<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 JUNE 29, 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 19,172,594 shares of the Company's Common Stock, par value $.0005,
outstanding on August 8, 1997.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
POLYCOM, INC.
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996.......................................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Month Periods Ended June 30, 1997 and
June 30, 1996.................................................. 4
Condensed Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 30, 1997 and June 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.................................... 17
Item 2 - Change in Securities................................. 17
Item 3 - Default Upon Senior Securities....................... 17
Item 4 - Submission of Matters to a Vote of Security Holders.. 17
Item 5 - Other Information.................................... 17
Item 6 - Exhibits and Reports on Form 8-K..................... 17
SIGNATURE............................................................... 18
2
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 14,905 $ 9,548
Short-term investments 5,003 10,101
Accounts receivable, net of allowance for
doubtful accounts of $442 at June 30, 1997
and $443 at December 31, 1996 5,241 6,965
Inventories 8,197 7,458
Other current assets 1,050 384
-------- --------
Total current assets 34,396 34,456
Fixed assets, net 3,457 3,164
Other assets 367 100
-------- --------
Total assets $ 38,220 $ 37,720
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,610 $ 4,307
Accrued and other current liabilities 2,187 2,192
-------- --------
Total current liabilities 7,797 6,499
-------- --------
Stockholders' equity:
Common stock 10 10
Additional paid-in capital 42,799 42,521
Notes receivable from stockholders (19) (29)
Accumulated deficit (12,367) (11,281)
-------- --------
Total stockholders' equity 30,423 31,221
-------- --------
Total liabilities and stockholders' equity $ 38,220 $ 37,720
-------- --------
-------- --------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
POLYCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------- ------ ------- -------
Net revenues $11,500 $9,250 $22,010 $17,488
Cost of net revenues 6,148 4,287 11,801 8,059
------- ------ ------- -------
Gross profit 5,352 4,963 10,209 9,429
------- ------ ------- -------
Operating expenses:
Sales and marketing 2,704 2,199 5,386 4,270
Research and development 2,380 2,023 4,601 3,793
General and administrative 763 540 1,453 1,038
Acquisition expenses 340 - 340 -
------- ------ ------- -------
Total operating expenses 6,187 4,762 11,780 9,101
------- ------ ------- -------
Operating income/(loss) (835) 201 (1,571) 328
Interest income, net 270 200 552 224
Other expense, net 47 12 67 29
------- ------ ------- -------
Net income/(loss) $ (612) $ 389 $(1,086) $ 523
------- ------ ------- -------
------- ------ ------- -------
Net income/(loss) per share $ (0.03) $ 0.02 $ (0.06) $ 0.03
------- ------ ------- -------
------- ------ ------- -------
Weighted average shares outstanding 19,043 18,975 19,001 18,069
------- ------ ------- -------
------- ------ ------- -------
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>
Six Months Ended
June 30, June 30,
1997 1996
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $(1,086) $ 523
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 874 726
Provision for excess and obsolete inventories 412 164
Changes in assets & liabilities:
Accounts receivable 1,724 (2,110)
Inventories (1,151) (1,848)
Prepaid expenses and other assets (933) (100)
Accounts payable 1,303 1,182
Accrued and other liabilities (5) 365
------- ---------
Net cash provided by/(used in) operating activities 1,138 (1,098)
------- ---------
Cash flows from investing activities:
Acquisition of fixed assets (1,167) (315)
Proceeds from sale and maturity of short term investments 7,353 83,929
Purchases of short term investments (2,255) (101,773)
------- ---------
Net cash provided by/(used in) investing activities 3,931 (18,159)
------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable - 1,824
Repayment of notes payable and capital leases - (4,816)
Proceeds from issuance of common stock, net of repurchases 278 20,078
Proceeds from repayment of notes receivable from stockholders 10 60
------- ---------
Net cash provided by financing activities 288 17,146
------- ---------
Net increase/(decrease) in cash and cash equivalents 5,357 (2,111)
Cash and cash equivalents, beginning of year 9,548 3,539
------- ---------
Cash and cash equivalents, end of period $14,905 $ 1,428
------- ---------
------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 101
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 June 30, 1997 and the
condensed consolidated statements of operations for the three and six month
periods ending June 30, 1997 and 1996 and condensed consolidated statements
of cash flows for the six month periods ending June 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 June 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
June 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 acceptance of SoundPoint, SoundStation Premier and
other new products; the timely launch of the color ShowStation 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 on May 6, 1997, and the Form 10-Qs.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined in
a manner which approximates the first-in, first-out ("FIFO") method.
Inventories consisted of the following (in thousands):
June 30, Dec 31,
1997 1996
---- ----
Raw Materials $ 2,693 $ 3,252
Finished Goods 5,504 4,206
-------- --------
$ 8,197 $ 7,458
-------- --------
-------- --------
6
<PAGE>
3. BANK LINE OF CREDIT
On July 11, 1997, the Company signed an agreement with Silicon Valley Bank
for a $5.0 million bank revolving line of credit which replaces the line of
credit that expired on April 15, 1997 but was extended until July 31, 1997.
Borrowings under the line are unsecured and bear interest at the bank's prime
rate (currently 8.5%). 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 July 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 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 is expected to
approximate the currently presented net loss per share. However, basic net
income per share is expected to be higher than net income per share as
currently computed because the effect of dilutive stock options will not be
considered in computing basic net income per share. Diluted net income per
share is expected to be comparable to the currently presented net income per
share. The Company will adopt SFAS No. 128 in its fiscal quarter ending
December 31, 1997 and at that time all historical net income/(loss) per share
data will be restated to conform to the provisions of SFAS No. 128.
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. Polycom will grant 3M exclusive private-label rights in certain
distribution channels to the products developed under this agreement subject
to certain minimum volumes. In addition, 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.
8. SECOND AGREEMENT WITH 3M
In June 1997, the Company entered into a second joint marketing and
development agreement with Minnesota Mining and Manufacturing Company (3M).
Under this agreement, 3M provides $2.5 million in funding to Polycom for
certain deliverables related to the development of videoconferencing products
and may also provide shared technology resources for the development of
future products. Polycom will grant 3M exclusive private-label rights in
certain distribution channels to the products developed under this agreement.
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. The Company's audioconferencing products include
SoundStation, SoundStation EX, SoundStation Premier (introduced in November
1996) and SoundPoint, a desktop audioconferencing product introduced in
September 1996. The Company began shipping its first dataconferencing
product, ShowStation, in November 1995. The Company markets its products
domestically and internationally through a direct sales force and a network
of value-added resellers (VARs), original equipment manufacturers (OEMs) and
retail channels. Through June 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. The Company incurred an
operating loss in the first and second quarters of 1997. The Company intends
to continue to invest significantly in research and development, and plans to
operate with an operating loss or break-even results, excluding acquisition
expenses, through the third quarter of 1997. There can be no assurance that
the Company will achieve its operating plans or achieve profitable operations
in any subsequent period.
In January 1997, the Company announced plans to divisionalize the Company
along the two lines of business, audioconferencing and dataconferencing. The
Company named a general manager for each division and formally restructured
the Company's research and development organization into two separate
divisions, reporting to each business' general manager. Business unit
alignments were also made in the Company's sales, marketing and general and
administrative organizations. In the second quarter of 1997, business unit
alignments were also made in the manufacturing organization. In June of
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. Polycom will grant 3M
exclusive private-label rights in certain distribution channels to the
products developed under this agreement subject to certain minimum volumes.
In addition, 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. Through the
first six months of 1997, the Company has received, and recorded as revenue,
$2.0 million related to this agreement. There can be no assurance that the
Company will receive the final $1.0 million from 3M under the First Agreement in
the current quarter or ever.
In June 1997, the Company entered into a second joint marketing and
development agreement with (3M)(the "Second Agreement"). 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
9
<PAGE>
grant 3M exclusive private-label rights in certain distribution channels to
the products developed 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 under development, is intended to add a videoconferencing product and
engineering team to Polycom's audioconferencing and dataconferencing product
portfolio.
Under the terms of the agreement, 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. 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 or of market acceptance and future profitability of this
business.
This Report on Form 10-Q contains forward looking statements that involve
risks and uncertainties, including possible fluctuations in quarterly
results; the market acceptance of ShowStation and the risks associated with
this emerging market; the acceptance of SoundPoint, SoundStation Premier and
other new products; the timely launch of the color ShowStation 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 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-Qs.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues,
condensed consolidated statements of operations data for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of net revenues 53% 46% 54% 46%
----- ----- ----- -----
Gross profit 47% 54% 46% 54%
----- ----- ----- -----
Operating expenses:
Sales and marketing 23% 24% 24% 24%
Research and development 21% 22% 21% 22%
General and administrative 7% 6% 7% 6%
Acquisition expenses 3% 0% 2% 0%
----- ----- ----- -----
Total operating expenses 54% 52% 54% 52%
----- ----- ----- -----
Operating income/(loss) (7%) 2% (7%) 2%
Interest income, net 2% 2% 3% 1%
Other expense, net 0% 0% 0% 0%
----- ----- ----- -----
Net income/(loss) (5%) 4% (5%) 3%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
10
<PAGE>
The following table sets forth net revenues by line of business for the
periods indicated (amounts in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Audioconferencing:
Net revenues $9,421 $8,585 $17,766 $15,257
Cost of net revenues 4,738 3,348 9,004 5,890
------- ------- ------- --------
Gross profit $4,683 $5,237 $ 8,762 $ 9,367
------- ------- ------- --------
------- ------- ------- --------
Gross margin % 50% 61% 49% 61%
Dataconferencing:
Net revenues $2,079 $ 665 $ 4,244 $ 2,231
Cost of net revenues 1,410 939 2,797 2,169
------- ------- ------- --------
Gross profit $ 669 $ (274) $ 1,447 $ 62
------- ------- ------- --------
------- ------- ------- --------
Gross margin % 32% (41%) 34% 3%
</TABLE>
NET REVENUES
Total net revenues were $11.5 million in the second quarter of 1997
compared to $9.3 million in the second quarter of 1996, an increase of 24%.
Within the audioconferencing product line, net revenues were $9.4 million in
the second quarter of 1997, an increase of $0.8 million, or 10%, when
compared to the same period for 1996. The increase is due to the impact of
unit sales growth of the SoundStation product as 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 second quarter of 1997 increased $1.4
million, or 213%, when compared to the second quarter of 1996. However, much
of the increase in dataconferencing net revenues was due to a $1.0 million
payment associated with the joint marketing and development agreement with
3M.
For the first six months of 1997, total net revenues were $22.0 million,
an increase of $4.5 million or 26% compared to the same period in 1996. The
audioconferencing net revenues for the first six months of 1997 were up $2.5
million, or 16%, when compared to the first six 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 six months of 1997, SoundStation
unit sales increased 29% over the same period in 1996, offsetting the impact
of the price reduction. Dataconferencing revenues were $4.2 million for the
first six months of 1997 versus $2.2 million in the first six months of 1996.
This increase was due primarily to the First Agreement with 3M.
Additionally, product revenue increases internationally offset product
revenue decreases in North America.
During the second quarters of 1997 and 1996 and for the first six months
of 1997 and 1996, the Company derived a substantial 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, $2.0 million under the First 3M Agreement over the
first six months of 1997. There can be no assurance that the Company will
receive the final $1.0 million payment in the current quarter or ever.
International net revenues for the second quarter and for the first six
months of 1997 accounted for 22% of total net revenues for the Company, up
slightly from the comparable periods in 1996. The Company anticipates that
international sales will continue to account for a significant portion of
total net revenues for the foreseeable future. However, international net
revenues may fluctuate in the future as the Company introduces new products,
since the Company expects to initially introduce such products in North
America and also because of the additional time required for product
homologation and regulatory
11
<PAGE>
approvals of new products in international markets. In addition, the
implementation of the international price reduction for SoundStation products
effective April 1997 will affect international revenues in future quarters.
To the extent the Company is unable to expand international sales in a timely
and cost-effective manner, the Company's business, financial condition or
results of operations could be adversely affected. There can be no assurance
that the Company will be able to maintain or increase international market
demand for the Company's products. To date, a substantial majority of the
Company's international sales have been denominated in U.S. currency,
however, the Company expects that in the future more international sales may
be denominated in local currencies.
COST OF NET REVENUES
Cost of net revenues consists primarily of the Company's manufacturing
organization, contract manufacturers, tooling depreciation, warranty expense
and allocation of overhead expenses. The cost of net revenues represented
53% and 46% of net revenues for the second quarters of 1997 and 1996,
respectively. By division, audioconferencing cost of net revenues was 50% in
the second quarter of 1997 versus 39% in the 1996 second quarter, while
dataconferencing cost of net revenues was 68% in the second quarter of 1997
compared to 141% in the second 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. Additionally, the
introduction of a lower margin audio product contributed to the higher cost
of net revenues percentage. In the dataconferencing division, the decrease
in the cost of net revenues percentage is primarily due to the revenue
received under the 3M agreement, which had very low associated costs,
partially offset by an inventory write down associated with managing the end
of life cycle for the initial ShowStation product.
For the first six months of 1997 the cost of net revenues percentage was
54%, compared to 46% for the same period in 1996. The audioconferencing cost
of net revenues was 51% in the first six months of 1997 versus 39% in the
first six 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 66% in the first six months of 1997
versus 97% 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,
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 of 1997, the Company began manufacturing products at a
manufacturing contractor based in Thailand. The Company expects that this
change will lower manufacturing costs, although there can be no guarantee
that this will occur. In July of 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.
12
<PAGE>
SALES AND MARKETING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, INCREASE/ JUNE 30, JUNE 30, INCREASE/
$ IN THOUSANDS 1997 1996 (DECREASE) 1997 1996 (DECREASE)
- --------------- ---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Expenses $2,704 $2,199 23.0% $5,386 $4,270 26.1%
% of Net Revenues 23.5% 23.8% (0.3%) 24.5% 24.4% 0.1%
</TABLE>
Sales and marketing expenses consist primarily of salaries and
commissions, advertising and promotional expenses, allocation of overhead
expenses and customer service and support costs. The increase in expenses of
the second quarter of 1997 compared to the second 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 six 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 products, the Company has incurred significant expenses to
develop a sales presence for the ShowStation product and believes it will be
required to incur significant additional expenses for sales and marketing,
including advertising, to educate potential customers as to the desirability
of ShowStation.
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, INCREASE/ JUNE 30, JUNE 30, INCREASE/
$ IN THOUSANDS 1997 1996 (DECREASE) 1997 1996 (DECREASE)
- --------------- ---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Expenses $2,380 $2,023 17.6% $4,601 $3,793 21.3%
% of Net Revenues 20.7% 21.9% (1.2%) 20.9% 21.7% (0.8%)
</TABLE>
Research and development expenses consist primarily of compensation
costs, consulting fees, allocation of overhead expense, supplies and
depreciation. The expense increases for the second quarter of 1997 versus
the second quarter of 1996 and for the first six 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.
The Company believes that technological leadership is critical to its
success and is committed to continuing a high level of research and
development, especially in the development of the planned next generation
ShowStation product. Consequently, the Company intends to increase its
research and development expenses in absolute dollars in the future.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, INCREASE/ JUNE 30, JUNE 30, INCREASE/
$ IN THOUSANDS 1997 1996 (DECREASE) 1997 1996 (DECREASE)
- --------------- ---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Expenses $763 $540 41.3% $1,453 $1,038 40.0%
% of Net Revenues 6.6% 5.8% 0.8% 6.6% 5.9% 0.7%
</TABLE>
13
<PAGE>
General and administrative expenses consist primarily of compensation
costs, outside legal and accounting expenses. The increase in dollar amount
for the second 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 increased focus in both the
audioconferencing and dataconferencing divisions. The increase in expenses
for the first six months of 1997 over the first six 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.
ACQUISITION EXPENSES
For the second quarter of 1997 and the first six months of 1997, the
Company incurred expenses totaling $0.3 million related to the pending
acquisition of ViaVideo Communications, Inc. 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.
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
second quarter and first six months of 1997, interest income, net increased
over the same periods of 1996 due to the increase 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 Company expects to incur operating
losses or break-even results, before acquisition related expenses, through
the third quarter of 1997 and consequently expects to incur minimal federal
and state income taxes in 1997. As of December 31, 1996, the Company had
approximately $6.4 million in federal net operating loss carryforwards and
$790,000 in tax credit carryforwards. The future utilization of the
Company's net operating loss carryforwards may be subject to certain
limitations upon certain changes in ownership.
The Company 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
or indicative of future operating results. For example, the Company believes
that the 37% price reduction in the North American list price of its
SoundStation product line, effective December 1996 for resellers and January
1997 for end user customers, 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 second quarter and first six
months of 1997 and will continue to negatively impact net revenues and gross
margins throughout 1997. The Company expects that gross margins will
continue to be negatively affected in the future as a result of several
factors, including low to negative gross margins for the Company's
first-generation ShowStation dataconferencing
14
<PAGE>
products, the reduction in the list prices of the SoundStation product line,
the introduction of the lower margin SoundPoint desktop product line and
continuing competitive price pressure in the audioconferencing and
dataconferencing markets. Although price reductions have been driven by the
Company's desire to expand the market for its products, and the Company
expects that in the future it may further reduce prices or introduce new
products that carry lower margins in order to further expand the market or to
respond to competitive pricing pressures, there can be no assurance that such
actions by the Company will expand the market for its products or be
sufficient to meet competitive pricing pressures. In addition, the Company's
limited operating history and limited resources, among other factors, make
the prediction of future operating results difficult if not impossible.
Further, there can be no assurance that the Company will receive the final
$1.0 million payment from 3M, which would be recorded as revenue, under the
First 3M Agreement in the current quarter or ever.
In the past the Company has experienced delays from time to time in the
introduction of certain new products and enhancements and expects that such
delays may occur in the future. For instance, the introduction of
ShowStation was delayed by approximately eighteen months from the originally
anticipated date of introduction because of unforeseen technical challenges
and difficulties in building core technologies and, for approximately six
weeks in the first quarter of 1996, shipments were interrupted in order to
correct software and other technical problems identified by initial
customers. In addition, SoundStation Premier first customer shipments were
delayed from its original shipment target of September 1996 to November 1996
due to engineering issues. Any similar delays could have a material adverse
effect on the Company's results of operations.
The Company's operating results have fluctuated in the past and may
fluctuate in the future as a result of a number of factors, including market
acceptance of the ShowStation products and other new product introductions
and product enhancements by the Company or its competitors, the prices of the
Company's or its competitors' products, the mix of products sold, the mix of
products sold directly and through resellers, fluctuations in the level of
international sales, the cost and availability of components, manufacturing
costs, the level of warranty claims, changes in the Company's distribution
network, the level of royalties to third parties and changes in general
economic conditions. In addition, competitive pressure on pricing in a given
quarter could adversely affect the Company's operating results for such
period, and such price pressure over an extended period could materially
adversely affect the Company's long-term profitability. The Company's ability
to maintain or increase net revenues will depend upon its ability to increase
unit sales volumes of its SoundStation, SoundStation Premier and SoundPoint
families of audioconferencing products and the dataconferencing line of
products, currently comprised of the ShowStation product, and any new
products or product enhancements. There can be no assurance that the Company
will be able to increase unit sales volumes of existing products, introduce
and sell new products or reduce its costs as a percentage of net revenues.
The Company typically ships products within a short time after receipt of
an order, does not usually have a significant backlog and backlog fluctuates
significantly from period to period. As a result, backlog at any point in
time is not a good indicator of future net revenues and net revenues for any
particular quarter cannot be predicted with any degree of accuracy.
Accordingly, the Company's expectations for both short- 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
15
<PAGE>
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments of $19.9 million,
an increase of $0.3 million from December 31, 1996. Additionally, as of July
11, 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.
The Company generated $1.1 million in cash from operating activities for
the first six months of 1997 versus a use of $1.1 million in cash for the
same period in 1996. The improvement in cash from operating activities is
due primarily to improved collections of accounts receivable, offset somewhat
by a net loss in the first six months of 1997 compared to net income in the
same period of 1996.
The total net change in cash and cash equivalents for the first six
months of 1997 was an increase of $5.4 million. The primary sources of cash
were $1.1 million from operating activities, and net sales of investments of
$5.1 million. The positive cash flow from operating activities was the
result of a lower accounts receivable balance, a higher accounts payable
balance, and a positive net income before non-cash items such as depreciation
and increases to inventory reserves, offset by an increase in inventories and
prepaid assets. The primary uses of cash during the first six months of 1997
were purchases of property, plant and equipment of $1.2 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 $2.8 million.
The Company believes that its available cash 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.
16
<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
The Company distributed its Definitive Proxy Statement, Proxy
and Annual Report to Stockholders on or about May 13, 1997, and
an Amendment to the Proxy Statement dated May 13, 1997 on or
about May 21, 1997, to each stockholder of record on May 9,
1997, for its Annual Meeting of Stockholders held June 11,
1997, (the "Annual Meeting"). At the Company's Annual Meeting,
the stockholders were asked to consider three proposals.
The first proposal involved the election of directors. The
existing Board of Directors selected six nominees, all of whom
ran unopposed and all of whom were then serving as directors of
the Company. The nominees of the Board, and the voting results
with respect thereto, were:
Name Votes For Withheld
---- --------- --------
Brian L. Hinman 13,452,435 41,982
Robert C. Hagerty 13,463,402 31,015
Bandel Carano 13,461,402 33,015
Stanley J. Meresman 13,467,118 27,299
John P. Morgridge 13,457,118 37,299
James R. Swartz 13,467,118 27,299
The second proposal concerned amendments to the Company's
1996 Stock Incentive Plan including a 1,000,000-share increase
in the number of shares of Common Stock authorized for
issuance. The following numbers are the votes cast:
For: 10,779,724
Against: 518,117
Abstentions: 18,618
Broker Non-Votes: 2,177,958
The third and final proposal concerned the ratification of
the Company's independent auditors for the fiscal year ending
December 29, 1997. The following numbers are the votes cast:
For: 13,345,625
Against: 75,062
Abstentions: 9,708
Broker Non-Votes: 64,022
Item 5. OTHER INFORMATION
Effective July 21, 1997, Dale Bastian joined the Company as the
Vice President, Worldwide Sales and Service.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
NUMBER EXHIBIT
- ------ ---------------------------------------------------------------
2.1 (1) Agreement and Plan of Reorganization by and between Polycom,
Inc. and ViaVideo Communications, Inc., dated June 11, 1997.
10.1 (2) Joint Marketing and Development Agreement, dated June 10, 1997,
by and between Polycom, Inc. and Minnesota Mining and
Manufacturing Company, as amended on June 10, 1997.
11.1 Computation of Net Income/(Loss) per Common and Common Equivalent
Share
27 Financial Data Schedule
(1) Incorporated by reference from the Company's report on Form 8-K filed
August 13, 1997.
(2) Confidential treatment requested as to certain portions of this document.
(b) Report on Form 8-K: No reports on Form 8-K were filed during the
quarter ended June 30, 1997.
17
<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: August 13, 1997 POLYCOM, INC.
/s/ Michael R. Kourey
----------------------------------
Michael R. Kourey
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
18
<PAGE>
Exhibit 10.1
JOINT MARKETING AND DEVELOPMENT AGREEMENT
This JOINT MARKETING AND DEVELOPMENT AGREEMENT (this "Agreement") dated
as of the date of the execution of this Agreement by the last party to sign
(the "Effective Date") is by and between MINNESOTA MINING AND MANUFACTURING
COMPANY, a Delaware corporation, acting through its Visual Systems Division,
with its principal place of business at 3M Austin Center, 6801 Riverplace
Boulevard, Austin, Texas 78726-9000 ("3M") and POLYCOM, INC., a Delaware
corporation, with its principal place of business at 2584 Junction Avenue,
San Jose, California 95134-1902 ("Polycom"). As used herein, the term "Party"
shall refer to 3M or Polycom, as the context may require, while the term
"Parties" shall refer to 3M and Polycom collectively. The term "Agreement"
specifically includes all Exhibits referred to herein.
RECITALS:
WHEREAS, Polycom has developed a technology base for the development of
teleconferencing products allowing the participation of individuals at remote
locations through audio, data and video means; and
WHEREAS, 3M, a leading, world wide manufacturer and marketer of products
that facilitate the exchange of ideas in meetings of people, desires to
purchase and distribute the teleconferencing products to be developed by
Polycom and to assist in such development, all in accordance with the terms
of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
promises hereinafter set forth, the Parties hereto agree as follows:
ARTICLE I
DEVELOPMENT OF VIDEO CONFERENCING PRODUCTS
1.1 DEVELOPMENT OF POLYCOM PRODUCTS; DELIVERY OF PROTOTYPES.
(a) Subject to the terms and conditions of this Agreement, as of the
Effective Date, Polycom intends to design, develop and prepare for commercial
production a [ * ] device meeting the specifications set forth on Exhibit A
(the "Polycom Product"). [ * ] [ * ]
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
<PAGE>
[ * ]
(b) 3M agrees to provide funding to Polycom for its delivery of the
initial Polycom Product in final, commercially marketable form [ * ] and the
initial enhancement thereto (collectively, the "Polycom Deliverables")
identified on the potential product migration schedule for the Polycom
Product (the "Migration Schedule") attached hereto as Exhibit B at the times
and in the amounts set forth below, provided that the associated Polycom
Deliverable is delivered to 3M on or before the delivery date:
DELIVERY POLYCOM DELIVERABLES PAYMENT DATE AMOUNT
DATE
[ * ] [ * ] [ * ] [ * ]
In the event Polycom should fail to timely deliver any Polycom
Deliverable, Polycom shall have the right to cure such failure for a period
of up to [ * ] following such Delivery Date (each a "Cure Period") by
delivering such Polycom Deliverable to 3M. Following Polycom's delivery of a
Polycom Deliverable within a Cure Period, 3M shall deliver the funding amount
due Polycom within [ * ] following the date of delivery. If Polycom fails to
timely cure such default, 3M shall have the right to terminate this Agreement
by delivering written notice of termination to Polycom without any
requirement of notice and further opportunity to cure as otherwise provided
under Article 7 below. Notwithstanding the foregoing, Polycom's failure to
deliver the First Migration Product to 3M prior [ * ] shall constitute a
material breach of this Agreement of which Polycom shall be deemed to have
been notified and been given a full opportunity to cure for purposes of
Article 13 below.
1.2 DEVELOPMENT OF 3M PROPRIETARY PRODUCTS. The Parties agree that 3M
shall have the right to request Polycom's development from time to time of
unique [ * ] products based upon 3M design concepts incorporating Polycom's
teleconferencing technology (each a "3M Proprietary Product"). Upon its
receipt of a concept proposal from 3M, Polycom shall have [ * ] days to
deliver a detailed development proposal, providing proposed specifications
for the 3M Proprietary Product, along with an estimate of cost and a schedule
of development to 3M. Following its review of Polycom's development
proposal, 3M shall notify Polycom whether it desires to proceed with
development of the 3M Proprietary Product and, if it does, the Parties shall
thereafter negotiate in good faith to develop a mutually agreed upon
definitive plan of development for such
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
2
<PAGE>
3M Proprietary Product. In no event shall Polycom be obligated to proceed
with development of any 3M Proprietary Product unless and until the Parties
have entered into a written development plan including, without limitation,
costs and expenses.
1.3 SCOPE OF PRODUCTS COVERED BY AGREEMENT; SPECIFICATIONS. For the
purposes of this Agreement, the terms Polycom Product and 3M Proprietary
Product (each a "Product" and collectively, the "Products") shall include
subsequent generations of each such Product and all options, accessories and
enhancements thereto developed during the term hereof. The term
"Specifications" means the detailed technical specifications for the Products
including, but not limited to, product specifications, accessories
specifications, performance requirements, packaging specifications, agency
approvals and labels, quality control procedures and marking specifications
in accordance with Section 3.4 below. 3M shall own the 3M Proprietary Product
Specifications created by or for 3M except for any Polycom intellectual
property and/or proprietary information, or any property owned by any third
party, incorporated therein. The Specifications may change from time to time
through Engineering Change (as defined in Section 1.5 below) procedures.
1.4 ENHANCEMENTS. 3M shall have the option to have included in all
Products the enhancements that are developed by Polycom for the Products,
including but not limited to those identified in the Migration Schedule. In
order to enable 3M to sell market-acceptable Products through the
incorporation of such enhancements, Polycom agrees to provide 3M with a
written report, in a mutually agreed format, by [ * ] summarizing the status
of development for the Products for the [ * ].
1.5 ENGINEERING CHANGE. The term "Engineering Change" shall mean any
design, material, or manufacturing process change to any Product, whether
originating with 3M or Polycom. Mutual agreement of the Parties shall be
required for Engineering Changes that would affect the form, fit and/or
material function of any Polycom Product or that would have the effect of
rendering finished goods inventory or field service inventory of Polycom
Products obsolete. Any Engineering Change respecting any 3M Proprietary
Product shall be at 3M's sole discretion. Polycom agrees to give 3M prior
written notice of any Engineering Change that would affect the safety,
performance, serviceability, appearance, dimensions, packaging or field
support of any Product. Either Party may request an Engineering Change.
Polycom, upon receiving such request from 3M or proposing any such change,
shall evaluate it and provide 3M with estimates for changes in costs,
performance, quality and schedule of the Products resulting from any such
proposed Engineering Change.
1.6 PROJECT MANAGEMENT. The Parties shall form a management team to
manage the Project (the "Management Team") consisting of one business
representative and one technical representative designated by Polycom and 3M.
Each Party shall designate its two representatives to the other Party in
writing within [ * ] following the Effective Date. The Management Team shall
oversee the development of the Project, determine the course of development
of the Products, including the updates and enhancements to be pursued,
provide input and/or approval on behalf of their respective Parties, and
resolve disputes to the extent possible. In the event the Management Team is
unable to resolve any dispute between the Parties, they shall refer the matter
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
3
<PAGE>
to the senior management of Polycom and 3M's Visual System Division,
respectively, for resolution. If senior management is unable to informally
resolve the dispute, the dispute resolution mechanism set forth in Article 19
shall be invoked.
ARTICLE 2
INTELLECTUAL PROPERTY
[ * ]
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
4
<PAGE>
[ * ]
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
5
<PAGE>
[ * ]
ARTICLE 3
MANUFACTURING AND MARKETING RIGHTS; ROYALTIES
3.1 MANUFACTURING.
(a) CHOICE OF MANUFACTURER. The Parties shall mutually agree upon a
manufacturer for the Products and Polycom shall thereafter promptly commence
negotiations with such manufacturer and conduct such negotiations in a
reasonably diligent manner in an effort to insure that the manufacture of the
Products can be promptly commenced once the [ * ] has been delivered to 3M
pursuant to the provisions of Section 1.1(b) above. 3M agrees to provide an
assessment of the demand for Products in its market segments and such other
information as Polycom may reasonably request, and to otherwise cooperate
with Polycom, in order to engage in the initial manufacture.
(b) SUBSTITUTE AND/OR ADDITIONAL MANUFACTURER. In order to allow the
Parties to assess whether adequate manufacturing capacity will be available
to meet both Parties' needs, each Party agrees to provide the other, by the
[ * ], with a non-binding, written forecast of its anticipated requirements
for Products for the [ * ]. If, after conferring in good faith, the Parties
determine that any joint manufacturer will be unable to supply a Party with
sufficient quantities of Products to meet demand in its market segment in
light of the other Party's supply requirements, the Parties agree to engage a
secondary or substitute manufacturer in order to meet such demand. Further,
if any joint manufacturer is unable to meet any cost reduction and/or quality
improvement target(s) established by the Parties pursuant to the provisions
of Section 3.11 below, the Parties agree to engage a substitute manufacturer
capable of meeting such target(s) and the Parties' supply requirements for
Products. The Parties shall mutually agree upon any new manufacturer engaged
to manufacture Products as described herein, and Polycom shall promptly
commence negotiations with such manufacturer and conduct such negotiations in
a reasonably diligent manner in an effort to insure that the manufacture of
the Products will continue uninterrupted and that market demand will be met.
(c) PURCHASE TERMS; PRODUCT ALLOCATION. The Parties agree to work
together in negotiating with manufacturers in order to obtain purchase terms
that are mutually beneficial. In the event that the combined demand for
Products of Polycom and 3M and its Affiliates from any
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
6
<PAGE>
manufacturer should exceed such manufacturer's manufacturing capacity in any
given month, Polycom and 3M agree to allocate the available capacity between
them pro rata based upon the forecast for that month set forth in the firm
[ * ] forecast filed by each Party with such manufacturer.
(d) FAILSAFE PRODUCTION. In the event that Polycom (i) suspends, for
more than [ * ] or terminates its [ * ] business, (ii) becomes subject to any
bankruptcy or insolvency proceeding under federal or state statute, which
proceeding is not dismissed within [ * ] of the filing thereof, or (iii)
becomes insolvent or subject to direct control by a trustee, receiver or
similar authority, 3M shall have the right to have Products manufactured by a
party of its choosing having the wherewithal to produce the Products to the
Specifications and in accordance with the quality control procedures
developed by the Parties. In order to facilitate the manufacturing of
Products by any subsequent manufacturer chosen by 3M, Polycom hereby grants
any such manufacturer an irrevocable (only during the remaining term of this
Agreement), royalty-free, nontransferable, non-exclusive, and
non-sublicensable license in any of its intellectual property incorporated
into the Specifications for the Products for the sole purpose of the
manufacture of Products solely for the account of 3M and its Affiliates
during the remaining term of this Agreement. Additionally, Polycom agrees to
place the source code for any software necessary in the manufacture and/or
operation of Products into escrow, allowing 3M access thereto upon the
occurrence of certain conditions, all as set forth in Exhibit C. 3M shall
ensure that any such manufacturer shall not exercise the foregoing license
unless and until one of the release conditions expressly set forth in Exhibit
C has been triggered and escrow agent has released the Deposit Materials (as
defined in Exhibit C) to 3M pursuant to Exhibit C.
3.2 MARKETING RIGHTS.
(a) [ * ]
(b) [ * ]
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
7
<PAGE>
actual delivery thereof to 3M. Prior to any such conversion becoming
effective, Polycom shall deliver within [ * ] of the end of such [ * ]
written notice to 3M of its failure to meet the required level of sales to
maintain its exclusive marketing rights for Polycom Products. Thereafter, 3M
shall have the opportunity to cure any such default by tendering a payment in
cash or cash equivalents to Polycom in an amount equal to the royalties that
would have been due Polycom on the difference between the sales goal 3M and
its Affiliates had failed to reach and actual sales of 3M and its Affiliates
for the period in question by no later [ * ] following 3M's receipt of such
notice from Polycom. 3M's failure to timely cure any such default shall also
cause a termination of the automatic renewal of this Agreement for any
Renewal Term pursuant to the provisions of Section 6.2 below.
3.3 MARKETING COMMITMENT. [ * ]
3.4 BRAND NAMES AND PATENT MARKINGS. [ * ]
3.5 POLYCOM DOCUMENTATION. Polycom will provide 3M with master
documentation that is inclusive of all features and functionality of the
Products, along with other sales, marketing, instructional, packaging,
labels, media, merchandise, manuals, service information and promotional
positioning which 3M may use as part of its Product rollout. Polycom agrees
that 3M may alter this information with Polycom's prior approval, which shall
not be unreasonably withheld or delayed.
3.6 REGULATORY APPROVALS. Polycom hereby agrees to promptly obtain, at
its sole cost and expense, all regulatory approvals necessary to authorize
the sale of Products by both Polycom and 3M in those countries identified on
Exhibit E [ * ] attached hereto. Polycom agrees to obtain all required
regulatory approvals in the countries identified in Column A of Exhibit E
immediately upon the first commercial shipment of each Product delivered
thereto. With respect to countries identified in Columns B and C, Polycom
shall obtain all required regulatory approvals in a timely fashion in the
ordinary course of its business. Additionally, upon 3M's written request,
Polycom agrees to seek (i) expedited approval for any country identified in
Columns B or C and (ii) all regulatory approval necessary to authorize 3M's
sale of Products in additional countries designated by 3M. 3M agrees to
provide reasonable assistance to Polycom as
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
8
<PAGE>
may be required to obtain any such expedited or additional approval and to
bear all costs associated therewith.
3.7 POLYCOM'S ROYALTY.
(a) DETERMINATION OF ROYALLY PERCENTAGE. 3M and its Affiliates shall pay
Polycom royalties from the sale of Products equal to the percentage indicated
below of the Net Billable Price they receive for sales up to and including
the number of units of the Products (exclusive of options and accessories)
(the "Cumulative Product Unit Sales Target") during each Royalty Period
during the term hereof. For purposes of this Agreement:
(i) [ * ]
(ii) "Royalty Period" shall mean each successive period of twelve (12)
months commencing with the Commencement Date and each anniversary
thereof during the term of this Agreement.
As 3M and its Affiliates meet the Cumulative Product Unit Sales Targets
during each Royalty Period, the royalty payable by 3M and/or its Affiliates
on all subsequent sales of Products during the remainder of that Royalty
Period shall be reduced to the next percentage range payable of the Net
Billable Price received by 3M and all 3M Affiliates from such sales.
[ * ] [ * ]
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
9
<PAGE>
ROYALTY CUMULATIVE PRODUCT UNIT SALES TARGETS
DURING A ROYALTY PERIOD
[ * ] [ * ]
Royalties on sales of Products by 3M Affiliates may be paid directly to
Polycom by any such Affiliate; however, 3M shall remain primarily liable for
any such royalties in the event of default in payment by any of its
Affiliates.
(b) PAYMENT. Royalties shall be due and payable on a [ * ] with payment
to be delivered on or before the [ * ]. If an audit discloses that 3M or any
of its Affiliates had failed to pay any royalties due during an audited
period, 3M or such Affiliate, as the case may be, shall tender payment of
such unpaid royalties within [ * ] its receipt of notice of such discrepancy.
3.8 AUDIT RIGHTS. Polycom shall be entitled to examine all records of
3M pertaining to its distribution and sale of Products at any time upon
reasonable notice in order to verify the performance of 3M pursuant to
Sections 3.2(b), 3.3 and 3.7 hereof. All such audits shall be conducted by
an independent auditor of Polycom's choosing in the offices of 3M during
business hours. The auditor shall report only whether any discrepancy in the
required level of performance or payment was discovered and, if so, the
amount thereof. The costs of any such audit shall be borne by Polycom unless
such audit discloses that 3M has failed to perform within [ * ] of the
required level of performance or payment required in any audited period, in
which case 3M shall bear all such costs. 3M agrees to establish a commodity
classification for the 3M-branded Products on its internal records, in
accordance with generally accepted accounting principles, that will
facilitate verification of 3M's required sales and marketing expenditures in
support of the 3M-branded Products by Polycom's independent auditor, subject
to mutually agreed to confidentiality restrictions.
3.9 SALES AND SERVICE SUPPORT. Polycom agrees to reasonably assist 3M
in setting up such service facilities (which setup shall be at 3M's expense),
and in training 3M's designated sales and service personnel, to provide
adequate service support to the Products in the marketplace by the start of
mass production of the Polycom Product. 3M agrees to provide first and second
level customer support to its sales channels, direct sales representatives
and 3M customers. Polycom agrees to provide training to 3M sales and
technical personnel involved in the marketing, sales and support of the
Products as follows:
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
10
<PAGE>
(a) Polycom will provide initial sales training classes to a
reasonable number of 3M sales people designated by 3M at Polycom's
corporate office in Austin, Texas. Such training classes shall be
held at mutually agreeable times and dates within [ * ] prior to
first commercial shipment of Products to 3M. Thereafter, Polycom
will conduct sales training classes [ * ] at times and dates to be
mutually agreed upon at a 3M designated location; and
(b) Polycom will provide initial technical training classes to a
reasonable number of 3M technical people designated by 3M at
Polycom's corporate office in Austin, Texas. Such training classes
shall be held at mutually agreeable times and dates within [ * ]
prior to first commercial shipment of Products to 3M. Thereafter,
Polycom will conduct maintenance training classes once each calendar
quarter at times and dates to be mutually agreed upon at a 3M
designated location.
3.10 QUALITY ASSURANCE; ENGINEERING DOCUMENTATION. The Parties shall
develop and implement a mutually acceptable quality assurance plan in the
manufacture of the Products and require adherence to such plan by all
manufacturers engaged to manufacture Products for their account. Polycom
agrees to provide 3M, within [ * ] days following its written request
therefor, with engineering documentation sufficient to allow 3M to inspect
and qualify the Products as meeting the Specifications, publish end-user and
service support documentation, and provide adequate service support to
distributors and/or purchasers of the Products.
3.11 PRICE REDUCTION, QUALITY IMPROVEMENT AND PERFORMANCE ENHANCEMENT.
The Parties agree to meet at least on a [ * ] to establish cost reduction,
quality improvement and performance enhancement targets for Products
and to develop effective and on-going cost reduction, quality improvement and
performance enhancement programs, to meet or exceed the cost, quality, and
performance enhancement targets. Each and every detail of the manufacturing
process, including without limitation, bill of materials, inventory control,
material handling, material substitution, supplier substitution and cycle
time, yield and process improvement, will be subject to these cost reductions
and quality improvement programs.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS AND WARRANTIES OF 3M. 3M hereby represents and
warrants to Polycom as follows:
(a) ORGANIZATION AND GOOD STANDING. 3M is a corporation duly organized,
validly existing and in good standing under the laws of Delaware, with all
requisite power and authority to carry on the business in which it is engaged
and to own the property it owns. 3M is duly qualified and licensed to do
business and is in good standing in all jurisdictions where the nature of its
business makes such qualification necessary.
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
11
<PAGE>
(b) AUTHORIZATION AND VALIDITY. The execution, delivery and performance
of this Agreement and the other agreements contemplated hereby, by 3M, and
the consummation of the transaction contemplated hereby and thereby, have
been duly authorized by 3M. This Agreement and each other agreement
contemplated hereby have been duly executed and delivered by 3M and
constitute legal, valid and binding obligations of 3M, enforceable against it
and in accordance with their respective terms, except as may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditor's rights
generally or the availability of equitable remedies.
(c) NO VIOLATION. Neither the execution and performance of this
Agreement or the agreements contemplated hereby nor the consummation of the
transactions contemplated hereby or thereby will (i) result in a violation or
breach of the Articles of Incorporation or Bylaws of 3M or any agreement or
other instrument under which 3M is bound or to which any of the assets of 3M
is subject, or result in the creation or imposition of any lien, charge or
encumbrance upon any of such assets, or (ii) violate any applicable law,
regulation or any judgment or order of any court or governmental agency.
(d) NO VIRUSES. Any software supplied by 3M, its employees and/or
agents incorporated into Product as delivered to the manufacturer shall be
free of any wilfully introduced computer virus or any other similar or
harmful, malicious or hidden programs or data, and 3M shall indemnify and
hold harmless Polycom from (i) any cost or damages awarded against Polycom in
connection with any such virus, programs or data and (ii) the cost of
debugging any virus and the cost of alternative processing while debugging is
underway.
4.2 REPRESENTATIONS AND WARRANTIES OF POLYCOM. Polycom hereby
represents and warrants to 3M as follows:
(a) ORGANIZATION AND GOOD STANDING. Polycom is a corporation duly
organized, validly existing and in good standing under the laws of Delaware,
with all requisite power and authority to carry on the business in which it
is engaged and to own the property it owns. Polycom is duly qualified and
licensed to do business and is in good standing in all jurisdictions where
the nature of its business makes such qualification necessary.
(b) AUTHORIZATION AND VALIDITY. The execution, delivery and performance
of this Agreement, and the other agreements contemplated hereby, by Polycom,
and the consummation of the transaction contemplated hereby and thereby, have
been duly authorized by Polycom. This Agreement and each other agreement
contemplated hereby have been duly executed and delivered by Polycom
and constitute legal, valid and binding obligations of Polycom, enforceable
against it and in accordance with their respective terms, except as may be
limited by applicable bankruptcy, insolvency or similar laws affecting
creditor's rights generally or the availability of equitable remedies.
(c) NO VIOLATION. Neither the execution and performance of this
Agreement or the agreements contemplated hereby nor the consummation of the
transactions contemplated hereby or
12
<PAGE>
thereby will (i) result in a violation or breach of the Articles of
Incorporation or Bylaws of Polycom or any agreement or other instrument under
which Polycom is bound or to which any of the assets of Polycom is subject,
or result in the creation or imposition of any lien, charge or encumbrance
upon any of such assets, or (ii) violate any applicable law, regulation or
any judgment or order of any court or governmental agency.
(d) PATENTS AND TRADE SECRETS.
(i) To the best of Polycom's knowledge, Polycom owns all trade
secrets, patents and copyrights necessary to manufacture, distribute,
and sell Product, or possesses adequate licenses or other rights, if any,
therefor (collectively, the "Polycom Proprietary Rights").
(ii) To the best of Polycom's knowledge at the time of incorporation
into a Product, Polycom has the right to use the Polycom Proprietary
Rights without infringing or violating the rights of any third parties.
To the best of Polycom's knowledge at the time of incorporation into a
Product, no claim has been asserted by any person to the ownership of, or
right to use, any Polycom Proprietary Right or challenging or questioning
the validity or effectiveness of any such license or agreement and Polycom
knows of no valid basis for any such claim. To the best of Polycom's
knowledge at the time of incorporation into a Product, each of the Polycom
Proprietary Rights is valid and subsisting, has not been terminated and,
if applicable, has been duly issued or filed. Polycom will maintain its
interest in the Polycom Proprietary Rights throughout the term of this
Agreement.
(e) PRODUCT DESIGN. The design of Products, as delivered to any
manufacturer for the manufacture of Products for 3M's account, will meet the
Specifications therefor as mutually agreed to by Polycom and 3M hereunder.
(f) NO VIRUSES. The software incorporated into Product, other than
software supplied by 3M, its employees or agents, if any, or by a third party
other than an independent contractor of Polycom, as delivered to the
manufacturer, shall be free of any wilfully introduced computer virus or any
other similar or harmful, malicious or hidden programs or data, and Polycom
shall indemnify and hold harmless 3M from (i) any cost or damages awarded
against 3M in connection with any such virus, programs or data and (ii) the
cost of debugging any virus and the cost of alternative processing while
debugging is underway.
(g) MAXIMUM FAILURE RATE. In the event that Products purchased by 3M
hereunder experience a field failure rate, based on a material Polycom design
defect (excluding cosmetic defects), of [ * ] or more based upon returns of
defective Products during any [ * ] Polycom shall reimburse 3M for any and
all costs incurred by it in the repair or replacement of such Products;
provided, however, that Polycom shall have no obligation with respect to such
repair or replacement if it is determined that the defect is directly
attributable to a 3M design.
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
13
<PAGE>
ARTICLE 5
CONFIDENTIAL INFORMATION
5.1 Either Party who receives Confidential Information of the other
Party shall protect the confidentiality of such Confidential Information for
a period of [ * ] from the termination of this Agreement. Confidential
Information includes: (a) written materials delivered to the recipient marked
as confidential or with a similar legend of confidentiality, (b) visual
information indicated as confidential by means of written notices or signs,
(c) oral information that is indicated orally to be confidential and
subsequently summarized and designated as confidential in a written memo sent
to the recipient within [ * ] and (d) disclosed in the form of tangible
products or materials transmitted to the recipient with an accompanying
written memorandum. It is the responsibility of each Party to identify its
own information which it deems to be "Confidential Information."
5.2 Use of the disclosing Party's Confidential Information by the
receiving Party shall be limited to the express purposes of this Agreement in
the following areas:
(a) 3M information in the areas of [ * ]
(b) Polycom information in the areas of [ * ]
5.3 A recipient shall return or properly dispose of all information
(including tangible products or materials) received from the disclosing Party
upon request of the disclosing Party except that the recipient may retain in
the office of its legal counsel one copy of written information for record
purposes only.
5.4 A recipient shall protect the disclosed Confidential Information by
using the same degree of care, but no less than a reasonable degree of care,
to prevent the unauthorized use or disclosure of the Confidential Information
of the disclosing Party, as the recipient uses to protect its own
Confidential Information of like nature. A recipient of the other Party's
Confidential Information shall not disclose any such Confidential Information
to any third party. Confidential information of the disclosing Party will be
restricted to those directors, officers, employees, agents, or contractors of
each receiving Party having a need-to-know. In the event that the recipient
is required by judicial or administrative process to divulge Confidential
Information of the disclosing Party, the recipient shall promptly notify the
disclosing Party and allow the disclosing Party a reasonable time to oppose
such process prior to divulging such Confidential Information.
5.5 This Agreement imposes no obligation upon a recipient with respect
to information that (a) was in the recipient's possession before receipt from
the disclosing Party, (b) is or becomes available to the public through no
fault of the recipient, (c) is received in good faith by the recipient
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
14
<PAGE>
from a third party and is not subject to an obligation of confidentiality
owed to the third party, (d) is independently developed by the recipient
without reference to information received hereunder, or (e) is the
disclosing Party's own Confidential Information and is disclosed by such
Party to a third party on a non-confidential basis.
ARTICLE 6
TERM
6.1 TERM. This Agreement shall be effective as of the Effective Date
and shall continue in effect for [ * ] following the Commencement Date (the
"Initial Term").
6.2 RENEWAL. Subject to the provisions of Section 3.2(b) above, this
Agreement shall be automatically renewed for [ * ] (each a "Renewal Term")
unless either Party gives written notice to the other Party of its desire to
have the Agreement expire at the end of the Initial Term or initial Renewal
Term, as the case may be, at least [ * ] prior to such expiration.
6.3 BUSINESS REVIEW. The Parties agree to meet at least [ * ] at a
mutually agreeable place and time to discuss the results of their respective
marketing programs and plans therefor, Product development results and plans,
projected demand for each category of Product and Polycom's manufacturing
capabilities and plans therefor, among other things.
ARTICLE 7
TERMINATION
Either Party may terminate this Agreement during the Initial or Renewal
Term, upon written notice sent in accordance with the provisions of Article
17 below, in the event the other Party fails to perform a material obligation
under this Agreement or otherwise is in breach of any of its material
obligations hereunder. The Party receiving such notice shall have [ * ] from
the date of receipt thereof to cure the failure or breach. If the Party
receiving such notice does not cure the failure or breach within such cure
period, the Party claiming breach may terminate this Agreement by sending
written notice of termination in accordance with the provisions of Article 17
below, to the other Party.
ARTICLE 8
LIMITATION OF LIABILITIES
IN THE EVENT EITHER PARTY SHOULD BECOME LIABLE TO THE OTHER FOR ANY
MATTER RELATING TO THIS AGREEMENT, WHETHER ARISING IN CONTRACT, EQUITY OR
TORT (INCLUDING, WITHOUT LIMITATION, NEGLIGENCE), AND IN ADDITION TO ANY
OTHER LIMITATION OF LIABILITY OR REMEDY SET FORTH IN THIS AGREEMENT, THE
AMOUNT OF DAMAGES RECOVERABLE BY THE INJURED PARTY SHALL NOT INCLUDE ANY
AMOUNTS FOR INDIRECT OR CONSEQUENTIAL
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
15
<PAGE>
DAMAGES, INCLUDING LOST PROFITS, LOST INCOME OR LOST SAVINGS, OR FOR ANY
AMOUNTS WITH RESPECT TO CLAIMS BY ANY OTHER PARTY. These exclusions do not
apply to claims for personal injury by a third party.
ARTICLE 9
INDEMNIFICATION
9.1 INDEMNIFICATION BY POLYCOM. Polycom will indemnify, defend, and
hold harmless 3M, the 3M Affiliates, and their respective directors,
officers, shareholders, agents, and employees from any loss, claim, liability
and expense (including reasonable attorney's fees, court costs, and other
expenses of litigation) with respect to:
(a) any claim for sickness, bodily injury, personal injury, death,
property damage or loss as asserted by third parties where the
claim is based in whole or in any part on, or is in any way related
to, any act or omission attributable to Polycom, its agents,
employees, or subcontractors, or in any way related to the work
performed, or to be performed, by Polycom hereunder, except to the
extent that such claims are due solely and directly to the
negligence or intentional misconduct of 3M; and
(b) any claim that any Product infringes any patent, copyright, trade
secret or other intellectual property of a third party based upon
3M's sale of such Product hereunder except to the extent such claim
is based on Polycom's use of 3M's intellectual property licensed to
Polycom pursuant to the provisions of Sections 2.1 above.
Notwithstanding the foregoing, claims arising, directly or indirectly, from
any feature that is unique to any 3M Proprietary Product developed hereunder
shall not be subject to Polycom's obligations under this Section 9.1.
Polycom further agrees that it will not knowingly provide 3M with an
infringing product or knowingly specify any infringing technology for use in
any Products. 3M shall give Polycom prompt notice of the assertion of such a
claim, and permit Polycom full control, including, but not limited to,
choice of counsel, in the negotiation, litigation, and/or settlement of any
such claim and shall reasonably cooperate with Polycom in the defense and/or
settlement of any such claim.
9.2 INDEMNIFICATION BY 3M. 3M will indemnify, defend, and hold harmless
Polycom, Polycom's Affiliates, and their respective directors, officers,
shareholders, agents, and employees from any loss, claim, liability and
expense (including reasonable attorney's fees, court cost, and other expenses
of litigation) with respect to:
(a) any claim for sickness, bodily injury, personal injury, death,
property damage or loss as asserted by third parties where the
claim is based in whole or in any part on, or is in any way related
to, any act or omission attributable to 3M, its agents, employees,
or subcontractors, or in any way related to the work performed, or
to be
16
<PAGE>
performed, except to the extent that such claims are due solely and
directly to the negligence or intentional misconduct of Polycom; and
(b) any claim that any feature that is unique to any 3M Proprietary
Product infringes any patent, copyright, trade secret or other
intellectual property of a third party based upon Polycom's
manufacture or 3M's sale of such Product hereunder.
3M further agrees that it will not knowingly provide Polycom with an
infringing product or knowingly specify any infringing technology for use in
any Products. Polycom shall give 3M prompt notice of the assertion of such a
claim, and permit 3M full control, including, but not limited to, choice of
counsel, in the negotiation, litigation, and/or settlement of any such claim
and shall reasonably cooperate with 3M in the defense and/or settlement of
any such claim.
ARTICLE 10
PUBLIC DISCLOSURE
3M and Polycom agree not to disclose the terms and conditions of
this Agreement, except as may be required by law or government regulations or
in connection with any due diligence relating to any financing, merger or
acquisition involving such Party, without written authorization of the other
Party, for the term of this Agreement. In the event such disclosure is
required, the disclosing Party agrees to provide the other Party with prompt
notice of such disclosure and, where possible, with prior notice thereof.
ARTICLE 11
FORCE MAJEURE
11.1 If the performance of this Agreement or of any obligation hereunder
is prevented, restricted or interfered with by reason of fire or earthquake
or other casualty or accident; inability to procure raw materials, power or
supplies (for reasons other than Polycom's negligence or fault or failure to
timely order); war or other violence; or any law, order, proclamation,
regulation, ordinance, demand or requirement of any government agency, court
or intergovernmental body (collectively "Force majeure"), the Party whose
performance is prevented, restricted or interfered with shall be excused from
such performance to the extent of such prevention, restriction or
interference; provided that the Party so affected shall use its reasonable
efforts as to avoid or remove such causes of nonperformance and shall resume
performance hereunder with the utmost dispatch whenever such causes are
removed.
11.2 If performance of this Agreement or of any obligation hereunder is
prevented, restricted or interfered with for any reason set forth in this
Article, and such prevention, restriction or interference lasts for, or is
expected to last for more than [ * ] the Party whose performance is not
affected by the force majeure condition shall have the option of being
excused, without further obligation, from performance of the Agreement or of
any obligation.
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
17
<PAGE>
ARTICLE 12
RELATIONSHIP OF PARTIES
12.1 No Party is an agent of any other Party and has no authority to
bind any other Party, transact any business in any other Party's name or on
its behalf, or make any promises or representations on behalf of any other
Party. Each Party makes this Agreement and will perform all of its
respective obligations under this Agreement, as an independent contractor,
and no joint venture, partnership or other relationship shall be created or
implied by this Agreement. The employees and agents of each Party are NOT
for any purpose the employees or agents of the other Party.
12.2 During the term of this Agreement and for a period of one year
thereafter, both 3M and Polycom agree that they will not, directly or
indirectly, for their own account or otherwise, solicit for employment or
employ or engage as an independent contractor, consultant or otherwise, any
employee, or former employee employed during the term hereof, of the other
Party without such Party's prior written approval.
ARTICLE 13
NO ASSIGNMENT
This Agreement may not be transferred or assigned, in whole or in part,
by either Party hereto without the written consent of the other Party, except
as a part of the transfer of substantially all of such Party's capital stock,
assets or that portion of the transferring Party's business to which this
Agreement pertains. If at any time prior to [ * ] Polycom fails to cure a
material breach of this Agreement of which Polycom has been notified pursuant
to the terms of Section 1.1(b) or Article 7 above, and given an opportunity
to cure as set forth therein, Polycom agrees to assign this Agreement, at
3M's option, to a third party designated by 3M in writing. In the event of
any such assignment, Polycom agrees to grant such third party a
non-exclusive, royalty-free, non-transferable, non-sublicensable license to
any Polycom intellectual property necessary to the manufacture of any Product
that is developed during the term of, and under, this Agreement for the sole
purpose of development and manufacture of such Product solely for 3M and its
Affiliates.
ARTICLE 14
SURVIVAL
The rights and obligations of the Parties hereto under Articles 2, 4, 5,
8, 9, 14, 16-20, Sections 3.7(b), 3.8 and 12.2 and all rights to payment shall
survive any termination, cancellation or expiration of this Agreement.
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
18
<PAGE>
ARTICLE 15
PARAGRAPH HEADINGS
The title and headings of the various articles of this Agreement are
inserted for convenience of reference only and shall not be constructed to
affect the construction or interpretation of any of its provisions.
ARTICLE 16
WAIVER
Any failure or delay by either Party in exercising any right or remedy in
one or many instances will not prohibit a Party from exercising it at a later
time or from exercising any other right or remedy.
ARTICLE 17
NOTICES
Any notices required or permitted hereunder shall be given in writing
either (a) through, personal delivery by courier with tracking capabilities
or otherwise, (b) by telecopy or other electronic medium to be promptly
followed by confirmation pursuant to subsections (a) or (c), or (c) by
deposit in United States mail, postage paid, certified or registered mail,
return receipt requested to the address stated below or to such other address
notice of which is given in accordance with this Article 17:
If to 3M: Division Vice President
3M Visual Systems Division
Minnesota Mining and Manufacturing Company
3M Austin Center
6801 River Place Boulevard
Austin, Texas 78726-9000
Telecopier No.: 512/984-5191
If to Polycom: Chief Executive Officer
Polycom, Inc.
2584 Junction Avenue
San Jose, California 95134-1902
Telecopier No.: 415/474-2955
All notices shall be deemed given or made (x) on the date delivered if
delivered personally, by courier or otherwise, (y) on the date initially
received, if delivered by telecopy or other electronic
19
<PAGE>
medium followed by confirmation by personal delivery or registered or
certified mail, or (z) on the third business day after it is mailed, if
mailed in accordance with subsection (c) above.
ARTICLE 18
GOVERNING LAW; CHOICE OF FORUM
18.1 THIS AGREEMENT IS ENTERED INTO AND PERFORMABLE IN SANTA CLARA
COUNTY, CALIFORNIA AND ANY QUESTIONS, CLAIMS, DISPUTES OR LITIGATION
CONCERNING OR ARISING FROM THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF
CALIFORNIA, USA WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS DOCTRINES OF
ANY FEDERAL STATE OF THE UNITED STATES OR ANY NATION STATE.
18.2 The Parties agree that both California and Texas have a substantial
relationship to this transaction, and each Party consents to personal
jurisdiction in the courts thereof. Any action or suit arising from or
related to this Agreement shall only be brought by the Parties in any federal
or state court with appropriate jurisdiction over the subject matter
established or sitting in (a) in the case of Polycom, state of Texas, located
in Austin, Texas, and (b) in the case of 3M, the state of California, located
in San Jose, California.
ARTICLE 19
DISPUTE RESOLUTION
19.1 UNAIDED NEGOTIATIONS. To resolve any disputes among the Parties,
3M or Polycom must first provide written notice to the other, specifying in
as much detail as possible the source or reason for the dispute and the
resolution proposed by the notifying Party. The receiving Party shall
respond in writing to any such notice within [ * ] after receipt. The
receiving Party may include in its reply a detailed description of any
disputes it would like to resolve and the proposed resolutions. The first
notifying Party shall respond within [ * ]. If the dispute is not then
resolved there shall follow within [ * ] of the last written response a
meeting between at least one representative of each Party. Each Party agrees
to have present such person or persons who are authorized to fully and
finally resolve the dispute. The purpose of this meeting shall be to discuss
and negotiate in good faith the complete resolution of any outstanding
dispute(s). The date and time shall be mutually agreed (within the stated
period), and the location of the meeting shall be chosen by the Party
responding to the first notice. Each Party shall bear its own costs
(including travel expenses) incident to this negotiation and meeting.
19.2 MEDIATION. Should the procedure outlined above not bring about a
resolution of the dispute, then within [ * ] following the meeting of
principals, the Party first sending the notice shall initiate a voluntary,
nonbinding mediation conducted at a mutually-agreed location (or, if no
location can be agreed upon in Chicago, Illinois), by a mutually-agreed
mediator selected from the membership of the local chapter of the Association
of Attorney-Mediators. Should the Parties for any reason be unable or
unwilling to agree upon a mediator, they shall request the local chapter
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
20
<PAGE>
of the Association of Attorney-Mediators to appoint one of its members for
them. The Parties shall bear equally all costs and expenses (including any
mediator's fees) of this mediation and endeavor in good faith to resolve
their differences. While this mediation shall be nonbinding in all respects
(except agreements in settlement of the dispute negotiated by the Parties),
each Party agrees that:
(a) It shall appear when directed by the mediator, be fully prepared
to work towards a resolution of the dispute, and participate in good faith
in the mediation towards a resolution of all disputed issues or concerns;
(b) The duty to mediate in good faith shall be specifically
enforceable by the courts of California and Texas; and
(c) Should a court in any litigation stemming from the same general
dispute or disagreement among the Parties determine that either did not
participate in good faith in the mediation process hereunder, the court
shall impose against such Party a sanction equal to the other Party's
attorneys' fees in the resulting litigation, [ * ].
19.3 LITIGATION. In the event that the Parties are unable to resolve
any outstanding disagreement or dispute as provided above, then, as a last
resort, either Party may commence litigation; provided, however, that, in the
case of Polycom, it must do so in the courts (state or federal, provided the
court selected has subject matter jurisdiction) of the state of Texas located
in Austin, Texas, and, in the case of 3M, it must do so in the Courts (state
or federal, provided the court selected has subject matter jurisdiction) of
the state of California located in San Jose, California.
ARTICLE 20
ENTIRE AGREEMENT
20.1 This Agreement and the exhibits referred to in this Agreement
supersede and terminate all prior agreements, if any, whether written or
oral, between the Parties with respect to the subject matter contained herein.
20.2 Each Party agrees that it has not relied on any representation,
warranty, or provisions not explicitly stated in this Agreement, and that no
oral statement has been made to either Party that in any way tends to waive
any of the terms or conditions of this Agreement. This Agreement constitutes
the final written expression of all terms of the Agreement, and it is a
complete and exclusive statement of those terms.
20.3 No part of this Agreement may be waived, modified, or supplemented
hi any manner whatsoever (including a course of dealing or of performance or
usage of trade) except by a written instrument signed by duly authorized
officers of the Parties.
(THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK)
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
21
<PAGE>
The Parties, intending to be bound, have signed this Agreement as of the
Effective Date.
3M: MINNESOTA MINING
AND MANUFACTURING COMPANY
By: /s/ C. A. Meek
---------------------------------
Printed Name: C. A. Meek
-----------------------
Title: Division Vice President
------------------------------
Date: 6/6/97
-------------------------------
POLYCOM: POLYCOM, INC.
By: /s/ Michael R. Koucey
---------------------------------
Printed Name: Michael R. Koucey
-----------------------
Title: CFO
------------------------------
Date: 6/10/97
-------------------------------
Exhibit A Specifications for Polycom Product
Exhibit B Migration Schedule
Exhibit C Source Code Escrow Provisions
Exhibit D Minimum Sales Requirements to Maintain
3M's Exclusive Marketing Rights
Exhibit E [ * ] Regulatory Approval
22
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
<PAGE>
EXHIBIT A
SPECIFICATIONS FOR POLYCOM PRODUCT
[ * ]
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
<PAGE>
EXHIBIT B
POLYCOM PRODUCT MIGRATION SCHEDULE
[ * ]
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
<PAGE>
EXHIBIT C
SOURCE CODE ESCROW PROVISIONS
1. INITIAL DEPOSIT. Within [ * ] after the Effective Date of this
Agreement, Polycom shall deposit with Brobeck, Phleger & Harrison, L.L.P.
("Escrow Agent"), a copy of the source code for software owned by Polycom and
incorporated into the Specifications for the Polycom Product, including
related documentation necessary for the manufacture and/or operation of the
Polycom Products ("Initial Deposit").
2. SUPPLEMENTAL DEPOSIT. A "Supplemental Deposit" will include any
materials added to the Initial Deposit by Polycom pursuant to this Exhibit C.
During the term of this Agreement, Polycom will deposit source code (a) for
software owned by Polycom and incorporated into the Specifications for any
Polycom Product and/or 3M Proprietary Product, including related
documentation necessary for the manufacture and/or operation of any such
Products (collectively, "Product Software") and (b) for any upgrades, bug
fixes or new releases of any Product Software within [ * ] of Polycom's
incorporation thereof into a Product. The Initial Deposit together with any
Supplemental Deposits shall be collectively referred to herein as "Deposit
Materials."
3. CONTENT AND ACCURACY. Escrow Agent shall not be responsible for
verifying the contents or validating the accuracy of the Deposit Materials or
Polycom's labeling of the Deposit Materials.
4. RELEASE CONDITIONS. During the term of this Agreement, Escrow Agent
shall release the Deposit Materials to 3M only in accordance with all the
terms and conditions of this Exhibit C and only in the event Polycom:
i. suspends, for [ * ], or terminates its [ * ] business;
ii. becomes subject to any bankruptcy or insolvency proceeding
under federal or state statute, which proceeding is not dismissed within [ * ]
of the filing thereof; or
iii. becomes insolvent or subject to direct control by a trustee,
receiver or similar authority.
The parties expressly acknowledge and agree that there are no other
condition or circumstances under which Escrow Agent may release the Deposit
Materials to 3M, unless otherwise instructed in a writing signed by both
Polycom and 3M or pursuant to a court order.
5. CONDITIONS FOR USE AND LICENSE. As set forth in Section 3.1(d) of
this Agreement and subject to all the terms and conditions of this Agreement
and this Exhibit C, Polycom grants to any
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
<PAGE>
manufacturer chosen by 3M pursuant to Section 3.1(d) an irrevocable (only
during the remaining term of this Agreement), royalty-free, non-transferable,
non-exclusive and non-sublicensable license to use the Deposit Materials for
the sole purpose of manufacturing the Products solely for the account of 3M
and its Affiliates during the term of this Agreement. 3M shall ensure that
any such manufacturer shall not exercise the foregoing license unless and
until one of the release conditions expressly set forth in Paragraph 4 i-iii
above has been triggered and Escrow Agent has released the Deposit Materials
to 3M pursuant to Paragraph 6 below.
6. RELEASE OF DEPOSIT TO 3M. Upon notice to Escrow Agent by 3M (in the
form of an affidavit or declaration by an officer of 3M) of the occurrence of
a release condition as specified in Paragraph 4 above, Escrow Agent shall so
notify Polycom with a copy of the notice from 3M. If Polycom provides
"Contrary Instructions" (as defined below) to Escrow Agent within [ * ] after
the date of Escrow Agent's notice to Polycom, Escrow Agent shall not deliver
the Deposit Materials to 3M. "Contrary Instructions" shall mean the filing of
an affidavit or declaration with Escrow Agent by an officer of Polycom
stating that a Release Condition has not occurred or has been cured.
Escrow Agent will send a copy of any Contrary Instructions to 3M. Upon
receipt of Contrary Instructions, Escrow Agent shall not release any Deposit
Materials and shall continue to store the Deposit Materials until otherwise
directed by Polycom and 3M jointly in writing or by court order.
If Escrow Agent does not receive Contrary Instructions from Polycom,
Escrow Agent is authorized to release the Deposit Materials to 3M pursuant to
this Exhibit C.
7. INDEMNIFICATION. Polycom and 3M each agree to indemnify, defend and
hold Escrow Agent and its partners, officers, employees, contractors and
agents harmless from and against all claims, actions, proceedings, suits,
liabilities, losses, damages, settlements, costs, charges, penalties,
attorneys' fees, and other expenses of any nature as a result of its
obligations or performance of its obligations under this Exhibit C.
8. GENERAL. Subject to all terms and conditions of this Exhibit C,
Escrow Agent may act in reliance upon any written instructions, instrument or
signature reasonably believed to be genuine and may assume that any person
giving any written notice, request, advice or instruction in connection with
or relating to this Exhibit C has been duly authorized to do so. Escrow Agent
is not responsible for failure to fulfill its obligations under this Exhibit
C due to causes beyond its reasonable control. Polycom and 3M expressly
acknowledge and agree that Escrow Agent's only obligations shall be as
expressly and unambiguously set forth in Exhibit C.
C2
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
<PAGE>
EXHIBIT D
MNIMUM SALES REQUIREMENTS TO MAINTAIN 3M'S EXCLUSIVE MARKETING RIGHTS
[ * ]
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
<PAGE>
EXHIBIT E
[ * ] REGULATORY APPROVALS
[ * ]
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
<PAGE>
AMENDMENT
THIS AMENDMENT amends the Joint Marketing and Development Agreement dated
June 6, 1997 (hereinafter "Agreement") between MINNESOTA MINING AND
MANUFACTURING COMPANY, acting through its Visual Systems Division, with its
principal place of business at 3M Center, 6801 River Place Blvd., Austin,
Texas 78726-9000, ("3M"); and POLYCOM, INC., a Delaware corporation, with its
principal place of business at 2584 Junction Avenue, San Jose, California
95134-1902 ("Polycom").
POLYCOM and 3M agree as follows:
1. Delete Subsection 3.2(a) of the Agreement and substitute the following:
(a) [ * ]
2. Delete Subsection 3.4 of the Agreement and substitute the following:
3.4 BRAND NAMES AND PATENT MARKINGS. [ * ]
1
* Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission
<PAGE>
3. This Amendment shall become effective on June 10, 1997.
4. Except as provided herein above all other terms and conditions of the
Agreement remain unamended.
The parties have signed this Amendment on the day and year indicated below.
MINNESOTA MINING AND POLYCOM, INC.
MANUFACTURING COMPANY
BY: /s/ C.A. MEEK BY: /s/ MICHAEL R. KOUREY
------------------------------- -------------------------------
TITLE: Division Vice President TITLE: CFO
---------------------------- ----------------------------
DATE: June 10, 1997 DATE: 6/10/97
----------------------------- -----------------------------
2
<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
------------------ ------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY & FULLY DILUTED
Weighted average common shares outstanding 19,043 13,450 19,001 8,099
Common equivalent shares from options and warrants 0 393 0 254
Common equivalent shares from common stock
subject to repurchase (2) 0 574 0 602
Common equivalent shares from convertible
redeemable preferred stock and warrants 0 3,997 0 7,993
Common equivalent shares from options and
convertable redeemable preferred stock (1) 0 561 0 1,121
------ ------ ------ ------
Total shares 19,043 18,975 19,001 18,069
------ ------ ------ ------
------ ------ ------ ------
Net income (loss):
Amount $ (612) $ 389 $(1,086) $ 523
Per share $(0.03) $0.02 $ (0.06) $0.03
</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 six month period ended June 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 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-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,905
<SECURITIES> 5,003
<RECEIVABLES> 5,683
<ALLOWANCES> 442
<INVENTORY> 8,197
<CURRENT-ASSETS> 34,396
<PP&E> 8,074
<DEPRECIATION> 4,617
<TOTAL-ASSETS> 38,220
<CURRENT-LIABILITIES> 7,797
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 30,413
<TOTAL-LIABILITY-AND-EQUITY> 38,220
<SALES> 11,500
<TOTAL-REVENUES> 11,500
<CGS> 6,148
<TOTAL-COSTS> 6,148
<OTHER-EXPENSES> 5,964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (612)
<INCOME-TAX> 0
<INCOME-CONTINUING> (612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (612)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
