to period. As a result, backlog at any point in
time is not a good indicator of future net revenues and net revenues for any
particular quarter cannot be predicted with any degree of accuracy.
Accordingly, the Company's expectations for both short- and long-term future
net revenues are based in large part on its own estimate of future demand and
not on firm customer orders. In addition, the Company has in the past
received orders and shipped a substantial percentage of the total products
sold during a particular quarter in the last several weeks of the quarter. In
some cases, these orders have consisted of distributor stocking orders and
the Company has from time to time provided special incentives for
distributors to purchase more than the minimum quantities required under
their agreements with the Company. Therefore, the Company has been
uncertain, even during most of the quarter, what level of revenues it will
achieve in the quarter and the impact that distributor stocking orders will
have on revenues and gross margins in that quarter and subsequent quarters.
In addition, because a substantial percentage of product sales occur at the
end of the quarter, product mix and therefore gross margins are difficult to
predict. Further, there can be no guarantee that the Company's contracted
manufacturers will be able to meet product demand before the quarter ends.
The Company anticipates that this pattern of sales will continue in the
future. Expense levels are based, in part, on these estimates and, since the
Company is limited in its ability to reduce expenses quickly if orders and
net revenues do not meet expectations in a particular period, operating
results would be adversely affected. In addition, a seasonal demand may
develop for the Company's products in the future. Due to all of the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts
and investors. In such event, the price of the Company's Common Stock would
likely be materially adversely affected.
17
<PAGE>
The Company's operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure and other events beyond
the Company's control. Additionally, most of the Company's operations are
currently located in the San Francisco Bay Area, an area that is susceptible
to earthquakes. The Company does not carry sufficient business interruption
insurance to compensate the Company for losses that may occur, and any losses
or damages incurred by the Company could have a material adverse effect on
its business, financial condition or operating results.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments of $18.4 million,
a decrease of $1.2 million from December 31, 1996. 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 generated $0.3 million in cash from operating activities for
the first nine months of 1997 versus a use of $1.5 million in cash for the
same period in 1996. The improvement in cash from operating activities was
due primarily to improved collections of accounts receivable and larger
accounts payable and accrued liability balances, offset somewhat by a net
loss in the first nine months of 1997 compared to net income in the same
period of 1996 and an increase in prepaid assets.
The total net change in cash and cash equivalents for the first nine
months of 1997 was an increase of $7.1 million. The primary sources of cash
were $0.3 million from operating activities, and net sales of investments of
$8.3 million. The positive cash flow from operating activities was the result
of higher accounts payable and accrued liability balances and a positive net
income before non-cash items such as depreciation and increases to inventory
reserves, offset by an increase in inventories, prepaid assets and accounts
receivable. The primary uses of cash during the first nine months of 1997
were purchases of property, plant and equipment of $1.8 million. The Company
expects to continue to purchase additional equipment throughout the remainder
of 1997.
The Company's material commitments consist of obligations under its
revolving bank line of credit, operating leases and a $200,000 stand-by
letter of credit which has been issued to guarantee certain of the Company's
contractual obligations. The Company estimates that 1997 capital
expenditures will total approximately $3.0 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 December 31, 1997. Thereafter, the
Company may require additional funds to support its working capital
requirements or for other purposes and may seek to raise such additional
funds through public or private equity financing or from other sources.
There can be no assurance that additional financing will be available at all
or that, if available, such financing will be obtainable on terms favorable
to the Company and would not be dilutive. The Company's future liquidity and
cash requirements will depend on numerous factors, including introduction of
new products and potential product family or technology acquisitions.
18
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Effective October 20, 1997, Allan White joined the Company as the
Vice President of Marketing.
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
(b) Reports on Form 8-K:
On August 13, 1997, the Company filed a report on Form 8-K to report
that it signed an agreement to acquire ViaVideo Communications, Inc.
of Austin, Texas.
On September 9, 1997, the Company filed a report on Form 8-K to report
that VTEL Corporation filed suit against ViaVideo Communications, Inc.
citing breach of contract, breach of confidential information,
disclosure of proprietary information and related allegations.
19
<PAGE>
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: November 12, 1997 POLYCOM, INC.
/s/ Michael R. Kourey
-------------------------------
Michael R. Kourey
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
20
<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 Nine Months Ended
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY & FULLY DILUTED
Weighted average common shares outstanding 19,105 18,831 19,053 11,676
Common equivalent shares from options and warrants 624 514 0 341
Common equivalent shares from common stock
subject to repurchase (2) 54 488 0 564
Common equivalent shares from convertible
redeemable preferred stock and warrants 0 0 0 5,329
Common equivalent shares from options and
convertable redeemable preferred stock (1) 0 0 0 747
-------- -------- -------- --------
Total shares 19,783 19,833 19,053 18,657
-------- -------- -------- --------
-------- -------- -------- --------
Net income / (loss):
Amount $ 14 $ 425 $ (1,072) $ 948
Per share $ - $ 0.02 $ (0.06) $ 0.05
</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 month
period and nine month period ended September 30, 1996.
(2) 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 for the nine months ended September 30, 1997 as their effect is
antidilutive.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 16,664
<SECURITIES> 1,752
<RECEIVABLES> 7,833
<ALLOWANCES> 438
<INVENTORY> 9,023
<CURRENT-ASSETS> 36,014
<PP&E> 8,744
<DEPRECIATION> 5,097
<TOTAL-ASSETS> 40,020
<CURRENT-LIABILITIES> 9,557
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 30,453
<TOTAL-LIABILITY-AND-EQUITY> 40,020
<SALES> 12,507
<TOTAL-REVENUES> 12,507
<CGS> 6,755
<TOTAL-COSTS> 6,755
<OTHER-EXPENSES> 5,738
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14
<INCOME-TAX> 0
<INCOME-CONTINUING> 14
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
