<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 0-27978
-------------
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 No.)
2485 Junction Avenue, San Jose, California 95134
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 474-2900
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0005 PAR VALUE, PER SHARE
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
----- -----
Indicated by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $113,832,810 as of February 27, 1998. Shares
of Common Stock held by each executive officer and director and by each person
who beneficially owns more than 5% of the outstanding Common Stock have been
excluded in that such persons may under certain circumstances be deemed to be
affiliates. This determination of executive officer or affiliate status is not
necessarily a conclusive determination for other purposes.
28,970,672 shares of the Registrant's $0.0005 par value Common Stock were
outstanding as of February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III. Such Proxy Statement
will be filed within 120 days of the fiscal year covered by this Annual Report
on Form 10-K.
<PAGE>
ITEM 1. BUSINESS
Polycom, Inc. (the "Company" or "Polycom") develops, manufactures and
markets teleconferencing products that facilitate meetings at a distance.
With its SoundStation product line, Polycom believes it has established
itself as a leading provider of audioconferencing equipment designed for
group use. SoundStation is a high quality, full-duplex, easy-to-use
audioconferencing solution. The SoundStation products are designed to operate
with local telephone systems throughout the world and Polycom has obtained
regulatory approval for SoundStation's use in 27 countries. Polycom's
technologies permit its SoundStation products to achieve audioconferencing
communications quality that approaches handset communications quality. More
than 175,000 SoundStation systems had been shipped as of December 31, 1997,
and Polycom believes SoundStation is the best selling product in the group
audioconferencing market.
Polycom's innovative ShowStation dataconferencing products, introduced in
November 1995, enables real-time exchange of data and other images over ordinary
phone lines via the rapidly emerging T.120 dataconferencing protocol standard.
ShowStation and ShowStation IP are easy-to-use, high-resolution dataconferencing
solutions that enable groups in multiple locations to simultaneously view, edit
and annotate paper or electronic documents and data in a lights-on environment.
In January 1998, Polycom acquired ViaVideo Communications, Inc.
("ViaVideo") in a stock transaction accounted for as a pooling of interests.
ViaVideo is a development stage company that designs and develops high
quality, low cost, easy-to-use, group videoconferencing systems that utilize
advanced video and audio compression technologies along with
Internet/Web-based features. The first product offering of ViaVideo is the
ViewStation, which commenced first customer shipments in February 1998. The
ViewStation establishes Polycom in the videoconferencing market and provides
the Company with a complete conferencing suite of products.
Polycom's products integrate advanced telecommunications, acoustic, image
capture and processing technologies. Polycom sells its products globally through
marketing and sales relationships with Lucent, MCI, 3M, ConferTech, British
Telecom, Siemens, Sprint, SKC, GBH, Unitel, PictureTel, Hibino, and Hello
Direct, which collectively represented approximately 57% of Polycom's net
product revenues in 1997, and with other resellers and OEMs. In addition,
Polycom also sells its audioconferencing products through its direct sales
force.
Polycom was incorporated in December 1990 in Delaware and has a wholly
owned subsidiary, Polyspan Teleconferencing B.V., a corporation organized under
the laws of the Netherlands. Polycom's principal executive offices are located
at 2584 Junction Avenue, San Jose, California 95134. Its telephone number is
(408) 474-2900.
INDUSTRY BACKGROUND
The telecommunications industry has experienced substantial growth in
recent years. Voice communications have expanded with the proliferation of
cellular phones and voice mail and the emergence of high speed switching
technologies, while the data communications infrastructure has been widely
expanded through the implementation of fax machines, corporate WANs and the
growing use of the Internet. One of the fastest growing segments of the
telecommunications market is equipment and services for teleconferencing, which
includes audioconferencing, videoconferencing and dataconferencing.
Dataconferencing is the sharing of data and documents by groups in multiple
locations over standard telephone lines the proliferation of which has been
enabled by the recent adoption of the T.120 protocol standard.
Numerous factors are driving the growth of the teleconferencing market,
including the development of a global economy, the internationalization of
business organizations, the development of "extended enterprises" of companies
and their suppliers, customers and other business partners and the increasing
corporate emphasis on team projects and group and interoffice communication. As
a result, tools such as voicemail, E-mail and fax machines that allow workers to
communicate more effectively and facilitate business interactions have become
vital to improving productivity in most organizations. To enhance the real-time
exchange of information when face-to-face meetings are not possible or
practical, companies are increasingly seeking advanced teleconferencing
solutions to facilitate meetings at a distance.
Audioconferencing is the essential component of all teleconferencing. In
the audioconferencing market, key enablers such as the audio bridging services
provided by AT&T, MCI, Sprint and other carriers are expanding the use of
2
<PAGE>
audioconferencing as a medium for meetings at a distance and have increased
demand for high quality audioconferencing equipment. For instance, a fifty-point
analyst call that would not have been contemplated only a few years ago is now
commonplace in the investor community. However, despite the widespread adoption
of audioconferencing, the equipment used for audioconferencing has generally
suffered from technology and performance weaknesses. Desktop and built-in
speakerphones, which are the most widely used audioconferencing devices, often
fail to provide clear verbal information exchange as voice transmissions echo,
are distorted and are frequently clipped due to a lack of full-duplex technology
(the ability for both parties to talk and be heard simultaneously). Early
conference speakerphones designed for group use suffer from these same quality
shortcomings. Businesses and other organizations need audioconferencing
equipment that provides high quality, full-duplex sound, is easy to install and
use and is compliant with telecommunications protocols in business centers
around the world.
Since the adoption of the H.320 videoconferencing protocol standard in
1990, organizations have further accelerated the adoption of videoconferencing
as a way to conduct group meetings at a distance. Videoconferencing enhances
remote meetings by permitting groups in disparate locations to see each other
and by making reactions and body language visible. Videoconferencing is,
therefore, the ideal teleconferencing tool for the relationship building aspect
of a remote meeting.
For complex information exchange, dataconferencing is the best tool for the
real-time exchange and annotation of printed or computer-generated information
such as graphics, spreadsheets, engineering diagrams or other detailed visual
data. The T.120 dataconferencing protocol is now emerging and being implemented
as an industry standard. Although the T.120 standard has been adopted by a large
number of the world's leading technology and telecommunications companies, such
as AT&T, British Telecom, IBM, Intel, Microsoft and NEC, many of which are
currently in the process of implementing the standard in their products or
services, the market has historically lacked equipment implementing the standard
that solves growing dataconferencing needs. Businesses and other organizations
require affordable, easy-to-use, high resolution dataconferencing solutions that
enable groups in multiple locations to simultaneously view, edit and annotate
paper or electronic documents and data in a lights-on environment.
THE POLYCOM SOLUTION
Polycom develops, manufactures and markets audioconferencing,
dataconferencing and videoconferencing products that facilitate meetings at a
distance. Polycom's SoundStation product line is a family of audioconferencing
products that provide near handset quality communications. SoundStation products
are easy-to-use, and Polycom's echo cancellation and acoustic technologies
minimize background echoes, word clipping and distortion. Users can engage in
natural, free-flowing discussions without having to shout to be heard or strain
to hear what others are saying. Because of Polycom's patented full-duplex, echo
cancellation technology and the distinctive triangular design of the
SoundStation products, Polycom believes SoundStation is the best selling product
in the group audioconferencing market. The SoundStation is configurable, and has
been approved for use with the local telephone systems in 27 countries.
Polycom's ShowStation dataconferencing products enable real-time exchange
of data and other images between groups or individuals engaged in an
audioconference or videoconference. ShowStation and ShowStation IP provide a
cost-effective method for two or more groups or individuals that are separated
by a distance to view, edit and annotate paper and electronic documents and data
in real-time over standard telephone lines in a lights-on environment.
ShowStation and ShowStation IP incorporate high resolution imaging, data
compression and communications technology in a compact, easy-to-use unit that
includes pen-based editing capabilities and supports mouse-based editing from
remote personal computers.
The Company's revolutionary ViewStation group videoconferencing system
delivers the performance and features of a high-end room videoconferencing
system, but at a fraction of the cost. Offering true ease of use, ViewStation
offers 15-30 frames-per-second video, an embedded Web server, an integrated
presentation system and a voice-tracking camera. Using a unique embedded system
architecture, Polycom is delivering an entirely new generation of high
performance, affordable systems that it believes will radically shift the way
customers view videoconferencing and the status quo of the industry.
3
<PAGE>
PRODUCTS
AUDIOCONFERENCING
Polycom's audioconferencing products are designed to overcome the poor
audio problems associated with traditional speaker phones by providing high
quality, full-duplex, easy-to-use audio.
SOUNDSTATION. SoundStation, Polycom's first product, which was introduced in
September 1992, is a high quality, digital, full-duplex audioconferencing system
that operates over ordinary telephone lines. It provides clear, two-way voice
communications with no echoes, clipping or distortion. Users can engage in
natural, free-flowing discussions without having to shout to be heard or strain
to hear what others are saying. SoundStation's three built-in unidirectional
microphones pick up sound from around the room while limiting reverberation. The
unit's central foam-encased speaker and advanced digital signal processing
("DSP") and integrated software technology eliminate acoustic feedback while
broadcasting sound at sufficient volume and clarity to be heard up to 30 feet
away.
SoundStation has a distinctive design that Polycom believes is widely
associated with high-quality audioconferencing. SoundStation is connected via a
single cord to a power transformer that plugs into a standard electrical outlet
and a telephone cord that connects to a standard telephone outlet. Due to its
inherent simplicity, customers are able to self-install and immediately begin
using the SoundStation. The North American list price for SoundStation is $499.
SOUNDSTATION EX. SoundStation EX contains all of the technology and physical
elements of the SoundStation but also offers two connectors for extendible
microphones. The microphones can extend up to six feet in each direction
allowing the SoundStation EX to accommodate larger conference rooms. Each
extended microphone also contains a mute button and LED mute indicator. An
optional wireless lapel microphone is available for the SoundStation EX that
provides flexibility for stand-up presenters. The North American list price for
SoundStation EX ranges from $799 to $1,299, depending on options.
Polycom also manufactures private label versions of its SoundStation
products for Lucent, 3M, British Telecom and KPN Royal PTT Nederland, N.V.
pursuant to OEM relationships.
SOUNDSTATION PREMIER. Incorporating the latest in DSP technology, the
SoundStation Premier is designed with a 70 MIP DSP. This allows individually
echo-canceled microphones, thereby lowering conference room reverberation or the
echo experienced with most speakerphones. The SoundStation Premier's microphone
switching technology turns on and off each microphone depending on who is
talking. With the additions of an LCD display, caller ID, and infrared remote
control, the SoundStation Premier provides a complete full duplex business
conference phone solution. The North American list price for SoundStation
Premier ranges from $999 to $1,899, depending on options.
SOUNDPOINT AND SOUNDPOINT PC. SoundPoint, Polycom's first desktop conference
phone adjunct product is designed for the office environment. The SoundPoint
product is connected between the telephone line and an analog telephone set, and
provides near handset quality full duplex conversations. A special version of
this SoundPoint is manufactured for direct communication to Lucent's Definity
telephone sets, pursuant to the Lucent OEM relationship. The SoundPoint PC
variant is designed for desktop videoconferencing and Internet telephony
applications. The SoundPoint PC is connected to a personal computer video codec
or sound card, through a standard set of audio jacks and includes a handset when
more privacy is desired. The North American list price for SoundPoint and
SoundPoint PC is $299.
Sales of the SoundStation product line have accounted for a substantial
majority of Polycom's net revenues through December 31, 1997, and Polycom
anticipates that such sales will continue to account for a substantial amount of
its net revenues at least through the year ending December 31, 1998. The market
for Polycom's SoundStation products is subject to technological change, new
product introductions by Polycom or its competitors, and continued market
acceptance of the SoundStation product line. Any factor adversely affecting the
demand or supply for the SoundStation product line could materially adversely
affect Polycom's business, financial condition or results of operations.
4
<PAGE>
DATACONFERENCING
Polycom's dataconferencing products are designed to allow for the real-time
exchange of data and other images between groups or individuals engaged in an
audioconference or videoconference. By integrating audioconferencing and
dataconferencing, Polycom's products are designed to significantly enhance the
productivity of workers, allowing them to conduct meetings remotely with a level
of data exchange that Polycom believes has traditionally been possible only
through a personal meeting.
SHOWSTATION AND SHOWSTATION IP. ShowStation, Polycom's first dataconferencing
product, is a fully integrated, easy-to-use unit that can exchange and project
data, documents and images using corporate LAN connections or ordinary telephone
lines between ShowStations. In addition, the ShowStation can exchange data,
documents and images using ordinary telephone lines with any personal computers
that utilize T.120 dataconferencing protocol software, such as the DataBeam
software that is distributed by Polycom. Working in tandem with the
SoundStation, ShowStation provides a cost-effective method for two or more
groups or individuals that are separated by a distance to simultaneously view,
discuss, edit and annotate paper or electronic documents and data in a lights-on
environment. Multipoint dataconferences are possible through connections
generally established by a dataconferencing bridge service, such as ConferTech
or MCI, which merge multiple network connections so that each participant can
communicate with all other participants. ShowStation incorporates advanced
imaging, data compression and communications technology utilizing over 250,000
lines of code into a compact and easy-to-use unit. Polycom plans to begin
shipping its next generation of ShowStation products, with enhanced features, in
the first quarter of 1998.
ShowStation and ShowStation IP capture an image of the original document
using an integrated camera or receives data from a personal computer and
displays a high-resolution image on a flat-panel LCD display. Light is then
projected through the LCD panel and onto a screen for local viewing, without
having to dim conference room lights. Simultaneously, the image is compressed
and transmitted over a standard telephone line using the T.120 open standard
protocol to other ShowStations or certain T.120-compliant computer or projection
devices where the image is decompressed and projected. The images can then be
annotated or highlighted in real-time by the transmitting person or any of the
document recipients using an integrated computer pen or through mouse-based
editing from remote personal computers and saved in memory for review and
printing. Pen or mouse annotations can be seen simultaneously by all parties
participating in the dataconference and each ShowStation can print the image and
all annotations on a printer connected via a serial cable.
To facilitate PC-connectivity to ShowStation products, Polycom supplies,
for a fee, copies of DataBeam's T.120 communications software, which can then be
loaded onto a PC. Polycom anticipates that the T.120 protocol will be
incorporated into future versions of Windows and other operating systems so that
any computer running such operating system will be able to participate in a
dataconference with a ShowStation over an ordinary telephone line. Additionally,
the ShowStation IP will likely include browser software that enable connections
with an unlimited number of remote sites using the Internet or an existing
corporate Intranet; however, due to potential technological difficulties in
implementing this feature, there can be no assurance that this will happen.
Company will be able to incorporate. The North American list price for the
first generation of the ShowStation product ranges from $9,995 to $11,995
depending on options. The North American list price for the next generation
ShowStation IP product has been announced as starting at $12,999.
Polycom's future growth is substantially dependent on net revenues
generated from sales of Polycom's next generation of ShowStation products.
In November 1995, Polycom began customer shipments of its first generation
ShowStation products. ShowStation IP, the next generation ShowStation
product, is targeted for first customer shipment in March 1998.
Dataconferencing is an emerging market and there can be no assurance that it
will develop sufficiently to enable Polycom to achieve broad commercial
acceptance of its ShowStation products. Because the dataconferencing market
is relatively new and evolving, and because current and future competitors
are likely to introduce competing dataconferencing products, it is difficult
to predict the rate at which demand for Polycom's next generation of
ShowStation products will grow, if at all, or to predict the level of future
growth, if any, of the dataconferencing market. If the dataconferencing
market fails to grow, or grows more slowly than anticipated, Polycom's
business, operating results and financial condition would be materially
adversely affected. Although there are currently no products in the
dataconferencing market that offer all of the same functions and features as
the next generation of ShowStation products, there are products that enable
users to participate in a dataconference and other products, such as
multimedia presentation products, that are not designed primarily for
dataconferencing but can be used to provide a dataconferencing solution.
There can be no assurance that the market for dataconferencing products with
the functions
5
<PAGE>
and features of the next generation of ShowStation products will achieve
broad commercial acceptance or that the market for Polycom's new ShowStation
IP product will grow.
Even if the market for dataconferencing products does develop, there can
be no assurance that Polycom's next generation of ShowStation products will
achieve commercial success within such market. Due to the unique nature of
the new ShowStation products, Polycom believes it will be required to incur
significant expenses for sales and marketing, including advertising, to
educate potential customers as to the desirability of ShowStation. Polycom
also expects to incur substantially longer sales cycles with respect to its
ShowStation products than has been the case for the SoundStation products. In
addition, the list price of the ShowStation products, which is significantly
higher than the SoundStation product, could significantly limit consumer
acceptance of the ShowStation products. Furthermore, given the significant
differences between the SoundStation and the ShowStation products, Polycom is
developing new distribution channels for the ShowStation products and there
can be no assurance that Polycom will be successful selling the next
generation of ShowStation products through these distribution channels. In
addition, Polycom's ShowStation products comply with certain layers of the
emerging T.120 standard. Increasing market acceptance and longevity of the
T.120 standard is in part a function of user acceptance and the incorporation
of the T.120 standard into personal computer operating systems,
teleconferencing appliances and network infrastructures and is, therefore,
difficult to predict. Because of Polycom's focus on the T.120 standard,
Polycom's business, financial condition and results of operations would be
materially adversely affected if another technology were to significantly
challenge or replace the emerging T.120 industry standard. Broad
commercialization of Polycom's next generation of ShowStation products will
require Polycom to overcome significant technological and market development
obstacles, many of which may not be currently foreseen.
Polycom's new ShowStation products are extremely complex and because of
the recent introduction of these products, Polycom has not yet had experience
with respect to the performance and reliability of these products. If
Polycom's new ShowStation products have performance, manufacturability,
reliability or quality problems or shortcomings, then Polycom may experience
reduced orders, higher manufacturing costs and additional warranty and service
expenses which would have a material adverse effect on Polycom's business,
financial condition and results of operations. For example, Polycom chose to
stop shipments of its ShowStation products from mid-January 1996 through the
end of February 1996 to correct software and other technical problems
identified by initial customers. Also, the new ShowStation IP product has been
delayed from its planned first shipment target date in 1997 due to engineering
design changes and certain technical difficulties. There can be no assurance
that the new ShowStation products will be able to achieve or sustain
commercial acceptance, that sales of the new ShowStation products will account
for a material part of Polycom's net revenues or that Polycom will be able to
achieve volume manufacturing. Failure of the next generation of ShowStation
products to achieve first customer shipment in March 1998 or achieve and
sustain commercial acceptance, or of Polycom or its contract manufacturer to
achieve volume manufacturing would have a material adverse effect on Polycom's
business, financial condition and results of operations.
VIDEOCONFERENCING
Polycom's videoconferencing products are designed to be low cost, high
quality alternatives to the expensive videoconferencing products in the market
today.
VIEWSTATION. As its entree into the videoconferencing market, Polycom's
ViewStation group videoconferencing system is a revolutionary video product that
delivers the performance and features of a high-end room videoconferencing
system, but at a fraction of the cost, at an industry-leading price point of
$5,999. The new ViewStation is the first videoconferencing system to include an
embedded web server, an integrated presentation system and ease-of-use features,
which make videoconferencing setup and use more automatic. Using a unique
embedded system architecture, Polycom is the first company to deliver an
entirely new generation of high performance, affordable systems that the Company
hopes will shift the way customers view videoconferencing and the status quo of
the industry.
ViewStation delivers the power of a group system in a convenient footprint
about the size of a sheet of notebook paper. ViewStation delivers high-quality
images on small or large display monitors and is a completely self-contained
unit that sits atop an S-Video or composite television monitor. ViewStation is
one of the first systems to implement the H.263 video compression algorithm that
delivers enhanced video performance at 128kbps. With a targeted first
customer ship date in April 1998, the ViewStation will provide a 30
frames-per-second, 384kbps or 512kpbs option to provide premium-quality
full-motion
6
<PAGE>
video. Using a unique, high-performance low-delay codec architecture,
ViewStation has a short delay and is fully interoperable with legacy
videoconferencing systems using the H.320 standard. ViewStation supports full
dual monitor functionality as a standard feature, as well as VCR
playback/record and a document or second room camera. ViewStation also
supports high resolution Annex D slide send and receive.
Integrating Polycom's market-leading Acoustic Clarity Technology-TM-,
ViewStation provides full-duplex, digital audio with noise suppression and
echo cancellation which adapts almost instantly to the changing
characteristics of the conference room to deliver crystal-clear audio. In
addition, ViewStation supports the G.711, G.722 and G.728 audio standards.
The custom digital tabletop microphone pod uses the latest hypercardioid
microphone technology and will be able to be daisy-chained to provide superb
audio coverage for even the largest conference rooms, although there can be
no assurances that the daisy chain feature will be available. ViewStation
also includes as a standard feature a telephone connection for audio only
additions to the videoconference.
As with the ShowStation IP product, Polycom's future growth is
substantially dependent on net revenues generated from sales of the
ViewStation. There can be no assurance that the launch of the 512/384kbps
version will be on schedule, that the manufacturing ramp of the ViewStation
products will be successful or that the market for Polycom's videoconferencing
products will achieve broad commercial acceptance. Also, since this product
was originally developed by ViaVideo Communications, Inc., the success of the
integration of this company into Polycom will have an impact on the success of
the release of this product. There can be no assurance that the integration
will be successful. Failure of the launch and manufacturing ramp of the
ViewStation products or failure to successfully integrate ViaVideo
Communications, Inc. into Polycom would have a material adverse effect on
Polycom's business, financial condition and results of operation.
TECHNOLOGY
Polycom intends to continue to invest in and leverage its core technologies
to develop and introduce audioconferencing and dataconferencing product
enhancements and new products. Polycom's core technologies include the
following:
ECHO CANCELLATION. Traditional speakerphone architectures employ suppression
technology to compensate for the echo problems resulting from the feedback
caused by microphones and speakers being located in close proximity. Suppressors
solve the problem by only allowing one side of the telephone connection to talk
at a time. Historically, this has been done by using simple metrics to locally
determine which side is speaking more loudly. This often causes numerous
problems during the course of a natural conversation such as words or even
entire phrases being clipped off because both ends of the call were speaking
simultaneously. Polycom's patented DSP software solves this problem by building
and continually updating a model of how the sound waves reflect off the walls
and obstructions in a room. This software, comprised of over 10,000 lines of
assembly microcode, then calculates an echo canceling signal that is subtracted
from the microphone signal, thereby removing the echoes while still allowing
both the speaker and the microphone to remain on at the same time.
ACOUSTICS TECHNOLOGY. The design and interaction of transducers within a
full-duplex audio device significantly impacts the effectiveness of the digital
echo canceling systems and the sound quality. Working with carefully designed
algorithms and electronics, Polycom develops and designs proprietary speaker and
microphone enclosure systems that are a critical part of high-clarity,
audioconferencing systems.
IMAGE PROCESSING TECHNOLOGY. Polycom has invested a significant amount of
its research and development efforts on the design and implementation of
high-resolution document cameras that provide XGA resolution (1024 x 768
pixels) images in a compact package. XGA resolution was achieved by
developing a method by which two television resolution charge coupled devices
("CCDS") are seamed together to form a single high resolution image.
Significant advancements in fine scale device alignment and mounting as well
as in high speed DSP software to compensate for lens blurring, non-uniform
lighting conditions and natural CCD device variations were required to
achieve the target. The result is a cost-effective document scanning system
that captures and displays type sizes as small as 10 points.
IMAGE COMPRESSION TECHNOLOGY. Polycom uses the international standard known
as Joint Bi-Level Image Group ("JBIG") to achieve rapid image transmission
rates. Polycom employs certain modes of this algorithm to enable images to be
transmitted incrementally, allowing an image to achieve legibility within a
minimum time. Polycom was the editor of, and principal contributor to, the T.126
layer of the T.120 protocol for still-image transfer that incorporated JBIG and
optimizations utilized in ShowStation. Polycom developed a high performance
implementation of this algorithm for incorporation into DataBeam's standard
T.120 toolkit to enable throughput to be achieved even if a low-end computer is
used
7
<PAGE>
to compress and send images over standard telephone lines. DataBeam's T.120
toolkit has been licensed by numerous other software and hardware providers.
OPTO-MECHANIC TECHNOLOGY. To achieve "lights on" LCD projection and high
resolution image capture, Polycom has developed core technologies in optical
systems, including LCD cooling for uniformity, light collection efficiency and
light source cooling for extended lamp life with minimal sound. This has
resulted in a projected image that is uniformly illuminated and viewable with
normal room lighting.
COMMUNICATION PROTOCOLS. Polycom is a leader in the development and adoption
of the T.120 protocol standard for dataconferencing devices. The T.120 protocol
standard separates multipoint conferencing services into several layers that
address data conferencing through various communications networks. These layers
are generally implemented in software and control the manner in which data is
communicated and is processed and presented to the end user. Layers of T.120
functionality are being developed and deployed by numerous major international
communications companies. In conjunction with this standardization process,
Polycom co-founded the Consortium for Audiographic Teleconferencing Standards in
order to encourage broad industry coordination and advocacy of T.120 technology,
thereby encouraging the development of the availability of desktop software and
bridging services to support Polycom's product offerings. This organization was
merged with the advocacy body for H.320, the video conferencing standard, to
become the International Multimedia Teleconferencing Consortium ("IMTC") with
the broader goal of insuring industry-wide H.320 and T.120 interoperability,
integration and advocacy. Additionally, the Personal Conferencing Work Group
("PCWG") recently merged into the IMTC. A representative of Polycom sits on the
board of directors of this consortium, which includes companies such as AT&T,
IBM, Intel, Microsoft and PictureTel, each of which has incorporated, or
announced its intention to incorporate, various layers of the T.120 standard
into their products.
TELEPHONY INTERFACES. Polycom has developed a single telephone network
interface circuit that is configurable either by Polycom or its resellers so
that Polycom's products will comply with various international telephone network
requirements. Polycom's SoundStation product is currently approved for use in 27
countries. Polycom believes this will expedite the regulatory approval of new
audioconferencing, dataconferencing and videoconferencing products globally.
SALES AND DISTRIBUTION
Polycom markets its SoundStation and ShowStation products primarily to
Fortune 1000 companies through a national account program both directly and in
coordination with its resellers and also markets its products directly to
certain U.S. government organizations through a General Services Administration
("GSA") contract. Polycom believes that most of its national account customers
have placed multiple orders for products from Polycom. As of December 31, 1997,
Polycom had approximately 315 signed national accounts. Polycom believes that it
is important to maintain a close working relationship with these large customers
in order to meet their demands for sales and support on a multinational basis.
Polycom sells its products in North America through a group of approximately 48
resellers, including Lucent, ConferTech, MCI, Hello Direct, Sprint, 3M, British
Telecom, Siemens, SKC, GBH, Unitel, PictureTel and Hibino. Many of these
resellers sell a variety of teleconferencing products and/or services and, with
Polycom's products, offer a complete teleconferencing product portfolio. One of
these resellers, Hello Direct, sells a competing audioconferencing product that
it purchases from Gentner and relabels under the Hello Direct name. Also,
PictureTel has been an OEM reseller for the ShowStation product yet provides
competing products to the Polycom videoconferencing business. In addition to
working through resellers, Polycom also sells its products directly through its
internal sales force and through a national account group. The national account
managers focus on strategic selling and the development of major account
relationships, while internal sales representatives devote time to pursuing the
sales opportunities within a signed national account. In order to minimize
channel conflict with resellers, the national account managers are compensated
on a channel-neutral basis and are responsible for resolving any channel
conflict in the field. To complement its direct sales efforts, Polycom runs
direct response advertising in in-flight magazines and selected business
publications. Polycom maintains North American sales offices in the metropolitan
areas of Boston, Chicago, Cleveland, Dallas, New York and San Jose.
Polycom sells its SoundStation and ShowStation products primarily through
resellers. Polycom will sell its ViewStation product through resellers beginning
in 1998. Polycom's resellers accounted for approximately 64%, 67%, and 71% of
Polycom's net revenues in 1997, 1996, 1995, respectively. Lucent Technologies
accounted for 10% of net revenue in 1997 and ConferTech accounted for 11% of net
revenues in 1995. No other customer or reseller accounted
8
<PAGE>
for more than 10% of Polycom's net revenues during the periods indicated and
no customer or reseller accounted for more than 10% of net revenues in 1996.
Resellers generally offer products of several different companies, including
products that compete with Polycom's products. Accordingly, these resellers
may give higher priority to products of other suppliers, thus reducing their
efforts to sell Polycom's products. Agreements with resellers may be
terminated at any time. A reduction in sales effort or termination of a
distribution relationship by one or more of Polycom's resellers could have a
material adverse effect on future operating results. Use of resellers also
entails the risk that resellers will build up inventories in anticipation of a
growth in sales. If such sales growth does not occur as anticipated by these
resellers, these resellers may substantially decrease the amount of product
ordered in subsequent quarters, causing or contributing to fluctuations in
Polycom's future operating results. Furthermore, although Polycom takes steps
to reduce channel conflict, sales by Polycom's direct sales force to potential
and current customers of these resellers could have an adverse effect on
Polycom's reseller relationships. The teleconferencing distribution industry
has historically been characterized by rapid change, including consolidations
and financial difficulties of certain resellers and the emergence of
alternative distribution channels. In addition, there is an increasing number
of companies competing for access to these channels. The loss or
ineffectiveness of any of Polycom's major resellers could have a material
adverse effect on Polycom's operating results. There can be no assurance that
Polycom will be able to successfully sell its products through any new
channels that Polycom may be required to develop as a result of the foregoing
or any other factors. Polycom has signed distribution agreements with
potential distributors and is in the process of negotiating other agreements
for its next generation of ShowStation and first-generation ViewStation
products. Polycom entered into distribution agreements with 3M in March, 1997
and June 1997, and such agreements have certain exclusivity provisions and
minimum purchase requirements. The Company's results of operations with
respect to its next generation ShowStation and first generation ViewStation
products, at least in the near term, will be substantially dependent on the
success of 3M as a reseller of such products. There can be no assurance that
Polycom or 3M will be able to successfully develop a distribution network for
the next generation of Polycom's ShowStation or first generation ViewStation
products; if no such distribution networks are developed it would have a
material adverse effect on Polycom's business, financial condition and results
of operations.
Polycom has historically focused its international sales efforts in regions
of the world where it believes customers have begun to invest significantly in
teleconferencing equipment and services. These regions currently include the
United Kingdom, France, Germany, Italy, Japan, Australia and parts of Southeast
Asia. Polycom intends to significantly expand its international distribution
network. The principal international resellers of Polycom's products currently
include British Telecom, Unitel, Dynamic Communications, Ltd., Genedis, Hibino
Corporation, PTT Telecom, Siemens, Singapore Telecom and Telenor.
Polycom's net revenues from international sales represented approximately
23%, 23%, and 24% of Polycom's total net revenues in the years ended December
31, 1997, 1996, 1995, respectively. In 1997, price reductions offset unit
growth internationally and the $3.0 million in revenue associated with the
First 3M Agreement offset other product revenue growth in the Company's
international business. The reduction in the percentage of international net
revenues for 1996 from 1995 resulted from initial sales of the SoundPoint and
SoundStation Premier product families, which were introduced first in North
America. Polycom is establishing product distribution centers in the European
and Asian markets in order to better serve its international customers, which
will increase the costs associated with such international operations.
International sales are subject to a number of risks, including changes in
foreign government regulations and telecommunications standards, export
license requirements, tariffs and taxes, other trade barriers, fluctuations in
currency exchange rates, difficulty in collecting accounts receivable,
difficulty in staffing and managing foreign operations and political and
economic instability. Sales to international resellers are usually made in
U.S. dollars in order to minimize the risks associated with fluctuating
foreign currency exchange rates. To date, a substantial majority of Polycom's
international sales have been denominated in U.S. currency, however, Polycom
expects that in the future more international sales may be denominated in
local currencies. Declines in currency exchange rates, as happened in the
Asian market in late 1997, could cause Polycom's products to become relatively
more expensive to customers in a particular country, leading to a reduction in
sales or profitability in that country. Also, current economic conditions in
Asia may generally reduce demand for the Company's products which would have a
material adverse effect on Polycom's business, financial condition and results
of operation. In addition, the costs associated with developing international
sales may not be offset by increased sales in the short term, or at all.
9
<PAGE>
CUSTOMER SERVICE AND SUPPORT
Polycom believes that service and support are critical components of
customer satisfaction. Polycom maintains and supports products sold directly
by Polycom to its North American customers, while resellers maintain and
provide technical support to their end-user customers. Polycom operates a
toll-free Technical Service Center "hotline" to provide a full range of
telephone support to its North American resellers and to Polycom's end-user
customers. If an issue cannot be resolved remotely or through product repair
and return, Polycom or its reseller may dispatch a service engineer to the
customer site. Internationally, customer service is provided to the end-user
by either Polycom or local resellers.
Polycom generally warrants its products for 12 months and offers
24-month dataconferencing and 60-month audioconferencing warranties to
national accounts. As of December 31, 1997, Polycom's warranty expense has
not been significant; however, due to uncertainties concerning the service
and support requirements of the ShowStation IP and ViewStation products,
Polycom may experience higher warranty claims in the future. Polycom offers a
variety of installation, maintenance and extended warranty services that are
fulfilled either directly by Polycom or by an authorized reseller.
RESEARCH AND DEVELOPMENT
Polycom believes that its future success depends in part on its ability
to continue to enhance its existing products and to develop new products
that maintain technological competitiveness. Polycom's current development
efforts are focused on each of the audioconferencing, dataconferencing and
videoconferencing businesses. In the audioconferencing market, Polycom is
developing SoundStation and SoundStation Premier product line extensions
into the higher and the lower end of the market. In the dataconferencing
market, Polycom is devoting significant resources to developing a next
generation of its ShowStation products. In the videoconferencing market,
Polycom's ViewStation is currently being demonstrated. Polycom intends to
expand upon these new product platforms through the development of options,
upgrades and future product generations. There can be no assurance, however,
that these products will be made commercially available as expected or
otherwise on a timely and cost-effective basis or that, if introduced, these
products will achieve market acceptance. Furthermore, there can be no
assurance that these products will not be rendered obsolete by changing
technology or new product announcements by other companies.
Polycom believes that the structure of its development group represents
a significant competitive advantage for Polycom. The development staff
includes product marketing personnel in order to maintain channel and
customer input throughout the development phase. This team structure is the
basis for an integrated process designed to enable Polycom to develop
superior products with minimum time-to-market. Additionally, the development
staff focuses on Polycom's core technologies and outsources other development
tasks such as industrial design. This structure is designed to enable Polycom
to devote its key resources to technological advancement in its primary areas
of business.
Research and development expenses were approximately $9.1 million, $7.6
million, and $6.9 million for the years ended 1997, 1996 and 1995,
respectively. Polycom believes that significant investments in research and
development are required to remain competitive since technological
competitiveness is key to its future success. As a consequence, Polycom
intends to continue to make substantial investments in product and technology
development. Polycom also intends to continue to drive the adoption of the
emerging T.120 protocol and other teleconferencing industry standards.
The audioconferencing, dataconferencing and videoconferencing markets
are subject to rapid technological change, frequent new product introductions
and enhancements, changes in end-user requirements and evolving industry
standards. Polycom's ability to remain competitive in this market will depend
in significant part upon its ability to successfully develop, introduce and
sell new products and enhancements on a timely and cost-effective basis. The
success of Polycom in developing new and enhanced products depends upon a
variety of factors, including new product selection, timely and efficient
completion of product design, timely and efficient implementation of
manufacturing, assembly and test processes, product performance at customer
locations and development of competitive products and enhancements by
competitors. Polycom is currently engaged in the development of several new
products and extensions of the SoundStation, SoundStation Premier,
SoundPoint, ShowStation and ViewStation product families, and expects to
continue to invest significant resources in new product development and
enhancements to current and future products. In addition, Polycom's
introduction of its next generation of ShowStation, and its introduction of
ViewStation and other new products could result in higher warranty claims,
product returns and manufacturing, sales and marketing and other expenses
that could materially adversely affect Polycom's business, financial
condition or results of operations. There can be no assurance that Polycom
will be successful in selecting, developing, manufacturing and marketing, or
10
<PAGE>
recognize a return on new products or enhancements. The inability of Polycom
to introduce new products or enhancements on a timely and cost-effective
basis that contribute significantly to net revenues would have a material
adverse effect on Polycom's business, financial condition and results of
operations. In the past, Polycom has experienced delays from time to time in
the introduction of certain of its products. In particular, 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, new product or technology
introductions by Polycom's competitors could cause a decline in sales or loss
of market acceptance of Polycom's existing products or new products. Further,
from time to time, Polycom may announce new products, capabilities or
technologies that have the potential to replace Polycom's existing products
or future products. There can be no assurance that announcements of product
enhancements or new product offerings by Polycom or its competitors will not
cause customers to defer or stop purchasing Polycom's products.
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 has provided $3.0
million in funding to Polycom for certain deliverables related to the
development of the next generation dataconferencing product and will also
provide shared technology resources for the development of future products.
Polycom granted 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. 3M also has certain rights of first offer under its
stock warrant agreement with Polycom which will give 3M the right, for a
period of 45 days after the Effective Time, to purchase approximately one
million shares of Polycom Common Stock at a purchase price of $7.50 per
share. In February 1998, 3M exercised this option and purchased approximately
one million shares of Polycom common stock for a consideration of
approximately $7.6 million. As a result of the purchase, 3M owns
approximately 3.5% of outstanding Polycom common stock.
In June 1997, the Company entered into a second joint marketing and
development agreement with 3M (the "SECOND AGREEMENT"). Under this
agreement, 3M will provide $2.5 million in funding to Polycom for certain
deliverables related to the development of videoconferencing products and may
also provide shared technology resources for the development of future
products. However, in order to receive the funding, Polycom must meet
certain milestones as outlined in the agreement. There can be no assurance
that the Company will meet these milestones or receive the funding. If this
funding is not received, it may have a material adverse effect on Polycom's
business, financial condition or results of operations. Polycom agreed to
grant 3M exclusive private-label rights in certain distribution channels to
the products developed under this agreement. As of December 31, 1997, the
Company has not recognized any revenue under this agreement.
COMPETITION
The market for teleconferencing products is highly competitive and
subject to rapid technological change, regulatory developments and emerging
industry standards. Polycom expects competition to persist and increase in
the future. In the audioconferencing market segment, Polycom's major
competitors include Coherent Communications Systems Corporation, NEC,
Gentner, Lucent (one of Polycom's resellers), Panasonic and other companies
that offer lower cost full duplex speakerphones such as Hello Direct (one of
Polycom's resellers). Hello Direct offers a competitive product under the
Hello Direct name through an OEM relationship with Gentner. Most of these
companies have substantially greater financial resources and production,
marketing, engineering and other capabilities than Polycom with which to
develop, manufacture, market and sell their products. In addition, all major
telephony manufacturers produce hands-free speakerphone units that are a
lower cost, lower quality alternative to Polycom's audioconferencing
products.
In the dataconferencing market, Polycom's major competitors include
Microfield Graphics, Inc. and SMART Technologies, Inc., which have
substantially greater financial resources and production, marketing,
engineering and other capabilities than Polycom with which to develop,
manufacture, market and sell their products. In addition, in this market
segment, videoconferencing, PC-based communications solutions and multimedia
presentation products may be an alternative for certain applications. Also,
several LCD projector products are available from manufacturers such as In
Focus Systems, Inc., Proxima Corporation and 3M. These products have local
projection only capabilities but may compete with ShowStation IP for basic
functionality and budget dollars. 3M is an OEM distributor for Polycom for its
ShowStation IP, ViewStation and SoundStation product lines.
11
<PAGE>
In the videoconferencing market, Polycom's major competitors include
PictureTel, which dominates the group videoconferencing market and which is a
significant distributor of Polycom dataconferencing products, VTEL, CLI
(recently acquired by VTEL), Intel, Sony, NEC, Tandberg, Mitsubishi,
Panasonic, Fujitsu, British Telecom, General Plesey Telecommunications and
Vista Communications Instruments. Most of these companies have substantially
greater financial resources and production, marketing, engineering and other
capabilities than Polycom with which to develop, manufacture, market and
sell their products. In addition, with advances in telecommunications
standards, connectivity, and video processing technology and the increasing
market acceptance of videoconferencing, other established or new companies
may develop or market products competitive with Polycom's videoconferencing
products.
Polycom believes its ability to compete depends on such factors as
reputation, quality, customer support and service, price, features and
functions of products, ease of use, reliability, and marketing and
distribution channels. Polycom believes it competes favorably with respect to
each of these factors. However, there can be no assurance that Polycom will
be able to compete successfully in the future with respect to any of the
above factors.
Polycom expects its competitors to continue to improve the performance
of their current products and to introduce new products or new technologies
that provide improved performance characteristics. New product introductions
by Polycom's competitors could cause a significant decline in sales or loss
of market acceptance of Polycom's existing products and future products. For
example, 3Com/USR, a former competitor, introduced an audioconferencing
product that was sold at a price substantially lower than Polycom's list
price for SoundStation. Polycom believes that the possible effects from this
ongoing competition may be the reduction in the prices of its products and
its other competitors' products or the introduction of additional lower
priced competitive products. Although such reduction was not in direct
response to the introduction of a lower priced audioconferencing product by
3Com/USR, Polycom reduced the North American list price of its SoundStation
product line by 37% in January 1997 and the International price by 30%
effective April 1997 which resulted in lower gross margins. Polycom expects
this increased competitive pressure may lead to intensified price-based
competition, resulting in lower prices and gross margins which would
materially adversely affect Polycom's business, financial condition and
results of operations. There can be no assurance that Polycom will be able
to compete successfully.
MANUFACTURING
Polycom's manufacturing operations consist primarily of materials
planning and procurement, test development and manufacturing engineering.
Polycom subcontracts the manufacture of its SoundStation and SoundStation
Premier product families to International Manufacturing Services, Inc.
("IMS"), a global third party contract manufacturer. Polycom is currently
launching the manufacturing of its ViewStation products at IMS. Polycom uses
IMS's Thailand facilities and should there be any disruption in supply due to
recent economic and political difficulties in Thailand and Asia, such
disruption would have a material adverse effect on Polycom's business,
financial condition and result of operations. IMS is ISO 9002 approved and has
British Approvals Board for Telecommunications ("BABT") registration.
Polycom's products are quality tested by automated test equipment with final
functional tests performed on equipment and with processes developed or
approved by Polycom. Polycom manufactures its SoundPoint product through
General Electronics (H.K.) Ltd., a Hong Kong based contract manufacturer.
Polycom is in the process of finalizing negotiations with a contract
manufacturer for its next generation of ShowStation products.
Polycom is located in the San Francisco Bay Area, which has in the past
and may in the future experience significant, destructive seismic activity
that could damage, destroy or disrupt Polycom's facilities or its
operations. Polycom maintains no earthquake insurance for damages or
business interruptions. In the event that Polycom or its contract
manufacturers were to experience financial or operational difficulties that
are not covered by insurance, it would adversely affect Polycom's results of
operations until Polycom could establish sufficient manufacturing supply
through an alternative source, and the effect of such reduction or
interruption in supply on results of operations would be material. Polycom
believes that there are a number of alternative contract manufacturers that
could produce Polycom's products, but in the event of a reduction or
interruption of supply, for any reason, it would take a significant period of
time to qualify an alternative subcontractor and commence manufacturing,
which would have a material adverse effect on Polycom's business, financial
condition and results of operations. Also, the Company is working toward
solutions to the Company's information systems year 2000 problems. Failure to
successfully resolve these
12
<PAGE>
problems could have an adverse affect on Polycom's business, financial
condition or results of operations. See "Readiness for Year 2000."
Certain key components used in Polycom's products are currently
available from only one source and others are available from only a limited
number of sources. Components currently available from only one source
include certain key integrated circuits and optical elements. Polycom also
obtains certain plastic housings, metal castings and other components from
suppliers located in Hong Kong and China, and any political or economic
instability in that region in the future, or future import restrictions, may
cause delays or an inability to obtain such supplies. Polycom has no supply
commitments from its suppliers and generally purchases components on a
purchase order basis either directly or through its contract manufacturers.
Polycom and Polycom's contract manufacturers have had limited experience
purchasing volume supplies of components for its audioconferencing,
dataconferencing and videoconferencing product lines and some of the
components included in these products, such as microprocessors and other
integrated circuits, have from time to time been subject to limited
allocations by suppliers, and there can be no assurance that Polycom will not
in the future be subject to component supply allocations that would adversely
affect Polycom's operating results. In the event that Polycom or its contract
manufacturer were unable to obtain sufficient supplies of components or
develop alternative sources as needed, Polycom's operating results could be
materially adversely affected. Moreover, operating results could be
materially adversely affected by receipt of a significant number of defective
components, an increase in component prices or the inability of Polycom to
obtain lower component prices in response to competitive price reductions.
Additionally, Polycom's videoconferencing products are designed to be
compatible with certain integrated circuits produced by Philips and certain
video equipment produced by Sony. If Polycom could no longer obtain such
integrated circuits or video equipment, Polcom would incur substantial
expense and take substantial time in redesigning its products to be
compatible with components from other manufacturers which would have a
material adverse impact on the profitability of the Company. Additionally,
both Sony and Philips are competitors of Polycom in the videoconferencing
market which may adversely affect Polycom's ability to obtain necessary
components. Failure to obtain adequate supplies could prevent or delay
product shipments which could materially and adversely affect Polycom's
business, financial condition or results of operations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
While Polycom relies on a combination of patent, copyright, trademark
and trade secret laws and confidentiality procedures to protect its
proprietary rights, Polycom believes that factors such as technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position.
Polycom currently has seven United States patents issued covering the
SoundStation and ShowStation designs, the concept and function of the
ShowStation and certain echo cancellation technology that expire in 2007,
2010, 2011, 2012, 2013 and 2015. In addition, Polycom currently has twelve
United States patents pending, nine foreign patents issued, which expire in
2001, 2007, 2010, 2016, 2017 and 2022, and eleven foreign patent applications
pending. Polycom, SoundStation Premier, ShowStation, SoundPoint, SoundStation
and Polycom logos are registered trademarks of Polycom, and ViewStation,
ViaVideo Communications, SoundStation Premier Satellite and Clarity by
Polycom are trademarks of Polycom, in the U.S. and various countries.
According to federal and state law, Polycom's trademark protection will
continue for as long as Polycom continues to use its trademarks in connection
with the products and services of Polycom. Polycom seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which only afford limited protection. There can be no
assurance that others will not independently develop similar proprietary
information and techniques or gain access to Polycom's intellectual property
rights or disclose such technology or that Polycom can meaningfully protect
its intellectual property rights. In addition, there can be no assurance that
any patent or registered trademark owned by Polycom will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to Polycom or that any of Polycom's pending or future
patent applications will be issued with the scope of the claims sought by
Polycom, if at all. Furthermore, there can be no assurance that others will
not develop similar products, duplicate Polycom's products or design around
the patents owned by Polycom. In addition, there can be no assurance that
foreign intellectual property laws will protect Polycom's intellectual
property rights.
Litigation may be necessary to enforce Polycom's patents and other
intellectual property rights, to protect Polycom's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or
to defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could
13
<PAGE>
have a material adverse effect on Polycom's business, financial condition or
results of operations. There can be no assurance that infringement or
invalidity claims by third parties or claims for indemnification resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect
Polycom's business, financial condition and results of operations. If any
claims or actions are asserted against Polycom, Polycom may seek to obtain a
license under a third party's intellectual property rights. There can be no
assurance, however, that a license will be available under reasonable terms
or at all. In addition, Polycom could decide to litigate such claims, which
could be extremely expensive and time consuming and could materially
adversely affect Polycom's business, financial condition or results of
operations.
ViaVideo Communications, Inc. ("ViaVideo") is involved in certain
lawsuits alleging breach of contract, breach of confidential relationship,
patents and other related allegations. ViaVideo will vigorously defend
against these claims and any related claims for damages. While litigation is
inherently uncertain, ViaVideo believes that the ultimate resolution of these
matters beyond that provided in the balance sheet at December 31, 1997 of
ViaVideo will not have a material adverse effect on the Company's financial
position.
Additionally, from time to time, the Company is subject to a variety of
disputes or litigation in the normal course of business including suits
related to intellectual property, contract law, personal injury and employee
relations. In the opinion of management, matters in which the Company is
currently involved, in the aggregate, should not have a material adverse
effect on the Company's financial statements.
DEPENDENCE ON THIRD-PARTY LICENSES
Polycom incorporates into its ShowStation products software licensed
from third parties, including certain communications software which is
licensed from DataBeam Corporation ("Databeam"), digitizer and pen software
which is licensed from Scriptel Corporation ("Scriptel") and Windows
software from Microsoft Corporation ("Microsoft"). The DataBeam license
agreement will terminate in March 2001 if either party has given notice at
least 90 days prior to that time of its desire to terminate the agreement.
The Scriptel agreement terminates June 30, 1998 but may be extended for
six-month periods upon mutual agreement of the parties. Polycom also has
licensing agreements with various vendors for software incorporated into its
ViewStation products. For example, Polycom licenses certain video
communications source code from RADVision, EBSNet, Inc., certain video
algorithm protocol from VIVO Software, Inc. and VideoServer and development
source code from Digital Equipment Corporation and Philips Semiconductor.
There can be no assurance that these third-party software licenses will
continue to be available to Polycom on commercially reasonable terms, if at
all. The termination or impairment of these software licenses could result
in delays or reductions in new product introductions or product shipments
until equivalent software could be developed, licensed and integrated, which
would materially adversely affect Polycom's business, financial condition
and results of operations.
READINESS FOR YEAR 2000
Many existing computer systems and applications, and other control
devices, use only two digits to identify a year in the date field, without
considering the impact of the upcoming change in the century. They could
fail or create erroneous results unless corrected so that they can process
data related to the year 2000. The Company relies on its systems,
applications and devices in operating and monitoring all major aspects of its
business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, infrastructure, embedded
14
<PAGE>
computer chips, networks and telecommunications equipment and end products.
The Company also relies on external systems of business enterprises such as
customers, suppliers, creditors, financial organizations, and of governments,
both domestically and globally, directly for accurate exchange of data and
indirectly. The Company's current estimate is that the costs associated with
the Year 2000 issue, and the consequences of incomplete or untimely
resolution of the Year 2000 issue, will not have a material adverse affect on
the result of operations or financial position of the Company in any given
year. However, despite the Company's efforts to address the Year 2000 impact
on its internal systems, the Company is not sure that it has fully identified
such impact and that it can resolve it without disruption of its business and
without incurring significant expense. In addition, even if the internal
systems of the Company are not materially affected by the Year 2000 issue,
the Company could be affected through disruption in the operation of the
enterprises with which the Company interacts.
EMPLOYEES
As of December 31, 1997 Polycom employed a total of 175 persons,
including 52 in sales, marketing and customer support, 56 in product
development, 35 in manufacturing and 32 in finance and administration. Of
these, seven employees were located in the U.K., three were located in
Singapore, three were located in China and the remainder were located in the
United States. None of Polycom's employees is represented by a labor union.
Polycom has experienced no work stoppages and believes its relationship with
its employees is good.
Polycom believes that its future success will depend in part on its
continued ability to hire, assimilate and retain qualified personnel.
Competition for such personnel is intense, and there can be no assurance
that Polycom will be successful in attracting or retaining such personnel.
The loss of any key employee, the failure of any key employee to perform in
his or her current position or Polycom's inability to attract and retain
skilled employees, as needed, could materially adversely affect Polycom's
business, financial condition or results of operations. Continued development
and commercialization of Polycom's videoconferencing products also depends
substantially upon the continued efforts of its engineering and marketing
personnel, and there can be no assurance that such individuals will continue
to remain employed by Polycom. The loss of the services of any executive
officer or other key technical or management personnel involved with
Polycom's videoconferencing products for any reason could have a material
adverse effect on the business, financial condition or results of operations
of Polycom.
ITEM 2. PROPERTIES
Polycom's headquarters are located in a 52,000 square foot facility in
San Jose, California pursuant to a lease which expires in December 1998.
Polycom has two options to extend the lease for terms of one (1) year at
market rate. This facility accommodates corporate administration, research
and development, marketing, sales and customer support. On May 12, 1997, the
Company entered into a three year operating lease for 19,890 square feet of a
building in Livermore, California which is used as the Company's North
American and Latin American distribution center and repair center. This lease
expires on May 31, 2000. The Company also utilizes space at its manufacturing
contractor in Thailand and its United Kingdom distribution contractor in the
United Kingdom to provide an Asian and European distribution and repair
center, respectively. Polycom also leases, on a short-term basis, sales
office space in the metropolitan areas of Chicago, Austin, London, Munich,
China and Singapore. Polycom believes that its current facilities are
adequate to meet its needs for the foreseeable future. Polycom believes that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
ViaVideo Communications, Inc. ("ViaVideo") is involved in certain
lawsuits alleging breach of contract, breach of confidential relationship,
patents and other related allegations. ViaVideo will vigorously defend
against these claims and any related claims for damages. While litigation is
inherently uncertain, ViaVideo believes that the ultimate resolution of these
matters beyond that provided in the balance sheet at December 31, 1997 of
ViaVideo will not have a material adverse effect on the Company's financial
position.
Additionally, from time to time the Company is subject to a variety of
disputes or litigation in the normal course of business including suits
related to intellectual property, contract law, personal injury and employee
relations. In the opinion of management, matters in which the Company is
currently involved, in the aggregate, should not have a material adverse
effect on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 1997, the Stockholders of the Company held a special
meeting to consider and vote upon the combination of ViaVideo Communications,
Inc. with Polycom through the merger of Venice Acquisition Corporation, a wholly
owned subsidiary of Polycom, with and into ViaVideo. Details of the Merger Plan
are contained in the Schedule 14A filing to the Securities and Exchange
Commission on November 19, 1997. The results of the vote are as follows:
<TABLE>
<S> <C>
For: 14,192,333
Against: 17,345
Abstentions: 11,010
Broker Non-Votes: 144,594
</TABLE>
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "PLCM." Prior to its initial public offering on
April 29, 1996, there was no public market for the Company's Common Stock. The
following table sets forth the high and low closing sales prices for the Common
Stock as reported by Nasdaq for the periods indicated. These prices do not
include retail mark-ups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR 1996
Second Quarter (commencing April 30, 1996) $ 10 3/4 $ 6 5/8
Third Quarter 9 1/4 5 5/8
Fourth Quarter 7 3/16 3 3/4
FISCAL YEAR 1997
First Quarter 5 11/16 3 1/2
Second Quarter 5 3/8 2 3/4
Third Quarter 5 7/8 4 3/8
Fourth Quarter 6 5/8 4 7/8
FISCAL YEAR 1998
First Quarter (through February 27, 1998) 7 7/8 5 1/8
</TABLE>
On February 27, 1998, the last sale price reported on the Nasdaq National
Market for the Company's Common Stock was $7.88 per share. As of such date,
there were approximately 127 stockholders of record who held shares of the
Company's Common Stock (although Polycom has been informed that there are
approximately 2,100 beneficial owners), as shown on the records of Polycom's
transfer agent for such shares.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its capital stock
and does not intend to pay any dividends in the foreseeable future. The Company
currently intends to retain its earnings, if any, for the growth and development
of its business. Any future determination to pay cash dividends will be at the
discretion of the Company's Board of Directors and will depend upon the earnings
of the Company, its financial condition, capital requirements and such other
factors as the Company's Board of Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's audited consolidated financial statements and
related notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are included elsewhere in this
Form10-K. The consolidated statement operations data for the years ended
December 31, 1997, 1996 and 1995 and the consolidated balance sheet data at
December 31, 1997 and 1996, are derived from, and are qualified by reference to,
the consolidated financial statements which have been audited by Coopers &
Lybrand L.L.P. and are included in this Form 10-K. The consolidated balance
sheet data at December 31, 1995, 1994 are derived from audited consolidated
financial statements which have also been audited by Coopers & Lybrand L.L.P.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
(in thousands, except per share data) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues $46,630 $37,032 $24,944 $15,025 $8,669
Costs and expenses:
Cost of net revenues 25,255 17,698 10,859 6,211 3,725
Sales and marketing 10,504 9,095 7,073 5,307 2,917
Research and development 9,060 7,574 6,852 5,527 4,253
General and administrative 3,141 2,148 1,819 1,140 801
Acquisition costs 597 --- -- -- ---
------- ------ ------- ------- -------
Operating income (loss) (1,927) 517 (1,659) (3,160) (3,027)
Taxes, interest and other, net 859 966 57 197 30
------- ------ ------- ------- -------
Net income (loss) $(1,068) $1,483 $(1,602) $(2,963) $(2,997)
------- ------ ------- ------- -------
------- ------ ------- ------- -------
Basic net income (loss) per share $(0.06) $0.11 $(0.60) $(1.25) $(1.43)
Diluted net income (loss) per share $(0.06) $0.08 $(0.60) $(1.25) $(1.43)
Weighted average shares outstanding for basic ES 19,066 13,978 2,650 2,371 2,099
Weighted average shares outstanding for diluted EPS 19,066 18,568 2,650 2,371 2,099
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 16,462 $ 19,649 $ 6,261 $ 5,792 $ 8,196
Working capital 26,347 27,957 7,829 5,442 8,273
Total assets 41,598 37,720 18,000 10,778 11,888
Notes payable, less current portion -- --- 1,178 757 494
Convertible redeemable preferred stock --- -- 22,360 17,380 17,380
Total stockholders' equity (deficit) 30,665 31,221 (12,640) (11,088) (8,169)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND OTHER SECTIONS OF THIS DOCUMENT CONTAIN
FORWARD-LOOKING STATEMENTS THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES
AND PROJECTIONS ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS, AND
ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES" AND VARIATIONS OF SUCH
WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED
OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND
UNCERTAINTIES INCLUDING POTENTIAL FLUCUATIONS IN RESULTS AND FUTURE GROWTH
RATES; THE SUCCESSFUL LAUNCH AND MANUFACTURING RAMP OF THE VIEWSTATION,
SHOWSTATION IP AND OTHER NEW PRODUCTS; THE MARKET ACCEPTANCE OF VIEWSTATION,
SHOWSTATION IP AND OTHER NEW PRODUCTS; THE ACHIEVEMENT OF THE PRODUCT
DEVELOPMENT DELIVERABLES ASSOCIATED WITH THE SECOND 3M AGREEMENT AND THE
SUCCESS OF 3M IN ESTABLISHING AND MAINTAINING CHANNELS FOR THE VIEWSTATION AND
SHOWSTATION IP PRODUCTS; THE PROFITABILITY OF THE DATACONFERENCING AND
VIDEOCONFERENCING PRODUCT LINES; DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL
CHANGE; UNCERTAINTIES RELATING TO THE INTEGRATION OF OPERATIONS OF VIAVIDEO
COMMUNICATIONS, INC.; EFFECTS OF THE ACQUISITION ON EXISTING BUSINESS
PARTNERSHIPS; DEPENDENCE ON THIRD PARTY DISTRIBUTORS; RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS; DEPENDENCE ON RESEARCH AND DEVELOPMENT; COMPETITION;
DEPENDENCE ON THIRD PARTY MANUFACTURERS; DEPENDENCE ON INTELLECTUAL PROPERTY
AND OTHER PROPRIETARY RIGHTS; DEPENDENCE ON THIRD-PARTY LICENSES; DEPENDENCE
ON PERSONNEL; AND OTHER RISKS
18
<PAGE>
DETAILED FROM TIME TO TIME IN THE COMPANY'S SEC REPORTS, INCLUDING THE
QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 30, 1997, JUNE
29, 1997 AND SEPTEMBER 28, 1997 AND THE COMPANY'S CURRENT REPORTS ON FORM 8-K
FILED WITH THE COMMISSION ON AUGUST 13, 1997, SEPTEMBER 9, 1997 AND JANUARY
16, 1998. UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE. HOWEVER, INVESTORS SHOULD CAREFULLY
REVIEW THE RISK FACTORS AND OTHER INFORMATION SET FORTH IN THE REPORTS AND
OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE COMMISSION.
OVERVIEW
Polycom was incorporated in December 1990 to develop, manufacture and
market audioconferencing, dataconferencing and videoconferencing products
that facilitate meetings at a distance. Polycom was engaged principally in
research and development from inception through September 1992, when it began
volume shipments of its first audioconferencing product, SoundStation. As of
December 31, 1997, Polycom's audioconferencing product line consisted
principally of the SoundStation, SoundStation EX, SoundStation Premier, and
SoundPoint. Polycom began shipping its first dataconferencing product,
ShowStation, in November 1995. In October 1997, Polycom announced
enhancements to its audio and dataconferencing product lines and its first
videoconferencing product, the ViewStation which are discussed later in this
section. In January 1998, the Company acquired all the outstanding shares of
ViaVideo Communications, Inc. in a stock transaction valued at $54 million.
ViaVideo is a development stage company dedicated to the development of
videoconferencing equipment. Polycom's ViewStation product comes about as a
result of the merger and commenced first customer shipments in the first
quarter of 1998. Polycom markets its products domestically and
internationally through a network of value-added resellers ("VARS"), original
equipment manufacturers ("OEMS"), and retailers and also sells its
audioconferencing products through its direct sales force. Through December
31, 1997, Polycom has derived a substantial majority of its net revenues from
sales of its SoundStation products. Polycom anticipates that sales of its
SoundStation product line will continue to account for a substantial majority
of net revenues at least through the year ending December 31, 1998. Any
factor adversely affecting the demand or supply for the SoundStation product
line could materially adversely affect Polycom's business, financial
condition, cash flows or results of operations.
From inception through the nine month period ended September 30, 1995, the
Company incurred losses from operations, primarily as a result of its
investments in the development of its products and the expansion of its sales
and marketing, manufacturing and administrative organizations. The Company
achieved profitability in the fourth quarter of 1995 and generated a small
operating income in each quarter of fiscal 1996. The Company incurred a
quarterly operating loss in each quarter of 1997. The Company intends to
continue to invest significantly in research and development, and plans to
operate with an operating loss or break-even results, excluding acquisition
expenses, through the first quarter of 1998. There can be no assurance that the
Company will achieve its operating plans or achieve profitable operations in
any subsequent period.
In March 1997, Polycom entered into a joint marketing and development
agreement (the "FIRST AGREEMENT") with 3M. Under the agreement, 3M provided
$3.0 million in funding to Polycom for certain deliverables related to the
development of the next generation dataconferencing product and will also
provide shared technology resources for the development of future products.
Through December 31, 1997, Polycom recorded the $3.0 million as revenue,
$1.0 million in each of the first three quarters of 1997, based on delivery of
the items specified in the contract. The amounts recognized as revenue
approximates the amount that would have been recognized using the percentage of
completion methodology. Additionally, Polycom has granted 3M exclusive
private-label rights in certain distribution channels to the products developed
under this agreement subject to certain minimum volumes. Further, 3M received
warrants to purchase up to 2,000,000 shares of Polycom's common stock at an
exercise price of $7.50 per share. The warrants expire in March 1999, which may
be extended until March 2000 depending on the delivery of Polycom's first
product developed under the agreement. At the time of grant, the warrants were
valued using the Black-Scholes model and were determined to have a value of
$40,000. 3M also has certain rights of first offer under its stock warrant
agreement with Polycom which will give 3M the right, for a period of 45 days
after the Effective Time, to purchase additional shares of Polycom Common Stock
at a purchase price of $7.50 per share. In February 1998, 3M exercised this
option and purchased approximately one million shares of Polycom common stock
for a consideration of approximately $7.6 million. As a result of the purchase,
3M owns approximately 3.5% of outstanding Polycom common stock.
19
<PAGE>
In June 1997, Polycom entered into a second joint marketing and development
agreement (the "SECOND AGREEMENT") with 3M. Under this agreement, 3M is expected
to provide $2.5 million in funding to Polycom for certain deliverables related
to the development of videoconferencing products and may also provide shared
technology resources for the development of future products. However, in order
to receive the funding, Polycom must meet certain milestones as outlined in the
agreement. There can be no assurance that the Company will meet these
milestones or receive the funding. If Polycom does not receive this funding
from 3M, it will have a material adverse impact on the profitability of the
Company. Polycom will grant 3M exclusive private-label rights in certain
distribution channels to the products developed under this agreement. As of
December 31, 1997, Polycom has not recognized any revenue under this agreement.
As mentioned above, in June 1997 Polycom signed an agreement under which
Polycom would acquire ViaVideo. This acquisition of ViaVideo adds a
videoconferencing product and engineering team to Polycom's audioconferencing
and dataconferencing product portfolio. In December 1997, the shareholders of
both companies voted to approve the merger and, on January 2, 1998, the merger
became effective. On January 2, 1998, under the terms of the agreement, 8.7
million shares of Polycom Common Stock, plus an additional 1.1 million shares
based on option grants by ViaVideo, were exchanged for all outstanding shares
and options of ViaVideo. The transaction is being accounted for as a pooling
of interests and qualifies as a tax-free reorganization.
In October 1997, Polycom announced a new set of data, video and
audioconferencing products to add to its existing line. In the dataconferencing
market, Polycom announced its new ShowStation IP product which is its next
generation conference room projector. The ShowStation IP is targeted to be
available in North America in the first quarter of 1998 and in Europe and Asia
Pacific on a country-by-country basis over the following several months. In the
videoconferencing arena, Polycom introduced the new ViewStation product family
which includes a 128kbps version, providing enhanced video performance, or a
384kbps/512kbps version which provides premium-quality full-motion video. The
128kbps version began shipping in North America in the first quarter of 1998
while the 384kbps/512kbps version has a targeted first customer ship date in
April 1998. In the audioconferencing market, Polycom introduced the
SoundStation Premier Satellite which is a unique enhanced system that works
in conjunction with Polycom's SoundStation Premier conference phone. The
SoundStation Premier Satellite began shipping in North America in December
1997. There can be no assurance that any products not yet commercially
available will be available by Polycom's targeted dates and the lack of
availability of these products will materially affect Polycom's financial
results.
20
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997
The following table sets forth, as a percentage of net revenues,
consolidated statement of operations data for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues 100% 100% 100%
Cost of net revenues 54% 48% 44%
-----------------------------
Gross profit 46% 52% 56%
Operating expenses:
Sales and marketing 23% 25% 28%
Research and development 19% 20% 28%
General and administrative 7% 6% 7%
Acquisition expenses 1% 0% 0%
-----------------------------
Total operating expenses 50% 51% 63%
-----------------------------
Operating income (loss) (4%) 1% (7%)
Interest income, net 2% 2% 1%
Litigation settlement income, net 0% 1% 0%
Other expense, net 0% 0% 0%
-----------------------------
Income (loss) before provision for income taxes (2%) 4% (6%)
Provision for income taxes 0% 0% 0%
-----------------------------
Net income (loss) (2%) 4% (6%)
-----------------------------
-----------------------------
</TABLE>
The following table sets forth net revenues, by line of business, for the
periods indicated (amounts in thousands.)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
AUDIOCONFERENCING:
Net revenues $40,875 $32,242 $23,814
Cost of net revenues 20,524 12,629 9,906
----------------------------
Gross profit $20,351 $19,613 $13,908
Gross margin 50% 61% 58%
DATACONFERENCING:
Net revenues $5,755 $4,790 $1,130
Cost of net revenues 4,731 5,069 953
----------------------------
Gross profit $1,024 $(279) $177
Gross margin 18% (6)% 16%
</TABLE>
NET REVENUES
Total net revenues for 1997 were $46.6 million, an increase of $9.6 million
or 26%, compared to the same period in 1996. The audioconferencing net revenues
for 1997 were up $8.6 million, or 27%, when compared to 1996. This increase was
due to the introduction of the new Premier and SoundPoint product lines in this
division, which was partially offset by price reductions for the SoundStation
product line. For SoundStation, unit sales increased over the same period in
1996. Dataconferencing revenues were $5.8 million for 1997 versus $4.8 million
for 1996. This increase was due entirely to the revenue associated with the
First Agreement with 3M which offset significant ShowStation unit volume
decreases.
Net revenues increased $12.1 million, or 49%, when comparing 1996 to 1995.
Audioconferencing net revenues increased 35% to $32.2 million in 1996 from 1995.
The increase was primarily due to increased unit sales, resulting from the
21
<PAGE>
increased market acceptance of Polycom's audioconferencing product line, and, to
a lesser extent, through the expansion of Polycom's North American and
international distribution networks, offset in part by a decline in the list
price of its SoundStation products. Dataconferencing net revenues increased 336%
to $4.8 million in 1996 when compared to 1995. The increase was due to increased
product shipments. The first dataconferencing products began shipping in
November 1995 and did not have any net revenues prior to this time.
During 1997, 1996 and 1995, Polycom derived a substantial majority of its
net revenues from sales of its SoundStation product family. Lucent Technologies
accounted for 10% of net revenues in 1997 and ConferTech accounted for 11% of
net revenues in 1995. No other customer or reseller accounted for more than 10%
of Polycom's net revenues during the periods.
International net revenues accounted for 23%, 23%, and 24% of total net
revenues for 1997, 1996, and 1995, respectively. See Note 13 of Notes to
Consolidated Financial Statements for business segment information. In 1997,
price reductions offset unit growth internationally and the $3.0 million in
revenue associated with the First 3M Agreement offset other product revenue
growth in the Company's international business. The reduction in the percentage
of international net revenues for 1996 from 1995 resulted from initial sales of
the SoundPoint and SoundStation Premier product families, which were introduced
first in North America. Polycom 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 Polycom introduces new products since Polycom expects to initially
introduce such products in North America and also because of the additional time
required for product homologation and regulatory approvals of new products in
international markets. Additionally, the recent economic problems in the Asian
market could adversely offset the Company's profitability if it continues in
1998. To the extent Polycom is unable to expand international sales in a timely
and cost-effective manner, Polycom's business, financial condition, or results
of operations could be adversely affected. There can be no assurance that
Polycom will be able to maintain or increase international market demand for
Polycom's products. To date, a substantial majority of Polycom's international
sales have been denominated in U.S. currency; however, Polycom 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 Polycom's manufacturing
organization, contract manufacturers, tooling depreciation, warranty expense and
an allocation of overhead expenses. The cost of net revenues represented 54% of
net revenue in 1997 compared to 48% in 1996. The audioconferencing cost of net
revenues percentage was 50% in 1997 versus 39% in the 1996. The increase in
audioconferencing cost of net revenue percentage is primarily attributable to
the 37% SoundStation price reduction implemented in North America in January
1997 and the 30% price reduction implemented in the International regions in
April 1997. Also, the costs associated with transitioning the SoundStation and
Premier product manufacturing to IMS in Thailand and the introduction of a lower
margin audio product contributed to the higher cost of net revenues percentage.
The dataconferencing cost of net revenues was 82% in 1997 compared to 106% in
1996. In the dataconferencing division, the decrease in the cost of net revenues
percentage was primarily due to the revenue received under the First Agreement
with 3M, which had very low associated costs. Although Polycom's
dataconferencing division will not receive revenue associated with deliverables
from the First Agreement with 3M in 1998, the dataconferencing cost of net
revenues is expected to decrease in 1998 due to the introduction of the next
generation ShowStation product and a royalty revenue stream associated with the
First Agreement with 3M.
When comparing 1996 to 1995, the cost of net revenue percentage increased
to 48% in 1996 from 44% in 1995. The audioconferencing cost of net revenue
percentage decreased to 39% in 1996 from 42% in 1995 which was due cost
reductions in the SoundStation product line, partially offset by the negative
impact of the price reduction in the first quarter of 1996. The dataconferencing
cost of net revenues percentage increased to 106% in 1996 from 84% in 1995.
This increase was due to higher costs associated with the manufacturing start-up
of the ShowStation product and lower than planned unit volume which generated
unfavorable manufacturing cost variances.
Polycom expects that the overall cost of net revenues percentage will
remain at current levels in 1998. Cost of net revenue percentage increases
due to increased sales of lower margin audio products should be offset by
cost of net revenue percentage decreases due to increased royalty streams
associated with the video and data products and the 3M video revenue
associated with deliverables connected with the Second Agreement with 3M
which is expected to be recognized in the first
22
<PAGE>
half of 1998; however there can be no assurances that this will happen. Due
to significant dependence on uncertain items such as the royalty revenue
stream, manufacturing efficiencies of subcontractors, manufacturing and
purchased part variances, warranty costs related to the new data and video
products, and timing of sales within each quarter of 1998, the cost of net
revenues percentage can fluctuate significantly. There can be no assurances
on achieving profitability targets due to these and other uncertainties.
Polycom's historical price reductions have been driven by Polycom's desire
to expand the market for its products, and Polycom 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. There can be no
assurance that such actions by Polycom will expand the market for its products
or be sufficient to meet competitive pricing pressures. In the future, the cost
of net revenue percentage may be affected by price competition and changes in
unit volume shipments, product cost and warranty expenses. The cost of net
revenues percentage may also be impacted by the mix of distribution channels
used by Polycom, the mix of products sold and the mix of International versus
North American revenues. Polycom typically realizes lower cost of net revenue
percentages on direct sales than on sales through indirect channels. If sales
through resellers, especially OEMs, increase as a percentage of total revenues,
Polycom's cost of net revenues percentage will be adversely impacted.
In June 1997, Polycom began manufacturing the SoundStation products at a
manufacturing contractor based in Thailand. During the third quarter of 1997,
this same manufacturer also began producing the Premier product family. Although
the transition of the manufacturing process to the Thailand manufacturer caused
an unfavorable cost variance in the initial phase, Polycom realized lower
audioconferencing cost of net revenues in the fourth quarter of 1997, primarily
in SoundStation and Premier product families, and expects this trend to continue
for these products, although there can be no assurances that this will occur.
Additionally, in July 1997, Polycom moved its distribution and product repair
center to a new location in Livermore, California. This move is expected to
provide Polycom 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.
SALES AND MARKETING EXPENSES
<TABLE>
<CAPTION>
Increase (Decrease)
Year End December 31, From Prior Year
---------------------------- --------------------
Dollars in Thousands 1997 1996 1995 1997 1996
- -------------------- ---------------------------- --------------------
<S> <C> <C> <C> <C> <C>
Expenses $10,504 $9,095 $7,073 15% 29%
% of Net Revenues 23% 25% 28% (2%) (3%)
</TABLE>
The increase in absolute dollars in 1997 and 1996 was primarily related to
the expansion of Polycom's sales and marketing organization, primarily for the
direct sales force and associated costs, and increased commission expenses
related to higher sales volumes. Additionally, in compliance with a joint
services agreement with ViaVideo, Polycom incurred, and billed out as a credit
to its expense, charges related to marketing work done on behalf of ViaVideo.
In 1996, the sales and marketing expense increase was related to the launch of
Polycom's dataconferencing business.
Polycom 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 IP and ViewStation
products, Polycom 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 these products. Further, due to
uncertainties concerning the service and support requirements of the ShowStation
IP and ViewStation products, Polycom may experience higher customer support
charges in the future. Also, compensation and benefits for the new Vice
President of Marketing will cause an increase in Marketing and Sales expense in
the future. Also, the Company will likely incur additional expenses related to
the liquidation of the ShowStation product in Latin America. Further, due in
large part to the merger with ViaVideo, sales and marketing expenses will
increase in absolute dollars and as a percentage of net revenues which will
materially adversely affect the profitability of Polycom.
23
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
Increase (Decrease)
Year End December 31, From Prior Year
---------------------------- --------------------
Dollars in Thousands 1997 1996 1995 1997 1996
- --------------------- ---------------------------- --------------------
<S> <C> <C> <C> <C> <C>
Expenses $9,060 $7,574 $6,852 20% 11%
% of Net Revenues 19% 20% 28% (1%) (8%)
</TABLE>
Research and development expenses consist primarily of compensation costs,
outside services, consulting fees, an allocation of overhead expense, supplies
and depreciation. The increase in dollar amount in research and development
expenses in 1997 and 1996 was primarily attributable to increased staffing and
associated support required to expand and enhance Polycom's dataconferencing and
audioconferencing product lines. As of December 31, 1997, all research and
development costs have been expensed as incurred. Also, in compliance with a
joint services agreement with ViaVideo, Polycom incurred, and billed out as a
credit to its expense, charges related to development work done on behalf of
ViaVideo.
Polycom believes that technological leadership is critical to its success
and is committed to continuing a high level of research and development.
Consequently, Polycom intends to increase its research and development expenses
in absolute dollars in the future. Further, due in large part to the merger with
ViaVideo, research and development expenses will increase in absolute dollars
and as a percentage of net revenues which will materially adversely affect the
profitability of Polycom.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Increase (Decrease)
Year End December 31, From Prior Year
--------------------------- -------------------
Dollars in Thousands 1997 1996 1995 1997 1996
- -------------------- --------------------------- -------------------
<S> <C> <C> <C> <C> <C>
Expenses $3,141 $2,148 $1,819 46% 18%
% of Net Revenues 7% 6% 7% 1% (1%)
</TABLE>
General and administrative expenses consist primarily of compensation
costs, an allocation of overhead expense, and outside legal and accounting
expenses. The increase in dollar amount in 1997 and 1996 was primarily due to
increased staffing, including the hiring of a president at the beginning of
1997, to support Polycom's growth and, during 1996, to costs related to patent
litigation. Polycom believes that its general and administrative expenses will
increase in absolute dollar amounts in the future primarily as a result of
expansion of Polycom's administrative staff and infrastructure and additional
information technology improvements to support a larger company. Further, due in
large part to the merger with ViaVideo and the addition of its management staff,
general and administrative expenses will increase in absolute dollars and as a
percentage of net revenues which will materially adversely affect the
profitability of Polycom.
ACQUISITION EXPENSES
In 1997, Polycom incurred expenses totaling $0.6 million related to the
acquisition of ViaVideo. A significant portion of these charges were for
outside legal, accounting and consulting services. There can be no assurances
that Polycom will not incur additional acquisition related charges in
subsequent quarters associated with the merger with ViaVideo or that
management will be successful in its efforts to integrate the operations of
the acquired company. There are significant risks associated with the
acquisition of ViaVideo including but not limited to: (i) difficulties in
generating enough videoconferencing revenue to offset the substantial
operating expenses associated with this product family; (ii) difficulties in
integration of the companies; (iii) difficulties in maintaining revenue
levels during product transitions; (iv) difficulties or delays in achieving
product and technology integration benefits; and (v) increased competition
from other videoconferencing companies. Further, the acquisition relates to a
company that is in its early stage of development. As a result, Polycom
believes that the increases in costs of net revenues and in operating
expenses associated with the development and integration of these
technologies will, in
24
<PAGE>
the near term, greatly exceed any associated increases in net revenues, which
will have an adverse impact on operating results.
OTHER INCOME AND EXPENSE AND PROVISION FOR INCOME TAXES
Interest income consists of interest earned on Polycom's cash equivalents
and short-term investments. Interest expense is from Polycom's bank debt
facilities. Interest income, net of interest expense was $1.0 million, $0.8
million and $0.2 million for 1997, 1996, and 1995, respectively. The increase in
1997 was due to the increase in Polycom'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 increase in interest
income, net of interest expense, in 1996 over 1995 was primarily due to the
increase in Polycom's cash equivalents and short-term investments resulting from
Polycom's initial public offering.
Polycom accounts for income taxes in accordance with the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." In 1997 and 1996 Polycom provided for income tax
of $171,000 and $108,000, respectively, for federal and certain foreign
alternative minimum taxes. Polycom incurred a net loss and consequently paid no
federal or state income taxes in 1995. In 1998 and beyond, Polycom is targeting
to realize increasingly profitable results which will generate significantly
higher federal and state income tax expense, although there can be no assurance
Polycom will achieve profitable results.
As of December 31, 1997, Polycom had approximately $4.1 million in
federal net operating loss carryforwards and $1.4 million in federal tax
credit carryforwards. The future utilization of Polycom's net operating loss
carryforwards may be subject to certain limitations upon certain changes in
ownership. Polycom believes that its initial public offering on April 29,
1996 triggered a change in ownership pursuant to the Internal Revenue Code of
1986, as amended, such that the annual limitation for utilization of federal
net operating loss carryforwards is approximately $7.1 million. The ViaVideo
acquisition may trigger an additional limitation in 1998.
Polycom has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluates on a quarterly basis the recoverability of the deferred
tax assets and the level of the valuation allowance. At such time as it is
determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced. See Note
11 of Notes to Consolidated Financial Statements.
OTHER FACTORS AFFECTING FUTURE OPERATIONS
Polycom's net revenues have grown primarily through increased market
acceptance of its established audioconferencing product line, new product
introductions and through the expansion of Polycom's North American and
International distribution networks. While Polycom has experienced growth in
net revenues in recent quarters, it does not believe that the historical
growth rates in net revenues will be sustainable nor are they indicative of
future operating results. For example, Polycom believes that the 37% price
reduction in the North American list price of its SoundStation product line,
effective December 1996 for resellers and January 1997 for end user
customers, and the 30% price reduction for SoundStation products sold
internationally effective April 1997, negatively impacted Polycom's net
revenues and profitability 1997 and will continue to negatively impact net
revenues and profitability throughout 1998. Polycom believes that
profitability could continue to be negatively affected in the future as a
result of several factors including low to negative gross margins for
Polycom's ShowStation and ShowStation IP dataconferencing products and
ViewStation videoconferencing product, inventory value loss related to the
ShowStation inventory if it is determined that the units cannot be sold for
at least carrying cost, the reduction in the list prices of the SoundStation
product line, the introduction of the lower margin SoundPoint desktop product
line and continuing competitive price pressure in the audioconferencing and
dataconferencing markets. Although price reductions have been driven by
Polycom's desire to expand the market for its products, and Polycom expects
that in the future it may further reduce prices or introduce new products
that carry lower margins in order to further expand the market or to respond
to competitive pricing pressures, there can be no assurance that such actions
by Polycom will expand the market for its products or be sufficient to meet
competitive pricing pressures. In addition, costs related to the merger with
ViaVideo, and its integration into Polycom, expense growth related to the
activities of the combined entities and costs related to the introduction of
the new ShowStation IP, ViewStation, and SoundStation Satellite products
could negatively impact future profitability. Also, the impacts of pending or
future litigation against
25
<PAGE>
Polycom or ViaVideo, including the suit filed by VTEL against ViaVideo as
mentioned in Polycom's Form 8-K filed on September 9, 1997 and the suit filed
by Datapoint, as discussed in Polycom's Form 8-K filed on January 2, 1998,
are difficult to predict at this time. Further, Polycom's limited operating
history and limited resources, among other factors, make the prediction of
future operating results difficult if not impossible.
In the past Polycom has experienced delays from time to time in the
introduction of certain new products and enhancements and expects that such
delays may occur in the future. For instance, the introduction of ShowStation
was delayed by approximately eighteen months from the originally anticipated
date of introduction because of unforeseen technical challenges and
difficulties in building core technologies and, for approximately nine weeks
in the first quarter of 1996, shipments were interrupted in order to correct
software and other technical problems identified by initial customers. In
addition, SoundStation Premier first customer shipments were delayed from its
original shipment target of September 1996 to November 1996, ShowStation IP
was delayed from September 1997 to its targeted first customer shipment date
of February 1998, and ViewStation was delayed from December 1997 to February
1998 due to engineering and manufacturing start-up issues. Any similar delays
could have a material adverse effect on Polycom's results of operations.
Polycom's operating results have fluctuated in the past and may
fluctuate in the future as a result of a number of factors, including market
acceptance of the next generation of ShowStation products, the ViewStation,
and other new product introductions and product enhancements by Polycom or
its competitors, the prices of Polycom's or its competitors' products, the
mix of products sold, the mix of products sold directly and through
resellers, fluctuations in the level of international sales, the cost and
availability of components, manufacturing costs, the level and cost of
warranty claims, changes in Polycom's distribution network, the level of
royalties to third parties and changes in general economic conditions. In
addition, competitive pressure on pricing in a given quarter could adversely
affect Polycom's operating results for such period, and such price pressure
over an extended period could materially adversely affect Polycom's
long-term profitability. Polycom's ability to maintain or increase net
revenues will depend upon its ability to increase unit sales volumes of its
SoundStation, SoundStation Premier and SoundPoint families of
audioconferencing products and the dataconferencing line of products,
currently comprised of the ShowStation products, its first videoconferencing
product, ViewStation, and any new products or product enhancements. There
can be no assurance that Polycom will be able to increase unit sales volumes
of existing products, introduce and sell new products or reduce its costs as
a percentage of net revenues.
Polycom typically ships products within a short time after receipt of an
order, and historically has not had a significant backlog, however, backlog
may fluctuate significantly from period to period. As a result, backlog at
any point in time is not a good indicator of future net revenues and net
revenues for any particular quarter cannot be predicted with any degree of
accuracy. Accordingly, Polycom's expectations for both short- and long-term
future net revenues are based in large part on its own estimate of future
demand and not on firm customer orders. In addition, Polycom has in the past
received orders and shipped a substantial percentage of the total products
sold during a particular quarter in the last several weeks of the quarter. In
some cases, these orders have consisted of distributor stocking orders and
Polycom has from time to time provided special incentives for distributors to
purchase more than the minimum quantities required under their agreements
with Polycom. Therefore, Polycom has been uncertain, throughout most of each
quarter, as to the level of revenues it will achieve in the quarter and the
impact that distributor stocking orders will have on revenues and
profitability in that quarter and subsequent quarters. In addition, because a
substantial percentage of product sales occur at the end of the quarter,
product mix and, therefore, profitability is difficult to predict. Further,
there can be no guarantee that Polycom's contract manufacturers will be able
to meet product demand before a quarter ends. Polycom anticipates that this
pattern of sales may continue in the future with the exception that the
Company may reduce and ultimately eliminate the end of quarter incentives
offered to distributors. If the Company chooses to eliminate reduced
stocking incentive programs, particularly those associated with
audioconferencing sales, quarterly revenue may be materially adversely
affected. Expense levels are based, in part, on these estimates and, since
Polycom is limited in its ability to reduce expenses quickly if orders and
net revenues do not meet expectations in a particular period, operating
results would be adversely affected. In addition, a seasonal demand may
develop for Polycom's products in the future. Due to all of the foregoing
factors, it is likely that in some future quarter Polycom's operating results
will be below the expectations of public market analysts and investors. In
such event, the price of Polycom's Common Stock would likely be materially
adversely affected.
26
<PAGE>
Polycom has a significant inventory of monochrome ShowStation products
which it plans to sell in Latin America over the next several quarters. There
can be no assurance that Polycom will be successful in the sale of such
products. The failure to successfully sell such inventory would have a material
adverse effect on Polycom's business, financial condition and results of
operations.
The markets for videoconferencing products are characterized by changing
technology, evolving industry standards and frequent new product
introductions. The success of Polycom's new videoconferencing products is
dependent on several factors, including proper new product definition,
product cost, timely completion and introduction of new products,
differentiation of new products from those of Polycom's competitors and
market acceptance of these products. Polycom is attempting to address the
need to develop new products through its internal development efforts and
joint developments with other companies. There can be no assurance that
Polycom will successfully identify new videoconferencing product
opportunities and develop and bring new videoconferencing products to market
in a timely manner, or that videoconferencing products and technologies
developed by others will not render Polycom's videoconferencing products or
technologies obsolete or noncompetitive. The failure of Polycom's new
videoconferencing products development efforts would have a material adverse
effect on Polycom's business, financial condition and results of operations.
Polycom completed the acquisition (the "Acquisition") of ViaVideo
Communications Inc. on January 2, 1998. Polycom acquired ViaVideo with the
expectation that the Acquisition would result in operating and strategic
benefits, including operating cost reductions and product development,
marketing and sales synergies. If the operations of ViaVideo are not
successfully combined with those of Polycom in a coordinated, timely and
efficient manner, Polycom's business, financial condition and results of
operations would be materially adversely effected. The integration of
ViaVideo's product offerings and operations with Polycom's product offerings
and operations and the coordination of ViaVideo's sales and marketing
efforts with those of Polycom will require substantial attention from
management. The diversion of the attention of management and any
difficulties encountered in the transition process could have a material
adverse affect on Polycom's business, financial condition or results of
operations. The difficulties of assimilation may be increased by the
necessity of integrating personnel with disparate business backgrounds and
combining two different corporate cultures. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses,
which could have an adverse effect on the combined operations. As a result of
the acquisition, Polycom's operating expenses will increase in absolute
dollars. Should the expected revenues from ViaVideo products not occur, or
occur later or in an amount less than expected, the higher operating expenses
could have a material adverse affect on the business, financial condition and
results of operations of Polycom. Failure to achieve the anticipated benefits
of the Acquisition or to successfully integrate the operations of the
companies could have a material adverse effect upon the business, operating
results or financial condition of Polycom. Additionlly, there can be no
assurance that Polycom will not incur additional material charges in future
quarters to reflect additional costs associated with the Acquisition.
The Acquisition could cause customers and potential customers of Polycom
or ViaVideo to delay or cancel orders for products as a result of customer
concerns and uncertainty over product evolution, integration and support of
ViaVideo's products with Polycom's products. Such a delay or cancellation of
orders could have a material adverse effect on the business, financial
condition or results of operations of Polycom.
Polycom and PictureTel have entered into agreements whereby PictureTel
resells Polycom's ShowStation products and supplies Polycom's SoundPoint
products to other producers of videoconferencing products. Polycom does not
have any such agreements with PictureTel regarding the resale or supply of any
of Polycom's videoconferencing products. Polycom and PictureTel are also
competitors in the teleconferencing market and, as such, there can be no
assurance that PictureTel will enter into future agreements to resell or supply
any new or enhanced teleconferencing products. Products under development at
ViaVideo are expected to be more directly competitive with PictureTel products,
and thus competition between PictureTel and Polycom is likely to increase,
resulting in a strain on the existing relationship between the companies, which
could have a material adverse effect on the business, financial condition or
results of operations of Polycom.
Polycom's operations are vulnerable to interruption by fire, earthquake,
power loss, telecommunications failure and other events beyond Polycom's
control. Additionally, most of Polycom's operations are currently located in the
San Francisco
27
<PAGE>
Bay Area, an area that is susceptible to earthquakes. Polycom does not carry
sufficient business interruption insurance to compensate Polycom for losses
that may occur, and any losses or damages incurred by Polycom could have a
material adverse effect on its business, financial condition or operating
results.
LIQUIDITY AND CAPITAL RESOURCES FOR THE THREE YEARS ENDED DECEMBER 31, 1997
As of December 31, 1997, Polycom's principal sources of liquidity included
cash and cash equivalents of $11.3 million and short-term investments of $5.2
million. Additionally, on October 17, 1997, the Company re-established a $5.0
million revolving bank line of credit from Silicon Valley Bank. This line of
credit allows for an additional facility of $5.0 million available upon request
by the Company and contingent upon payment of associated fees. The line of
credit facility contains provisions that require the maintenance of certain
financial ratios and profitability requirements. As of December 31, 1997,
Polycom was in compliance with these covenants. See Note 8 of Notes to
Consolidated Financial Statements.
Polycom used cash in operating activities totaling $1.0 million, $2.3
million, and $3.3 million for the years ended 1997, 1996, and 1995,
respectively. The improvement in cash from operating activities was due
primarily to improved collections of accounts receivable and larger accounts
payable balances, offset somewhat by lower profitability, after considering
non-cash items such as depreciation, in 1997 compared to 1996 and a larger
increase in other current assets, primarily related to receivables from
Polycom's contracted manufacturers. When comparing 1996 to 1995, the
improvement in cash from operating activities was due to higher
profitability, after considering non-cash items, and lower increases of
inventory, offset by larger increases in accounts receivable and smaller
increases in accounts payable.
The total net change in cash and cash equivalents for 1997 was an increase
of $1.7 million. The primary sources of cash were $4.9 million proceeds from
sales of investments, net of purchases, and net proceeds from issuance of common
stock of $0.4 million. The primary uses of cash during 1997 were purchases of
property, plant and equipment of $2.7 million and cash used in operating
activities of $1.0 million. The use of cash in operating activities was the
result of higher accounts receivable, due to a larger portion of revenue
realized at the end of the year, higher inventory levels and higher other
current assets, primarily related to receivables from Polycom's contracted
manufacturers. This was offset somewhat by higher accounts payable and a
positive net income before considering non-cash expenses such as depreciation.
Polycom has no material commitments other than obligations under its
revolving bank line of credit facility, a SW licensing agreement and operating
leases. See Notes 7 and 8 of Notes to Consolidated Financial Statements.
Polycom may in the future 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 financings 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 Polycom
and would not be dilutive. Polycom's future liquidity and cash requirements will
depend on numerous factors, including introduction of new products and potential
product family, technology or outright acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
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 Polycom 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
28
<PAGE>
statements would be provided. SFAS No. 131 is effective for Polycom in 1998
and the impact of adoption has not been determined.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 and the financial statement
schedules required by Item 14(d) are included following Item 14 hereof. The
supplemental data called for by Item 8 is not applicable to the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS - The information required by this item is included in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders
and is incorporated herein by reference.
(b) EXECUTIVE OFFICERS - The executive officers of the Company, and their ages,
as of March 13, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Brian L. Hinman* 36 Chief Executive Officer and Chairman of the Board of Directors
Robert C. Hagerty* 46 President, Chief Operating Officer and Director
Michael R. Kourey 38 Vice President, Finance and Administration, Chief Financial Officer, and Secretary
Dale A. Bastian 44 Vice President, Worldwide Sales and Service
Ardeshir Falaki 39 Vice President and General Manager, Dataconferencing
Alan D. Hagedorn 50 Vice President, Manufacturing
Craig B. Malloy 36 Vice President and General Manager, Videoconferencing
Rose M. Rambo 47 Vice President and General Manager, Audioconferencing
Allan W. White 49 Vice President, Corporate Marketing
</TABLE>
- ----------------------
* Member of the Board of Directors.
BRIAN L. HINMAN is a founder of the Company and serves as the Chief
Executive Officer and as Chairman of the Board of Directors. Mr. Hinman
co-founded PictureTel, a leading manufacturer of videoconferencing equipment,
in August 1984. At PictureTel, he served as the Vice President of Engineering
from August 1984 until January 1991 and as a member of the Board of Directors
from August 1984 to December 1989. He is a co-founder and director of the
International Multimedia Teleconferencing Consortium, Inc. which is dedicated
to the International Telecommunications Union standards of H.320 and T.120
for video and dataconferencing. Mr. Hinman holds eight U.S. patents in the
teleconferencing field. Mr. Hinman also holds a B.S.E.E. from the University
of Maryland and an S.M.E.E. from Massachusetts Institute of Technology.
ROBERT C. HAGERTY joined the Company in January 1997 and serves as the
President and Chief Operating Officer and as a member of the Board of
Directors. Prior to joining Polycom, Mr. Hagerty served as president of
Stylus Assets, Ltd., a developer of software and hardware products for fax,
document management and Internet communications. He also held several key
management positions with Logitech, including Operating Committee Member to
the Office of the President, and Senior Vice President/General Manager of
Logitech's retail division and worldwide operations. In addition, Mr.
Hagerty's career history includes positions as Vice President, High
Performance Products for Conner Peripherals, Director of Manufacturing
Operations and General Manager for Signal Corporation, and Operations Manager
for Digital Equipment Corporation. Mr. Hagerty holds a B.S. in Operations
Research and Industrial Engineering from the University of Massachusetts, and
an M.A. in Management from St. Mary's College of California.
MICHAEL R. KOUREY joined Polycom in July 1991 and served as the company's
Vice President, Finance and Operations until January 1995. He assumed the
additional roles of Secretary and Treasurer in June 1993. Since January 1995,
Mr. Kourey has served as Vice President, Finance and Administration and Chief
Financial Officer of the company. Prior to joining Polycom, he was Vice
President, Operation of Verilink, a leading supplier of T1 telecommunications
equipment. He brings over 15 years experience in high technology finance and
manufacturing management to Polycom. Mr. Kourey holds a B.S. in Managerial
Economics from the University of California, Davis, and an M.B.A. from the
University of Santa Clara.
DALE A. BASTIAN joined the Company in July 1997 as Vice President,
Worldwide Sales and Service. Before joining Polycom, Mr. Bastian served as Vice
President, Sales and Marketing for Allen Telecom Group. Previously, Mr. Bastian
also held posts as Vice President of Sales for Rose Communications and Digital
Sound Corporation, as well as
30
<PAGE>
sales management positions with Commterm Corporation, Code-A-Phone
Corporation and Sony Corporation. He brings over 17 years of sales
experience in the telecommunications to his position at Polycom. Mr. Bastian
holds a B.B.A. in Management from Ohio University.
ARDERSHIR FALAKI joined the Company in April 1996, as Vice President,
Dataconferencing Engineering. In January 1998 he was promoted to General
Manager, Dataconferencing. Mr. Falaki was formerly Director of Performance
Systems for PictureTel Corporation, a leading videoconferencing provider.
Previously, he held a variety of key engineering, sales and marketing
positions at PictureTel. Before joining PictureTel, Mr. Falaki served in
various engineering positions at Siemens Energy and Automation, Inc. Mr.
Falaki brings over 8 years of teleconferencing development experience to
Polycom. Mr. Falaki holds a B.S.E.E. from Northeastern University and
participated in graduate studies in electrical engineering and physics at the
University of Massachusetts, Dartmouth.
ALAN D. HAGEDORN joined the Company in September 1996 as the Vice
President, Manufacturing. Mr. Hagedorn was formerly Vice President of
Manufacturing for Amati Communications, Inc., a leading developer of advanced
transmission equipment. Prior to that, he served as Vice President of
Manufacturing for Network Computing Devices, Inc. and has held senior
manufacturing positions with companies including PRIAM, Inc. and Anicon, Inc.
Mr. Hagedorn brings over 25 years of experience in high tech manufacturing to
his position at Polycom. Mr. Hagedorn holds a B.A. in Management from
California State University, Fullerton.
CRAIG B. MALLOY joined the Company in January 1998 as Vice President and
General Manager, Videoconferencing. Mr. Malloy co-founded ViaVideo
Communications in 1996. Prior to founding ViaVideo, Mr. Malloy served in
various marketing management roles at VTEL, including Manager of Product
Marketing and Director of Commercial Analysis. Mr. Malloy also held
marketing and manufacturing management positions with Baxter Healthcare and
Pfizer-Shiley, and served as a lieutenant in the U.S. Navy. Mr. Malloy holds
a B.S. degree in Political Science from the United States Naval Academy and a
M.B.A. degree from the University of California, Los Angeles.
ROSE M. RAMBO joined the Company in January 1998 as Vice President and
General Manager, Audioconferencing. Ms. Rambo comes to Polycom from Siemens
Corporation, where she most recently served as Director of Siemens' small and
medium switching business unit in the U.S. During her tenure at Siemens, Ms.
Rambo also held a number of other key positions, including Director of
Product Management and Brand Manager, among others. Ms. Rambo brings nearly
20 years of experience in the telecommunications industry to her position
with Polycom. Ms. Rambo holds a Bachelor of Arts degree from Oberlin
College, and a Master of Science in Industrial Administration from Carnegie
Mellon University.
ALLAN W. WHITE joined the Company in October 1997 as Vice President,
Corporate Marketing. Prior to joining Polycom, Mr. White held the post of
Director, PC Systems Solutions & Worldwide OEM Business Development for Octel
Communications' GBS Division. For Apple Computer, he served as Senior
Director, Communications Business Development Group and General Manager,
Latin America Division, based at Apple's world headquarters in California.
Mr. White also held several corporate and field management positions with
ITT/Alcatel's Business Communications Systems. He brings over 18 years
experience in the telecommunications and computer industry to his position
with Polycom. Mr. White holds a B.S. degree in Electrical Engineering and a
M.B.A. in Marketing from the University of El Salvador, Central America.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Proxy Statement for
the Company's Annual Meeting of Stockholders, tentatively scheduled to be
held on May 21, 1998, and is incorporated herein by reference.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSHIP AND MANAGEMENT
The information required by this item is included under the captions
"Ownership of Securities" in the Proxy Statement for the Company's Annual
Meeting of Stockholders, tentatively scheduled to be held on May 21, 1998,
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the captions
"Certain Transactions" in the Proxy Statement for the Company's Annual
Meeting of Stockholders, tentatively scheduled to be held on May 21, 1998,
and is incorporated herein by reference.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. (see Item 8 above)
Polycom, Inc. Consolidated Financial Statements as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997.
2. Financial Statement Schedule. (see Item 8 above) The following Financial
Statement Schedule of the Registration is filed as part of this Report:
Schedule II - Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
3. Exhibits.
The following Exhibits are filed as part of, or incorporated by reference
into, this Report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- ------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated as of June 11,
1997, by and among Polycom, Inc., Venice Acquisition and
ViaVideo Communications, Inc. (which is incorporated herein
by reference to Exhibit 2.1 to Form 8-K filed by the
Registrant with the Commission on August 13, 1997).
2.2 Amendment No. 1 to the Agreement and Plan of Reorganization,
dated as of September 2, 1997, by and among the Registrant,
Venice Acquisition Corporation and ViaVideo Communications,
Inc. (which is incorporated herein by reference to
Exhibit 2.2 to Form 8-K filed by the Registrant with the
Commission on January 16, 1998).
3.1 Amended and Restated Certificate of Incorporation of Polycom,
Inc. (which is incorporated herein by reference to Exhibit 3.2
to the Registrant's Registration Statement on Form S-1,
Registration No. 333-2296 ("Registrant's 1996 S-1")).
3.2 Amended and Restated Bylaws of Polycom, Inc. (which is
incorporated herein by reference to Exhibit 3.4 to the
Registrant's 1996 S-1).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock certificate (which is incorporated
herein by reference to Exhibit 4.2 to the Registrant's 1996
S-1).
4.3 Amended and Restated Investor Rights Agreement, dated May 17,
1995, among the Registrant and the Investors named therein
(which is incorporated herein by reference to Exhibit 4.3 to
the Registrant's 1996 S-1).
10.1 Form of Indemnification Agreement entered into between the
Registrant and each of its directors and officers (which is
incorporated herein by reference to Exhibit 10.1 to the
Registrant's 1996 S-1).
10.2 The Registrant's 1991 Stock Option Plan and forms of
agreements thereunder (which is incorporated herein by
reference to Exhibit 10.2 to the Registrant's 1996 S-1).
10.3 The Registrant's 1996 Stock Incentive Plan and forms of
agreements thereunder (which is incorporated herein by
reference to Exhibit 10.3 to the Registrant's 1996 S-1).
33
<PAGE>
10.4 The Registrant's Employee Stock Purchase Plan and forms of
agreements thereunder (which is incorporated herein by
reference to Exhibit 10.4 to the Registrant's 1996 S-1).
10.5 Lease Agreement by and between the Registrant and Orchard
Investment Company Number 701 dated June 24, 1993, as amended,
regarding the space located at 2584 Junction Avenue (which is
incorporated herein by reference to Exhibit 10.5 to the
Registrant's 1996 S-1).
10.6 Amended and Restated Development, Volume Purchase and
Distribution Agreement, dated December 22, 1995, by and
between PictureTel Corporation and Polycom, Inc. (which is
incorporated herein by reference to Exhibit 10.6 to the
Registrant's 1996 S-1).
10.7(1) Sublicense Agreement, dated March 31, 1994, by and between
DataBeam Corporation and Polycom, Inc. (which is incorporated
herein by reference to Exhibit 10.7 to the Registrant's 1996
S-1).
10.8(1) Amended and Restated General Distribution Agreement, dated
February 14, 1996, by and between DataBeam Corporation and
Polycom, Inc. (which is incorporated herein by reference to
Exhibit 10.8 to the Registrant's 1996 S-1).
10.9(1) Volume Purchase Agreement, dated March 1, 1994, as amended, by
and between Scriptel Corporation and Polycom, Inc. (which is
incorporated herein by reference to Exhibit 10.10 to the
Registrant's 1996 S-1).
10.10(1) Volume Purchase Agreement, dated March 29, 1996, by and
between Scriptel Corporation and Polycom, Inc. (which is
incorporated herein by reference to Exhibit 10.11 to the
Registrant's 1996 S-1).
10.11 Stock Pledge Agreement and Note Secured by Stock Pledge
Agreement, each dated June 9, 1995, by and between Polycom,
Inc. and Patrick P. Day. (which is incorporated herein by
reference to Exhibit 10.1 to the Registrant's Form 10-Q dated
May 14, 1997).
10.12 Series D Preferred Stock Purchase Agreement and Amended and
Restated Investor Rights Agreement dated May 17, 1995 (which
is incorporated herein by reference to Exhibit 10.13 to the
Registrant's 1996 S-1).
10.13(1) Joint Marketing and Development Agreement and Stock Warrant
Agreement, each dated March 28, 1997, by and between Polycom,
Inc. and Minnesota Mining and Manufacturing Company (which is
incorporated herein by reference to Exhibit 10.2 to the
Registrant's Form 10-Q dated May 14, 1997).
10.14(1) 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 (which is
incorporated herein by reference to Exhibit 10.1 to the
Registrant's Form 10-Q dated August 13, 1997).
10.15 Lease Agreement by and between the Registrant and The Joseph
and Eda Pell Revocable Trust, dated May 12, 1997, regarding
the space located at Arroyo Business Center in Livermore,
California (filed herein).
10.16 Stock Pledge Agreement and Note Secured by Stock Pledge
Agreement, each dated March 17, 1997 (which is incorporated
herein by reference to Exhibit 10.1 to the Registrant's Form
10-Q dated May 14, 1997).
21.1 Subsidiaries of the Registrant (which is incorporated herein
by reference to Exhibit 21.1 to the Registrant's 1996 S-1).
23.1 Consent of Independent Accountants (filed herein).
24.1 Power of Attorney (filed herein on page 36).
27.1 Financial Data Schedule (filed herein).
</TABLE>
(1) Confidential treatment requested as to certain portions of these
documents.
34
<PAGE>
(b) REPORTS ON FORM 8-K.
A report on Form 8-K was filed on January 2, 1998, regarding Polycom's
acquisition of ViaVideo Communications. Inc. effective January 2, 1998.
Also disclosed, Datapoint Corporation filed a complaint contesting patent
infringement of its U.S. patents related to videoconferencing. Polycom,
Inc. and ViaVideo Communications, Inc. were named as putative class members
in the Datapoint motion for class action certification along with over 500
other companies.
(c) EXHIBITS.
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES.
See Items 8 and 14(a)(2) above.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on this 13th day of March, 1998.
POLYCOM, INC.
/s/ Brian L. Hinman /s/ Michael R. Kourey
- ----------------------------- -----------------------------------
Brian L. Hinman Michael R. Kourey
Chairman of the Board and Vice President, Finance and
Chief Executive Officer Administration, Chief Financial
Officer and Secretary
36
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Polycom, Inc., a Delaware
corporation, do hereby constitute and appoint Brian L. Hinman and Michael R.
Kourey, and each of them, the lawful attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Brian L. Hinman Chief Executive Officer March 13, 1998
- --------------------- and Chairman of the Board of
Brian L. Hinman Director (Principal Executive Officer)
/s/ Robert C. Hagerty President, Chief Operating Officer March 13, 1998
- --------------------- and Director
Robert C. Hagerty
/s/ Michael R. Kourey Vice President, Finance and March 13, 1998
- --------------------- Administration, Chief Financial
Michael R. Kourey Officer and Secretary (Principal
Financial and Accounting Officer)
/s/ Bandel Carano Director March 13, 1998
- ---------------------
Bandel Carano
/s/ Stanley J. Meresman Director March 13, 1998
- ---------------------
Stanley J. Meresman
/s/ John P. Morgridge Director March 13, 1998
- ---------------------
John P. Morgridge
/s/ James R. Swartz Director March 13, 1998
- ---------------------
James R. Swartz
</TABLE>
37
<PAGE>
POLYCOM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Coopers & Lybrand L.L.P., Independent Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity/(Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Polycom, Inc. Stockholders,
We have audited the accompanying consolidated balance sheets of Polycom,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Polycom, Inc. and subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 20, 1998, except for note 15b, for which the date is
February 19, 1998.
F-2
<PAGE>
POLYCOM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,278 $ 9,548
Short-term investments 5,184 10,101
Accounts receivable, net of allowance for doubtful
accounts of $438 and $443 in 1997 and 1996, respectively 8,135 6,244
Inventories 9,514 7,458
Prepaid expenses and other current assets 3,169 1,105
-------- --------
Total current assets 37,280 34,456
Fixed assets, net 3,967 3,164
Deposits and other assets 351 100
-------- --------
Total assets $ 41,598 $ 37,720
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,531 $ 4,307
Accrued payroll and related liabilities 1,061 880
Other accrued liabilities 1,341 1,312
-------- --------
Total current liabilities 10,933 6,499
-------- --------
Commitments and contingencies (Note 7).
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized: 18,095,690 shares
Issued and outstanding: none --- ---
Common stock, $0.0005 par value:
Authorized: 50,000,000 shares
Issued and outstanding:
19,210,078 at December 31, 1997
19,144,058 at December 31, 1996 10 10
Additional paid-in capital 43,028 42,521
Notes receivable from stockholders (24) (29)
Accumulated deficit (12,349) (11,281)
-------- --------
Total stockholders' equity 30,665 31,221
-------- --------
Total liabilities and stockholders' equity $ 41,598 $ 37,720
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
F-3
<PAGE>
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year end December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues $ 46,630 $ 37,032 $ 24,944
Cost of net revenues 25,255 17,698 10,859
-------- -------- --------
Gross profit 21,375 19,334 14,085
Operating expenses:
Sales and marketing 10,504 9,095 7,073
Research and development 9,060 7,574 6,852
General and administrative 3,141 2,148 1,819
Acquisition costs 597 --- ---
-------- -------- --------
Total operating expenses 23,302 18,817 15,744
-------- -------- --------
Operating income (loss) (1,927) 517 (1,659)
Interest income 1,026 884 361
Interest expense (8) (100) (172)
Litigation settlement income, net --- 303 ---
Other income (expense) 12 (13) (132)
-------- -------- --------
Income (loss) before provision for income taxes (897) 1,591 (1,602)
Provision for income taxes 171 108 ---
-------- -------- --------
Net income (loss) $ (1,068) $ 1,483 $ (1,602)
-------- -------- --------
-------- -------- --------
Basic net income (loss) per share $ (0.06) $ 0.11 $ (0.60)
-------- -------- --------
-------- -------- --------
Diluted net income (loss) per share $ (0.06) $ 0.08 $ (0.60)
-------- -------- --------
-------- -------- --------
Shares used in Basic per share calculation 19,066 13,978 2,650
Shares used in Diluted per share calculation 19,066 18,568 2,650
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
F-4
<PAGE>
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Notes
Common Stock Receivables
----------------- Additional From Accumulated
Shares Amount Paid-In Stockholders Deficit Total
--------- ------ ---------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, Dec. 31, 1994 2,956,050 $ 1 $ 82 $ (9) $ (11,162) $ (11,088)
Issuance of Common Stock
under stock option plan 720,591 1 204 (154) --- 51
Repurchase of Common Stock (6,595) --- (1) --- --- (1)
Net loss --- --- --- --- (1,602) (1,602)
---------- ----- --------- ------ ---------- ---------
Balances, Dec. 31, 1995 3,670,046 2 285 (163) (12,764) (12,640)
Issuance of Common Stock
through:
Initial public offering,
net of issuance costs of $996 2,500,000 2 19,927 --- --- 19,929
Conversion of preferred
shares 13,069,857 6 22,354 --- --- 22,360
Exercise of stock options
under stock option plan 138,738 --- 68 (17) --- 51
Exercise of warrants 22,500 --- --- --- --- ---
Payment of stockholder
notes receivable --- --- --- 151 --- 151
Repurchase of Common Stock (257,083) --- (113) --- --- (113)
Net income --- --- --- --- 1,483 1,483
---------- ----- --------- ------ ---------- ---------
Balances, Dec. 31, 1996 19,144,058 10 42,521 (29) (11,281) 31,221
Exercise of stock options
under stock option plan 87,120 --- 71 --- --- 71
Shares purchased under
Employee Stock Purchase Plan 92,731 --- 396 --- --- 396
Repurchase of Common Stock (113,831) --- (18) --- --- (18)
Interest on stockholder notes --- --- --- (8) --- (8)
Payment of stockholder notes
receivable --- --- --- 13 --- 13
Valuation of warrants --- --- 40 --- --- 40
Valuation of options to
outside consultants --- --- 18 --- --- 18
Net loss --- --- --- --- (1,068) (1,068)
---------- ----- --------- ------ ---------- ---------
Balances, Dec. 31, 1997 19,210,078 $ 10 $ 43,028 $ (24) $ (12,349) $ 30,665
---------- ----- --------- ------ ---------- ---------
---------- ----- --------- ------ ---------- ---------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
F-5
<PAGE>
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- -------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,068) $ 1,483 $ (1,602)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,886 1,513 944
Provision for doubtful accounts --- 1 255
Provision for excess and obsolete inventories 612 560 561
Value of stock options to outside consultants 18 --- ---
Value of warrants 40 --- ---
Changes in assets and liabilities:
Accounts receivable (1,891) (3,218) (1,454)
Inventories (2,668) (2,710) (4,570)
Prepaid expenses and other current assets (2,064) (770) (83)
Deposits and other assets (251) (1) (36)
Accounts payable 4,224 455 1,876
Accrued liabilities 210 427 823
--------- -------- --------
Net cash used in operating activities (952) (2,260) (3,286)
--------- -------- --------
Cash flows from investing activities:
Acquisition of fixed assets (2,689) (1,707) (758)
Purchase of short-term investments (7,154) (9,964) (2,722)
Sale of short-term investments 12,071 2,585 ---
--------- -------- --------
Net cash provided by (used in)
investing activities 2,228 (9,086) (3,480)
--------- -------- --------
Cash flows from financing activities:
Proceeds from initial public offering, net of
issuance costs --- 19,929 ---
Net proceeds from sale of convertible redeemable
preferred stock --- --- 4,980
Proceeds from issuance of notes payable --- 4,314 1,470
Repayment of notes payable and capital lease
obligation --- (6,977) (1,987)
Repayment of stockholder notes receivable, net 5 151 ---
Proceeds from issuance of common stock, net of
repurchases 449 (62) 50
--------- -------- --------
Net cash provided by financing activities 454 17,355 4,513
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,730 6,009 (2,253)
Cash and cash equivalents, beginning of period 9,548 3,539 5,792
--------- -------- --------
Cash and cash equivalents, end of period $ 11,278 $ 9,548 $ 3,539
--------- -------- --------
--------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ --- $ 121 $ 170
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING:
Fixed assets financed by notes payable $ --- $ --- $ 1,612
Common stock issued for notes receivable $ --- $ 17 $ 154
Conversion of preferred shares to common stock $ --- $ 22,360 $ ---
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
F-6
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Polycom, Inc. and subsidiary (the "Company"), a Delaware corporation, is
engaged in the development, manufacturing and marketing of
teleconferencing equipment. The Company's products are distributed and
serviced globally. The Company sells its products through its direct
sales force and maintains marketing and sales relationships with major
telecommunications carriers, value-added resellers, telecommunications
suppliers and catalog distributors, a leading videoconferencing
equipment supplier, and telecommunications specialists.
2. SUMMARY OF SELECTED ACCOUNTING POLICIES:
FISCAL YEAR:
The Company uses a 52-53 week fiscal year. As a result, a fiscal year
may not end as of the same day as the calendar year. For convenience of
presentation, the accompanying consolidated financial statements have
been shown as ending on December 31 of each applicable period.
RECLASSIFICATIONS:
Certain financial statements items have been reclassified to conform to
current year's format.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with 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 reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with original
maturities of 90 days or less at the time of purchase to be cash
equivalents.
SHORT-TERM INVESTMENTS:
Short-term investments are classified as available for sale and are
carried at fair value. Unrealized holding gains and losses on such
securities are reported net of related taxes as a separate component of
stockholders' equity. Realized gains and losses on sales of all such
securities are reported in earnings and computed using the specific
identification cost method.
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is
determined on a standard cost basis which approximates the first-in,
first-out ("FIFO") method. Appropriate consideration is given to
obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value.
F-7
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIXED ASSETS:
Fixed assets are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which is two to three years.
Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the remaining lease term or the
estimated useful life of the related assets, typically three to five
years. Disposals of capital equipment are recorded by removing the
costs and accumulated depreciation from the accounts. Gains or losses
are included in the results of operations.
CARRYING VALUE OF LONG-LIVED ASSETS:
The Company writes down the carrying value of long-lived assets to fair
market value if the carrying value is considered to be impaired. The
value is considered to be impaired if the carrying amount exceeds the
undiscounted future net cash flows generated by the assets.
REVENUE RECOGNITION:
The Company recognizes revenue from gross product sales, less a
provision for estimated future customer returns, upon shipment to the
customer, upon fulfillment of acceptance terms, if any, and when no
significant contractual obligations remain outstanding. During 1997,
the Company recognized $3.0 million in revenue related to certain
deliverables detailed in the First Agreement with 3M. The amounts
recognized as revenue from this agreement approximates the amount that
would have been recognized using the percentage of completion
methodology.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are charged to operations as
incurred.
ADVERTISING:
The Company expenses the production costs of advertising as the expenses
are incurred. The production costs of advertising consist primarily of
magazine advertisements, agency fees and other direct production costs.
The advertising expense for the years ended December 31, 1997, 1996 and
1995 was $1,835,000, $1,570,000 and $1,281,000, respectively.
INCOME TAXES:
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes". Under
SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
TRANSLATION OF FOREIGN CURRENCIES:
The Company's foreign consolidated subsidiary is considered to be an
extension of the U.S. operation and the functional currency is the U.S.
dollar. Accordingly, monetary assets and liabilities are translated at
year-
F-8
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
end exchange rates while nonmonetary items are translated at historical
rates. Income and expense accounts are translated at the average rates
in effect during the year, except for depreciation and cost of revenue
which are translated at historical rates. Foreign exchange gains and
losses have not been significant to date and have been recorded in
results of operations.
COMPUTATION OF NET INCOME/(LOSS) PER SHARE:
The Company adopted the Statement of Financial Standards No. 128 (SFAS
128), "Earnings Per Share" and, accordingly, all prior period EPS
figures have been restated. SFAS 128 requires net income (loss) per
share to be presented under two calculations, Basic EPS and Diluted EPS.
Basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the periods
represented. Diluted net income (loss) per share is computed using
common and dilutive common equivalent shares outstanding during the
periods represented. Common equivalent shares (including shares issued
under the Stock Option Plan which are subject to repurchase) are
excluded from the computation of fully diluted net loss per share as
their effect is antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts
payable and other accrued liabilities approximate fair value due to
their short maturities. Estimated fair values for short-term
investments, which are separately disclosed elsewhere, are based on
quoted market prices for the same or similar instruments.
STOCK BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation," encourages, but does not
require companies to record compensation cost for stock-based
compensation plans at fair value. The Company has chosen to continue to
account for employee stock options using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
RECENT PRONOUNCEMENTS:
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 Polycom 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 Polycom in 1998 and the impact of adoption has not been determined.
F-9
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SHORT-TERM INVESTMENTS:
Short-term investments at December 31, 1997 and 1996 comprise (in
thousands):
<TABLE>
<CAPTION>
Fair Cost
Value Basis Maturity Dates
--------------------------------------------------
<S> <C> <C> <C>
Commercial Paper $ 934 $ 934 February 1998
Corporate Notes 4,250 4,250 February 1998 - October 1998
--------------------
Balance at December 31, 1997 $ 5,184 $ 5,184
--------------------
--------------------
Commercial Paper $ 1,676 $ 1,676 February 1997 - March 1997
Corporate Notes 8,425 8,425 January 1997 - December 1997
--------------------
Balance at December 31, 1996 $ 10,101 $ 10,101
--------------------
--------------------
</TABLE>
During 1997 and 1996, there were no realized gains or losses on the
disposal of short-term investments.
4. INVENTORIES:
Inventories consist of the following (in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Raw materials $ 2,125 $ 3,252
Finished goods 7,389 4,206
-------- --------
Total inventories $ 9,514 $ 7,458
-------- --------
-------- --------
</TABLE>
5. FIXED ASSETS:
Fixed assets, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Computer equipment and software $ 3,832 $ 2,980
Equipment, furniture and fixtures 2,156 1,600
Tooling equipment 3,091 1,944
Leasehold improvements 517 401
-------- --------
9,596 6,925
Less accumulated depreciation and amortization 5,629 3,761
-------- --------
$ 3,967 $ 3,164
-------- --------
-------- --------
</TABLE>
6. BUSINESS RISKS AND CREDIT CONCENTRATION:
The Company sells a limited number of products which serve the
audioconferencing, dataconferencing and videoconferencing markets. A
substantial majority of the Company's net revenues are derived from
sales of the
F-10
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SoundStation products which serve the audioconferencing market. Any
factor adversely affecting demand or supply for the SoundStation
products could materially adversely affect the Company's business and
financial performance. Although the Company will begin volume shipments
of the new ShowStation IP product in 1998, the market for
dataconferencing products is only beginning to emerge, and there can be
no assurance that it will develop sufficiently to enable the Company to
achieve broad commercial acceptance of its ShowStation products.
Additionally, the ViewStation products, including the 128kbps version
which began shipping in February 1998, and the 384/512kbps version which
is targeted for first customer shipment in April 1998, will be the
Company's first videoconferencing offer. There can be no assurance that
Polycom will succeed in this market.
Currently, the Company subcontracts the manufacturing of its
SoundStation, SoundStation Premier and ViewStation products through one
subcontractor in Asia. The SoundPoint product is manufactured by one
subcontractor in China. The ShowStation product is manufactured by one
U.S. subcontractor. The Company believes that there are a number of
alternative contract manufacturers that could produce the Company's
products, but in the event of a reduction or interruption of supply, it
could take a significant period of time to qualify an alternative
subcontractor and commence manufacturing. The effect of such reduction
or interruption in supply on results of operations would be material.
Additionally, the Asian economy has gone through some recent problems
which, as yet, have not had a material impact on the supply of Polycom
product from the subcontractors used in this region. However, should the
economic problems in Asia persist, it could create an interruption in
supply which could materially adversely affect the results of
operations.
The Company's cash and cash equivalents are maintained with two
international investment management companies, and are invested in the
form of demand deposit accounts, money market accounts, commercial paper
and government securities.
The Company markets its products to distributors and end-users
throughout the world. Management performs ongoing credit evaluations of
the Company's customers and maintains an allowance for potential credit
losses, but historically has not experienced any significant losses
related to individual customers or group of customers in any particular
geographic area. The expansion of Polycom's product offerings,
including the ShowStation IP and the ViewStation, may increase the
Company's credit risk as customers place larger orders for the new
products. There can be no assurance that the Company's credit loss
experience will remain at or near historic levels.
7. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company is subject to a variety of disputes or
litigation in the normal course of business including suits related to
intellectual property, contract law, personal injury and employee
relations. In the opinion of management, matters in which the Company is
currently involved, in the aggregate, should not have a material adverse
effect on the Company's financial statements.
LICENSE AGREEMENT:
The Company entered into an agreement to license software to be
incorporated into its ShowStation products. Under the agreement, the
Company is obligated to pay annual minimum license fees, ranging from
$15,000 to $35,000 through the year 2001. The Company may cancel the
agreement at any time, provided the Company has paid a minimum of
$200,000 in connection with the agreement. As of December 31, 1997, the
Company had paid $225,000 of the minimum license fees.
F-11
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASES:
The Company leases certain office facilities and equipment under
noncancelable leases expiring between 1998 and 2001. Future minimum
lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
----------------
Year Ending December 31,
------------------------
<S> <C>
1998 $ 672
1999 612
2000 228
2001 2
----------
Minimum future lease payments $ 1,514
----------
----------
</TABLE>
In December 1994, the Company amended its headquarters office lease
agreement and expanded its facilities. The lease on the expanded
facilities can be terminated sooner under an option which may be
exercised by the Company. Under the terms of the lease, the Company is
responsible for related maintenance, taxes and insurance.
In May 1997, the Company entered into a three year operating lease for
its U.S. distribution and repair center in Livermore, California. The
lease associated with this building will expire on May 31, 2000 and
allows for earlier termination by the Company.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$598,000, $475,000 and $433,000, respectively.
8. CREDIT ARRANGEMENTS:
The Company has available a revolving line of credit with a bank for the
lesser of $5,000,000 or the sum of 80% of eligible domestic trade
accounts receivable and 50% of foreign trade accounts receivable, as
defined, less the sum of the aggregate outstanding face amount of all
letters of credit issued under the line. The line of credit expires in
October 1999. The agreement allows for an additional facility of $5.0
million and for the borrowing to convert to a term loan for any
outstanding amount upon request of Polycom and payment of associated
fees. Borrowings under the line are subject to certain financial
covenants and restrictions on indebtedness, equity distributions,
financial guarantees, business combinations and other related items.
Borrowings under the line of credit bear interest at the lender's
current prime rate (8.5% at December 31, 1997). In 1996 the borrowing
rate was the lender's current index rate plus 1% (9.25% at December 31,
1996). The weighted average interest rates for the years ended December
31, 1997, 1996 and 1995 were 9.3%, 9.5% and 9.2%, respectively.
All borrowings are collateralized by substantially all assets of the
Company. The Company must meet certain financial ratios, as well as
maintain minimum tangible net worth and quarterly maximum cumulative
losses. The agreements also require that the Company provide certain
financial information to the lender on a periodic basis and restrict the
Company from paying any cash dividends without the bank's consent.
9. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
In March 1996, the Company authorized 18,095,690 shares of preferred
stock.
F-12
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK:
In April 1996, the Company and a principal stockholder issued 2,500,000
and 150,000 shares of common stock, respectively, in an initial public
offering. In connection with the initial public offering, all
outstanding shares of preferred stock were converted into an aggregate
of 13,069,857 shares of common stock. Additionally 22,500 shares of
common stock were issued upon the net exercise of warrants for preferred
stock.
STOCK OPTION PLAN:
In 1996, the Board of Directors reserved 3,125,000 shares of common
stock under its 1996 Stock Option Plan (the "Plan") for issuance to
employees and directors of the Company. In 1997, an additional
1,000,000 shares were reserved through a shareholder vote. The 1996
Plan supersedes the 1991 Stock Option Plan.
Under the terms of the Plan, options may be granted at prices not lower
than fair market value at date of grant as determined by the Board of
Directors. The options are immediately exercisable upon the vesting,
expire ten years from date of grant and the shares issued upon exercise
of the options are generally subject to a right of repurchase by the
Company upon termination of employment with the Company. Option shares
subject to repurchase normally vest at 20% after completing one year of
service to the Company and the remaining amount equally over 48 months,
until fully vested after five years. Certain shares held by a founder
of the Company vest as follows: 20% on date of grant and 6.25% of the
remaining shares in equal installments upon the expiration of each three
months of service completed thereafter.
Activity under the Plan is as follows (in thousands, except share and
per share data):
<TABLE>
<CAPTION>
Outstanding Options
Shares --------------------------------------------------------
Available Number Exercise Aggregate Weighted Avg
for Grant of Shares Price Price Exercise Price
--------- --------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 128,950 813,029 $0.01-$0.225 $ 135 $0.16
Options reserved 601,971
Options granted (820,819) 820,819 $0.225-$4.75 1,062 $1.29
Options exercised --- (720,591) $0.01-$1.00 (205) $0.28
Options canceled 112,382 (112,382) $0.01-$2.00 (19) $0.17
------------------------ ------
Balances, December 31, 1995 22,484 800,875 $0.15-$4.75 973 $1.21
Options reserved 2,361,072
Options granted (1,035,829) 1,035,829 $4.75-$9.00 7,049 $6.81
Options exercised --- (138,738) $0.15-$7.20 (68) $0.49
Options canceled 202,803 (202,803) $0.15-$9.00 (705) $3.48
------------------------ ------
Balances, December 31, 1996 1,550,530 1,495,163 $0.15-$9.00 7,249 $4.85
Options reserved 1,000,000
Options granted (2,390,700) 2,390,700 $3.00-$6.06 10,892 $4.56
Options exercised --- (87,120) $0.15-$4.75 (71) $0.81
Options canceled 722,297 (722,297) $0.225-$9.00 (4,382) $6.07
Shares repurchased 12,091
------------------------ ------
Balances, December 31, 1997 894,218 3,076,446 $0.15-$9.00 13,688 $4.45
------------------------ ------
------------------------ ------
</TABLE>
As of December 31, 1997, 1996 and 1995, options to purchase 458,861,
613,113, 140,029 outstanding options were exercisable at an aggregate
average exercise price of $3.24, $2.10 and $0.21, respectively, and
33,771 shares of common stock acquired under the Plan were subject to
repurchase.
F-13
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Consistent with the provisions of SFAS No. 123, the Company's net income
or loss and net income or loss per share would have been adjusted to the
pro forma amounts indicated below (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Net income/(loss) - as reported $(1,068) $1,483 $(1,602)
Net income/(loss) - pro forma $(3,052) $572 $(1,690)
Basic net income/(loss) per share - as reported $(0.06) $0.11 $(0.60)
Basic net income/(loss) per share - pro forma $(0.16) $0.04 $(0.64)
Diluted net income/(loss) per share - as reported $(0.06) $0.08 $(0.60)
Diluted net income/(loss) per share - pro forma $(0.16) $0.03 $(0.64)
</TABLE>
The impact on pro forma net income (loss) per share and net income
(loss) in the table above may not be indicative of the effect in future
years as options vest over several years and the Company continues to
grant stock options to new employees. This policy may or may not
continue.
The fair value of each option grant is estimated on the date of grant
using the multiple options approach with the Black-Scholes model with
the following weighted average assumptions by subgroup:
<TABLE>
<CAPTION>
Group A Group B
------------- -------------
<S> <C> <C>
Risk-free interest rate 5.47% - 6.66% 5.47% - 6.66%
Expected life (yrs) 2 1
Expected dividends --- ---
Expected volatility .6 - .8 .6 - .8
</TABLE>
The weighted average fair value of options granted in 1997, 1996 and
1995 was $2.70, $4.17 and $0.77, respectively.
The weighted average expected life was calculated based on the vesting
period and the exercise behavior of each subgroup. Group A represents
higher paid employees, while Group B represents lower paid employees.
The risk-free interest rate was calculated in accordance with the grant
date and expected life calculated for each subgroup.
The options outstanding and currently exercisable by exercise price at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
------------------------------------------ -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercisable Number Exercise
Price Outstanding Life (Yrs) Price Exercisable Price
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.15 - $0.34 232,183 6.52 $0.22 142,466 $0.22
$1.00 - $2.00 47,279 7.53 $1.64 22,095 $1.71
$3.00 - $5.88 2,081,034 9.28 $4.32 186,163 $3.76
$6.06 - $6.38 652,100 9.25 $6.17 90,748 $6.27
$7.20 - $9.00 63,850 8.31 $8.54 17,389 $8.54
--------- --------- ----------
3,076,446 $4.45 458,861
--------- --------- ----------
--------- --------- ----------
</TABLE>
F-14
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has also estimated the fair value of purchase rights issued
under the Employee Stock Purchase Plan. Rights under this plan were
also evaluated using the Black-Scholes option-pricing model. The
Company's plan is described in Note 10. Purchase periods occur twice
yearly and each effectively contains a 6-month option.
<TABLE>
<CAPTION>
Jan. 1997 July 1997
-----------------------------
<S> <C> <C>
Risk Free Interest Rate 5.47% 5.61%
Expected Life 6 months 6 months
Volatility .8 .8
Dividend Yield --- ---
</TABLE>
The weighted average fair value of options granted pursuant to the
Employee Stock Purchase Plan in 1997 was $2.04.
WARRANTS:
In connection with a joint marketing and development agreement for the
next generation dataconferencing product, Polycom granted 3M warrants
to purchase up to 2,000,000 shares of the Company's common stock at an
exercise price of $7.50 per share. The warrants expire in March 1999,
which may be extended until March 2000 depending on the delivery of
Polycom's first product developed under the agreement. The warrants
were valued at approximately $40,000 using the Black-Scholes model.
10. EMPLOYEE BENEFITS PLANS:
401 (k) PLAN:
The Company has a 401 (k) Plan (the "401(k) Plan"), which covers
substantially all employees. Each eligible employee may elect to
contribute to the 401(k) Plan, through payroll deductions, up to 20% of
their compensation, subject to current statutory limitations. The
Company, at the discretion of the Board of Directors, may make matching
contributions to the 401(k) Plan but has not done so since the inception
of the 401(k) Plan.
EMPLOYEE STOCK PURCHASE PLAN:
Under the 1997 Employee Qualified Stock Purchase Plan, the Company can
grant stock purchase rights to all eligible employees during offering
periods up to a maximum of 24 months with exercise dates approximately
every six months (beginning each February and August). The Company has
reserved 500,000 shares of common stock for issuance under the plan.
Shares are purchased through employees' payroll deductions at exercise
prices equal to 85% of the lesser of the fair market value of the
Company's common stock at either the first day of an offering period or
the last day of such offering period. No participant may purchase more
than $25,000 worth of common stock in any one calendar year.
11. INCOME TAXES:
The Company's tax provision differs from the provision computed using
statutory increased tax rates as follow (in thousands):
F-15
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal tax at statutory rate $ (305) $ 541 $ (545)
Permanent difference due to non-deductible
differences 368 23 21
Foreign taxes --- 45 ---
State taxes, net of federal benefit (51) 93 (98)
Research credit (576) (197) (254)
Net operating losses and research credits not
benefited (benefited) 697 (460) 876
Alternative minimum tax 38 63 ---
------ ------ -------
Tax provision $ 171 $ 108 $ ---
------ ------ -------
------ ------ -------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Fixed assets, principally due to differences
in depreciation $ 163 $ 141 $ (105)
Other accrued liabilities 2,023 1,127 1,089
State taxes (net of federal benefit) 377 239 179
Capitalized research expenditures 334 419 547
Net operating loss carryforwards 1,414 2,190 2,835
Tax credit carryforward 1,959 1,200 943
Valuation allowance (6,270) (5,316) (5,488)
-------- -------- --------
Net deferred tax asset $ --- $ --- $ ---
-------- -------- --------
-------- -------- --------
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation
allowance against its otherwise recognizable net deferred tax assets.
The valuation allowance increased in 1997 by $954,000 and decreased
$172,000 in 1996 and increased $1,140,000 in 1995.
As of December 31, 1997, the Company has federal tax net operating loss
carryforwards for tax purposes of approximately $4,100,000 and Federal
tax credit carryforwards of $1,400,000. These net operating loss
carryforwards expire in the years 2007 through 2012 and the tax credit
carryforwards expire in the years 2007 through 2020. The Company has
state tax credit carryforwards of approximately $550,000, which expire
in the years 2007 through 2012.
The future utilization of the Company's net operating loss carryforwards
may be subject to certain limitations upon certain changes in ownership.
12. NOTES RECEIVABLE FROM STOCKHOLDERS:
During 1996 and 1995, the Company issued five notes receivable for
purchases of common stock under its stock option plan totaling $17,000
and $154,000, respectively. No notes were issued in 1997. As of
December 31, 1997, the remaining balance of these notes was $24,000.
The loans bear interest ranging from 5.98% to 7.33% per annum and mature
from July 2004 to July 2005.
F-16
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BUSINESS SEGMENT INFORMATION:
The Company operates in one industry segment and markets its products in
North America and in foreign countries through its own direct sales
organization and resellers.
The Company's export net revenues are all denominated in U.S. dollars,
and are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
Europe 5,446 5,159 3,560
Asia Pacific and rest of world 5,346 3,399 2,391
------ ----- -----
10,792 8,558 5,951
------ ----- -----
------ ----- -----
</TABLE>
Individual customers who comprise 10% or more of the Company's net
revenues are as follows:
Customers:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------
<S> <C> <C> <C>
A 10% --- ---
B --- --- 11%
</TABLE>
During 1996, there were no individual customers that comprised 10% of
the Company's net revenues.
14. EARNINGS PER SHARE (EPS) DISCLOSURES:
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands except per share amounts).
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Numerator - basic and diluted EPS
Net income (loss) $(1,068) $1,483 $(1,602)
---------------------------------------
---------------------------------------
Denominator - Basic EPS
Common stock outstanding 19,066 13,978 2,650
---------------------------------------
Total Shares used in calculation of Basic EPS 19,066 13,978 2,650
---------------------------------------
Basic net income (loss) per share $(0.06) $0.11 $(0.60)
---------------------------------------
---------------------------------------
Denominator - Diluted EPS
Denominator - Basic EPS 19,066 13,978 2,650
Effect of Dilutive Securities:
Common stock options --- 593 ---
Preferred stock --- 3,997 ---
---------------------------------------
Total Shares used in calculation of Diluted EPS 19,066 18,568 2,650
---------------------------------------
Diluted net income (loss) per share $(0.06) $0.08 $(0.60)
---------------------------------------
---------------------------------------
</TABLE>
F-17
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock options to purchase 3,076,446 shares of common stock at prices
ranging from $0.15 to $9.00 were outstanding at December 31, 1997 but
were not included in the computation of diluted net income (loss) per
share as they were antidilutive.
In January 1998, the Company completed a merger with ViaVideo
Communications, Inc. ("ViaVideo") in a transaction accounted for as a
pooling of interests. This transaction increased the Polycom
outstanding shares by approximately 8.7 million shares and an additional
1.1 million shares were registered to convert the existing stock options
of ViaVideo to Polycom stock options. Further, in February 1998,
associated with the first joint marketing and development agreement with
Minnesota, Mining and Manufacturing Company ("3M"), 3M exercised its
option of first offer and purchased an additional 1.0 million shares of
the Company's common stock. In connection with the aforementioned
agreement, 3M was granted 2,000,000 warrants to purchase common stock at
$7.50 per share. These warrants were antidilutive at December 31, 1997
but could dilute basic EPS in the future.
15. SUBSEQUENT EVENT:
a) ACQUISITION OF VIAVIDEO COMMUNICATIONS, INC.
On January 2, 1998, the Company completed the acquisition of ViaVideo
Communications, Inc., ("ViaVideo")' whereby a wholly owned subsidiary
of Polycom, Inc. was merged with and into ViaVideo. ViaVideo is a
development stage company that designs and develops high quality, low
cost, easy to use, group videoconferencing systems that utilize
advanced video and audio compression technologies along with
Internet/Web-based features. Approximately 8.7 million shares of
Polycom common stock were exchanged for all of the issued and
outstanding capital stock of ViaVideo. In addition, outstanding
stock options to purchase ViaVideo common stock were converted into
options to purchase approximately 1.1 million shares of Polycom
common stock. The transaction is being accounted for as a pooling of
interests.
As of December 31, 1997, Polycom had an outstanding non-trade
receivable from ViaVideo in the amount of $503,000 and an outstanding
payable to ViaVideo in the amount of $117,000. These amounts were
associated with a joint service agreement between Polycom and
ViaVideo whereby both companies incurred charges on behalf of the
other for various engineering, marketing and administrative efforts.
The combined results of operations for the periods prior to the
merger are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Revenue $46,630 $37,032
Net income (loss) $(14,675) $1,126
Basic net income (loss) per share $(0.68) $0.08
Diluted net income (loss) per share $(0.68) $0.06
Shares used in basic per share calculation 21,686 14,774
Shares used in diluted per share calculation 21,686 19,815
</TABLE>
ViaVideo Communications began operations in September 1996.
ViaVideo Communications, Inc. ("ViaVideo") is involved in certain
lawsuits alleging breach of contract, breach of confidential
relationship, patents and other related allegations. ViaVideo will
vigorously defend against these claims and any related claims for
damages. While litigation is inherently uncertain, ViaVideo believes
that the ultimate resolution of the matters beyond that provided in
the balance sheet at December 31, 1997 of ViaVideo will not have a
material adverse effect on the Company's financial position.
b) 3M EXERCISE OF RIGHT OF FIRST OFFER
On February 19, 1998, 3M exercised its right of first offer option
associated with the First Agreement with 3M and purchased
approximately one million shares of Polycom common stock for a
consideration of approximately $7.6 million. As a result of the
purchase, 3M owns approximately 3.5% of outstanding Polycom common
stock.
F-18
<PAGE>
POLYCOM, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
PAGE
Report of Coopers & Lybrand L.L.P., Independent Accountants on Financial
Statement Schedule S-2
Schedule II - Valuation and Qualifying Accounts. S-3
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Polycom, Inc. Stockholders,
Our report on the consolidated financial statements of Polycom, Inc. and
subsidiary is included on page F-2 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page S-1 of this Form
10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 20, 1998
S-2
<PAGE>
SCHEDULE II
POLYCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS (a) PERIOD
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for Doubtful Accounts $443 $0 $(5) $438
Provision for Obsolete Inventory $721 $612 $(4) $1,329
Tax Valuation Allowance $5,316 $954 $0 $6,270
Year ended December 31, 1996
Allowance for Doubtful Accounts $448 $1 $(6) $443
Provision for Obsolete Inventory $345 $560 $(184) $721
Tax Valuation Allowance $5,488 $0 $(172) $5,316
Year ended December 31, 1995
Allowance for Doubtful Accounts $200 $255 $(7) $448
Provision for Obsolete Inventory $100 $561 $(316) $345
Tax Valuation Allowance $4,348 $1,140 $0 $5,488
</TABLE>
(a) Uncollectible accounts written-off or disposal of unusable or damaged raw
materials.
S-3
<PAGE>
EXHIBIT 10.15
STANDARD INDUSTRIAL LEASE--MULTI-TENANT
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. PARTIES. This Lease, dated, for reference purposes only, May 12, 1997, is
made by and between THE JOSEPH AND EDA PELL REVOCABLE TRUST DATED AUGUST 18,
1989 (herein called "Lessor") and Polycom, Inc., a Delaware corporation
(herein called "Lessee").
2. PREMISES, PARKING AND COMMON AREAS.
2.1 PREMISES. Lessor hereby leases to Lessee and Lessee leases from
Lessor for the term, at the rental, and upon all of the conditions set forth
herein, real property situated in the County of Alameda, State of California
commonly known as 4569 Las Positas Road, Unit C and described as
approximately 19,890 square feet of industrial space in Building B of Arroyo
Business Center, as shown on Exhibit A attached hereto and incorporated
herein, and herein referred to as the "Premises," including rights to the
Common Areas as hereinafter specified but not including any rights to the roof
of the Premises or to any Building in the Industrial Center. The Premises are
a portion of a building, herein referred to as the "Building." The Premises,
the Building, the Common Areas, the land upon which the same are located,
along with all other buildings and improvements thereon, are herein
collectively referred to as the "Industrial Center."
2.2 VEHICLE PARKING. Lessee shall be entitled to 40 vehicle parking
spaces, unreserved and unassigned, on those portions of the Common Areas
designated by Lessor for parking. Lessee shall not use more parking spaces
than said number. Said parking spaces shall be used only for parking by
vehicles no larger than full size passenger automobiles or pick-up trucks,
herein called "Permitted Size Vehicles." Vehicles other than Permitted Size
Vehicles are herein referred to as "Oversized Vehicles."
2.2.1 Lessee shall not permit or allow any vehicles that belong to
or are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
2.2.2 If Lessee permits or allows any of the prohibited activities
described in paragraph 2.2 of this Lease, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may
have, to remove or tow away the vehicle involved and charge the cost to
Lessee, which cost shall be immediately payable upon demand by Lessor.
2.3 COMMON AREAS--DEFINITION. The term "Common Areas" is defined as
all areas and facilities outside the Premises and within the exterior
boundary line of the Industrial Center that are provided and designated by
the Lessor from time to time for the general non-exclusive use of Lessor,
Lessee and of other lessees of the Industrial Center and their respective
employees, suppliers, shippers, customers and invitees, including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways and landscaped areas.
2.4 COMMON AREAS--LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, customers, and
invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be
deemed to include the right to store any property, temporarily or
permanently, in the Common Areas. Any such storage shall be permitted only by
the prior written consent of Lessor or Lessor's designated agent, which
consent may be revoked at any time. In the event that any unauthorized
storage shall occur then Lessor shall have the right, without notice, in
addition to such other rights and remedies that it may have, to remove the
property and charge the cost to Lessee, which cost shall be immediately
payable upon demand by Lessor.
2.5 COMMON AREAS--RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
establish, modify, amend and enforce reasonable rules and regulations with
respect thereto. Lessee agrees to abide by and conform to all such rules and
regulations, and to cause its employees, suppliers, shippers, customers, and
invitees to so abide and conform. Lessor shall not be responsible to Lessee
for the non-compliance with said rules and regulations by other lessees of
the Industrial Center. Lessor's current rules and regulations are attached
hereto as Exhibit B and incorporated herein.
2.6 COMMON AREAS--CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas,
ingress, egress, direction of traffic, landscaped areas and walkways; (b) To
close temporarily any of the Common Areas for maintenance purposes, so long
as reasonable access to the Premises remains available; (c) To designate
other land outside the boundaries of the Industrial Center to be a part of the
Common Areas; (d) To add additional buildings and improvements to the Common
Areas; (e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; (f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as Lessor
may, in the exercise of sound business judgment, deem to be appropriate.
2.6.1 Lessor shall at all times provide the parking facilities
required by applicable law and in no event shall the number of parking spaces
that Lessee is entitled to under paragraph 2.2 be reduced.
3. TERM.
3.1 TERM. The term of this Lease shall be for thirty-six (36) months
commencing on June 1, 1997 and ending on May 31, 2000 unless sooner
terminated pursuant to any provision hereof. See Addendum No. 8.
3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee
hereunder or extend the term hereof, but in such case, Lessee shall not be
obligated to pay rent or perform any other obligation of Lessee under the
terms of this Lease, except as may be otherwise provided in this Lease, until
possession of the Premises is tendered to Lessee; provided, however, that if
Lessor shall not have delivered possession of the Premises within sixty (60)
days from said commencement date, Lessee may, at Lessee's option, by notice in
writing to Lessor within ten (10) days thereafter, cancel this Lease, in
which event the parties shall be discharged from all obligations hereunder;
provided further, however, that if such written notice is not received by
Lessor within said ten (10) day period. Lessee's right to cancel this Lease
hereunder shall terminate and be of no further force or effect. See Addendum
No. 1.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not advance the termination date, and Lessee
shall pay rent for such period at the initial monthly rates set forth below.
4. RENT.
4.1 BASE RENT. Lessee shall pay to Lessor, as Base Rent for the
Premises, without any offset or deduction, except as may be otherwise
expressly provided in this Lease, on the first (1st) day of each month of the
term hereof, monthly payments in advance as set forth in the Rent Schedule
attached hereto as Exhibit C and incorporated herein. Lessee shall pay Lessor
upon execution hereof $9,945.00 as Base Rent for June, 1997. Rent for any
period during the term hereof which is for less than one month shall be a pro
rata portion of the Base Rent. Rent shall be payable in lawful money of the
United States to Lessor at the address stated herein or to such other persons
or at such other places as Lessor may designate in writing.
4.2 OPERATING EXPENSES. Lessee shall pay to Lessor during the term
hereof, in addition to the Base Rent, Lessee's Share of Operating Expenses,
as hereinafter defined, during each calendar year of the term of this Lease,
in accordance with the following provisions:
(a) "Lessee's Share. *See Page 1A, attached hereto and incorporated
herein.
(b) "Operating Expenses" is defined, for purposes of this Lease, as
all costs incurred by Lessor, if any, for:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common
Area lighting facilities and fences and gates.
(bb) Trash disposal services.
(cc) Tenant directories.
(dd) Fire detection systems including sprinkler system
maintenance and repair.
Initials: MK
------
------
<PAGE>
* of Operating Expenses" shall mean the amount of any increase in Operating
Expenses over the Base Year allocable to the Premises. Such allocation may be
based on the ratio of the square footage of the Premises to the aggregate
leased square footage of the buildings in the Business Center. The "Base
Year" shall mean June 1, 1997 through May 31, 1998.
Initials: MK
------
------
Page 1A
<PAGE>
(ee) Security services.
(ff) Any other service to be provided by Lessor that is
elsewhere in this Lease stated to be an "Operating Expense."
(ii) The cost of water, gas and electricity to service the
Common Areas.
(c) The inclusion of the improvements, facilities and services set
forth in paragraph 4.2(b)(i) of the definition of Operating Expenses shall
not be deemed to impose an obligation upon Lessor to either have said
improvements or facilities or to provide those services unless the Industrial
Center already has the same, Lessor already provides the services, or Lessor
has agreed elsewhere in this Lease to provide the same or some of them.
(d) Lessee's Share of Operating Expenses shall be payable by Lessee
within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of
annual Operating Expenses and the same shall be payable monthly or quarterly,
as Lessor shall designate, during each twelve-month period of the Lease term,
on the same day as the Base Rent is due hereunder. In the event that Lessee
pays Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid,
Lessor shall deliver to Lessee within sixty (60) days after the expiration of
each calendar year a reasonably detailed statement showing Lessee's Share of
the actual Operating Expenses incurred during the preceding year. If Lessee's
payments under this paragraph 4.2(d) during said preceding year exceed
Lessee's Share as indicated on said statement, Lessee shall be entitled to
credit the amount of such overpayment against Lessee's Share of Operating
Expenses next falling due. If Lessee's payments under this paragraph during
said preceding year were less than Lessee's Share as indicated on said
statement, Lessee shall pay to Lessor the amount of the deficiency within ten
(10) days after delivery by Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
$9,945.00 as security for Lessee' faithful performance of Lessee's
obligations hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Lessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any
other sum to which Lessor may become obligated by reason of Lessee's default,
or to compensate Lessor for any loss or damage which Lessor may suffer
thereby. If Lessor so uses or applies all or any portion of said deposit,
Lessee shall within ten (10) days after written demand therefor deposit cash
with Lessor in an amount sufficient to restore said deposit to the full
amount then required of Lessee. If the monthly rent shall, from time to time,
increase during the term of this Lease, Lessee shall, at the time of such
increase, deposit with Lessor additional money as a security deposit so that
the total amount of the security deposit held by Lessor shall at all times
bear the same proportion to the then current Base Rent as the initial
security deposit bears to the initial Base Rent set forth in paragraph 4.
Lessor shall not be required to keep said security deposit separate from its
general accounts. If Lessee performs all of Lessee's obligations hereunder,
said deposit, or so much thereof as has not theretofore been applied by
Lessor, shall be returned, without payment of interest or other increment for
its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of
Lessee's interest hereunder) at the expiration of the term hereof, and after
Lessee has vacated the Premises. No trust relationship is created herein
between Lessor and Lessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for general
office and administration; and warehousing/distribution, assembly, light
manufacturing and repair of teleconferencing products or any other use which
is reasonably comparable and for no other purpose.
6.2 COMPLIANCE WITH LAWS.
(a) Lessor warrants to Lessee that the Premises, in the state
existing on the date that the Lease term commences, but without regard to the
use for which Lessee will occupy the Premises, does not violate any covenants
or restrictions of record, or any applicable building code, regulation or
ordinance in effect on such Lease term commencement date. In the event it is
determined that this warranty has been violated, then it shall be the
obligation of the Lessor, after written notice from Lessee, to promptly, at
Lessor's sole cost and expense, rectify any such violation. In the event
Lessee does not give to Lessor written notice of the violation of this
warranty within six months from the date that the Lease term commences, the
correction of same shall be the obligation of the Lessee at Lessee's sole
cost. The warranty contained in this paragraph 6.2(a) shall be of no force or
effect if, prior to the date of this Lease, Lessee was an owner or occupant
of the Premises and, in such event, Lessor shall correct any such violation
at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at
Lessee's expense, promptly comply with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements of any fire insurance underwriters or rating bureaus, now in
effect or which may hereafter come into effect, whether or not they reflect a
change in policy from that now existing, during the term or any part of the
term hereof, relating in any manner to the Premises and the occupation and
use by Lessee of the Premises and of the Common Areas. Lessee shall not use
nor permit the use of the Premises or the Common Areas in any manner that
will tend to create waste or a nuisance or shall tend to disturb other
occupants of the Industrial Center.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee clean and free of
debris on the Lease commencement date (unless Lessee is already in
possession) and Lessor warrants to Lessee that the plumbing, lighting, air
conditioning, heating, and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the event that it is
determined that this warranty has been violated, then it shall be the
obligation of Lessor, after receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation. Lessee's failure to give such written
notice to Lessor within thirty (30) days after the Lease commencement date
shall cause the conclusive presumption that Lessor has complied with all of
Lessor's obligations hereunder. The warranty contained in this paragraph
6.3(a) shall be of no force or effect if prior to the date of this Lease,
Lessee was an owner or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises as is, in their condition existing as of the Lease
commencement date or the ate that Lessee takes possession of the Premises,
whichever is earlier, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use of
the Premises, and any covenants or restrictions of record, and accepts this
Lease subject thereto and to all matters disclosed thereby and by any
exhibits attached hereto. Lessee acknowledges that neither Lessor nor
Lessor's agent has made any representation or warranty as to the present or
future suitability of the Premises for the conduct of Lessee's business. See
Addendum No. 7.
7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.
7.1 LESSOR'S OBLIGATIONS. Subject to the provisions of paragraphs 4.2
(Operating Expenses), 6 (Use), 7.2 (Lessee's Obligations) and 9 (Damage or
Destruction) and except for damage caused by any negligent or intentional act
or omission of Lessee, Lessee's employees, suppliers, shippers, customers, or
invitees, in which event Lessee shall repair the damage. Lessor, at Lessor's
expense, subject to reimbursement pursuant to paragraph 4.2, shall keep in
good condition and repair the foundations, exterior walls, structural
condition of interior bearing walls, and roof of the Premises, as well as the
parking lots, walkways, driveways, landscaping, fences, signs and utility
installations of the Common Areas and all parts thereof, as well as providing
the services for which there is an Operating Expense pursuant to paragraph
4.2. Lessor shall not, however, be obligated to paint the exterior or
interior surface of exterior walls, nor shall Lessor be required to maintain,
repair or replace windows, doors or plate glass of the Premises. Lessor shall
have no obligation to make repairs under this paragraph 7.1 until a
reasonable time after receipt of written notice from Lessee of the need for
such repairs. Lessee expressly waives the benefits of any statute now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Premises in good order, condition and repair. Lessor
shall not be liable for damages or loss of any kind or nature by reason of
Lessor's failure to furnish any Common Area Services when such failure is
caused by accident, breakage, repairs, strikes, lockout, or other labor
disturbances or disputes of any character, or by any other cause beyond the
reasonable control of Lessor.
7.2 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of paragraphs 6 (Use), 7.1 (Lessor's
Obligations), and 9 (Damage or Destruction), Lessee, at Lessee's expense,
shall keep in good order, condition and repair the Premises and every part
thereof (whether or not the damaged portion of the Premises or the means of
repairing the same are reasonably or readily accessible to Lessee)
including, without limiting the generality of the foregoing, all plumbing,
heating, ventilating and air conditioning systems (Lessee shall procure and
maintain, at Lessee's expense, a ventilating and air conditioning system
maintenance contract), electrical and lighting facilities and equipment
within the Premises, fixtures, interior walls and interior surfaces of
exterior walls, ceilings, windows, doors, plate glass, and skylights located
within the Premises. Lessor reserves the right to procure and maintain the
ventilating and air conditioning system maintenance contract and if Lessor so
elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof.
(b) If Lessee fails to perform Lessee's obligations under this
paragraph 7.2 or under any other paragraph of this Lease, Lessor may enter
upon the Premises after ten (10) days' prior written notice to Lessee (except
in the case of emergency, in which no notice shall be required), perform such
obligations on Lessee's behalf and put the Premises in good order, condition
and repair, and the cost thereof together with interest thereon at the
maximum rate then allowable by law shall be due and payable as additional
rent to Lessor together with Lessee's next Base Rent installment.
(c) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same
condition as received, ordinary wear and tear excepted, clean and free of
debris. Any damage or deterioration of the Premises shall not be deemed
ordinary wear and tear if the same could have been prevented by good
maintenance practices. Lessee shall repair any damage to the Premises
occasioned by the installation or removal of Lessee's trade fixtures,
alterations, furnishings and equipment. Notwithstanding anything to the
contrary otherwise stated in this Lease, Lessee shall leave the air lines,
power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing and fencing on the Premises in good
operating condition.
7.3 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent make
any alterations, improvements, additions, or Utility installations in, on or
about the Premises, or the Industrial Center, except for nonstructural
alterations to the Premises not exceeding $2,500 in cumulative costs, during
the term of this Lease. In any event, whether or not in excess of $2,500 in
cumulative cost, Lessee shall make no change or alteration to the exterior of
the Premises nor the exterior of the Building nor the Industrial Center
without Lessor's prior written consent. As used in this paragraph 7.3 the
term "Utility Installation" shall mean carpeting, window coverings, air
lines, power panels, electrical distribution systems, lighting fixtures,
space heaters, air conditioning, plumbing, and fencing. Lessor may require
that Lessee remove any or all of said alterations, improvements, additions or
Utility Installations at the
Initials: MK
------
------
-2-
<PAGE>
expiration of the term, consent to make the alteration, improvement, addition
or Utility Installation that removal of the same would be required at the
expiration of the term) and restore the Premises and the Industrial Center to
their prior condition. Lessor may require Lessee to provide Lessor at
Lessee's sole cost and expense, a lien and completion bond in an amount
equal to one and one-half times the estimated cost of such improvements, to
insure Lessor against any liability for mechanic's and materialmen's liens
and to insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval
of Lessor, Lessor may, at any time during the term of this Lease, require that
Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Industrial Center that Lessee
shall desire to make and which acquires the consent of the Lessor shall be
presented to Lessor in written form, with proposed detailed plans. If Lessor
shall give its consent, the consent shall be deemed conditioned upon Lessee
acquiring a permit to do so from appropriate governmental agencies, the
furnishing of a copy thereof to Lessor prior to the commencement of the work
and the compliance by Lessee of all conditions of said permit in a prompt and
expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, or the Industrial Center, or any
interest therein. Lessee shall give Lessor not less than ten (10) days'
notice prior to the commencement of any work in the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises or the Building as provided by law. If Lessee shall, in good faith,
contest the validity of any such lien, claim or demand, then Lessee shall, at
its sole expense defend itself and Lessor against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises or the Industrial
Center, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises and the Industrial Center free from the effect
of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's
attorney's fees and costs in participating in such action if Lessor shall
decide it is to Lessor's best interest to do so.
(d) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall be the property
of Lessor and shall remain upon and be surrendered with the Premises at the
expiration of the Lease term, unless Lessor requires their removal pursuant
to paragraph 7.3(a). Notwithstanding the provisions of this paragraph 7.3(d),
Lessee's machinery and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the
Premises, and other than Utility Installations, shall remain the property of
Lessee and may be removed by Lessee subject to the provisions of paragraph
7.2.
7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or
additional utility facilities throughout the Building and the Common Areas
for the benefit of Lessor or Lessee, or any other lessee of the Industrial
Center, including, but not by way of limitation, such utilities as plumbing,
electrical systems, security systems, communication systems, and fire
protection and detection systems, so long as such installations do not
unreasonably interfere with Lessee's use of the premises.
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE--LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of Combined
Single Limit Bodily Injury and Property Damage insurance insuring Lessee and
Lessor against any liability arising out of the use, occupancy or maintenance
of the Premises and the Industrial Center. Such insurance shall be in an
amount not less than One Million Dollars ($1,000,000) per occurrence. The
policy shall insure performance by Lessee of the indemnity provisions of this
paragraph 8. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder.
8.2 LIABILITY INSURANCE--LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Property Damage Insurance, insuring Lessor, but not Lessee, against any
liability arising out of the ownership, use, occupancy or maintenance of the
Industrial Center in an amount not less than $500,000.00 per occurrence.
8.3 PROPERTY INSURANCE. Lessor shall obtain and keep in force during
the term of this Lease a policy or policies of insurance covering loss or
damage to the Industrial Center improvements, but not Lessee's personal
property, fixtures, equipment or tenant improvements, in an amount not to
exceed the full replacement value thereof, as the same may exist from time to
time, providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
flood (in the event same is required by a lender having a lien on the
Premises), special extended perils ("all risk," as such term is used in the
insurance industry), plate glass insurance and such other insurance as Lessor
deems is advisable. In addition, Lessor shall obtain and keep in force, during
the term of this Lease, a policy of rental value insurance covering a period
of one year, with loss payable to Lessor, which insurance shall also cover
all Operating Expenses for said period.
8.4 PAYMENT OF PREMIUM INCREASE.
(a) After the term of this Lease has commenced, Lessee shall not
be responsible for paying any increase in the property insurance premium for
the Industrial Center specified by Lessor's insurance carrier as being caused
by the use, acts or omissions of any other lessee of the Industrial Center,
or by the nature of such other lessee's occupancy which create an
extraordinary or unusual risk.
(b) Lessee, however, shall pay the entirety of any increase in the
property insurance premium for the Industrial Center over what it was
immediately prior to the commencement of the term of this Lease if the
increase is specified by Lessor's insurance carrier as being caused by the
nature of Lessee's occupancy or any act or omission of Lessee.
(c) Lessee shall pay to Lessor, during the term hereof, in
addition to the rent, the amount of any increase in premiums for the
insurance required under paragraphs 8.2 and 8.3 over and above such premiums
paid during the Base Period, as hereinafter defined, whether such premium
increase shall be the result of the nature of Lessee's occupancy, any act or
omission of Lessee, requirements of the holder of a mortgage or deed of trust
covering the Premises, increased valuation of the Premises, or general rate
increases. In the event that the Premises have been occupied previously, the
words "Base Period" shall mean the last twelve months of the prior occupancy.
In the event that the Premises have never been occupied previously, the
premiums during the "Base Period" shall be deemed to be the lowest premiums
reasonably obtainable for said insurance assuming the most nominal use of the
Premises. Provided, however, in lieu of the Base Period, the parties may
insert a dollar amount at the end of this sentence which figure shall be
considered as the insurance premium for the Base Period: $N/A.
(d) Lessee shall pay any such premium increases to Lessor within
30 days after receipt by Lessee of a copy of the premium statement or other
satisfactory evidence of the amount due. If the insurance policies maintained
hereunder cover other improvements in addition to the Premises, Lessor shall
also deliver to Lessee a statement of the amount of such increase
attributable to the Premises and showing in reasonable detail, the manner in
which such amount was computed. If the term of this Lease shall not expire
concurrently with the expiration of the period covered by such insurance,
Lessee's liability for premium increases shall be prorated on an annual basis.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or
such other rating as may be required by a lender having a lien on the
Premises, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies carried by Lessor. Lessee shall deliver to Lessor copies of
liability insurance policies required under paragraph 8.1 within seven (7)
days after the commencement date of this Lease. No such policy shall be
cancellable or subject to reduction of coverage or other modification except
after thirty (30) days prior written notice to Lessor. Lessee shall, at least
thirty (30) days prior to the expiration of such policies, furnish Lessor
with renewals or "binders" thereof, or Lessor may order such insurance and
charge the cost therefor to Lessee.
8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
which perils occur in, on or about the Premises, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors
and/or invitees. Lessee and Lessor shall, upon obtaining the policies of
insurance required hereunder, give notice to the insurance carrier or
carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Industrial
Center, or from the conduct of Lessee's business or from any activity, work
or things done, permitted or suffered by Lessee in or about the Premises or
elsewhere and shall further indemnify and hold harmless Lessor from and
against any and all claims arising from any breach or default in the
performance of any obligation on Lessee's part to be performed under the
terms of this Lease, or arising from any act or omission of Lessee, or
any of Lessee's agents, contractors, or employees, and from and against all
costs, attorney's fees, expenses and liabilities incurred in the defense of
any such claim or any action or proceeding brought thereon, and in case any
action or proceeding be brought against Lessor by reason of any such claim.
Lessee upon notice from Lessor shall defend the same at Lessee's expense by
counsel reasonably satisfactory to Lessor and Lessor shall cooperate with
Lessee in such defense. Lessee, as a material part of the consideration to
Lessor, hereby assumes all risk of damage to property of Lessee or injury to
persons, in, upon or about the Industrial Center arising from any cause and
Lessee hereby waives all claims in respect thereto against Lessor.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or for damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers or any other
persons in or about the Premises or the Industrial Center nor shall Lessor
be liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other detects of pipes, sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures, or from any other cause,
whether said damage or injury results from conditions arising upon the
Premises or upon other portions of the Industrial Center, or from other
sources or places and regardless of whether the cause of such damage or
injury or the means of repairing the same is inaccessible to Lessee. Lessor
shall not be liable for any damages arising from any act or neglect of any
other lessee, occupant or user of the Industrial Center, nor from the failure
of Lessor to enforce the provisions of any other lease of the Industrial
Center.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Partial Damage" shall mean if the Premises are
damaged or destroyed to the extent that the cost of repair is less than fifty
percent of the then replacement cost of the Premises.
Initials: MK
------
------
-3-
<PAGE>
(b) "Premises Total Destruction" shall mean if the Premises are
damaged or destroyed to the extent that the cost of repair is fifty percent
or more of the then replacement cost of the Premises.
(c) "Premises Building Partial Damage" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that
the cost to repair is less than fifty percent of the then replacement cost of
the Building.
(d) "Premises Building Total Destruction" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the
extent that the cost to repair is fifty percent or more of the then
replacement cost of the Building.
(e) "Industrial Center Buildings" shall mean all of the buildings
on the Industrial Center site.
(f) "Industrial Center Buildings Total Destruction" shall mean if
the Industrial Center Buildings are damaged or destroyed to the extent that
the cost of repair is fifty percent or more of the then replacement cost of
the Industrial Center Buildings.
(g) "Insured Loss" shall mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8. The fact that an insured Loss has a deductible amount shall not
make the loss an uninsured loss.
(h) "Replacement Cost" shall mean the amount of money necessary to
be spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring excluding all improvements
made by lessees.
9.2 PREMISES PARTIAL DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is an
Insured Loss and which falls into the classification of either Premises
Partial Damage or Premises Building Partial Damage, then Lessor shall, at
Lessor's expense, repair such damage to the Premises, but not Lessee's
fixtures, equipment or tenant improvements, as soon as reasonably possible
and this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4
and 9.5, if at any time during the term of this Lease there is damage which
is not an insured Loss and which falls within the classification of Premises
Partial Damage or Premises Building Partial Damage, unless caused by a
negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense), which damage prevents Lessee from using the
Premises, Lessor may at Lessor's option either (i) repair such damage as
soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) give written notice to
Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease as of the
date of the occurrence of such damage. In the event Lessor elects to give
such notice of Lessor's intention to cancel and terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's intention to repair such damage at
Lessee's expense, without reimbursement from Lessor, in which event this
Lease shall continue in full force and effect, and Lessee shall proceed to
make such repairs as soon as reasonably possible. If Lessee does not give
such notice within such 10-day period this Lease shall be cancelled and
terminated as of the date of the occurrence of such damage.
9.3 PREMISES TOTAL DESTRUCTION; PREMISES BUILDING TOTAL DESTRUCTION;
INDUSTRIAL CENTER BUILDINGS TOTAL DESTRUCTION.
(a) Subject to the provisions of paragraphs 9.4 and 9.5, if at any
time during the term of this Lease there is damage, whether or not it is an
Insured Loss, and which falls into the classifications of either (i) Premises
Total Destruction, or (ii) Premises Building Total Destruction, or (iii)
Industrial Center Buildings Total Destruction, then Lessor may at Lessor's
option either (i) repair such damage or destruction, but not Lessee's
fixtures, equipment or tenant improvements, as soon as reasonably possible at
Lessor's expense, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall be cancelled and terminated as of the
date of the occurrence of such damage.
9.4 DAMAGE NEAR THE END OF TERM.
(a) Subject to paragraph 9.4(b), if at any time during the last six
months of the term of this Lease there is substantial damage, whether or not
an Insured Loss, which falls within the classification of Premises Partial
Damage, Lessor may at Lessor's option cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within 30 days after the date of occurrence of
such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has
an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, Lessee shall exercise such
option, if it is to be exercised at all, no later than twenty (20) days after
the occurrence of an Insured Loss falling within the classification of
Premises Partial Damage, during the last six months of the term of this
Lease. If Lessee duly exercised such option during said twenty (20) day
period, Lessor shall, at Lessor's expense, repair such damage, but not
Lessee's fixtures, equipment or tenant improvements, as soon as reasonably
possible and this Lease shall continue in full force and effect. If Lessee
fails to exercise such option during said twenty (20) day period, then Lessor
may at Lessor's option terminate and cancel this Lease as of the expiration
of said twenty (20) day period by giving written notice to Lessee of Lessor's
election to do so within ten (10) days after the expiration of said twenty
(20) day period, notwithstanding any term or provision in the grant of option
to the contrary.
9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event Lessor repairs or restores the Premises pursuant
to the provisions of this paragraph 9, the rent payable hereunder for the
period during which such damage, repair or restoration continues shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of rent, if any, Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this paragraph 9 and shall not commence such repair
or restoration within ninety (90) days after such obligation shall accrue,
Lessee may at Lessee's option cancel and terminate this Lease by giving
Lessor written notice of Lessee's election to do so at any time prior to the
commencement of such repair or restoration. In such event this Lease shall
terminate as of the date of such notice.
9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made
concerning advance rent and any advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's security
deposit as has not theretofore been applied by Lessor.
9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leased property is destroyed and agree
that such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAX INCREASE. Lessor shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Industrial Center, provided,
however, that Lessee shall pay, in addition to rent, the amount, if any, by
which real property taxes applicable to the Premises increase over the fiscal
real estate tax year 1994-1995. Such payment shall be made by Lessee within
thirty (30) days after the receipt of Lessor's written statement setting
forth the amount of such increase and the computation thereof. If the term
of this Lease shall not expire concurrently with the expiration of the tax
fiscal year, Lessee's liability for increased taxes for the last partial
lease year shall be prorated on an annual basis.
10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the
Industrial Center by other lessees or by Lessor for the exclusive enjoyment
of such other lessees. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.
10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real
property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Industrial Center or any
portion thereof by any authority having the direct or indirect power to tax,
including any city, county, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Lessor in the
Industrial Center of in any portion thereof, as against Lessor's right to
rent or other income therefrom, and as against Lessor's business of leasing
the Industrial Center. The term "real property tax" shall also include any
tax, fee, levy, assessment or charge (i) in substitution of, partially or
totally, any tax, fee, levy, assessment or charge hereinabove included within
the definition of "real property tax," or (ii) the nature of which was
hereinbefore included within the definition of "real property tax," or (iii)
which is imposed for a service or right not charged prior to June 1, 1978,
or, if previously charged, has been increased since June 1, 1978, or (iv)
which is imposed as a result of a transfer, either partial or total, of
Lessor's interest in the Industrial Center or which is added to a tax or
charge hereinbefore included within the definition of real property tax by
reason of such transfer, or (v) which is imposed by reason of this
transaction, any modifications or changes hereto, or any transfers hereof.
10.4 JOINT ASSESSMENT. If the Industrial Center is not separately
assessed, Lessee's real property tax liability shall be an equitable
proportion of the real property taxes for all of the land and improvements
included within the tax parcel assessed, such proportion to be determined by
Lessor from the respective valuations assigned in the assessor's work sheets
or such other information as may be reasonably available. Lessor's
reasonable determination thereof, in good faith, shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and
all other personal property to be assessed and billed separately from the
real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay to Lessor the taxes
attributable to Lessee within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
the Premises, Lessee shall pay a reasonable proportion to be determined by
Lessor of all charges jointly metered with other premises in the Building.
Initials: MK
------
------
<PAGE>
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the
Premises, without Lessor's prior written consent, which Lessor shall not
unreasonably withhold. Lessor shall respond to Lessee's request for consent
hereunder in a timely manner and any attempted assignment, transfer, mortgage,
encumbrance or subletting without such consent shall be void, and shall
constitute a breach of this Lease without the need for notice to Lessee under
paragraph 13.1.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by
or is under common control with Lessee, or to any corporation resulting from
the merger or consolidation with Lessee, or to any person or entity which
acquires all the assets of Lessee as a going concern of the business that is
being conducted on the Premises, all of which are referred to as "Lessee
Affiliate," provided that before such assignment shall be effective said
assignee shall assume, in full, the obligations of Lessee under this Lease.
Any such assignment shall not, in any way, affect or limit the liability of
Lessee under the terms of this Lease even if after such assignment or
subletting the terms of this Lease are materially changed or altered without
the consent of Lessee, the consent of whom shall not be necessary.
12.3 TERMS AND CONDITIONS OF ASSIGNMENT. Regardless of Lessor's consent,
no assignment shall release Lessee of Lessee's obligations hereunder or alter
the primary liability of Lessee to pay the Base Rent and Lessee's Share of
Operating Expenses, and to perform all other obligations to be performed by
Lessee hereunder. Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment. Neither a delay in the
approval or disapproval of such assignment nor the acceptance of rent shall
constitute a waiver or estoppel of Lessor's right to exercise its remedies
for the breach of any of the terms or conditions of this paragraph 12 or this
Lease. Consent to one assignment shall not be deemed consent to any
subsequent assignment. In the event of default by any assignee of Lessee or
any successor of Lessee, in the performance of any of the terms hereof,
Lessor may proceed directly against Lessee without the necessity of
exhausting remedies against said assignee. Lessor may consent to subsequent
assignments of this Lease or amendments or modifications to this Lease with
assignees of Lessee, without notifying Lessee, or any successor of Lessee,
and without obtaining its or their consent thereto and such action shall not
relieve Lessee of liability under this Lease.
12.4 TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of
Lessor's consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be included
in subleases:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
hereafter made by Lessee, and Lessor may collect such rent and income and
apply same toward Lessee's obligations under this Lease; provided, however,
that until a default shall occur in the performance of Lessee's obligations
under this Lease, Lessee may receive, collect and enjoy the rents accruing
under such sublease. Lessor shall not, by reason of this or any other
assignment of such sublease to Lessor nor by reason of the collection of the
rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such
sublessee under such sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor
stating that a default exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor the rents due and to become due under the
sublease. Lessee agrees that such sublessee shall have the right to rely
upon any such statement and request from Lessor, and that such sublessee
shall pay such rents to Lessor without any obligation or right to inquire as
to whether such default exists and notwithstanding any notice from or claim
from Lessee to the contrary. Lessee shall have no right or claim against
such sublessee or Lessor for any such rents so paid by said sublessee to
Lessor.
(b) No sublease entered into by Lessee shall be effective unless
and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublease as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublessee shall, by
reason of entering into a sublease under this Lease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every obligation herein to be performed by Lessee other than such
obligations as are contrary to or inconsistent with provisions contained in a
sublease to which Lessor has expressly consented in writing.
(c) If Lessee's obligations under this Lease have been guaranteed
by third parties, then a sublease, and Lessor's consent thereto, shall not be
effective unless said guarantors give their written consent to such sublease
and the terms thereof.
(d) The consent by Lessor to any subletting shall not release
Lessee from its obligations or alter the primary liability of Lessee to pay
the rent and perform and comply with all of the obligations of Lessee to be
performed under this Lease.
(e) The consent by Lessor to any subletting shall not constitute a
consent to any subsequent subletting by Lessee or to any assignment or
subletting by the sublessee. However, Lessor may consent to subsequent
sublettings and assignments of the sublease or any amendments or
modifications thereto without notifying Lessee or anyone else liable on the
Lease or sublease and without obtaining their consent and such action shall
not relieve such persons from liability.
(f) In the event of any default under this Lease, Lessor may
proceed directly against Lessee, any guarantors or any one else responsible
for the performance of this Lease, including the sublessee, without first
exhausting Lessor's remedies against any other person or entity responsible
therefor to Lessor, or any security held by Lessor or Lessee.
(g) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of Lessee under such sublease
from the time of the exercise of said option to the termination of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents
or security deposit paid by such sublessee to Lessee or for any other prior
defaults of Lessee under such sublease.
(h) Each and every consent required of Lessee under a sublease
shall also require the consent of Lessor.
(i) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(j) Lessor's written consent to any subletting of the Premises by
Lessee shall not constitute an acknowledgement that no default then exists
under this Lease of the obligations to be performed by Lessee nor shall such
consent be deemed a waiver of any then existing default, except as may be
otherwise stated by Lessor at the time.
(k) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within ten (10) days after service of said notice of default upon such
sublessee, and the sublessee shall have the right of reimbursement and offset
from and against Lessee for any such defaults cured by the sublessee.
12.5 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or
if Lessee shall request the consent of Lessor for any act Lessee proposes to
do then Lessee shall pay Lessor's reasonable attorney's fees incurred in
connection therewith, such attorney's fees not to exceed Five Hundred Dollars
($500.00) for each such request.
13. DEFAULT; REMEDIES.
13.1 DEFAULT. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(c) Except as otherwise provided in this Lease, the failure by
Lessee to observe or perform any of the covenants, conditions or provisions
of this Lease to be observed or performed by Lessee, other than described in
paragraph (b) above, where such failure shall continue for a period of thirty
(30) days after written notice thereof from Lessor to Lessee; provided,
however, that if the nature of Lessee's noncompliance is such that more than
thirty (30) days are reasonably required for its cure, then Lessee shall not
be deemed to be in default if Lessee commenced such cure within said thirty
(30) day period and thereafter diligently prosecutes such cure to completion.
To the extent permitted by law, such thirty (30) day notice shall constitute
the sole and exclusive notice required to be given to Lessee under applicable
Unlawful Detainer statutes.
(d) (i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as
defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in
the case of a petition filed against Lessee, the same is dismissed within
sixty (60) days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises or
of Lessee's interest in this Lease, where possession is not restored to
Lessee within thirty (30) days; or (iv) the attachment, execution or other
judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days. In the event that any provision of this
paragraph 13.1(d) is contrary to any applicable law, such provision shall be
of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, was materially false.
13.2 REMEDIES. In the event of any such material default by Lessee,
Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee all damages
incurred by Lessor by reason of Lessee's default including, but not limited
to, the cost of recovering possession of the Premises, expenses of reletting,
including necessary renovation and alteration of the Premises, reasonable
attorney's fees, and any real estate commission actually paid; the worth at
the time of award by the court having jurisdiction thereof of the amount by
which the unpaid rent for the balance of the term after the time of such
award exceeds the amount of such rental loss for the same period that Lessee
proves could be reasonably avoided; that portion of the leasing commission
paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of
this Lease.
Initials: MK
------
------
-5-
<PAGE>
(b) Maintain Lessee's right to possession in which case this Lease shall
continue in effect whether or not Lessee shall have vacated or abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent
as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law. See Addendum No. 2
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but
in no event later than thirty (30) days after written notice by Lessee to
Lessor and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to
Lessee in writing, specifying wherein Lessor has filed to perform such
obligation; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days are required for performance then Lessor
shall not be in default if Lessor commences performance within such thirty
(30) day period and thereafter diligently prosecutes the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other
sums due hereunder will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting
charges, and late charges which may be imposed on Lessor by the terms of any
mortgage or trust deed covering the Industrial Center. Accordingly, if any
installment of Base Rent, Operating Expenses, or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within ten (10)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such
overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default with respect to such overdue amount,
nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) consecutive installments of any of
the aforesaid monetary obligations of Lessee, then Base Rent shall
automatically become due and payable quarterly in advance, rather than
monthly, notwithstanding paragraph 4.1 or any other provision of this Lease
to the contrary.
14. CONDEMNATION. If the Premises or any portion thereof or the Industrial
Center are taken under the power of eminent domain, or sold under the threat
of the exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as of the
date the condemning authority takes title or possession, whichever first
occurs. If more than ten percent of the floor area of the Premises, or more
than twenty-five percent of that portion of the Common Areas designated as
parking for the Industrial Center is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in full force
and effect as to the portion of the Premises remaining, except that the rent
shall be reduced in the proportion that the floor area of the Premises taken
bears to the total floor area of the Premises. No reduction of rent shall
occur if the only area taken is that which does not have the Premises located
thereon. Any award for the taking of all or any part of the Premises under
the power of eminent domain or any payment made under threat of the exercise
of such power shall be the property of Lessor, whether such award shall be
made as compensation for diminution in value of the leasehold or for the
taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any award for loss of or damage to Lessee's trade
fixtures and removable personal property. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of
severance damages received by Lessor in connection with such condemnation,
repair any damage to the Premises caused by such condemnation except to the
extent that Lessee has been reimbursed therefor by the condemning authority.
Lessee shall pay any amount in excess of such severance damages required to
complete such repair.
15. BROKER'S FEE.
(a) Upon execution of this Lease by both parties, Lessor shall pay to
Colliers Parrish International, Inc. and CB Commercial (collectively, the
"Broker") Licensed real estate broker(s), a fee as set forth in a separate
agreement between Lessor and said broker(s).
16. ESTOPPEL CERTIFICATE.
(a) Each party (as "responding party") shall at any time upon not less
than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement
in writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and
the date to which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to the responding party's knowledge,
any uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied
upon by any prospective purchaser or encumbrancer of the Premises or of the
business of the requesting party.
(b) At the requesting party's option, the failure to deliver such
statement with such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it
shall be conclusive upon such party that (i) this Lease is in full force and
effect, without modification except as may be represented by the requesting
party, (ii) there are no uncured defaults in the requesting party's
performance, and (iii) if Lessor is the requesting party, not more than one
month's rent has been paid in advance.
(c) If Lessor desires to finance, refinance, or sell the Industrial
Center, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall
include the past three (3) years' financial statements of Lessee. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Industrial Center, and except as expressly
provided in paragraph 15, in the event of any transfer of such title or
interest. Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the date of such transfer of
all liability as respects Lessor's obligations thereafter to be performed,
provided that any funds in the hands of Lessor or the then grantor at the
time of such transfer, in which Lessee has an interest, shall be delivered to
the grantee. The obligations contained in this Lease to be performed by
Lessor shall, subject as aforesaid, be binding on Lessor's successors and
assigns, only during their respective periods of ownership. See Addendum No. 3
18. SEVERABILITY. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction, shall in no way affect the validity
of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the maximum
rate then allowable by law from the date due. Payment of such interest shall
not excuse or cure any default by Lessee under this Lease, provided, however,
that interest shall not be payable on late charges incurred by Lessee nor on
any amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence with respect to the obligations
to be performed under this Lease.
21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expenses and insurance and tax expenses payable shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No
prior or contemporaneous agreement or understanding pertaining to any such
matter shall be effective. This Lease may be modified in writing only, signed
by the parties in interest at the time of the modification. Except as
otherwise stated in this Lease, Lessee hereby acknowledges that neither the
real estate broker listed in paragraph 15 hereof nor any cooperating broker
on this transaction nor the Lessor or any employee or agents of any of said
persons has made any oral or written warranties or representations to Lessee
relative to the condition or use by Lessee of the Premises or the Industrial
Center and Lessee acknowledges that Lessee assumes all responsibility
regarding the Occupational Safety Health Act, the legal use and adaptability
of the Premises and the compliance thereof with all applicable laws and
regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified mail, and if
given personally or by mail, shall be deemed sufficiently given if addressed
to Lessee or to Lessor at the address noted below the signature of the
respective parties, as the case may be. Either party may by notice to the
other specify a different address for notice purposes except that upon
Lessee's taking possession of the Premises, the Premises shall constitute a
Lessee's address for notice purposes. A copy of all notices required or
permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
Initials: MK
------
------
-6-
<PAGE>
24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent
to or approval of any subsequent act by Lessee. The acceptance of rent
hereunder by Lessor shall not be a waiver of any preceding breach by Lessee
of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted, regardless of Lessor's knowledge of such
preceding breach at the time of acceptance of such rent.
25. RECORDING. Lessee shall, upon request of Lessor, execute, acknowledge
and deliver to Lessor a "short form" memorandum of this Lease for recording
purposes. See Addendum No. 4.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession
of the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provisions
of this Lease pertaining to the obligations of Lessee, but all Options, if
any, granted under the terms of this Lease shall be deemed terminated and be
of no further effect during said month to month tenancy. See Addendum No. 5.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions
of paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State where the Industrial Center is located and any litigation
concerning this Lease between the parties hereto shall be initiated in the
county in which the Industrial Center is located.
30. SUBORDINATION.
(a) This Lease, and any Option granted hereby, at Lessor's option,
shall be subordinate to any ground lease, mortgage, deed of trust, or any
other hypothecation or security now or hereafter placed upon the Industrial
Center and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms.
If any mortgagee, trustee or ground lessor shall elect to have this Lease and
any Options granted hereby prior to the lien of its mortgage, deed of trust
or ground lease, and shall give written notice thereof to Lessee, this Lease
and such Options shall be deemed prior to such mortgage, deed of trust or
ground lease, whether this Lease or such Options are dated prior or
subsequent to the date of said mortgage, deed of trust or ground lease or the
date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease or any Option granted
herein prior to the lien of any mortgage, deed of trust or ground lease, as
the case may be. Lessee's failure to execute such documents within ten (10)
days after written demand shall constitute a material default by Lessee
hereunder without further notice to Lessee or, at Lessor's option, Lessor
shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this paragraph 30(b).
31. ATTORNEY'S FEES. If either party brings an action to enforce the terms
hereof or declare rights hereunder, the prevailing party in any such action,
on trial or appeal, shall be entitled to his reasonable attorney's fees to be
paid by the losing party as fixed by the court.
32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to
enter the Premises at reasonable times for the purpose of inspecting the
same, showing the same to prospective purchasers, lenders, or lessees, and
making such alterations, repairs, improvements or additions to the Premises
or to the Industrial Center as Lessor may deem necessary or desirable. Lessor
may at any time place on or about the Premises or the Building any ordinary
"For Sale" signs and Lessor may at any time during the last 120 days of the
term hereof place on or about the Premises any ordinary "For Lease" signs.
All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the
same. See Addendum No. 6.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common
Areas without first having obtained Lessor's prior written consent.
Notwithstanding anything to the contrary in this Lease, Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether
to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises or the
Industrial Center without Lessor's prior written consent. Under no
circumstances shall Lessee place a sign on any roof of the Industrial Center.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of the Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Industrial Center.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease
or to renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (2) the option or right of first refusal to lease
the Premises or the right of first offer to lease the Premises or the right
of first refusal to lease other space within the Industrial Center or other
property of Lessor or the right of first offer to lease other space within
the Industrial Center or other property of Lessor; (3) the right or option to
purchase the Premises or the Industrial Center, or the right of first refusal
to purchase the Premises or the Industrial Center, or the right of first
offer to purchase the Premises or the Industrial Center, or the right or
option to purchase other property of Lessor, or the right of first refusal
to purchase other property of Lessor or the right of first offer to purchase
other property of Lessor.
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original
Lessee while occupying the Premises who does so without the intent of
thereafter assigning this Lease or subletting the Premises or any portion
thereof, and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee. The Options,
if any, herein granted to Lessee are not assignable.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
options to extend or renew this Lease a later option cannot be exercised
unless the prior option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i)
during the time commencing from the date Lessor gives to Lessee a notice of
default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the
noncompliance alleged in said notice of default is cured, or (ii) during the
period of time commencing on the date after a monetary obligation to Lessor is
due from Lessee and unpaid (without any necessity for notice thereof to
Lessee) and continuing until the obligation is paid, or (iii) at any time
after an event of default described in paragraphs 13.1(a), 13.1(d), or
13.1(e) (without any necessity of Lessor to give notice of such default to
Lessee), or (iv) in the event that Lessor has given to Lessee three or more
notices of default under paragraph 13.1(b) or paragraph 13.1(c), whether or
not the defaults are cured, during the 12 month period of time immediately
prior to the time that Lessee attempts to exercise the subject Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation
of Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessee fails to commence to cure a default specified in paragraph 13.1(c)
within thirty (30) days after the date that Lessor gives notice to Lessee of
such default and/or Lessee fails thereafter to diligently prosecute said cure
to completion, or (iii) Lessee commits a default described in paragraphs
13.1(a), 13.1(d) or 13.1(e) (without any necessity of Lessor to give notice
of such default to Lessee), or (iv) Lessor gives to Lessee three or more
notices of default under paragraph 13.1(b), or paragraph 13.1(c), whether or
not the defaults are cured.
40. SECURITY MEASURES. Lessee hereby acknowledges that Lessor shall have no
obligation whatsoever to provide guard service or other security measures for
the benefit of the Premises or the Industrial Center. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole
option, from providing security protection for the Industrial Center or any
part thereof, in which event the cost thereof shall be included within the
definition of Operating Expenses, as set forth in paragraph 4.2(b).
Initials: MK
------
------
-7-
<PAGE>
41. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure
to do so shall constitute a material default of this Lease by Lessee without
the need for further notice to Lessee.
43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution
of this Lease, deliver to Lessor evidence of such authority satisfactory to
Lessor.
44. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions, if any, shall be controlled by the
typewritten or handwritten provisions.
45. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease. This
lease shall become binding upon Lessor and Lessee only when fully executed by
Lessor and Lessee.
46. ADDENDUM. Attached hereto is an addendum or addenda containing
paragraphs 1 through 12 which constitute a part of this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR APPROVAL. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER
OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF
THIS LEASE OR THE TRANSACTION RELATING THERETO. THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR
OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
THE JOSEPH AND EDA PELL REVOCABLE TRUST POLYCOM, INC.,
DATED AUGUST 18, 1989 a Delaware corporation
- --------------------------------------- --------------------------------------
By Joseph Pell By Michael R. Kourey
------------------------------------ -----------------------------------
Name: Michael R. Kourey Title: CFO
By Eda Pell By
------------------------------------ -----------------------------------
Executed on Executed on
--------------------------- --------------------------
(Corporate Seal) (Corporate Seal)
ADDRESS FOR NOTICES AND RENT ADDRESS
2584 Junction Ave.
- --------------------------------------- --------------------------------------
San Jose, CA 95134
- --------------------------------------- --------------------------------------
- --------------------------------------- --------------------------------------
NOTE: These forms are often modified to meet changing requirements of law
and needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071.
(213) 687-8777
<PAGE>
ADDENDUM
TO
STANDARD INDUSTRIAL LEASE - MULTI-TENANT
This Addendum is made to that certain Standard Industrial Lease -
Multi-Tenant dated as of May 12, 1997, by and between THE JOSEPH AND EDA PELL
REVOCABLE TRUST DATED AUGUST 18, 1989, as Lessor, and POLYCOM, INC., a
Delaware corporation, as Lessee.
1. DELAY IN POSSESSION. [PARAGRAPH 3.2] Notwithstanding anything to the
contrary contained herein, if Lessor's failure to deliver possession of the
Premises to Lessee on the scheduled commencement date results from (a) the
prior lessee's holding-over in the Premises in violation of its lease with
Lessor; (b) Force Majeure (as hereinafter defined); or (c) any delay caused
by Lessee or its contractors, agents or employees beyond the scheduled
commencement date in the construction and installation of the initial
improvements to be constructed in the Premises (collectively, "Lessee
Delays"), then the sixty (60)-day period set forth herein shall be extended,
in each case, by the number of days that Lessor is delayed in delivering
possession of the Premises and, in the event of Lessee Delays, the rent and
other sums payable by Lessee under this Lease shall commence on the date when
the Lessor would have delivered possession of the Premises but for such
Lessee Delays. As used herein, the term "Force Majeure" shall mean a delay or
impediment caused by reason of strikes, lockouts, labor troubles, inability
to procure materials, failure of power, restrictive governmental laws or
regulations, riots, insurrection, war, fire, casualty, earthquake, acts of
God, or other reason of a like nature.
2. REMEDIES. [PARAGRAPH 13.2(c)] Lessor has the remedy described in
California Civil Code Section 1951.4 (Lessor may continue the Lease in effect
after Lessee's breach and abandonment and recover rent as it becomes due, if
Lessee has the right to sublet or assign, subject to only reasonable
limitations).
3. LESSOR'S LIABILITY. [PARAGRAPH 17] If Lessor is in default of this
Lease, and as a consequence Lessee recovers a money judgment against Lessor,
then the judgment shall be satisfied only out of the proceeds of the sale
received on execution of the judgment and levy against the right, title and
interest of Lessor in the Industrial Center, and out of rent or other income
from such real property receivable by Lessor or out of the consideration
received by Lessor from the sale or other disposition of all or any part of
Lessor's right, title and interest in the Industrial Center. No other
property or assets of Lessor (nor of any partner, officer, employee, or any
other person or entity related to or affiliated with or having an interest in
Lessor) shall be subject to any execution or other enforcement procedure for
the satisfaction of Lessee's remedies under or with respect to this Lease,
the relationship of Lessor to Lessee hereunder or Lessee's use or occupancy
of the Premises. Neither Lessor nor any of the individuals comprising Lessor
shall be personally liable for any deficiency.
4. RECORDING. [PARAGRAPH 25] Lessee shall not record this Lease or a
"short form" memorandum hereof without Lessor's prior written consent.
5. HOLDING OVER. [PARAGRAPH 26] Notwithstanding the foregoing, for each
month or portion thereof that Lessee holds over in the Premises, Lessee shall
pay to Lessor as rent a sum equal to 200% of the then-current rent for the
Premises, in addition to all other payments to be made by Lessee under this
Lease.
6. LESSOR'S ACCESS. [PARAGRAPH 32] In the case of emergency, Lessor and
Lessor's agents shall have the right to enter the Premises immediately,
without notice to Lessee, and Lessor shall have the right to use any means
Lessor deems necessary and proper to enter the Premises. Any entry into the
Premises by Lessor in accordance with
Initials: MK
------
------
1
<PAGE>
this provision shall not be a forcible or unlawful entry into, or a detainer
of, the Premises, or an eviction, actual or constructive, of Lessee from the
Premises.
7. CONDITION OF PREMISES. [PARAGRAPH 6.3(b)] Notwithstanding anything to
the contrary contained herein, Lessor agrees to paint the office area in the
Premises.
8. HAZARDOUS SUBSTANCES. Lessee shall not use the Premises in violation
of any federal, state or local law, ordinance or regulation relating to
health and/or safety. Lessee shall not use, generate, manufacture or store in
or about the Premises or transport to or from the Premises any flammable
explosives, radioactive materials, hazardous materials, hazardous wastes,
asbestos, PCB transformers, toxic substances or related materials
(collectively, "Hazardous Materials"), other than the use and storage in the
Premises of small quantities of common chemicals such as adhesives,
lubricants and cleaning fluids in order to conduct business at the Premises,
and any such substances shall be used, kept, stored and disposed of in strict
accordance with all applicable federal, state and local laws. Hazardous
Materials shall include, without limitation, substances defined as "hazardous
substances," "hazardous materials" or "toxic substances" in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
42 U.S.C. Sections 9601 et seq.; the Hazardous Materials Transportation Act,
49 U.S.C. Sections 1801 et seq.; and those substances defined as "hazardous
wastes" in Section 25117 of the California Health & Safety Code ("CH&SC") or
as "hazardous substances" in Section 25316 of CH&SC; and in the regulations
adopted and publications promulgated pursuant to said laws; and in any
revised or successor codes thereto. Upon the written request of Lessor,
Lessee shall provide periodic written reports detailing the type and
quantities of substances, materials, waste and contaminants used, stored or
disposed of by Lessee at the Premises. If Lessor determines that such
substances create a risk to the health and safety of Lessee's employees and
express invitees or to any other tenant or invitee of the Industrial Center,
then Lessee shall, upon demand by Lessor, and without limiting Lessor's other
rights under this Lease, take such remedial action, at the sole cost and
expense of Lessee (including, without limitation, removal of any Hazardous
Materials from the Premises), as Lessor deems reasonably necessary or
advisable or as is required by applicable law. Lessee shall indemnify, defend
(using counsel approved by Lessor) and hold harmless Lessor and its
directors, officers, employees and agents, and any successors to Lessor's
interest in the Premises (and their directors, officers, employees and
agents), from and against any and all liability (a) including all foreseeable
and unforeseeable consequential damages, directly or indirectly arising out
of the use, generation, manufacture, transportation or storage of Hazardous
Materials by Lessee in or about the Premises and (b) including, without
limitation, the cost of any required or necessary repair, cleanup or
detoxification and the preparation of any closure or other required plans, to
the full extent that such action is attributable, directly or indirectly, to
the presence or use, generation, manufacture, transportation, storage,
release or threatened release of Hazardous Materials by any person (other
than Lessor, Lessor's employees, agents, contractors or invitees) on, or in
connection with Lessee's business at, or use of, the Premises. Lessee's
obligations pursuant to this paragraph shall survive the expiration or
earlier termination of this Lease.
9. EARLY TERMINATION. At the end of the eighteenth (18th) month of the
term of this Lease (the "TERMINATION DATE"), Tenant may elect to cancel this
Lease upon ninety (90) days prior written notice to Landlord (the
"TERMINATION NOTICE"), which Termination Notice if so given shall be
conditionally effective as of the Termination Date; PROVIDED, HOWEVER, that
Tenant shall pay Landlord a termination fee (the "TERMINATION FEE") equal to
$65,637.00 (the sum of Base Rent for the six months following the Termination
Date). However, if, as of Landlord's receipt of the Termination Notice,
Tenant is in default under this Lease or an event has occurred that with the
giving of notice or the passage of time, or both, would become a default
under this Lease (a "POTENTIAL DEFAULT"), then the Termination Notice shall
be or no force or effect. If after giving the Termination Notice, Tenant is
in default under this Lease, or if a Potential Default has occurred, and that
default or Potential Default remains uncured as of the Termination Date, then
this Lease shall not be terminated but shall remain in
Initials: MK
------
------
2
<PAGE>
full force and effect. Tenant acknowledges that if Tenant so elects to
terminate this Lease pursuant to this paragraph, Landlord will suffer damages
due to the fact that Landlord will have incurred expenses based on the full
term of this Lease and Landlord will lose the benefit of the rentals provided
for the balance of the Initial Term. The Termination Fee shall constitute
compensation for such damages and payment for Tenant's privilege of
terminating this Lease. The Termination Fee shall be made by certified or
cashiers check and delivered to Landlord with the Termination Notice, and the
Termination Notice shall be of no force or effect unless it is accompanied by
the Termination Fee.
10. IMPOUNDS. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay
to Lessor, if Lessor shall so request, in addition to any other payments
required under this Lease, a monthly advance installment, payable at the same
time as the monthly rent, as estimated by Lessor, for real property tax and
insurance expenses on the Premises which are payable by Lessee under the
terms of this Lease. Such fund shall be established to insure payment when
due, before delinquency, of any or all such real property taxes and insurance
premiums. If the amounts paid to Lessor by Lessee under the provisions of
this paragraph are insufficient to discharge the obligations of Lessee to pay
such real property taxes and insurance premiums as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums
necessary to pay such obligations. All moneys paid to Lessor under this
paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a default in the obligations of Lessee to perform
under this Lease, than any balance remaining from funds paid to Lessor under
the provisions of this paragraph may, at the option of Lessor, be applied to
any monetary default of Lessee in lieu of being applied to the payment of
real property tax and insurance premiums.
11. WAIVER OF TRIAL BY JURY. Lessor and Lessee hereby waive trial by
jury in any action, proceeding or counterclaim brought by either party hereto
on any matters whatsoever arising out of or in any way connected with this
Lease.
12. DISCLAIMER OF AUTHORITY. The Brokers have acted as real estate
brokers in negotiating this Lease. By signing this Lease, Lessee acknowledges
and agrees that no promises, representations or assurances made by the
Brokers that are not expressly set forth in this Lease will be binding upon
or enforceable against Lessor.
Initials: MK
------
------
3
<PAGE>
EXHIBIT A
PREMISES
BUILDING A
44,356 Square Feet
- - Divisible to 6,233 SF
- - 20' clear height
- - Grade level loading
- - 32,095 SF available
BUILDING B
79,904 Square Feet
- - Divisible to 19,890 SF
- - 24,054 SF available [MAP]
with 2 dock-high
and 1 grade-level
loading doors
BUILDING C
54,254 Square Feet
- - Divisible to 14,096 SF
- - 20' clear height
- - Dock and grade
level loading
Initials: MK
------
------
A-1
<PAGE>
EXHIBIT B
RULES AND REGULATIONS
1. No Person shall use any roadway or walkway located within the
Industrial Center except as a means of egress from or ingress to the
Buildings, the Premises and the parking areas within the Industrial
Center, or adjacent public streets. Such use shall be in an orderly
manner, in accordance with the directional or other signs or guides.
Roadways within the Industrial Center shall not be used at a speed in
excess of the lesser of the posted speed limit or 20 miles per hour
and shall not be used for parking or stopping, except for the
immediate loading or unloading of passengers. No walkway shall be
used for any purpose other than pedestrian travel.
2. No person shall use any parking area within the Industrial Center
except for the parking of motor vehicles during the time that the
occupants of such vehicles are working at the Premises or are
customers or invitees within the Industrial Center. All vehicles
shall be parked in an orderly manner within the painted lines defining
the individual parking spaces. During peak periods of business
activity, limitations may be imposed as to the length of time for
parking use. Such limitations may be made in specified areas. No
vehicles shall be left in the parking areas overnight and no extended
term storage of vehicles shall be permitted. All directional signs
and arrows must be observed.
3. No person shall use any utility area, truck court or other area
reserved for use in connection with the conduct of business, except
for the specific purpose for which permission to use such area is
given.
4. Sidewalks and walkways shall not be obstructed by Lessee or used by
Lessee to display, store or replace any merchandise, equipment or
devices. The exterior areas immediately adjoining the Premises shall
be kept clean and free from dirt and rubbish by Lessee to the
satisfaction of Lessor.
5. No person, without the written consent of Lessor, shall in or on any
part of the Common Areas:
(a) Vend, peddle or solicit orders for sale or distribution of any
merchandise, device, service, periodical, book, pamphlet or
other matter.
(b) Exhibit any sign, placard, banner, notice or other written
material.
(c) Distribute any circular, booklet, handbill, placard or other
material.
(d) Solicit membership in any organization, group or association or
contribution for any purpose.
(e) Parade, rally, patrol, picket, demonstrate or engage in any
conduct that might tend to interfere with or impede the use of
any of the Common Areas by any Industrial Center customer or
occupant, create a disturbance, attract attention or harass,
annoy, disparage or be detrimental to the interest of any of the
establishments within the Industrial Center.
(f) Use any Common Areas for any purpose when none of the
establishments within the Industrial Center is open for business
or employment.
(g) Throw, discard or deposit paper, glass or extraneous matter,
except in designated receptacles, or create litter hazards.
Initials: MK
------
------
B-1
<PAGE>
(h) Use any sound-making device or create or produce, in any
manner, noise or sound that is annoying, unpleasant, or
distasteful.
The listing of specific items as being prohibited is not intended to
be exclusive, but to indicate in general the manner in which the right
to use the Common Areas solely as a means of access and convenience in
egressing and ingressing to the establishments in the Industrial
Center is limited and controlled by Lessor.
Lessor shall have the right to remove or exclude from or to restrain
(or take legal action to do so) any unauthorized person from, or from
coming upon, the Industrial Center, and prohibit, abate and recover
damages arising from any unauthorized act, whether or not such act is
in express violation of the prohibitions listed above.
6. All trash, refuse and waste materials shall be stored (a) in adequate
containers, which containers shall be located so as not to be visible
to the general public at the Industrial Center, and (b) so as not to
constitute any health or fire hazard, or nuisance. Lessee shall not
burn any trash or garbage of any kind in or about the Premises or the
Building.
7. The Premises shall not be used for lodging or sleeping, and no cooking
shall be done or permitted by Lessee at the Premises, except that the
preparation of coffee, tea, hot chocolate and similar items for Lessee
and its employees shall be permitted.
8. No advertising medium shall be utilized which can be heard or
experienced outside of the Premises, including, without limiting the
generality of the foregoing, flashing lights (not including standard
window marquees previously approved by Lessor), searchlights, loud
speakers, phonographs, radios or televisions.
9. Lessee shall not, without the prior consent of the Lessor, use or keep
in the Premises or the Industrial Center any kerosene, gasoline, or
flammable or combustible fluid or materials or use any method of
heating or air conditioning other than that approved by Lessor.
Lessee shall not use, keep or permit or suffer the Premises to be
occupied or used in a manner offensive or objectionable to Lessor or
other occupants of the Industrial Center by reason of noise, odors
and/or vibrations, or interfere in any way with other tenants or those
having business in the Industrial Center.
10. Lessor may waive any one or more of these Rules and Regulations for
the benefit of any particular tenant or tenants, but no such waiver by
Lessor shall be construed as a waiver of these Rules and Regulations
in favor of any other tenant or tenants, nor prevent Lessor from
thereafter enforcing any such Rules and Regulations against any or all
of the tenants of the Industrial Center.
11. Wherever the word "Lessee" occurs in these Rules or Regulations, it is
understood and agreed that it shall mean Lessee's assigns, directors,
officers, agents, clerks, employees and visitors. Wherever the word
"Lessor" occurs in these Rules and Regulations, it is understood and
agreed that it shall mean Lessor's assigns, directors, officers,
agents, clerks, employees and visitors.
12. These Rules and Regulations are in addition to, and shall not be
construed in any way to modify, alter or amend, in whole or in part,
the terms, covenants, agreements and conditions of any lease of any
portion of the Industrial Center.
13. Lessor reserves the right to make such other and reasonable rules and
regulations as in its judgement may from time to time be needed for
the safety, care and cleanliness of the Industrial Center, and for the
preservation of good order therein.
Initials: MK
------
------
B-2
<PAGE>
EXHIBIT C
RENT SCHEDULE
<TABLE>
<CAPTION>
LEASE MONTHS RENT/SQUARE FOOT/MONTH MONTHLY RENT
------------ ---------------------- ------------
<S> <C> <C>
1-12 $.50 $ 9,945.00
13-24 .55 10,939.50
25-36 .60 11,934.00
</TABLE>
C-1
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of Polycom, Inc. on Form S-8 (file numbers 333-45351 and
333-43059) and Form S-3 (file number 333-45349) of our reports dated January
20, 1998, except for the matters discussed in Note 15b for which the date is
February 19, 1998 on our audits of the consolidated financial statements and
financial statement schedule of Polycom, Inc. and subsidiary as of December
31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, which reports are included in this Annual Report on Form
10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,278
<SECURITIES> 5,184
<RECEIVABLES> 8,573
<ALLOWANCES> 438
<INVENTORY> 9,514
<CURRENT-ASSETS> 37,280
<PP&E> 9,596
<DEPRECIATION> 5,629
<TOTAL-ASSETS> 41,598
<CURRENT-LIABILITIES> 10,933
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 30,655
<TOTAL-LIABILITY-AND-EQUITY> 41,598
<SALES> 46,630
<TOTAL-REVENUES> 46,630
<CGS> 25,255
<TOTAL-COSTS> 25,255
<OTHER-EXPENSES> 22,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (897)
<INCOME-TAX> 171
<INCOME-CONTINUING> (1,068)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,068)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
