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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27978
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POLYCOM, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3128324
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1565 Barber Lane, Milpitas, California 95035
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 474-2000
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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
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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 $2,972,896,788 as of February 29, 2000.
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.
35,167,842 shares of the Registrant's $0.0005 par value Common Stock
were outstanding as of February 29, 1999.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Proxy Statement for the 2000 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.
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ITEM 1. BUSINESS
Polycom, Inc. develops, manufactures and markets a full range of
high-quality, media-rich communication tools and network solutions. Our
broadband communication solutions enable business users to immediately realize
the benefits of video, voice and data over rapidly growing converged networks.
We are the leading videoconferencing and voice conferencing product provider and
have recently entered the DSL access market, particularly in the area of
integrated voice appliances and broadband access devices.
In the video communications market, we offer various videoconferencing
end-points and media servers which facilitate data communications. Our video end
point products are anchored by the ViewStation product family which provides
high-quality, low-cost, easy-to-use, group videoconferencing systems that
utilize advanced video and audio compression technologies along with
Internet/Web-based features. We began shipping our first video end point product
in February 1998. Our media server products include streaming servers, such as
the StreamStation, webconferencing servers, and MeetingSite 5000 which provides
for large multipoint videoconference calls.
With our SoundStation products, we are the leading provider of voice
communications equipment designed for group use. The SoundStation is a
high-quality, full-duplex, easy-to-use voice communications solution designed to
operate with local telephone systems throughout the world. Our technologies
permit the SoundStation products to achieve voice communications quality that
approaches handset communications quality. The complete voice conferencing
equipment product line, including the SoundStation, began shipping in late 1992
and through December 31, 1999, approximately 500,000 systems have shipped.
In December 1999, we acquired Atlas Communication Engines, an OEM
supplier of Integrated Access Devices (IADs) and an emerging provider of
data-only Digital Subscriber Line (DSL) routers. Under the terms of the
agreement, we exchanged approximately 1.3 million shares of our common stock for
all outstanding shares of Atlas, and we assumed all outstanding Atlas stock
options of approximately 0.5 million shares. The value of the transaction was
approximately $110 million, and was accounted for as a pooling of interests.
By leveraging Atlas' early leadership position in IADs and our
leadership position in multimedia communications tools, this acquisition enables
us to create a uniquely differentiated product line of IADs and DSL routers that
provide video, voice, and data over the rapidly-growing DSL network. Through
this acquisition, we will now provide equipment for the emerging market for
high-speed connectivity by delivering a more complete DSL solution to small and
medium sized businesses around the globe.
We sell our products globally through a large number of resellers and
OEMs. We have marketing and sales and partnering relationships with Lucent
Technologies, Cisco Systems, Nortel, MCI Worldcom, Inc., Southwestern Bell,
Ameritech, Ingram Micro, British Telecom, Audeo Systems LTD, Siemens, Sprint,
Computer 2000, SKC Communications, GBH Distributing, All Communications, Target
Distributing, Jetstream Communications, Adcom, Inc., France Telecom, Office
Depot, Unitel and Hello Direct, which collectively represented approximately 52%
of our net revenues in 1999.
Polycom was incorporated in December 1990 in Delaware and has thirteen
wholly owned subsidiaries located throughout the world. Our principal executive
offices are located at 1565 Barber Lane, Milpitas, California 95035, and our
telephone number at this location is (408) 474-2000.
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INDUSTRY BACKGROUND
The communications 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 growing use of corporate intranets and the public internet.
One of the fastest growing segments of the communications market is equipment
and services for broadband communications, which includes ISP access, voice and
video communications. These markets are being enabled by the evolution of the
shift from traditional circuit-switched networks to the broadband IP and ATM
infrastructures.
Numerous factors are driving the growth of the communications
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 voice mail, e-mail, fax
and the internet 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 communications solutions to facilitate meetings
at a distance.
Video communications enhance remote meetings by permitting groups in
disparate locations to see each other and make reactions and body language
visible. Video communication is, therefore, the ideal communications tool for
the relationship building aspect of a remote meeting. The first video
communication products were introduced in the late 1970's. Early video
communication products were costly and usually required dedicated transmission
facilities, specially trained operators, and specialized rooms. Although there
was broad interest in video communications as a means of eliminating travel time
and expenses, most potential users could not justify the high cost of investing
in video communications technology given the level of quality and performance of
the products at that time. However, improved technology, implementation of
industry standards, lower costs, and greater connectivity and greater
availability of broadband technologies have improved the quality and
price/performance relationship of video communications and driven its
evolutionary growth.
The video communications market has evolved into two distinct segments,
group systems and desktop or personal systems. Historically, the group segment
has been divided into large and small group segments. However, with the advent
of a new generation of high performance set-top products this distinction is
blurring and the group system category is being segmented into pricing and
feature bands. The new generation of set-tops typically are priced from about
$3,000 - $4,000 for an entry level product to around $10,000 - $19,000 for
feature rich, high-bandwidth systems designed for large conference rooms or for
use in multi-point calls. The desktop or personal system market segment is
characterized by products designed for one-to-one communication and also
benefits from the availability of broadband in the enterprise. The desktop
systems are typically PC-based and require a hardware and software component to
be added to a personal computer. Personal video communications products
currently range in price from $500 - $1,500. In addition, streaming video is
becoming increasingly necessary to provide real-time and on-demand video
participation in a meeting or webcast. These streaming servers and other
webconferencing devices that provide for the sharing of graphics or other
detailed visual data are just beginning to evolve to fulfill this new demand and
typically sell for $4,000 - $20,000, depending on functionality and scalability.
Voice communication is the essential component of all discussions and
meetings. In the voiceconferencing segment of this market, bridging services
provided by AT&T, MCI Worldcom, Sprint and other carriers have increased demand
for high-quality voiceconferencing equipment that allow both parties to talk and
be heard simultaneously (full duplex) in an easy to install and use network
appliance. These products, designed for group use, sell for $500 - $3,000, while
such products designed for individual use sell for $200 - $400.
Broadband access is a rapidly emerging market as small to mid-sized
businesses, large enterprises, and telecommuters seek ISP access and voice and
video communications through one, convenient transport. This has created the
demand for both data-only routers and for integrated access devices that provide
voice and data over a single DSL or other broadband connection. In addition,
this market is already beginning to seek a solution that would enable video
devices to communicate over this same access point. These network access devices
typically sell for a few hundred to a few thousand dollars, depending on options
and scalability.
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THE POLYCOM SOLUTION
Polycom's integrated communication solutions enable business users to
immediately realize the benefits of video, voice and data over rapidly growing
converged and broadband networks. With our wide array of video communications,
voice communications and network access products, we offer customers numerous
high-quality, low-cost solutions to their media-rich and broadband communication
needs.
Our video communication products include group videoconferencing and
media servers. Our ViewStation group and videoconferencing systems deliver the
performance and features of a high-end room video communications system, but at
a fraction of the cost. Distinctively easy to set up and use, the ViewStation
product line offers high quality audio and video technology, embedded Web based
features, an integrated presentation system, a voice-tracking camera, and a
variety of other features in H.323 or H.320 networks. In addition, an "MP"
version of the product is available that provides up to four locations to
participate in a multi-point videoconference call. Using a unique embedded
system architecture, we are delivering a new generation of high performance,
affordable systems that we believe will radically shift the way customers view
video communications.
The media server product family consists of the StreamStation,
WebStation, ShowStation IP and MeetingSite 5000. The StreamStation, introduced
in May 1999, is the industry's only streaming "appliance" designed to make live
or on-demand webcast easy and affordable for business users. It provides an easy
and affordable way to view training sessions or meetings utilizing streaming
media technology from Microsoft or RealNetworks, as either a live webcast or for
video on-demand. With our WebStation system, introduced in December 1998,
remote-meeting participants anywhere in the world can join a meeting by simply
browsing the Web with any Java-enabled Web browser, or using any fully T.120
compatible data communication system. The ShowStation IP provides 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 the internet or standard telephone lines. Polycom's
MeetingSite 5000 was announced in April 1998 and is an OEM version of the Lucent
Technologies' multipoint conferencing unit product (MCU). The MeetingSite 5000
provides connectability for large multipoint videoconference calls.
Our voice communication product line, containing a wide range of
SoundStation and SoundPoint products, is a family of systems that provide near
handset quality communications. SoundStation products are easy to use, and our
advanced 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. The SoundStation
is configurable and has been approved for use with the local telephone systems
in more than 30 countries. Additionally, the SoundPoint Pro, introduced in 1998,
brings the same quality of conferencing to the desktop with the full
functionality of a business phone.
Polycom's new network access NetEngine products consist of the
NetEngine 3300R SDSL Router, the NetEngine 3300D SDSL DSU and the NetEngine 8000
series of products. This product family is intended to provide integrated
broadband voice and data services for small to mid-sized businesses, branch
offices of large enterprises and telecommuters. This enhanced bandwidth is
intended for ISP access for voice and video traffic as well as potentially
enabling a broader deployment of Polycom's voice and video products.
PRODUCTS
VIDEO COMMUNICATIONS
Polycom's video endpoint products are designed to be low-cost,
high-quality, and web-enabled, with list prices below most competitive video
communication products currently in the market.
VIDEO ENDPOINTS:
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VIEWSTATION128: The ViewStation 128 features outstanding audio and video
quality, embedded web capabilities, a voice tracking camera, automatic ISDN
configuration on set-up and a robust set of Web based management, diagnostic and
presentation tools. In addition, it can be upgraded to support 512 kbps ISDN and
multipoint capabilities. The ViewStation 128 has a U.S. list price of $5,999.
VIEWSTATION 512. The ViewStation 512 is a high performance product which
operates at up to 512Kbps or four ISDN lines which are multiplexed together at
up to 30 frames per second giving full motion video as well as increased quality
of audio using one of the standards based wide band algorithms. The ViewStation
512 has a U.S. list price of $8,999.
VIEWSTATION V.35. The ViewStation V.35 supports up to 768Kbps or half the
bandwidth of a T1 line through the V.35 physical interface, a universal serial
connector used to connect to a variety of brands of multiplexers and satellite
connections. It has a U.S. list price of $9,999.
VIEWSTATION MP. The ViewStation MP incorporates the ability to make an ad-hoc
multi-way video call as conveniently as pressing the "conference" button on any
office PBX phone. The ViewStation MP can make up to a 4 way call at single ISDN
line rates of 128KBps or a three way call using 2 ISDN lines for each of
256Kbps. The ViewStation MP has a U.S. list price of $11,999.
VIEWSTATION FX. The newest ViewStation extends the standard of high quality
video communications with the 60 fields feature that delivers TV quality video.
The ViewStation FX has embedded multipoint capabilities of up to a 4-way call at
384Kbps or a 3 way call at 512kbps. The ViewStation FX has a U.S. list price of
$16,999 to $19,499.
VS4000. The VS4000 is a cameraless codec that is designed for custom integration
in boardrooms and auditoriums that require the highest video and audio quality.
It offers the same features and functionality as the ViewStation FX but is
packaged in a rack mount configuration. The VS4000 has a U.S. list price of
$16,999 to $18,999.
VIEWSTATION SP. ViewStation SP is the entry level point solution that offers
business quality video and audio capabilities, embedded web capabilities and
presentation system. Additionally it contains a voice tracking camera, automatic
network configuration and web based management tools. It has a U.S. list price
ranging from $3,999 to $4,199.
The ViewStation product family delivers the most powerful video
communication group and desktop systems in a convenient footprint about the size
of a sheet of notebook paper. The ViewStation delivers high-quality images on
small or large display monitors and is a self-contained unit that sits atop an
S-Video or composite television monitor. The ViewStation is one of the first
systems to implement the H.263 and H.263+ video compression algorithm that
delivers enhanced video performance. Using a unique, high-performance low-delay
codec architecture, the ViewStation has a short delay and is fully interoperable
with legacy video communication systems using the H.320 and H323 standards.
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 and high resolution
SXGA graphics on the newest products.
Integrating our market-leading Acoustic Clarity Technology(TM), the
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, the 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 is able
to be daisy-chained to provide superb audio coverage for even the largest
conference rooms.
MEDIA SERVERS:
Our media server 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 voice or video communications
with data communications, our products are designed to significantly enhance the
productivity of workers, allowing them to conduct meetings remotely with a level
of data exchange that we believe has traditionally been possible only through a
personal meeting.
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STREAMSTATION. StreamStation is the first meeting appliance that enables
streaming of real-time or recorded video meetings to any Web browser.
StreamStation provides an easy-to-use solution for holding live webcast and
creating on-demand World Wide Web streaming content. StreamStation enables users
to easily conduct ad-hoc streaming events or meetings, and to create rich
multimedia presentations for on-demand viewing. With the press of a button, any
user can create streaming media content that can be viewed with either the
Microsoft Windows(R) Media Player or RealNetworks(R) RealPlayer-TM- G2.
StreamStation also adds powerful new streaming media functionality to
the Polycom ViewStation products. This complete solution provides the easiest
method for participants to view video, hear audio, and see presentation content
over the World Wide Web. Our SoundStation products can also be used with the
StreamStation to stream audioconferences and presentation content from meetings
over the Web. The Polycom StreamStation has a U.S. list price of $8,999.
WEBSTATION. Designed to enhance full participation and collaboration in group
meetings, the WebStation provides an affordable and easy way to present and
collaborate with both local and remote group meeting participants via the
Web. With a simple one-cable connection to any LCD projector and a standard
local area network connection, the Polycom WebStation delivers a full range
of features that enable an LCD projector to communicate over the Internet for
sharing documents and presentations with both local and remote meeting
locations. Presenters have several options for bringing presentation
materials into a meeting using WebStation. Because WebStation integrates the
full Microsoft(R) Office(R) suite, presenters can send PowerPoint-TM-,
Word-TM-, or Excel-TM- files directly to WebStation from their desktop
computer before the meeting, and then attend the meeting where the
presentation is ready and waiting. Presenters also have the option of
bringing Microsoft Office files into the meeting on a diskette and then load
them using WebStation's built-in floppy diskette drive. With our WebStation
system, remote-meeting participants anywhere in the world can join a meeting
by simply browsing the Web with any Java-enabled Web browser, or using any
fully T.120 compatible data communication system. Remote participants can
then collaborate in real-time and even share presentations or documents with
other meeting participants. The Polycom WebStation presentation and meeting
system has a U.S. list price of $2,999.
SHOWSTATION IP. ShowStation IP, Polycom's first internet data communication
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 ShowStation IP's. In addition, the ShowStation IP can
exchange data, documents and images using the World Wide Web with any personal
computer that has a Java-enabled browser or T.120 data communication protocol
software, such as the DataBeam software that is distributed by Polycom. Working
in tandem with the SoundStation or ViewStation, ShowStation IP 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. Multipoint dataconferences are possible with the
LAN/Multipoint option, which allows one ShowStation IP to connect to as many as
nine other ShowStation IPs and 25 browsers simultaneously. ShowStation IP
incorporates advanced imaging, data compression and communication technology
into a compact and easy-to-use unit that includes pen-based editing capabilities
ShowStation IP captures 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 the Internet using the T.120 open standard protocol to other T.120
compliant participants or using HTML to Web-based browser participants where the
image is decompressed and displayed. The images can then be annotated or
highlighted in real-time by the transmitting person or any of the T.120
compliant participants 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 dataconferences and each ShowStation IP can print the image
and all annotations on a printer connected via a parallel cable.
The North American list price for the ShowStation IP product ranges
from $9,999 to $12,999 depending on options.
MEETINGSITE 5000. The MeetingSite 5000 product, a MCU product, is a Lucent
Technologies manufactured H.320-based voice, data and video communication bridge
that allows up to 16 users to have worldwide, multi-party face-to-face
conferences. The MCU includes industry-leading features such as Continuous
Presence Plus, a capability that shows
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multiple sites on the same screen, and SpeedMatching, which allows endpoints
transporting video at different rates of speed to carry on a video conference.
The MCU supports the emerging H.263 video standard and incorporates the H.320
Translator, allowing H.263 endpoints to maintain their improved quality while
communicating with endpoints using the existing H.261 standard. The MCU is used
by major service providers, government organizations and commercial customers
throughout the world. This product is custom configured for the end-user and has
a base list price of $24,950.
VOICE COMMUNICATIONS
Polycom's voice communication products are designed to overcome the
poor audio problems associated with traditional speaker phones by providing high
quality, full-duplex, easy-to-use audio equipment.
SOUNDSTATION. SoundStation is a high quality, digital, full-duplex voice
communication system that operates over ordinary telephone lines. It provides
clear, two-way voice communication 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
directional microphones pick up sound from around the room while limiting
reverberation. The unit's central sorbathane-encased, acoustically-suspended
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 voice communication. 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
this inherent simplicity, customers are able to self-install and immediately
begin using the SoundStation. The U.S.
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 additional
microphones. The microphones can extend up to 25 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 U.S. 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 Technologies, Nortel and British Telecom pursuant to OEM
relationships.
SOUNDSTATION PREMIER. Incorporating the latest in DSP technology, the
SoundStation Premier is designed for larger, more demanding environments and
those requiring higher performance. Using a unique active microphone steering
algorithm in conjunction with multiple aligned microphone patterns, the
SoundStation Premier connects every conference participant more clearly and with
less room reverberation than older systems. With additions including an LCD
display, caller ID, and infrared remote control, the SoundStation Premier
provides a complete full duplex business conference phone solution. The U.S.
list price ranges from $999 to $1,899, depending on options.
SOUNDSTATION PREMIER EX. SoundStation Premier EX contains all of the technology
and physical elements of the SoundStation Premier but also offers two connectors
for additional microphones. The microphones can extend up to 25 feet in each
direction allowing the SoundStation Premier 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 Premier EX that provides flexibility for stand-up presenters. With
the SoundStation Premier Satellite, up to 4 additional microphones, a separate
speaker module or spread spectrum wireless microphones are available to cover
larger and more complex rooms. The U.S. list price for ranges from $999 to
$2,199, depending on configuration and options.
SOUNDPOINT AND SOUNDPOINT PC. SoundPoint, Polycom's first desktop conference
phone adjunct product, is designed for the office environment. The SoundPoint
system 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
system is similar to the basic SoundPoint system, but is designed for desktop
video communications and Internet telephony
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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 U.S. list price ranges from $99 to $299.
SOUNDPOINT PRO. SoundPoint Pro brings Polycom's high-quality hands-free voice
communication to telecommuters, home offices, and small businesses, and combines
professional-quality voice communication and elegant styling, in a fully
featured business telephone. Available in 2-line or 3-line models, users can
conduct conference calls with up to three other remote sites at the touch of a
button, and without using outside bridging services. Features also includes
20-number programmable speed dial, integrated primary Caller ID as well as
Caller ID for Call Waiting, and 99 number caller history. The U.S. list price
ranges from $249 to $299.
NETWORK ACCESS PRODUCTS
The NetEngine product line enables integrated broadband voice and data services
for small to medium-sized business customers.
NETENGINE 3300R SDSL ROUTER. The NetEngine 3300R SDSL Router is designed to
provide access to emerging high-speed SDSL data services. For new SDSL service
customers who do not yet have a router, the NetEngine 3300R provides both
transparent bridging and full IP routing capabilities. Its interoperability with
industry-leading DSLAM manufacturers, NAT, DHCP, and simple configurability make
it the ideal choice for small and medium businesses and branch office
connectivity. Its U.S. list price is $499.
NETENGINE 3300D SDSL DSU. The NetEngine 3300D SDSL DSU allows users to change to
SDSL technology without compromising CPE investments. Its support for Nx64 Kbps
data rates up to T1 and E1 make it an ideal network access point and affords
seamless migration from traditional T1 or E1 Leased Line or Frame Relay services
to SDSL. It's U.S. list price is $599.
NETENGINE 8000 MULTI-SERVICE ACCESS DEVICE. The NetEngine 8000 Multi-Service
Access Device is a flexible broadband voice and data access product with a four
slot modular architecture that provides a wide range of connectivity options.
Its ADSL, SDSL, ATM, T1/E1 and POTS modules enable the NetEngine 8000 to provide
access for small and medium-sized enterprises and branch offices into a broad
range of existing and emerging high-speed public networks. Its wide variety of
uses, including an ATM access device, multiport DSL router and IAD among others,
make the NetEngine 8000 one of the most advanced access products available. The
U.S. list price starts at $1,729.
Polycom also manufactures private label versions of some of its NetEngine
products for Jetstream Communications.
TECHNOLOGY
We intend to continue to invest in and leverage our core technologies
to develop and market our network access and conferencing products and product
enhancements. Our core technologies include the following:
INTEGRATION IN NETWORK ACCESS. We actively invest in technologies that will
enhance the ability of users to integrate network and internet access with their
communication and conferencing requirements. We are pursuing the extension of
our IAD (Integrated Access Device), gateway, and router products with enhanced
performance and functionality.
NETWORK/INTERNET CONNECTIVITY. We continue to extend our teleconferencing
products to operate over local and extended networks utilizing standard
protocols, including H.323, LDAP, IEEE 802.3 10 and 100 Mbps networks, ATM,
frame relay, and TCP/IP. Within the next several years, industry analysts
believe that a significant percentage of business communication, video and voice
as well as data, will take place over packet-switched rather than
circuit-switched networks (i.e., internal and external networks rather than the
public telephone network). Some of the advantages to this approach are greater
bandwidth availability, lower transmission costs, expandability, and the ability
to operate by managing only one network instead of several.
STREAMING MEDIA. We have developed a set of core technologies for generating,
managing, distributing and archiving portable streamed full-content media
streams. These are initially incorporated in the StreamStation system, and
provide
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users the ability to easily enhance their communication abilities for training,
marketing, documenting, remote conferencing, and a variety of other uses.
WEB-BASED DATA COMMUNICATIONS. We are a leader in developing "push" technology
for sending HTML pages to Java-enabled Web browsers on demand, allowing the
secure participation of multiple sites in presentations and data conferences.
Polycom uses proprietary techniques to assure meeting security and to provide
for smooth presentation flow that is normally unaffected by limited network
bandwidth.
ACOUSTICS TECHNOLOGY. We are making a significant investment in further
exploration in acoustics and digital acoustic processing. With the recent
opening of our Advanced Research Laboratories in Massachusetts, we are both
extending the state-of-the-art in these critical areas, and creating a powerful
mechanism to facilitate the incorporation of these technologies into products of
all divisions.
INTERNETWORKING. With a variety of different network protocols in use today,
communication between one system and another can be complex and expensive. We
are investing in continued extension of our internetworking products, which
today have an ability to simply and efficiently link networks running different
protocols such as IP, Frame Relay, and ATM.
INTEGRATED VOICE AND DATA. We are increasing functionality and tailoring our
products for some of the most popular needs. Polycom's IAD's perform multiple
functions: they act as CPE voice gateways, working with the major voice gateway
manufacturers to provide low-cost access for multiple independent telephones in
a small or medium-sized business, as bridges, and as data routers. These
multiple data streams are then combined by the IAD into a single DSL line,
providing a very efficient means of connecting both voice and data to the
commercial network.
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 resulting sound quality. Working with carefully
designed algorithms and electronics, we develop and design proprietary speaker
and microphone enclosure systems that are a critical part of high-clarity audio
communication systems.
CONFERENCING INTEGRATION AND MANAGEMENT. Our GMS (Global Management System) is a
versatile client/server system for meeting and device coordination and
management via integrated network control. This can improve the reliability and
accessibility of the systems, can help assure completeness and uniformity among
users, and is especially useful to corporate users and IT organizations.
VIDEO SYSTEM ARCHITECTURE. We continue to exploit the advantages of our
proprietary flexible ViewStation system architecture, which allows for a wide
range of very high performance but low cost video communication products. The
proprietary application-specific software developed for our systems addresses
the unique requirements of the various end-user conferencing markets as well as
international video telephony standards.
MULTIMEDIA TELECONFERENCING. We have developed a series of algorithms and
techniques to integrate video from multiple sources with electronic and physical
documents and wideband and narrowband audio to efficiently support conferences
from multiple sites. These methods include coordinated activities between the
ViewStation and WebStation products, allowing a conference to draw on the best
of both products in a single meeting setup.
DIGITAL ACOUSTIC PROCESSING. Traditional speakerphone architectures employ
simple back-and-forth switching to compensate for the feedback that often occurs
when microphones and speakers are located in close proximity. This can cause
numerous problems during the course of a natural conversation, such as words or
phrases being clipped off because both ends of the call were speaking
simultaneously. We have developed patented and proprietary techniques and
algorithms in our DSP software which solve these problems by creating accurate
simulations of how the sound waves reflect off the walls and obstructions in a
room and using these simulations to digitally extract the feedback before it
becomes a problem. By doing this, the instrument can allow both sides to talk at
the same time, restoring much of the "natural" feel to group telephone
conferences.
SALES AND DISTRIBUTION
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We market our products primarily to businesses and organizations of all
sizes through a wide network of value-added resellers ("VARS"),
telecommunication equipment distributors, wireline equipment manufacturers,
telecommunication service providers, and retailers. We sell our products through
a group of approximately 242 resellers and partnering relationships, which
include Lucent Technologies, Cisco Systems, Nortel, MCI Worldcom, Inc.,
Southwestern Bell, Ameritech, Ingram Micro, British Telecom, Audeo Systems LTD,
Siemens, Sprint, SKC Communications, Jetstream Communications, GBH Distributing,
All Communications, Target Distributing, Adcom, Inc., France Telecom, Office
Depot, Unitel and Hello Direct. Many of these resellers sell a variety of
communication products and/or services and, with Polycom's products, offer a
complete product portfolio. To complement our sales efforts, we advertise in
trade and general business print media as well as participating in a wide array
of trade shows and public relations activities. We currently maintain North
American sales offices in the metropolitan areas of Boston, Austin, Chicago, San
Jose and Santa Barbara.
We have historically focused our international sales efforts in regions
of the world where we believe customers have begun to invest significantly in
conferencing equipment and services. These regions currently include Europe,
Japan, Australia, Singapore, China and parts of Southeast Asia. We intend to
significantly expand our international distribution network. The principal
international resellers of Polycom's products currently include British Telecom,
France Telecom, Unitel, Genedis, Eurodis Onboard, Computer 2000, Hibino
Corporation, PTT Telecom, Siemens, CHS Latin America, Adcom and Telenor.
Additionally, in 1999, we made additional investments in Europe and further
investment will be made in Europe in the year 2000. In addition, similar
investments will be made in Asia in the year 2000. We currently have sales
offices in the U. K., France, Germany, Norway, Hong Kong, Japan, China,
Australia and Singapore. If we are not successful in expanding internationally
or if the anticipated growth in Europe or Asia does not materialize, it could
harm our business.
We have established product distribution centers in the European and
Asian markets in order to better serve our 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 our international sales have been denominated in U.S.
currency; however, we expect 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 our products to become
relatively more expensive to customers in a particular country, leading to a
reduction in sales or profitability in that country. In addition, the costs
associated with developing international sales may not be offset by increased
sales in the short term, or at all.
A majority of our revenues are from value-added resellers,
telecommunication equipment distributors, telecommunication service providers
and wireline equipment manufacturers. One customer, Lucent Technologies,
accounted for 11%, 11% and 10% of net revenues in 1999, 1998 and 1997,
respectively. On March 1, 2000, Lucent Technologies announced their intention to
spin off their PBX and LAN-based equipment business which will include Lucent's
conferencing and collaboration systems business. The effect of this spin-off on
Polycom is not known at this time, but if it significantly reduces the purchases
of equipment from us, it could harm our business. No other customer or reseller
accounted for more than 10% of our net revenues during these periods.
Value added 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 our resellers could harm 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 our future operating results.
The conferencing and network access distribution industries have
historically been characterized by rapid change, including consolidations 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
10
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ineffectiveness of any of our major resellers could have a material adverse
effect on our operating results. For example, 3M Company was a distributor of
our video and data conferencing products until the second quarter of 1999. In
April 1999, 3M announced that they were exiting the businesses associated with
prior development and distribution agreements they had with Polycom. The loss of
this distribution resulted in a reduction in royalty revenue in 1999 when
compared to 1998. We cannot assure you that we will be able to successfully sell
our products through any new channels that we may be required to develop as a
result of changes in our reseller channels.
CUSTOMER SERVICE AND SUPPORT
We believe that service and support are critical components of customer
satisfaction. We maintain and support products sold directly by us to our 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. In
1999, we contracted with Imation Corp. a worldwide provider of a variety of
products and services for the information and image management industry, to
provide on-site technical support and installation services for our conferencing
product lines.
We generally warrant our voice and video products for 12 months and
our network access products for 36 months. In 1999, our warranty expense
increased over 1998 and, due to uncertainties concerning the service and
support requirements of the NetEngine, ShowStation IP, StreamStation,
ViewStation and MCU products, we may experience higher warranty claims in the
future. We offer a variety of installation, maintenance and extended warranty
services that are fulfilled either directly by Polycom or by an authorized
reseller.
RESEARCH AND DEVELOPMENT
We believe that our future success depends in part on our ability to
continue to enhance existing products and to develop new products that maintain
technological competitiveness. Our current development efforts focus principally
on the video communications, network access, voice communications and data
communications businesses. In the video communication market, our ViewStation
product line is being enhanced to provide an even broader array of product
offerings, and extended to address related markets. Also, we are investing in
desktop video and video gateway and directory software, as well as enhancing our
web-based products. In the voice communication market, we are developing
products for related areas of the market, including proprietary interface and
IP-based systems, high-performance systems, and lower-end systems. In the
network access market, we are extending our product line and developing critical
new functions and capabilities in our products that can best exploit the shift
in the communication infrastructure to the IP network. We intend to expand upon
these new product platforms through the development of options, upgrades and
future product generations. However, we cannot assure you 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, we cannot assure you that these products will not be
rendered obsolete by changing technology or new product announcements by other
companies.
We believe that the structure of our development group, which combines
independent development teams with coordinated application of common
technologies and resources, represents a significant competitive advantage for
Polycom. Our product development staff includes product marketing personnel, in
order to maintain channel and customer input throughout the development process.
This team structure is the basis for an integrated process designed to enable us
to develop superior products with minimum time-to-market. Additionally, the
development staff focuses on our core technologies and outsources other
development tasks such as industrial design. This structure is designed to
enable us to devote our key resources to technological advancement in its
primary areas of business.
Research and development expenses were approximately $21.6 million,
$14.7 million and $17.0 million for the years ended 1999, 1998 and 1997,
respectively. We believe that significant investments in research and
development are required to remain competitive since technological
competitiveness is key to our future success. We intend to continue to make
substantial investments in product and technology development. Polycom also
intends to continue to participate in the development of various
teleconferencing industry standards, which are or may be incorporated into its
products.
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The video communication, voice communication and network access markets
are subject to rapid technological change, frequent new product introductions
and enhancements, changes in end-user requirements and evolving industry
standards. Our ability to remain competitive in this market will depend in
significant part upon our ability to successfully develop, introduce and sell
new products and enhancements on a timely and cost-effective basis. Our success
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. We are currently engaged
in the development of a number of new products and extensions of our network
access products such as IADs and routers, ViewStation, SoundStation,
SoundStation Premier, SoundPoint Pro and web-based product families, and we
expect to continue to invest significant resources in new product development
and enhancements to current and future products. In addition, our introduction
of new products could result in higher warranty claims, product returns and
manufacturing, sales and marketing and other expenses that could harm our
business. Our business may be harmed if we are unable to introduce new products
or enhancements on a timely and cost-effective basis that maintain or enhance
our competitive position and contribute significantly to net revenues. In the
past, we have experienced delays from time to time in the introduction and in
the continued production of certain of our products. For example, 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 our competitors could
cause a decline in sales or loss of market acceptance of our existing products
or new products. Further, from time to time, we may announce new products,
capabilities or technologies that have the potential to replace our existing
products or future products. Announcements of product enhancements or new
product offerings by us or our competitors could cause customers to defer or
stop purchasing our products.
COMPETITION
In the video communication market, our major competitors include
PictureTel, Tandberg, Sony, VCON and VTEL. Many 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 video communications, other established or new companies
may develop or market products competitive with our video communication
products. In addition, our video streaming products employ technology from
Microsoft and Real Networks who both have solutions competitive with our
products.
The market for voice communication, particularly voiceconferencing, is
highly competitive and subject to rapid technological change, regulatory
developments and emerging industry standards. We expect competition to persist
and increase in the future. At the current time, we are the market leader in
voiceconferencing based principally on product quality, breadth of product line,
and ease of use. In the voice communication market segment, our major
competitors include ClearOne, SoundGear, NEC, Gentner and other companies that
offer lower cost full duplex speakerphones such as Lucent Technologies (one of
our resellers) and Hello Direct (one of our 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 our voice communication products.
Our network access products have significant competition from Efficient
Networks, Netopia, 3Com (a customer of Polycom) and Cisco Systems (a strategic
partner of Polycom).
We believe our 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.
We believe we compete favorably with respect to each of these factors. However,
we cannot assure you that we will be able to compete successfully in the future
with respect to any of the above factors.
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We expect our 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 our
competitors could cause a significant decline in sales or loss of market
acceptance of our existing products and future products. We believe that the
possible effects from ongoing competition may be the reduction in the prices of
our products and our competitors' products or the introduction of additional
lower priced competitive products. We expect this increased competitive pressure
may lead to intensified price-based competition, resulting in lower prices and
gross margins which would materially adversely affect our business. We cannot
assure you that we will be able to compete successfully.
MANUFACTURING
Our manufacturing operations consist primarily of materials planning
and procurement, test development and manufacturing engineering. We subcontract
the manufacture of most of our products to Celestica, Inc., a global third-party
contract manufacturer. In addition, Polycom and Celestica are working to
transition the manufacture our network access product to Celestica. We use
Celestica's Thailand facilities and should there be any disruption in supply due
to economic or political difficulties in Thailand and Asia, such disruption
would harm our business. Celestica is ISO 9002 approved and has British
Approvals Board for Telecommunications ("BABT") registration. Our products are
quality tested by automated test equipment with final functional tests performed
on equipment and with processes developed or approved by us. We manufacture our
SoundPoint product through the Shenzen facility of Jabil Circuits and purchase
our web-based products from Gateway. Our MCU product line is an OEM version of
the Lucent Technologies multipoint conferencing product, which is manufactured
by Lucent Technologies in Denver, Colorado. However, as Lucent Technologies is
spinning off components of its equipment business including the conferencing and
collaboration systems business, and the effect of this spin-off on us is not
known yet.
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 our facilities or operations. We maintain 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 our results of operations until we 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.
We believe that there are a number of alternative contract manufacturers that
could produce our 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 harm our
business.
Certain key components used in our products are currently available
from only one source and others are available from only a limited number of
sources, including certain key integrated circuits and optical elements. We also
obtain certain plastic housings, metal castings and other components from
suppliers located in Singapore 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. We have no supply
commitments from our suppliers and generally purchase 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 various components for our 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. In the event that we or our contract manufacturers were unable to
obtain sufficient supplies of components or develop alternative sources as
needed, our 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
our inability to obtain lower component prices in response to competitive price
reductions. Additionally, our video communication products are designed based on
certain integrated circuits produced by Philips and certain video equipment
produced by Sony. If we could no longer obtain such integrated circuits or video
equipment, we would incur substantial expense and take substantial time in
redesigning our products to be compatible with components from other
manufacturers which would harm our business. Additionally, both Sony and Philips
are competitors of Polycom in the video communication market, which may
adversely affect our ability to obtain necessary components. The failure to
obtain adequate supplies could prevent or delay product shipments, which could
harm our business.
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We are also reliant on the introduction schedules of certain key
components in the development or launch of new products. Any delays in the
availability of these new, key components could harm our business.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
While we rely on a combination of patent, copyright, trademark and
trade secret laws and confidentiality procedures to protect our proprietary
rights, we believe that factors such as technological and creative skills of our
personnel, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are more essential to establishing
and maintaining a technology leadership position. We currently has sixteen
United States patents issued covering the SoundStation, ShowStation and
ViewStation designs, some aspects of the ViewStation and ShowStation; and
certain acoustic technology that expire in 2007, 2010, 2011, 2012, 2013, 2014,
2015, 2016, and 2017. In addition, we currently have thirteen United States
patents pending, thirty-one foreign patents issued, which expire in 2001, 2002,
2003, 2007, 2008, 2009, 2010, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2021 and
2022, and eleven foreign patent applications pending. Polycom, Polyspan,
SoundStation Premier, ShowStation, SoundPoint, SoundStation and Polycom logos
are registered trademarks of Polycom, and ViewStation, StreamStation,
WebStation, NetEngine, MeetingSite, ViaVideo Communications, SoundStation
Premier Satellite, IPrioirty 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 we continue to use our
trademarks in connection with the products and services of Polycom. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which only afford limited protection. Others may
independently develop similar proprietary information and techniques or gain
access to Polycom's intellectual property rights or disclose such technology. In
addition, we cannot assure you that any patent or registered trademark owned by
Polycom will not be invalidated, circumvented or challenged in the U.S. or
foreign countries, that the rights granted thereunder will provide competitive
advantages to us or that any of our pending or future patent applications will
be issued with the scope of the claims sought by Polycom, if at all.
Furthermore, others may develop similar products, duplicate our products or
design around the patents owned by Polycom. In addition, foreign intellectual
property laws may not protect our intellectual property rights.
Litigation may be necessary to enforce our patents and other
intellectual property rights, to protect our 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 have a material adverse
effect on our business. We cannot assure you 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 harm our business.
In March 2000, Polycom and VTEL Corporation ("VTEL") entered into a
cross license agreement pursuant to which we obtained non-exclusive license
rights under three VTEL patents, and VTEL obtained non-exclusive license rights
to a patent for our videoconferencing technology.
DEPENDENCE ON THIRD-PARTY LICENSES
We have licensing agreements with various suppliers for software
incorporated into our products. For example, we license certain video
communication source code from RADVision, Telesoft, Omnitel, Adtran and EBSNet,
Inc., certain video algorithm protocols from REAL Networks and VideoServer,
development source code from Digital Equipment Corporation and Philips
Semiconductor, camera tracking technology from Brown University, audio
algorithms from Lucent Technologies, communication software from DataBeam
Corporation ("DataBeam"), digitizer and pen software from Scriptel Corporation
("Scriptel") and Windows software from Microsoft Corporation ("Microsoft"). In
addition, for our new network access products, we have interoperability
agreements with Jetstream Communications and Tollbridge, and we are highly
dependent on these agreements and our ability to secure similar licenses for
companies competitive to these gateway providers. These third-party software
licenses may not continue to be available to us on commercially reasonable
terms, if at all. The termination or impairment of these licenses could result
in delays or reductions in new product introductions or current product
shipments until equivalent software could be developed, licensed and integrated,
if at all possible, which would harm our business.
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EMPLOYEES
As of December 31, 1999, Polycom employed a total of 362 persons,
including 147 in sales, marketing and customer support,112 in product
development, 44 in manufacturing and 59 in finance and administration. Of these,
fifteen employees were located in the U.K., five were located in Singapore, four
were located in China, four in France, one in Germany, four in Hong Kong, two in
the Netherlands, one in Norway, one in Japan, one in Australia and the remainder
were located in the United States. None of our employees is represented by a
labor union. We have experienced no work stoppages and believes its relationship
with its employees is good.
We believe that our future success will depend in part on our continued
ability to hire, assimilate and retain qualified personnel. Competition for such
personnel is intense, and we may not 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 our inability to attract and retain
skilled employees, particularly technical and management, as needed, could harm
our business. The loss of the services of any executive officer or other key
technical or management personnel could harm our business.
ITEM 2. PROPERTIES
Through February 2000, Polycom's headquarters were located in a
leased 52,000 square foot facility in San Jose, California. In February 2000,
Polycom moved its headquarters to a 102,240 square foot facility in Milpitas,
California pursuant to a lease which expires in January 2007. This facility
accommodates corporate administration, research and development,
manufacturing, marketing, sales and customer support. The majority of our
video communication engineering and marketing operations are located in a
23,000 square foot facility in Austin, Texas pursuant to a sublease which
expires in February 2004. We also lease approximately 20,000 square feet of a
building in Livermore, California which is used as our North American and
Latin American distribution center. This lease expires on May 31, 2000 after
which we plan to move this distribution center to an approximately 44,000
square foot facility in Tracy, California. In addition, we lease space in
Santa Barbara, California for our network access products' engineering,
manufacturing and marketing organizations pursuant to a lease due to expire
in January 2002. Further, we utilize space at our manufacturing contractor in
Thailand and its European distribution contractor in the United Kingdom and
Netherlands to provide Asian and European distribution and repair centers,
respectively. We lease sales office space in the metropolitan areas of
Rosemont (Illinois ), Chicago (Illinois), Boston, Oxnard (California), the
U.K., Netherlands, France, Germany, Hong Kong, Japan, China, Australia and
Singapore. We believe that our current facilities are adequate to meet our
needs for the foreseeable future, and that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.
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ITEM 3. LEGAL PROCEEDINGS
On September 3, 1997, VTEL Corporation ("VTEL") filed a lawsuit in the
State District Court in Travis County, Texas against ViaVideo Communications,
Inc., a subsidiary of Polycom, and its founders (who were formerly employed by
VTEL). On May 27, 1998, VTEL amended its suit to add Polycom as a defendant. In
the lawsuit, VTEL alleged breach of contract, breach of confidential
relationship, disclosure of proprietary information and related allegations.
ViaVideo, its founders and Polycom answered the suit, denying in their entirety
VTEL's allegations. On March 3, 2000, VTEL dismissed the lawsuit against Polycom
and ViaVideo with prejudice for no consideration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
PRICE RANGE OF COMMON STOCK
Polycom'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 Polycom's Common Stock. The
following table sets forth the high and low 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 1998
First Quarter 12.25 4.75
Second Quarter 17.63 10.38
Third Quarter 18.00 7.06
Fourth Quarter 23.13 8.63
FISCAL YEAR 1999
First Quarter 27.13 11.94
Second Quarter 60.13 17.63
Third Quarter 50.00 26.94
Fourth Quarter 67.69 42.63
FISCAL YEAR 2000
First Quarter (through February 29, 2000) 121.00 53.50
</TABLE>
On February 29, 2000, the last sale price reported on the Nasdaq
National Market for Polycom's Common Stock was $116.31 per share. As of such
date, there were approximately 289 registered shareholders of record who held
shares of Polycom's Common Stock and approximately 12,500 beneficial owners, as
shown on the records of Polycom's transfer agent for such shares.
DIVIDEND POLICY
Polycom has never declared or paid any dividends on its capital stock
and does not intend to pay any dividends in the foreseeable future. Polycom
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 Polycom's Board of Directors and will depend upon the earnings of
Polycom, its financial condition, capital requirements and such other factors as
Polycom's Board of Directors may deem relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Polycom'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, 1999, 1998 and 1997 and the consolidated balance sheet data at
December 31, 1999 and 1998, are derived from, and are qualified by reference to,
the audited consolidated financial statements and are included in this Form
10-K. The consolidated statement of operations data for the year ended December
31, 1996 and 1995 and the consolidated balance sheet data at December 31,
1997, 1996 and 1995 are derived from audited consolidated financial statements.
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SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues $200,067 $116,886 $50,394 $39,006 $25,073
Costs and expenses:
Cost of net revenues 91,257 57,906 27,583 18,987 10,944
Sales and marketing 36,047 22,156 13,247 9,170 7,073
Research and development 21,615 14,719 17,038 8,088 6,928
General and administrative 8,269 5,518 7,019 2,310 1,820
Acquisition costs 1,650 185 597 -- --
-------- -------- -------- ------- -------
Operating income (loss) 41,229 16,402 (15,090) 451 (1,692)
Interest, net and other income (expense) 1,740 948 1,166 1,087 69
-------- -------- -------- ------- -------
Income (loss) before taxes 42,969 17,350 (13,924) 1,538 (1,623)
Taxes 13,616 1,749 171 108 12
-------- -------- -------- ------- -------
Net income (loss) $ 29,353 $ 15,601 $(14,095) $ 1,430 $(1,635)
======== ======== ======== ======= =======
Basic net income (loss) per share $ 0.90 $ 0.54 $(0.66) $0.10 $(0.35)
Diluted net income (loss) per share $ 0.81 $ 0.46 $(0.66) $0.07 $(0.35)
Weighted average shares outstanding for basic EPS 32,536 28,810 21,489 14,798 4,712
Weighted average shares outstanding for diluted EPS 36,458 33,847 21,489 21,183 4,712
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments $ 75,817 $ 23,489 $ 17,747 $21,507 $6,269
Working capital 86,324 46,417 22,023 29,676 7,797
Total assets 164,721 78,305 44,469 39,806 18,050
Notes payable, less current portion --- --- --- --- 1,178
Convertible redeemable preferred stock --- --- --- --- 22,360
Convertible preferred stock --- --- 9,496 1,975 ---
Total stockholders' equity (deficit) 113,270 53,928 26,927 33,033 (12,672)
</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 FORM 10-K CONTAIN FORWARD
LOOKING STATEMENTS, INCLUDING STATEMENTS CONCERNING FUTURE REVENUES OF THE
VIEWSTATION, SOUNDSTATION, NETENGINE AND STREAMSTATION PRODUCT FAMILIES, FUTURE
INTERNATIONAL SALES, EXPECTATIONS FOR THE COST OF NET REVENUES PERCENTAGE,
EXPECTED EXPENSES IN ABSOLUTE DOLLARS AND AS A PERCENTAGE OF NET REVENUES, AND
THE IMPACT OF THE YEAR 2000 ISSUE ON POLYCOM. THESE STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
AND ASSUMPTIONS THAT ARE DIFFICULT, IF NOT IMPOSSIBLE, TO PREDICT. THEREFORE,
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY
SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE THE
SUCCESSFUL LAUNCH OF NEW PRODUCTS AND MANUFACTURING RAMP OF THE VIEWSTATION,
NETENGINE, STREAMSTATION, MEETINGSITE AND OTHER NEW PRODUCTS; LEVEL OF SALES TO
KEY
18
<PAGE>
CUSTOMERS, INCLUDING LUCENT AND ITS NEW SPIN-OFF COMPANY; POSSIBLE PRICE
COMPETITION; DEMAND FOR VIEWSTATION, NETENGINE, STREAMSTATION, SHOWSTATION IP,
WEBSTATION, SOUNDPOINT PRO, MEETINGSITE, NETENGINE AND OTHER NEW PRODUCTS;
POTENTIAL DIFFICULTIES ASSOCIATED WITH TRANSITIONING TO THE NEW MANAGEMENT
INFORMATION SYSTEM; UNCERTAINTIES RELATING TO THE INTEGRATION OF OPERATIONS OF
ATLAS COMMUNICATION ENGINES, INC. AND RETENTION OF KEY STAFF; EFFECTS OF THE
ACQUISITION ON EXISTING BUSINESS PARTNERSHIPS; DEPENDENCE ON THIRD PARTY
DISTRIBUTORS; THE PROFITABILITY OF THE MEDIA SERVER PRODUCT LINE; THE SUCCESS OF
THE RECENTLY ANNOUNCED BUSINESS RELATIONSHIPS SUCH AS JETSTREAM COMMUNICATION
INC., LUCENT TECHNOLOGIES, CISCO SYSTEMS AND NORTEL NETWORKS; RISKS ASSOCIATED
WITH INTERNATIONAL OPERATIONS; DEPENDENCE ON THIRD PARTY MANUFACTURERS AND
SOLE-SOURCE SUPPLIERS; RECRUITING AND RETENTION OF KEY TECHNICAL AND MANAGEMENT
PERSONNEL; AND OTHER RISKS DETAILED IN THIS REPORT AND POLYCOM'S OTHER SEC
REPORTS. POLYCOM UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
FURTHERMORE, INVESTORS SHOULD CAREFULLY REVIEW THE RISK FACTORS AND OTHER
INFORMATION SET FORTH IN THE REPORTS AND OTHER DOCUMENTS POLYCOM FILES FROM TIME
TO TIME WITH THE COMMISSION.
OVERVIEW
We were engaged principally in research and development from inception
through September 1992, when we began volume shipments of our first voice
communication product, SoundStation. As of December 31, 1999, our voice
communication product line consisted principally of the SoundStation,
SoundStation EX, SoundStation Premier, SoundStation Premier EX, SoundPoint and
SoundPoint Pro. In January 1998, we completed the acquisition of ViaVideo
Communications, Inc., (ViaVideo), a development stage company that designed
and developed high quality, low cost, easy-to-use, group video communication
systems. In February 1998, we began customer shipments of the ViewStation
product family, our video communication equipment product line. As of December
31, 1999, our video communication product line consisted principally of the
ViewStation 128, ViewStation 512, ViewStation V.35, ViewStation MP ViewStation
SP, StreamStation, WebStation, ShowStation IP and the MeetingSite 5000. In
December 1999, we acquired Atlas Communication Engines, Inc. (Atlas), a
privately-held, OEM supplier of Integrated Access Devices (IADs) and emerging
supplier of Digital Subscriber Line (DSL) routers. Atlas's line of IADs and DSL
routers, which will become our network access product line, provides voice and
data over the rapidly-growing DSL network.
Through December 31, 1999, we derived a majority of our net revenues
from sales of our ViewStation and SoundStation products. Although the IAD and
DSL routers are expected to become an increasingly important revenue
contributor, we anticipate that the ViewStation and SoundStation product lines
will continue to account for a significant portion of our net revenues at least
through the year ending December 31, 2000. Any factor adversely affecting the
demand or supply for these products would harm our business, financial
condition, cash flows and results of operations.
19
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999
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,
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues 100% 100% 100%
Cost of net revenues 46% 50% 55%
------------------------------------
Gross profit 54% 50% 45%
Operating expenses:
Sales and marketing 18% 19% 26%
Research and development 11% 12% 34%
General and administrative 4% 5% 14%
Acquisition costs 1% 0% 1%
------------------------------------
Total operating expenses 34% 36% 75%
------------------------------------
Operating income (loss) 20% 14% (30%)
Interest income, net 1% 1% 2%
Other expense, net 0% 0% 0%
------------------------------------
Income (loss) before provision for income taxes 21% 15% (28%)
Provision for income taxes 6% 2% 0%
------------------------------------
Net income (loss) 15% 13% (28%)
====================================
</TABLE>
NET REVENUES
Total net revenues for 1999 were $200.1 million, an increase of $83.2
million, or 71%, compared to 1998. This increase was due in large part to
revenues from the video communication products. This product line began shipping
in February of 1998 and Polycom has added various models since that time.
Additionally, voice communication product line sales volume increases also
contributed to the revenue growth. Further, while a majority of the growth was
in North America, we also saw growth in Europe due to our increase in investment
in this region in 1999.
Total net revenues for 1998 were $116.9 million, an increase of $66.5
million, or 132%, compared to 1997. This increase was due in large part to
revenues from the video communication products which were not part of the prior
year revenue stream. Additionally, voice communication product line sales volume
increases, primarily in North America, also contributed to the revenue growth.
Further, in 1998 we recorded $2.5 million in revenue relating to a joint
development and marketing agreement with 3M concerning the ViewStation product
line. This 1998 3M revenue compares with the $3.0 million in 1997 revenue
associated with a joint development and marketing agreement with 3M concerning
the ShowStation IP.
In 1999, 1998 and 1997, we derived a substantial majority of our net
revenues from sales of our video communication and voice communication products.
Lucent Technologies accounted for 11%, 11% and 10% of net revenues in 1999, 1998
and 1997, respectively. No other customer or reseller accounted for more than
10% of our net revenues during these periods. See Note 13 of Notes to
Consolidated Financial Statements for business segment information.
International net revenues (revenues outside of North America)
accounted for 31%, 23% and 21% of total net revenues for 1999, 1998, and 1997,
respectively (see Note 13 of Notes to Consolidated Financial Statements). In
1999, we invested greater resources in Europe over 1998 which helped drive
volumes and revenues up as a percentage of our revenue. Within Europe, video
revenues were the main driver of the increase. In addition, Asia also increased
as a percentage of our net revenue. In 1998, volume increases in all
international regions, primarily Europe, contributed to the increase in the
percentage of international revenue over 1997. We anticipate that international
sales will continue to account for a significant portion of total net revenues
for the foreseeable future, and we plan to continue our expansion in
20
<PAGE>
Europe and Asia in 2000. International sales, however, are subject to certain
inherent risks, including unexpected changes in regulatory requirements and
tariffs, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable and potentially
adverse tax consequences. Additionally, international net revenues may fluctuate
as a percentage of net revenues in the future as we introduce new products,
since we expect to initially introduce such products in North America and also
because of the additional time required for product homologation and regulatory
approvals of new products in international markets. To the extent we are unable
to expand international sales in a timely and cost-effective manner, our
business could be harmed. We cannot assure you that we will be able to maintain
or increase international market demand for our products. Additionally, to date,
a substantial majority of our international sales has been denominated in U.S.
currency; however, if international sales were denominated in local currencies
in the future, these transactions would be subject to currency fluctuation
risks. Further, beginning January 1, 1999, the participating member countries of
the European Union agreed to adopt the European Currency Unit (the "Euro") as
the common legal currency. On that same date they established fixed conversion
rates between their existing sovereign currencies and the Euro. The
establishment of the Euro has not had any significant impact on us to date and
should not in the future since a substantial majority of our international sales
are denominated in U.S. currency.
COST OF NET REVENUES
Cost of net revenues consists primarily of contract manufacturer costs
including material and direct labor, Polycom's manufacturing organization,
tooling depreciation, warranty expense and an allocation of overhead expenses.
The cost of net revenues as a percentage of net revenues was 46% in 1999
compared to 50% in 1998 and 55% in 1997. The improvement in cost over 1998 is
attributable to a more favorable product mix as more shipments of the higher
margin video products occurred, and favorable material price improvements. These
decreases were offset by a write-down of ShowStation IP inventory and the
SoundPoint inventory to net realizable value and reduced revenue received under
a joint development and marketing agreement with 3M concerning the ViewStation
which had very low associated costs. We received $0.9 million in revenue under
this agreement in 1999 compared to $2.5 million in 1998. The margin improvement
in 1998 over 1997 is attributable to a more favorable product mix, royalty
revenues with no associated costs, favorable material price improvements and
favorable manufacturing variances related to increased production levels.
Forecasting future gross margin percentages is difficult. While we
expect that the overall cost of net revenues percentage will be within a few
percentage points of the current level, there are a number of risks associated
with maintaining our current gross margin levels. For example, uncertainties
surrounding competition, changes in technology, changes in product mix,
manufacturing efficiencies of subcontractors, manufacturing and purchased part
variances, warranty costs, and timing of sales over the next few quarters can
cause our cost of net revenues percentage to fluctuate significantly.
Additionally, the IAD and DSL equipment products, Voice-over-IP (VoIP) products
and other desktop products have a significantly higher cost of net revenue
percentage than ViewStation and SoundStation product lines. If the IAD, DSL,
VoIP and other desktop products grow to be become a significant revenue stream,
this will have a negative effect on the future cost of revenue percentages.
Also, we may reduce prices on our products in the future for competitive reasons
or to stimulate demand which could increase our cost of net revenues percentage;
however, these possible price reductions may not offset competitive pressures or
stimulate demand. In addition, costs variances associated with the manufacturing
ramp of new products, such as the ViewStation 4000 and ViewStation FX or any
other new product, could occur which would increase our cost of net revenues
percentage. Further, gross margins associated with the ShowStation IP,
ViewStation SP and the SoundPoint Pro are lower than the targeted gross margins
of the total product portfolio, yet the gross margins for the WebStation are
closer to the targeted gross margins. The contribution of these products can
have a significant impact on our overall gross margins.
In addition to the uncertainties listed above, the cost of net revenues
percentage may increase due to a change in the mix of distribution channels and
the mix of international versus North American revenues. We had realized lower
cost of net revenue percentages on our direct sales than on sales through
indirect channels. Now that we no longer sell our products through a direct
sales force, profit margins will be negatively impacted.
21
<PAGE>
SALES AND MARKETING EXPENSES
<TABLE>
<CAPTION>
Increase (Decrease)
Year End December 31, From Prior Year
------------------------------------ --------------------------
Dollars In Thousands 1999 1998 1997 1999 1998
-------------------- ------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Expenses $ 36,047 $ 22,156 $ 13,247 63% 67%
% of Net Revenues 18% 19% 26% (1%) (7%)
</TABLE>
Sales and marketing expenses consist primarily of salaries and
commissions, advertising and promotional expenses, product marketing, an
allocation of overhead expenses and customer service and support costs. The
increase in sales and marketing expenses in absolute dollars in 1999 over 1998
was primarily related to increased advertising and promotional expenditures for
the video and voice products. Additionally, an increase in the investment in the
worldwide sales effort and the resulting staff increases also contributed to the
increase over 1998. The increase in sales and marketing expenses in absolute
dollars in 1998 over 1997 was primarily related to increased investment in the
video communication sales effort. As mentioned previously, we only began selling
the ViewStation products in 1998 and, consequently, had little sales and
marketing expense in 1997 associated with these products. Additionally,
increases in the voice communication sales efforts in 1998 have also contributed
to the overall increase over 1997.
We expect to continue to increase our 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, our acquisition of Atlas Communication Engines, Inc. expands our
product portfolio into the DSL access market which will require significant
additional marketing expenditures to communicate the value of our new product
offerings as well as significant additional sales expenditures to develop a
new sales organization for this market. In addition, due to the innovative
nature of the ViewStation, StreamStation, WebStation and ShowStation IP
products, we believe we will incur additional expenses for sales and marketing,
especially advertising, to educate potential customers as to the desirability of
these products over competing products. In addition, we will further invest in
the European and Asian markets, thereby, increasing the absolute dollars spent
in this area. Also, the launch of the StreamStation product, a product that
streams point-to-point or multipoint video communications using the ViewStation
to the Web, as well as VoIP and other potential desktop products, will cause an
increase in our sales and marketing expenses. Additionally, this video streaming
market is new for us and significant investments may need to be made to become
successful. Further, we are currently expanding the service organization to
provide expanded and improved support for its products which will increase our
sales and marketing expenses.
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
Increase (Decrease)
Year End December 31, From Prior Year
------------------------------------- --------------------------
Dollars In Thousands 1999 1998 1997 1999 1998
-------------------- ------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Expenses $ 21,615 $ 14,719 $ 17,038 47% (14%)
% of Net Revenues 11% 12% 34% (1%) (22%)
</TABLE>
Research and development expenses consist primarily of compensation
costs, consulting fees, depreciation and an allocation of overhead expense. The
research and development expense increased in 1999 over 1998 due to increases in
the network access, video and voice product lines. The expense decrease in 1998
when compared to 1997 was primarily attributable to higher development expenses
for the ShowStation IP and ViewStation products in 1997 which resulted in the
initial launch of these products in early 1998. For the remainder of 1998, the
development charges for these products normalized. These decreases were offset
somewhat by increases related to the voice communication product line. In all
years presented, all research and development costs have been expensed as
incurred.
22
<PAGE>
We believe that technological leadership is critical to our success and
we are committed to continuing a high level of research and development. Also,
continued investment in new product initiatives such as VoIP and desktop
products will require significant research and development spending.
Consequently, we intend to increase research and development expenses in
absolute dollars and as a percentage of net revenues in the future. However, due
to the extremely competitive hiring market in the high-technology industries, we
may not be able to find or hire qualified personnel in a timely manner or at
all. In fact, we established a development office in Boston, Ma. in 1999 in an
attempt to broaden our recruiting of top technical talent.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Increase (Decrease)
Year End December 31, From Prior Year
------------------------------------- ---------------------------
Dollars in Thousands 1999 1998 1997 1999 1998
-------------------- ------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Expenses $ 8,269 $ 5,518 $ 7,019 50% (21%)
% of Net Revenues 4% 5% 14% (1%) (9%)
</TABLE>
General and administrative expenses consist primarily of compensation
costs, an allocation of overhead expense, bad debt write-offs, legal expenses
and accounting expenses. The increase in general and administrative expenses in
1999 over 1998 is due to increased staffing and infrastructure costs to support
Polycom's growth including the conversion of the management information system.
The decrease in general and administrative expenses in 1998 when compared to
1997 is due to lower legal expenses associated with the VTEL and Datapoint
lawsuits. This decrease was offset by increases related to increased staffing
and infrastructure to support our growth. Additionally, during the third quarter
of 1998, we reversed a contingency reserve associated with the Datapoint
litigation which was resolved favorably during that quarter.
We believe that our general and administrative expenses will increase in
absolute dollar amounts in the future primarily as a result of expansion of our
administrative staff and costs related to supporting a larger company. These
additional charges include expenses related to a new information system, a new
tax deferral strategy and infrastructure charges related to the significant
investments being made in Europe and Asia. Additionally, write-offs associated
with bad debt are difficult to predict and material write-offs could negatively
affect the profitability in the quarter they are realized.
ACQUISITION COSTS
We incurred expenses totaling $1.7 million, $0.2 million and $0.6 million
in 1999, 1998 and 1997, respectively. In 1999, these costs were related to the
acquisition of Atlas in December 1999. In 1998 and 1997, the cost incurred were
related to the acquisition of ViaVideo. A significant portion of these charges
for both acquisitions were for outside legal, accounting and financial advisory
services. We do not anticipate any further material acquisition related expenses
associated with either of these acquisitions; however, there can be no
assurances that other expenses related to these or other acquisitions will not
be incurred or, if incurred, will not be material.
OTHER INCOME AND EXPENSE
Interest income consists of interest earned on our cash, cash
equivalents and investments. Interest expense is from our bank debt facilities.
Interest income, net of interest expense was $1.8 million, $1.0 million and $1.2
million for 1999, 1998, and 1997, respectively. The fluctuations in interest
income, net are due primarily to changes in average cash and investment balances
throughout the year.
23
<PAGE>
PROVISION FOR INCOME TAXES
In 1999, 1998 and 1997, the provision for income taxes was $13.6
million, $1.7 million and $0.2 million, respectively. The provision for income
taxes in 1998 and 1997 were primarily for state, federal alternative minimum and
certain foreign taxes. The increase in income taxes for 1999 is due to increased
profitability. The valuation allowance established in prior years was reversed
in 1999 due to our belief that the deferred tax assets will more likely than not
be realized.
As of December 31, 1999, we had approximately $4.8 million in net
operating loss carryforwards and $0.3 million in tax credit carryforwards as
well as other deferred tax assets arising from temporary differences. See
Note 12 of Notes to Consolidated Financial Statements.
YEAR 2000
Prior to the Year 2000, many currently installed computer systems and
software products were coded to accept only two digit entries in the date code
field. These code fields needed to accept four digit entries to distinguish
years beginning with "19" from those beginning with "20". As a result, computer
systems and/or software products used by many companies needed to be upgraded to
comply with such Year 2000 requirements. In anticipation of this issue, we
expended resources to review our internal use software in order to identify and
modify those systems that were not Year 2000 compliant. In addition, our
products and services were reviewed and certified to be Year 2000 compliant.
Further, we also initiated a project to replace our current internal business
information system in 1999. While this effort addressed the Year 2000 issues of
the legacy system, this internal system implementation effort was principally
being conducted to improve operating efficiencies.
The costs associated with this effort were immaterial yet incremental
to our operations and also represented a reallocation of existing resources.
These costs were expensed as incurred and were funded through cash generated
from operations.
We have not experienced a material adverse impact on our financial
condition or results of operations due to Year 2000 compliance issues. In
addition, to date, no significant projects have been delayed due to the Year
2000 project.
LIQUIDITY AND CAPITAL RESOURCES FOR THE THREE YEARS ENDED DECEMBER 31, 1999
As of December 31, 1999, our principal sources of liquidity included
cash and cash equivalents of $36.0 million, short-term investments of $24.8
million and long-term investments of $15.1 million. Additionally, we established
a $15.0 million line of credit with a bank. The line of credit facility contains
provisions that require the maintenance of certain financial ratios and
profitability requirements. As of December 31, 1999, we were in compliance with
these covenants. See Note 9 of Notes to Consolidated Financial Statements.
We generated cash from operating activities totaling $38.6 million and
$2.7 million and used cash in operating activities of $8.6 million for the years
ended 1999, 1998, and 1997, respectively. The improvement in cash from operating
activities in 1999 over 1998 was due primarily to the improvement in net income
before non-cash items, an increase in accounts and taxes payable and a smaller
increase in inventories, offset somewhat by the growth in receivables and
deferred taxes. The improvement in cash from operating activities in 1998
over 1997 was due primarily to the improvement in net income before non-cash
items and a reduction in non-trade receivables, offset somewhat by the growth
in receivables and inventory and a smaller increase in accounts payable and
accrued liabilities.
The total net change in cash and cash equivalents for 1999 was an
increase of $17.9 million. The primary sources of cash were $38.6 million from
operating activities, $15.0 million in proceeds from an exercise of warrants by
3M, and $5.6 million from the issuance of stock associated with the exercise of
stock options and purchases under the employee stock purchase plan. The primary
uses of cash during 1999 were net purchases of investments of $34.5 million and
purchases of property, plant and equipment of $7.2 million. The positive cash
from operating activities was primarily the result of positive net income before
considering non-cash expenses such as depreciation and higher total
24
<PAGE>
current liabilities (including accounts payable and taxes payable), offset by an
increase in accounts receivable, deferred taxes and inventory.
Our material commitments consist of obligations under our operating
leases. We also maintains, from time to time, commercial letters of credit as
payments for the importation of certain products. The amounts do not exceed
$300,000 and are outstanding less than 120 days. See Notes 8 and 9 of the Notes
to Consolidated Financial Statements.
We believe that our available cash, cash equivalents, investments and
bank line of credit will be sufficient to meet our operating expenses and
capital requirements through at least December 31, 2000. However, it cannot be
determined with any degree of certainty how successful we will be at growing the
market for our products, if at all. If there is substantial growth and, as a
result, we go beyond current acceptable liquidity levels, or if the financial
results were to violate the financial covenants of the bank line of credit, we
may require or desire additional funds to support our working capital
requirements or for other purposes, such as acquisitions or competitive reasons,
and may seek to raise such additional funds through public or private equity
financing or from other sources. We cannot assure you 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. Our future
liquidity and cash requirements will depend on numerous factors, including the
introduction of new products and potential acquisitions of related businesses or
technology.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 established methods of
accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities, and is
effective for the fiscal years beginning after June 15, 2000, as amended by SFAS
No. 137. We believe that adoption of this pronouncement will not have a material
impact on our financial position and results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provide guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the second quarter of
the fiscal year beginning after December 15, 1999. We believe that adopting SAB
101 will not have a material impact on our financial position and results of
operations.
OTHER FACTORS AFFECTING FUTURE OPERATIONS
INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE
MAKING AN INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING OUR COMPANY. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR
BUSINESS COULD BE HARMED BY ANY OF THESE RISKS. THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND INVESTORS MAY LOSE ALL OR
PART OF THEIR INVESTMENT. IN ASSESSING THESE RISKS, INVESTORS SHOULD ALSO REFER
TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS FORM
10-K REPORT, INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES.
CHANNEL SALES AND INVENTORY. We sell a significant amount of our products to
distributors and resellers which maintain their own inventory of products for
sale to dealers and end-users. A substantial percentage of the total products
sold during a particular quarter consist of distributor stocking orders. We
typically provide special cost or early payment incentives for distributors to
purchase the minimum or more than the minimum quantities required under their
agreements with us. If these resellers are unable to sell through an adequate
amount of their inventory, as determined by these resellers, of our products in
a given quarter to dealers and end-users or if resellers decide to decrease
their inventories, it would negatively affect the volume of our sales to these
resellers in the current or future quarters and also negatively affect our total
revenues. Also, if we choose to eliminate or reduce stocking incentive programs,
quarterly revenue may be lower than historical levels or under the capital
market expectations.
Our revenue estimates are based largely on the sell-through reporting
that the resellers provide to us on a monthly basis. The accuracy of this data
has been good in North America but is questionable outside of this region. To
the extent
25
<PAGE>
that this data (sell-through and channel inventory) is inaccurate in either
North America or outside of North America, we may not be able to make reseller
estimates or may find that our previous estimates are entirely inaccurate.
Many of our distributors and resellers, on whom our revenues depend
significantly, are undercapitalized yet carry multiple Polycom product lines.
Failure of these businesses to establish and sustain profitability or obtain
financing could significantly affect future revenue levels for Polycom. The loss
of distributors or resellers could harm our business. In addition, the effect of
the spin-off of Lucent Technologies' business equipment segment on Polycom is
not yet known. In light of the restructure, if Lucent decides to significantly
reduce the amount of the orders to Polycom, it could harm our financial
condition.
CHANNEL AND CUSTOMER ORDERS. We typically ship products within a short time
after receipt of an order and historically have no material backlog. 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. Additionally, orders from our reseller customers are
based on the level of demand from end-users. The uncertainty of such end-user
demand means that any quarter could be significantly negatively impacted by
lower end-user orders which could negatively affect orders we receive from our
resellers. Accordingly, our expectations for both short- and long-term future
net revenues are based almost exclusively on our own estimate of future demand
and not on firm customer orders. Expense levels are based, in part, on these
estimates and, since we are limited in our ability to reduce expenses quickly if
orders and net revenues do not meet expectations in a particular period,
operating results would be lower than expected. In addition, a seasonal demand
appears to be evident in a lag in demand during the summer months. This
seasonality can make predicting revenues levels difficult, if not impossible.
A substantial portion of our orders are received and shipped within the last few
weeks of a quarter, therefore, should Polycom, its suppliers or major customers
be subject to a business interruption, for example, a natural disaster, during
the last few weeks of a quarter, it would negatively affect our business.
Further, we cannot assure you that our contract manufacturers will be able to
meet product demand before any given quarter ends.
UNCERTAINTY OF FUTURE REVENUES AND RESULTS. As a result of several factors,
including reliance on channel sales and the timing of orders and shipments
during each quarter, throughout most of each quarter, we are uncertain as to the
level of revenues we will achieve in the quarter and the impact distributor
stocking orders will have on revenues and profitability in that quarter. In
addition, because a substantial percentage of product sales occur at the end of
the quarter, product mix and, therefore, profitability is difficult, if not
impossible, to predict. Due to these factors, it is likely that in a future
quarter our operating results will be materially below the expectations of
public market analysts and investors. In such event, the price of our common
stock would likely decrease significantly.
Our net revenues have grown primarily through increased market acceptance of our
ViewStation and SoundStation product lines and through the expansion of our
North American and international distribution networks. While we have
experienced growth in net revenues in recent quarters, we do not believe that
the historical growth rates in net revenues will be sustainable nor are they
indicative of future operating results. For example, we lowered the price of the
ShowStation IP 23% effective March 1999 due to market acceptance issues for this
product; similar price reductions and demand issues could occur for this and
other products which could negatively impact our net revenues and profitability.
Further, recent growth rates of voice and video product sales out from the sales
channels to end-users have been significant. Future growth rates may not achieve
these levels of success.
We believe that profitability could be negatively affected in the future as a
result of several factors including low to negative gross margins for the
ShowStation IP and continuing competitive price pressure in the conferencing
equipment market. Although price reductions have been driven by our desire to
expand the market for our products, and we expect that in the future we 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, such actions may not expand the market for our products or be
sufficient to meet competitive pricing pressures. Additionally, if end-users
decide to purchase the StreamStation or WebStation product instead of the
ShowStation IP, our net revenues could be significantly adversely affected and
it could create an excess and obsolescence issue for the ShowStation IP
inventory which could negatively impact our profitability. Similarly, if the
SoundPoint Pro product materially negatively affects the future sales of the
SoundPoint product, Polycom's total revenue could be lower and it could create
an excess and obsolescence issue concerning the SoundPoint inventory which could
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<PAGE>
lower our profitability. For example, during the third quarter of 1999, we
recorded a charge for excess and obsolete inventory concerns for the ShowStation
IP and SoundPoint product line which negatively impacted our cost of net
revenues percentage. The issue of new products rendering existing products
obsolete or reducing the demand for existing products, exists for every one of
our products. In addition, costs related to the introduction of our new products
such as NetEngine, ViewStation 4000, ViewStation FX, ViewStation SP, SoundPoint
Pro, WebStation and StreamStation could also negatively impact future
profitability.
Our 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
ViewStation, SoundPoint Pro, NetEngine, WebStation, ShowStation IP,
MeetingSite, StreamStation and other new product introductions and product
enhancements by us or our competitors, the prices of our or the competition's
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 our distribution network, the level of royalties
to third parties and changes in general economic conditions. For example,
beginning in November 1999, we eliminated our direct sales force and moved
our direct customers to resellers in our VAR channel. This sales channel
shift negatively impacted our cost of net revenues percentage and will
continue to negatively impact gross margins in the year 2000. In addition,
competitive pressure on pricing or demand levels in a given quarter could
adversely affect our operating results for such period, and such price
pressure over an extended period could materially adversely affect our near
and long-term profitability. Our ability to maintain or increase net revenues
will depend upon our ability to increase unit sales volumes of the
ViewStation product line, SoundStation, SoundStation Premier and SoundPoint
families of products, the ShowStation and WebStation line of products, our
new network access products and any new products or product enhancements. We
cannot assure you that we will be able to increase unit sales volumes of
existing products, introduce and sell new products or reduce our costs as a
percentage of net revenues.
PRODUCT INTRODUCTIONS. Our revenue growth since the beginning of 1998 was due in
large part to new product introductions in the video communication product line.
In each quarter of 1998 we had a major new video product introduction which
significantly contributed to the revenue growth. Although we are continuing to
introduce new product releases, such as the recently announced ViewStation 4000
and ViewStation FX, we cannot assure you that new product releases will be
timely or that they will be made at all. Additionally, we cannot assure you that
these or any new product introductions in 2000 will produce the revenue growth
experienced in 1998 and 1999.
In the past we have experienced delays in the introduction of certain new
products and enhancements and believe that such delays may occur in the future.
For instance, we experienced delays in introducing the ViewStation MP and
WebStation in 1998 from their original expected release dates due to unforeseen
technology and manufacturing ramp issues. Additionally, the ShowStation IP was
delayed from its original shipment target of September 1997 to its first
customer shipment date of March 1998 due to engineering and manufacturing
start-up issues. Similar delays occurred during the introduction of the
SoundStation Premier and the ShowStation affecting the first customer ship dates
of these products. Any similar delays in the future for other new product
offerings such as VoIP, desktop or NetEngine product line extensions could have
a material adverse effect on our results of operations.
ATLAS INTEGRATION. We completed the acquisition of Atlas Communication Engines,
Inc. in December 1999. We acquired Atlas with the expectation that the
acquisition would result in operating and strategic benefits, including product
development and marketing and sales synergies. If outstanding merger related
issues are not successfully addressed in a coordinated, timely and efficient
manner, our business and results of operations could be harmed. The integration
of Atlas's product offerings and operations with our product offerings and
operations and the coordination of the two companies' sales and marketing
efforts may require substantial attention from management. The diversion of the
attention of management and any difficulties encountered in the transition
process could harm our business. The difficulties of assimilation may be
increased by the necessity of integrating personnel with disparate business
backgrounds and combining two different corporate cultures which may result in
problems with employee retention. 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, our
operating expenses will likely increase in absolute dollars. In fact, we are
currently recruiting both management and technical staff to be added to this
group. Should future expected revenues from Atlas's products not occur, or occur
later or in an amount less than expected, the higher operating expenses could
harm our
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<PAGE>
business. Failure to achieve the anticipated benefits of the acquisition or to
successfully integrate the operations of the companies could also harm our
business and results of operations. Additionally, we cannot assure you that we
will not incur additional material charges in future quarters to reflect
additional costs associated with the acquisition.
CHANNEL CONFLICTS. We have various OEM agreements with some major
telecommunications equipment manufacturers such as Lucent Technologies whereby
we manufacture our products to work with the equipment of the OEM partner. These
partnerships can create channel conflicts with other Polycom distributors who
directly compete with our OEM partner, which could adversely affect revenue from
such non-OEM channels. Because many of our distributors also sell equipment that
compete with the Polycom product lines, the distributors could devote more
attention to the other product lines which could materially adversely affect our
profitability. Further, other channel conflicts could arise which cause
distributors to devote resources to other non-Polycom conferencing equipment
thereby negatively affecting our business or results of operations.
We currently have agreements with certain video communication equipment
providers whereby these equipment suppliers resell our SoundPoint PC products
along with their video communication products. Polycom and these equipment
suppliers are competitors in the conferencing market and, as such, there can be
no assurance that they will enter into future agreements to resell or supply any
of our new or enhanced conferencing products. Further, certain current Polycom
video products and other video products under development are directly
competitive with the products of these suppliers, and thus competition between
us and the other suppliers is likely to increase, resulting in a strain on the
existing relationship between the companies. If this occurs, it could limit the
potential contribution of these relationships on our results of operations.
In addition, we are dependent on certain agreements with critical partners, such
as Jetstream Communications, in the network access arena. Conflicts may occur in
this evolving market as we seek other relationships with partners competitive to
our current relationships. If this occurs, it could harm our business.
TECHNOLOGY AND TRAINING. The markets for voice and video communication products
and network access products are characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. The success
of our new ViewStation and NetEngine 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 our competitors
and market acceptance of these products. Additionally, properly addressing the
complexities associated with DSL and ISDN compatibility, reseller training,
technical and sales support as well as field support are also factors that may
affect our success in this market. Further, the shift of communications from the
circuit-switched to IP network over time may require us to add new resellers and
gain new core technological competencies. We are attempting to address these
needs and the need to develop new products through our internal development
efforts and joint developments with other companies. We cannot assure you that
we will successfully identify new voice, video and network access product
opportunities and develop and bring new voice, video and network access products
to market in a timely manner, or that competing and technologies developed by
others will not render our ViewStation and SoundStation products or technologies
obsolete or noncompetitive. The failure of our new voice, video and network
access product development efforts on our ability to service or maintain the
necessary third party interoperability licenses would harm our business and
results of operations.
MANUFACTURING DISRUPTIONS. We subcontract the manufacture of our SoundStation,
SoundStation Premier, SoundPoint Pro and ViewStation product families and are
currently migrating the production of our new network access products to
Celestica, Inc., a global third-party contract manufacturer. We use Celestica's
Thailand facilities and should there be any disruption in supply due to economic
and political difficulties in Thailand and Asia, such disruption would harm our
business and results of operations. Also, Celestica is currently the sole source
provider of these product lines and if the supply from this subcontractor
experiences an interruption in operations, we would experience a delay in
shipping these products which could negatively affect revenues in the quarter of
the disruption. In addition, operating in the international environment exposes
us to certain inherent risks, including unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations and potentially adverse tax consequences all of which could harm our
business and results of operations.
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MANAGEMENT INFORMATION SYSTEM TRANSITION. We are transitioning to a new
enterprise resource planning system which affects almost every facet of our
business operations. This conversion is expected to bring new process
efficiencies which should improve our business operations. However, typically,
these conversions negatively affect a company's ability to conduct business
initially due to problems such as historical data conversion errors, the
learning curve associated with the new system, delays in implementation or
unforeseen technical problems during conversion. If such problems arise during
this transition, we could experience, for a period of time, delays in or lack of
shipping, an inability to support our existing customer base, delays in paying
vendors, delays in collecting from customers, an inability to place or receive
product orders or other operational problems. If this were to occur, our
profitability or financial position could be negatively impacted.
INFRASTRUCTURE GROWTH. Our recent overall growth has and will likely continue to
cause strains on our normal business processes and infrastructure. If we do not
manage this growth through resource additions such as headcount, capital and
processes, in a timely and efficient manner, future growth and profitability
will likely be significantly negatively affected. We cannot assure you that
resources will be available when we need them or that capital will be available
to fund these resource needs.
SERVICE AND SUPPORT. Our recent growth has been due in large part to an
expansion into product lines with more complex technologies and protocols. This
shift, as well as the acquisition of Atlas Communication Engines and its network
products has increased the need for increased product warranty and service
capabilities. In addition, increased international competition has forced
companies in the conferencing market to provide a complete service and support
package. We maintain an in-house hotline support group and subcontracts on-site
technician support functions. If we cannot develop and train our internal
support organization, maintain our relationship with our outside technical
support or efficiently transition to a new service contractor, it could
negatively affect future sales of the higher technology products like video and
VoIP equipment and network access products which would have a material negative
effect on our results from operations.
CASH FLOW FLUCTUATIONS DUE TO RECEIVABLE COLLECTIONS. In 1999, we initiated a
significant investment in Europe to expand our business in this region. In
Europe and Asia, as with other international regions, credit terms are typically
longer than in the United States. Therefore, as Europe, Asia and other
international regions grow as a percentage of our total net revenues, as has
happened during 1999, accounts receivable balances will likely increase over
previous years. Additionally, sales in the video communication product market
typically have longer payment periods over our traditional experience in the
voice communication market. Therefore, as we sell more video products as a
percentage of net revenues, accounts receivable balances will increase over
previous experience. These increases will cause our days sales outstanding to
increase over prior years and will negatively affect future cash flows. In
addition, we have been able to offset the affect of these influences through the
additional incentives offered to resellers at the end of the quarter in the form
of prepay discounts. These additional incentives has lowered profitability and
improved days sales outstanding performance.
POTENTIAL ASSET IMPAIRMENT CONCERNS. We operate in a high technology market
which is subject to rapid and frequent technology changes. These technology
changes can and do often render existing technologies obsolete. These
obsolescence issues can require write-downs in inventory value when it is
determined that the existing inventory can not be sold at or above net
realizable value. This situation occurred during the third quarter of 1999 for
the ShowStation IP and the SoundPoint products when we recorded $1.3 million in
excess and obsolescence charges and for the original ShowStation product in the
third quarter of 1998 when we wrote-down an additional $1.5 million related to
the loss in value associated with this inventory.
STOCK PRICE FLUCUATIONS. Our stock price has varied greatly as has the trading
volume of our common shares. We expect these fluctuations to continue due to
factors such as announcements of new products, services or technological
innovations by us or our competitors, announcements of major restructurings by
us or our competitors, quarterly variations in our results of operations,
changes in revenue or earnings estimates by the investment community,
speculation in the press or investment community, general conditions in the
communications industry, changes in our revenue growth rates or the growth rates
of our competitors, and sales of large blocks of our stock.
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The stock market will likely experience extreme price and volume fluctuations
from time to time. Many technology companies, such as Polycom, have experienced
such fluctuations. In addition, our stock price may be affected by general
market conditions and domestic and international macroeconomic factors unrelated
to our performance. Often such fluctuations have been unrelated to the operating
performance of the specific companies.
BUSINESS INTERRUPTION. Our operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure and other events beyond our
control. We do not have a detailed disaster recovery plan. In addition, we do
not carry sufficient business interruption insurance to compensate us for losses
that may occur and any losses or damages incurred by us could have a material
adverse effect on our business, financial condition or operating results.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Polycom's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and bank borrowings. Polycom does not use
derivative financial instruments in its investment portfolio, and its investment
portfolio only includes highly liquid instruments.
Polycom is subject to fluctuating interest rates that may impact,
adversely or otherwise, its results of operations or cash flows for its variable
rate bank borrowings, available-for-sale securities and cash and cash
equivalents.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for Polycom's investment portfolio and debt
obligations:
As of December 31, 1999:
<TABLE>
<CAPTION>
Expected Maturity
2000 2001 2002 Total
---- ---- ---- -----
(in thousands, except interest rates)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents 35,952 --- --- 35,952
Average interest rates 2.53% --- --- 2.53%
Investments 24,815 15,050 --- 39,865
Average interest rates 4.40% 4.95% --- 4.61%
LIABILITIES
Bank line of credit --- --- --- ---
Average interest rates 8.75% --- --- 8.75%
</TABLE>
The estimated fair value of our cash, cash equivalents and investments
approximates the principal amounts reflected above based on the short maturities
of these financial instruments. The estimated fair value of our debt obligations
approximates the principal amounts reflected above based on rates currently
available to us for debt with similar terms and remaining maturities.
All of our sales are denominated in US dollars. As only a small amount of
foreign bills are paid in currencies other than the US dollar, our foreign
exchange risk is considered immaterial.
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 in pages F-1 to F-23 and S-1 to
S-4. The supplemental data called for by Item 8 is not applicable to Polycom.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS - The information required by this item is included in Polycom's
Proxy Statement for the 2000 Annual Meeting of Stockholders and is
incorporated herein by reference.
(b) EXECUTIVE OFFICERS - The executive officers of Polycom, and their ages, as
of March 29, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C>
Robert C. Hagerty * 48 Chairman of the Board of Directors, Chief Executive Officer and President
Michael R. Kourey * 40 Senior Vice President, Finance and Administration, Chief Financial Officer, Secretary and
Director
Sunil K. Bhalla 43 Senior Vice President and General Manager, Business Communications
Dale A. Bastian 46 Senior Vice President, Worldwide Sales
Ardeshir Falaki 41 Senior Vice President and General Manager, Business Solutions and Services
Alan D. Hagedorn 52 Senior Vice President, Manufacturing
Craig B. Malloy 38 Senior Vice President and General Manager, Enterprise Visual Communications
</TABLE>
- ------------------------
* Member of the Board of Directors.
ROBERT C. HAGERTY joined Polycom in January 1997 as President and Chief
Operating Officer and as a member of the Board of Directors. In July 1998, Mr.
Hagerty was appointed the role of President and Chief Executive Officer and in
March 2000 he was named the Chairman 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 Polycom's
Senior 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 Senior Vice President, Finance and Administration and
Chief Financial Officer of Polycom. In January 1999, Mr. Kourey became a member
of the Board of Directors. Prior to joining Polycom, he was Vice President,
Operations of Verilink, a supplier of T1 telecommunications equipment. He brings
over 19 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.
SUNIL K. BHALLA joined Polycom in February 2000 as Senior Vice
President, Business Communications. Before joining Polycom, Mr. Bhalla served as
Vice President and General Manager of Polaroid Corporation's Internet Business
and also served as Polaroid's Vice President and General Manager, Worldwide
Digital Imaging Business. Previously, Mr. Bhalla also held posts as Director of
Strategic Marketing at Computervision Corporation, as well as senior management
positions with Digital Equipment Corporation. He has over 18 years of
high-technology experience. Mr. Bhalla holds a M.S. in Mechanical/Systems
Engineering and CAD/CAM from Lehigh University.
DALE A. BASTIAN joined Polycom in July 1997 as Senior 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 sales management positions with Commterm
Corporation, Code-A-Phone Corporation and Sony Corporation. He brings
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over 18 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 Polycom in April 1996, as Vice President, Data
Communications Engineering. In January 1998 he was promoted to Senior Vice
President and General Manager, Data Communications Products and in 1999 he
assumed the responsibility of the Business Solutions and Services Organization
which provide worldwide service and support for Polycom customers. Mr. Falaki
was formerly Director of Performance Systems for PictureTel Corporation, a
leading video communications 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 9 years of conferencing 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 Polycom in September 1996 as the Senior 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 26 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 Polycom in January 1998 and is currently Senior
Vice President and General Manager, Enterprise Visual Communications. Mr. Malloy
co-founded ViaVideo Communications, Inc. 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.
The information required by this item regarding compliance with Section
16(a) of the Exchange Act is included in the Proxy Statement for Polycom's 2000
Annual Meeting of Stockholders and is incorporated herein by reference.
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
Polycom's 2000 Annual Meeting of Stockholders and is incorporated herein by
reference.
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 Polycom's 2000 Annual
Meeting of Stockholders 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 Polycom's 2000 Annual Meeting
of Stockholders and is incorporated herein by reference.
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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,
1999 and 1998 and for each of the three years in the period ended
December 31, 1999.
2. Financial Statement Schedule. (see Item 8 above) The following
Financial Statement Schedule 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:
EXHIBIT NO. DESCRIPTION
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).
2.3 Agreement and plan of reorganization by and
among Polycom, Inc. Periscope Acquisition
Corporation and Atlas Communication Engines,
Inc., dated as of November 18, 1999 (which
is incorporated herein by reference to
Exhibit 2.1 to Form 8-K filed by the
Registrant with the Commission on December
15, 1999).
3.1 Amended and Restated Certificate of
Incorporation of Polycom, Inc. (which is
incorporated herein by reference to Exhibit
A to the Registrant's Definitive Proxy
Statement on Schedule 14A filed with the
Securities and Exchange Commission on April
21, 1998).
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 4.2
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).
4.4 Preferred Shares Rights Agreement dated as
of July 15, 1998, between Polycom, Inc. and
BankBoston N.A., including the Certificate
of Designation, the form of Rights
Certificate and the Summary of Rights
Attached thereto as Exhibits A, B and C,
respectively (which is incorporated herein
by reference to Exhibit 1 to the
Registrant's
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<PAGE>
Form 8-A filed with the Securities and
Exchange Commission on July 22, 1998).
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 10.2
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 as
amended and restated March 5, 1997(which is
incorporated herein by reference to Exhibit
10.3 to the Registrant's 1996 S-1 and
Exhibit 99.1 to the Registrant's
registration statement on Form S-8
registration No. 333-43059).
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
(which is incorporated herein by reference
to Exhibit
34
<PAGE>
10.15 to the Registrant's Form 10-K dated
March 13, 1998).
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).
10.17 ViaVideo Communications, Inc. 1996 Stock
Option/Stock Issuance Plan and related
agreements (which is incorporated by
reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-8,
Registration No. 333-45351).
10.18 Lease Agreement by and between the
Registrant and Trinet Essential Facilities
XXVI, dated December 1, 1999, regarding the
space located at 1565 Barber Lane (filed
herein).
21.1 Subsidiaries of the Registrant (filed
herein).
23.1 Consent of Independent Accountants (filed
herein).
24.1 Power of Attorney (filed herein).
27.1 Financial Data Schedule (filed herein).
27.2 Financial Data Schedule Annual Restatement
for 1998, 1997 and 1996 for Pooling
Transaction with Atlas Communication
Engines, Inc. (filed herein).
27.3 Financial Data Schedule Quarterly
Restatement for 1999, 1998 and 1997 for
Pooling Transaction with Atlas Communication
Engines, Inc. (first, second and third
quarter of 1997 and first and second
quarter of 1998) (filed herein).
27.4 Financial Data Schedule Quarterly
Restatement for 1999, 1998 and 1997 for
Pooling Transaction with Atlas Communication
Engines, Inc. (third quarter of 1998 and
first, second and third quarter of 1999)
(filed herein).
(1) Confidential treatment requested as to certain portions of
these documents.
(b) REPORTS ON FORM 8-K.
A report on Form 8-K was filed on December 15, 1999, regarding
Polycom's acquisition of Atlas Communication Engines. Inc. effective
December 1, 1999.
A report on Form 8-K/A was filed on February 11, 2000, providing an
update concerning Polycom's acquisition of Atlas Communication Engines.
Inc. effective December 1, 1999. This update clarified that the
financial statements of Atlas and the pro forma financial information
relating to the Merger specified in Items 7(a) and (b) of Form 8-K are
not required to be filed because the Merger does not the meet the
conditions specified in Sections 210.3-05(b)(2)(i) and 210.11-01,
respectively, of Regulation S-X.
(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 29th day of March, 2000.
POLYCOM, INC.
/s/ Robert C. Hagerty /s/ Michael R. Kourey
- ------------------------------------ --------------------------------
Robert C. Hagerty Michael R. Kourey
Chairman of the Board of Directors, Senior Vice President, Finance
Administration, and
Chief Executive Officer and President Chief Financial Officer and
Secretary
36
<PAGE>
POLYCOM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Polycom, Inc. and Polycom, Inc. Stockholders,
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Polycom, Inc. and its subsidiaries at December 31, 1999 and 1998, and results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 28, 2000, except for Note 15
which is as of March 3, 2000
F-2
<PAGE>
POLYCOM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,952 $ 18,006
Short-term investments 24,815 5,483
Accounts receivable, net of allowance for doubtful accounts of $1,304 and
$871 in 1999 and 1998, respectively 47,445 25,168
Inventories 18,136 17,326
Deferred and refundable taxes 9,059 2,594
Prepaid expenses and other current assets 2,368 2,217
------------- -------------
Total current assets 137,775 70,794
Fixed assets, net 9,795 6,802
Noncurrent deferred taxes 1,546 -
Long-term investments 15,050 -
Other assets 555 709
------------- -------------
Total assets $ 164,721 $ 78,305
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,433 $ 12,683
Accrued payroll and related liabilities 4,031 3,505
Taxes payable 9,633 1,405
Other current liabilities 11,354 6,784
------------- -------------
Total current liabilities 51,451 24,377
------------- -------------
Commitments and contingencies (Note 8) --- ---
Stockholders' equity :
Preferred stock, $0.001 par value:
Authorized: 5,000,000 shares in 1999 and 1998
Issued and outstanding: none in 1999 and 1998 --- ---
Common stock, $0.0005 par value:
Authorized: 50,000,000 shares
Issued and outstanding: 34,342,874 shares in 1999 and 31,097,583 in 1998 17 16
Additional paid-in capital 97,594 65,465
Unrealized loss on marketable securities (85) ---
Unearned stock-based compensation (1,953) ---
Retained earnings (deficit) 17,697 (11,553)
------------- -------------
Total stockholders' equity 113,270 53,928
------------- -------------
Total liabilities and stockholders' equity $ 164,721 $ 78,305
============= =============
</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 ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Net revenues $ 200,067 $ 116,886 $ 50,394
Cost of net revenues 91,257 57,906 27,583
-------------- -------------- -------------
Gross profit 108,810 58,980 22,811
Operating expenses:
Sales and marketing 36,047 22,156 13,247
Research and development 21,615 14,719 17,038
General and administrative 8,269 5,518 7,019
Acquisition costs 1,650 185 597
-------------- -------------- -------------
Total operating expenses 67,581 42,578 37,901
-------------- -------------- -------------
Operating income (loss) 41,229 16,402 (15,090)
Interest income, net 1,771 957 1,154
Other income (expense) (31) (9) 12
-------------- -------------- -------------
Income (loss) before provision for
income taxes 42,969 17,350 (13,924)
Provision for income taxes 13,616 1,749 171
-------------- -------------- -------------
Net income (loss) $ 29,353 $ 15,601 $ (14,095)
============== ============== =============
Basic net income (loss) per share $ 0.90 $ 0.54 $ (0.66)
============== ============== =============
Diluted net income (loss) per share $ 0.81 $ 0.46 $ (0.66)
============== ============== =============
Shares used in Basic per share calculation 32,536 28,810 21,489
Shares used in Diluted per share calculation 36,458 33,847 21,489
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-4
<PAGE>
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------------- ------------------------ Paid-In
Shares Amount Shares Amount Capital
----------------------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997 2,390,388 $ 2 23,056,585 $ 12 $ 44,685
Issuance of preferred stock 3,418,706 3 --- --- 7,517
Exercise of stock options under stock option plan --- --- 361,378 --- 127
Shares purchased under ESPP --- --- 92,731 --- 396
Repurchase of common stock --- --- (113,831) --- (18)
Interest on stockholder notes --- --- --- --- ---
Payment of stockholder notes receivable --- --- --- --- ---
Valuation of warrants --- --- --- --- 40
Valuation of options granted to outside
consultants --- --- --- --- 76
Dividend to S-Corporation shareholders --- --- --- --- ---
Capital contribution by S-Corporation
shareholders --- --- --- --- 423
Net loss --- --- --- --- ---
----------- -------- ----------- -------- -----------
Balances, December 31, 1997 5,809,094 $ 5 23,396,863 $ 12 $ 53,246
----------- -------- ----------- -------- -----------
Conversion of preferred stock into common stock (5,809,094) (5) 5,809,094 3 2
Issuance of common stock --- --- 1,020,476 1 7,629
Exercise of stock options under stock option plan --- --- 791,180 --- 1,651
Shares purchased under ESPP --- --- 79,970 --- 495
Cost of Stockholders' Rights Plan --- --- --- --- (26)
Payment of stockholder notes receivable --- --- --- --- ---
Valuation of options granted to outside
consultants --- --- --- --- 122
Tax benefit from stock option activity --- --- --- --- 2,121
Dividend to S-Corporation shareholders --- --- --- --- ---
Capital contribution by S-Corporation
shareholders --- --- --- --- 225
Net income --- --- --- --- ---
----------- -------- ----------- -------- -----------
Balances, December 31, 1998 --- $ --- 31,097,583 $ 16 $ 65,465
----------- -------- ----------- -------- -----------
Issuance of stock through exercise of warrants --- --- 2,000,000 1 14,999
Exercise of stock options under stock option plan --- --- 1,108,136 --- 4,592
Shares purchased under ESPP --- --- 137,155 --- 1,039
Cost of registration statements --- --- --- --- (31)
Valuation of options granted to outside consultants --- --- --- --- 26
Unearned stock compensation --- --- --- --- 2,400
Amortization of stock-based compensation --- --- --- --- ---
Tax benefit from stock option activity --- --- --- --- 9,104
Unrealized loss on investments --- --- --- --- ---
Dividend to S-Corporation shareholders --- --- --- --- ---
Net income --- --- --- --- ---
----------- -------- ----------- -------- -----------
Balances, December 31, 1999 --- $ --- 34,342,874 $ 17 $ 97,594
=========== ======== =========== ======== ===========
Unearned Retained
Stock-based Earnings
Compensation Other (Deficit) Total
------------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Balances, January 1, 1997 $ --- $ (29) $ (11,637) $ 33,033
Issuance of preferred stock --- --- --- 7,520
Exercise of stock options under stock option plan --- --- --- 127
Shares purchased under ESPP --- --- --- 396
Repurchase of common stock --- --- --- (18)
Interest on stockholder notes --- (8) --- (8)
Payment of stockholder notes receivable --- 13 --- 13
Valuation of warrants --- --- -- 40
Valuation of options granted --- --- -- 76
Dividend to S-Corporation shareholders --- --- (157) (157)
Capital contribution by S-Corporation
shareholders --- --- (423) ---
Net loss --- --- (14,095) (14,095)
------------- --------- ------------ -----------
Balances, December 31, 1997 $ --- $ (24) $ (26,312) $ 26,927
------------- --------- ------------ -----------
Conversion of preferred stock into common stock --- --- --- ---
Issuance of common stock --- --- --- 7,630
Exercise of stock options under stock option plan --- --- --- 1,651
Shares purchased under ESPP --- --- --- 495
Cost of Stockholders' Rights Plan --- --- --- (26)
Payment of stockholder notes receivable --- 24 --- 24
Valuation of options granted to outside
consultants --- --- --- 122
Tax benefit from stock option activity --- --- --- 2,121
Dividend to S-Corporation shareholders --- --- (617) (617)
Capital contribution by S-Corporation
shareholders --- --- (225) ---
Net income --- --- 15,601 15,601
------------- --------- ------------ -----------
Balances, December 31, 1998 $ --- $ --- $ (11,553) $ 53,928
------------- --------- ------------ -----------
Issuance of stock through exercise of warrants --- --- --- 15,000
Exercise of stock options under stock option plan --- --- --- 4,592
Shares purchased under ESPP --- --- --- 1,039
Cost of registration statements --- --- --- (31)
Valuation of options granted to outside consultants --- --- --- 26
Unearned stock compensation (2,400) --- --- ---
Amortization of stock-based compensation 447 --- --- 447
Tax benefit from stock option activity --- --- --- 9,104
Unrealized loss on investments --- (85) --- (85)
Dividend to S-Corporation shareholders --- --- (103) (103)
Net income --- --- 29,353 29,353
------------- --------- ------------ -----------
Balances, December 31, 1999 $ (1,953) $ (85) $ 17,697 $ 113,270
============= ========= ============ ===========
</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,
--------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 29,353 $ 15,601 $ (14,095)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,263 3,314 2,031
Provision for doubtful accounts 433 400 30
Provision for excess and obsolete inventories 4,958 2,799 1,302
Tax benefit from exercise of stock options 9,104 2,121 ---
Value of stock-based compensation 475 121 76
Loss on asset dispositions --- 6 308
Other non-cash adjustments --- --- 48
Changes in assets and liabilities:
Accounts receivable (22,710) (16,895) (2,427)
Inventories (5,768) (9,910) (3,977)
Deferred taxes (8,011) (2,594) ---
Prepaid expenses and other current assets (497) 357 (2,055)
Accounts payable 13,750 856 7,338
Taxes payable 8,228 1,292 25
Accrued liabilities 5,062 5,199 2,811
-------------- -------------- --------------
Net cash provided by (used in) operating activities 38,640 2,667 (8,585)
-------------- -------------- --------------
Cash flows from investing activities:
Acquisition of fixed assets (7,222) (5,486) (3,623)
Purchase of investments (44,735) (9,686) (7,154)
Proceeds from sale of investments 10,268 9,387 12,071
Other 500 27 ---
-------------- -------------- --------------
Net cash provided by (used in) investing activities (41,189) (5,758) 1,294
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of repurchases and
issuance costs 5,598 9,752 504
Proceeds from exercise of warrants 15,000 --- ---
Dividends paid to S-Corporation shareholders (103) (617) (157)
Proceeds from line of credit borrowings --- 9,601 2,558
Repayment of line of credit borrowings --- (10,226) (1,983)
Proceeds from issuance of preferred stock, net of issuance costs --- --- 7,521
Repayment of stockholder notes receivable, net --- 24 5
-------------- -------------- --------------
Net cash provided by financing activities 20,495 8,534 8,448
-------------- -------------- --------------
Net increase in cash and cash equivalents 17,946 5,443 1,157
Cash and cash equivalents, beginning of period 18,006 12,563 11,406
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 35,952 $ 18,006 $ 12,563
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 77 $ 16 $ 141
Income taxes paid $ 4,289 $ 399 $ 40
Advertising barter trade credits $ (770) $ 770 $ ---
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING:
Capital leases $ 34 $ 113 $ 20
Capital contribution of S-Corp shareholders $ --- $ 225 $ 423
Conversion of preferred shares to common stock $ --- $ 9,496 $ ---
</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 subsidiaries (the Company), a Delaware
corporation, develops, manufactures and markets a full range of
premium-quality, media-rich communication tools and network
solutions. The Company's products are distributed and serviced
globally. The Company sells its products through marketing and
sales relationships with a wide network of value-added resellers,
telecommunications equipment distributors, wireline equipment
manufacturers, telecommunication service providers, and retailers.
2. SUMMARY OF SIGNIFICANT 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. Due to timing, 1998 was a 53 week fiscal
year. Consequently, the first quarter of 1998 had 14 weeks rather
than the usual 13 weeks.
RECLASSIFICATIONS:
Certain items in prior year's financial statements 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 subsidiaries. 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
or remaining maturities of 90 days or less at the time of purchase
to be cash equivalents.
INVESTMENTS:
Investments are classified as available for sale securities 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 one 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 and gains or losses on disposals 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, when no
significant contractual obligations remain outstanding and
collection is considered probable. Additionally, the Company
recognizes extended service revenue over the life of the service
contract. During 1998, the Company recognized $2.5 million in
revenue related to certain deliverables detailed in the joint
development and marketing agreement with 3M concerning the
ViewStation product line. In 1997, the Company recognized $3.0
million in revenue related to certain deliverables detailed in
the joint development and marketing agreement with 3M concerning
the ShowStation IP. The amounts recognized as revenue from these
agreements approximate the amounts 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, 1999, 1998 and 1997 was $9.2 million, $5.2 million,
$1.8 million, respectively. In 1998, the Company traded inventory
for advertising barter trade credits which were reflected in
prepaid assets and stated at a net book value of $770,000 as of
December 31, 1998. No revenue was recognized on this transaction.
In 1999, the inventory was returned in exchange for the return of
the barter credits. Therefore, the net book value of the
advertising barter trade credits was zero as of December 31, 1999.
INCOME TAXES:
Income tax expense is based on pretax financial accounting income.
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:
For all of the Company's foreign subsidiaries, the functional
currency is the U.S. dollar. Accordingly, monetary assets and
liabilities are translated at year-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.
F-8
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
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 when 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 of investments, which
are 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" and complies with the
disclosure provisions of SFAS No. 123. 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 and is
recognized over the vesting period which is generally three to five
years.
The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues
Task Force Issue No. 96-18,"Accounting for Equity Instruments That
are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services."
SOFTWARE FOR INTERNAL USE:
In March 1998, American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 98-1, "Software for
Internal Use," which provides guidance on accounting for the cost
of computer software developed or obtained for internal use. The
Company adopted SOP 98-1 in 1999 and the adoption did not have a
material impact on the Company's financial position and results of
operations.
ACQUISITIONS:
On December 1, 1999, the Company completed the acquisition of Atlas
Communication Engines, Inc., (Atlas) whereby a wholly owned
subsidiary of Polycom, Inc. was merged with and into Atlas. Atlas
designed, developed, marketed and sold high quality DSL customer
premise equipment and internet access devices primarily on an OEM
basis. Approximately 1.3 million shares of Polycom common stock
were exchanged for all of the issued and outstanding capital stock
of Atlas. In addition, outstanding stock options to purchase Atlas
common stock were converted into options to purchase approximately
0.5 million shares of Polycom common stock. The transaction was
treated as a pooling of interests for financial reporting purposes
and, consequently, all prior period figures have been restated as
if the combined entity existed for all periods presented. All
intercompany transactions between the two companies have been
eliminated in consolidation. Polycom and Atlas had the same fiscal
year end of December 31. Adjustments, related primarily to fixed
asset capitalization, depreciation and inventory accounting, have
been made to conform and align accounting policies between the two
companies.
On January 2, 1998, the Company completed the acquisition of
ViaVideo Communications, Inc., (ViaVideo) whereby a wholly-owned
subsidiary of Polycom, Inc. was merged with and into ViaVideo.
ViaVideo was a development stage company that designed and
developed high quality, low cost, easy to use, group
F-9
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was treated as a pooling of interests for financial
reporting purposes and, consequently, all prior period figures were
restated as if the combined entity existed for all periods
presented. All intercompany transactions between the two companies
have been eliminated in consolidation. Polycom and ViaVideo had the
same fiscal year end of December 31 and activity from the start of
fiscal 1998 to the merger date was not material. Further, there
were no adjustments required to conform accounting policies between
the two companies.
The following table reconciles Polycom's previously reported
revenue and earnings to the restated amounts ($ in thousands):
<TABLE>
<CAPTION>
Nine months
ended Year ended Year ended
Sept. 30, 1999 Dec. 31, 1998 Dec. 31, 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Net revenues:
Polycom previously reported $ 136,113 $ 111,696 $ 46,630
Atlas 3,466 5,190 3,764
---------------- ---------------- -----------------
Restated net revenues $ 139,579 $ 116,886 $ 50,394
================ ================ =================
Net income (loss):
Polycom previously reported $ 22,459 $ 14,759 $ (14,675)
Atlas (993) 842 580
---------------- ---------------- -----------------
Restated net income (loss) $ 21,466 $ 15,601 $ (14,095)
================ ================ =================
Basic net income (loss) per share:
Polycom previously reported $ 0.73 $ 0.54 $ (0.73)
Atlas (0.06) --- 0.07
---------------- ---------------- -----------------
Restated basic net income (loss) per share $ 0.67 $ 0.54 $ (0.66)
================ ================ =================
Diluted net income (loss) per share:
Polycom previously reported $ 0.65 $ 0.46 $ (0.73)
Atlas (0.06) --- 0.07
---------------- ---------------- -----------------
Restated diluted net income (loss) per share $ 0.59 $ 0.46 $ (0.66)
================ ================ =================
</TABLE>
COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, (SFAS No.
130), "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes
all changes in equity (net assets) during a period from non-owner
sources. The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Net Income $ 29,353 $ 15,601
Unrealized loss on investments (85) -
---------------- --------------
Comprehensive income $ 29,268 $ 15,601
================ ==============
</TABLE>
F-10
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT PRONOUNCEMENTS:
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 established
methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other
hedging activities, and is effective for fiscal years beginning
after June 15, 2000, as amended by SFAS No. 137. Although the
Company does not believe SFAS 133 will have a material effect on
its operations and financial position, the Company has not yet
fully determined this statement's impact.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) 101, "Revenue Recognition," which
outlines the basic criteria that must be met to recognize revenue
and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial
statements filed with the Securities and Exchange Commission. The
effective date of this pronouncement is the second quarter of the
fiscal year beginning after December 15, 1999. The Company believes
that adopting SAB 101 will not have a material impact on the
Company's financial position and results of operations.
3. INVESTMENTS:
Investments at December 31, 1999 and 1998 comprise (in thousands):
<TABLE>
<CAPTION>
Fair Cost
Value Basis
-----------------------------
<S> <C> <C>
INVESTMENTS - CURRENT:
US government securities $ 7,718 $ 7,743
State and local governments 5,520 5,520
Corporate debt securities 11,577 11,577
-----------------------------
Total $ 24,815 $ 24,840
INVESTMENTS - NONCURRENT:
US government securities $ 3,762 $ 3,777
State and local governments 7,976 8,013
Corporate debt securities 3,312 3,320
-----------------------------
$ 15,050 $ 15,110
-----------------------------
Balances at December 31, 1999 $ 39,865 $ 39,950
=============================
INVESTMENTS - CURRENT:
US government securities $2,611 $2,611
Foreign Government Securities 504 504
Corporate debt securities 2,368 2,368
-----------------------------
Balances at December 31, 1998 $ 5,483 $ 5,483
=============================
</TABLE>
All current investments as of December 31, 1999 and 1998 mature
within one year. Noncurrent investments mature within two years.
During 1999 and 1998, there were no realized gains or losses on the
disposal of investments.
F-11
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES:
Inventories consist of the following (in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Raw materials $ 1,542 $ 1,601
Finished goods 16,594 15,725
--------------- ---------------
Total inventories $18,136 $ 17,326
=============== ===============
</TABLE>
5. FIXED ASSETS:
Fixed assets, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Computer equipment and software $ 12,777 $6,507
Equipment, furniture and fixtures 4,456 3,866
Tooling equipment 4,732 4,700
Leasehold improvements 687 567
------------ ------------
22,652 15,640
Less accumulated depreciation and amortization 12,857 8,838
------------ ------------
$ 9,795 $6,802
============ ============
</TABLE>
6. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Accrued expenses and legal fees $ 5,202 $ 3,127
Warranty reserve 2,814 1,721
Deferred service revenue 1,247 270
Sales tax payable 661 579
Employee stock purchase plan withholding 663 391
Other accrued liabilities 767 696
------------ ------------
$11,354 $ 6,784
============ ============
</TABLE>
7. BUSINESS RISKS AND CREDIT CONCENTRATION:
The Company sells a limited number of products which serve the
communications equipment market. A substantial majority of the
Company's net revenues are derived from sales of the SoundStation
and ViewStation products. Any factor adversely affecting demand or
supply for the SoundStation and ViewStation products could
materially adversely affect the Company's business and financial
performance.
F-12
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Currently, the Company subcontracts the manufacturing of a majority
of its products through one subcontractor in Asia. 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 subcontractor 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, cash equivalents and investments are maintained
with three international investment management companies and five
commercial banks and their international affiliates, and are
invested in the form of demand deposit accounts, money market
accounts, corporate debt securities and government securities.
Deposits in these institutions may exceed the amount of insurance
provided on such deposits.
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. The expansion of Polycom's product
offerings 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.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
On September 3, 1997, VTEL Corporation ("VTEL") filed a lawsuit in
the State District Court in Travis County, Texas against ViaVideo
Communications, Inc., a subsidiary of Polycom, and its founders
(who were formerly employed by VTEL). On May 27, 1998, VTEL amended
its suit to add Polycom as a defendant. In the lawsuit, VTEL
alleged breach of contract, breach of confidential relationship,
disclosure of proprietary information and related allegations.
ViaVideo, its founders and Polycom answered the suit, denying in
their entirety VTEL's allegations (see Note 15 Subsequent Events).
STANDBY LETTER OF CREDIT:
The Company has several standby letters of credit totaling
approximately $200,000 which have been issued to guarantee certain
of the Company's foreign office lease obligations and other
contractual obligations. The Company also maintains, from time to
time, commercial letters of credit as payments for the importation
of certain products. The amounts do not exceed $300,000 and are
outstanding less than 120 days.
The Company had a $300,000 standby letter of credit that was issued
in 1997 to guarantee certain of the Company's contractual
obligation. This letter of credit was canceled in October 1999.
During May 1997, a bank issued a standby letter of credit to one of
ViaVideo's major suppliers for $335,000. The letter of credit
expired in April 1998 and was secured by ViaVideo's certificate of
deposit for a similar amount deposited with the bank.
During August 1997, a bank issued a standby letter of credit to one
of ViaVideo's major suppliers for $75,000. The letter of credit
expired in July 1998 and was secured by ViaVideo's certificate of
deposit for a similar amount deposited with the bank.
LICENSE AGREEMENT:
The Company entered into an agreement to license software to be
incorporated into its web-based products. Under the agreement, the
Company was obligated to pay annual minimum license fees, ranging
from $15,000 to
F-13
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$35,000 through the year 2001 and the Company could cancel the
agreement at any time, provided it had paid a minimum of $200,000
in connection with the agreement. As of December 31, 1998, the
Company had paid $275,000 of the minimum license fees. In February
1999, the Company re-negotiated the terms of the contract and paid
a lump sum figure of $195,000. Under the terms of this new
contract, the Company has no further obligation regarding any fees
associated with this licensed software.
LEASES:
The Company leases certain office facilities and equipment under
noncancelable operating leases expiring between 2000 and 2007.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, Leases
------------------------ --------------------
<S> <C>
2000 $ 2,514
2001 2,751
2002 2,682
2003 2,781
2004 2,895
Thereafter 5,929
-------------------
Minimum future lease payments $ 19,552
===================
</TABLE>
In November 1999, the Company leased 102,240 square feet of office
space for its headquarters location in Milpitas, California. This
lease is due to expire in January 2007. Under the terms of the
lease, the Company is responsible for related maintenance, taxes
and insurance. In all other material facility leases, the Company
is responsible for related maintenance, taxes and insurance.
Rent expense for the years ended December 31, 1999, 1998 and 1997
was $ 2.3 million, $1.3 million and $692,000, respectively.
9. CREDIT ARRANGEMENTS:
The Company has available a $15.0 million bank revolving line of
credit under an agreement with a bank. Borrowings under the line
are unsecured and bear interest at the bank's prime rate (8.50% at
December 31, 1999) or at an offshore interbank offered rate (IBOR)
plus 0.65% (approximately 6.3% to 7.1%, depending on the term of
the borrowings at December 31, 1999). Borrowings under the line are
subject to certain financial covenants and restrictions on
liquidity, indebtedness, financial guarantees, business
combinations, profitability levels, and other related items. The
line expires on October 31, 2000 but may be renewed by the Company
for an additional year so long as certain liquidity measures are
met at the time of renewal. The weighted average interest rates for
the years ended December 31, 1999, 1998 and 1997 were 8.1%, 8.4%
and 9.3%, respectively.
Prior to October 1999, the Company had 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 expired in October 1999.
Borrowings under the line were subject to certain financial
covenants and restrictions on indebtedness, equity distributions,
financial guarantees, business combinations and other related items
and were collateralized by substantially all of the Company's
assets.
As of December 31, 1997, ViaVideo Communications had a bank credit
agreement which provided for a revolving line of credit of up to
$750,000. The outstanding balance on the line of credit at December
31, 1997 was $625,000 with an interest rate equal to the bank's
prime rate plus 0.75% (9.25% at December 31, 1997). The line was
collateralized by substantially all of the assets of ViaVideo. The
outstanding balance was paid in full during 1998 and the line was
closed.
F-14
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no balances outstanding for the above mentioned lines of
credit for the periods presented.
10. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
In March 1996, the Company authorized 18,095,690 shares of
preferred stock. In May 1998, the Company reduced the authorized
shares of preferred stock to 5,000,000. As of December 31, 1997,
the Company had 7,102,104 authorized shares of convertible
preferred stock, of which, 5,809,094 shares were outstanding.
During 1998, the outstanding convertible preferred shares were
converted to common stock before the merger between Polycom and
ViaVideo Communications. As of December 31, 1999, the Company has
no shares of preferred stock outstanding.
COMMON STOCK:
As of December 31, 1999, 539,941 shares of common stock, stemming
primarily from the founder stock of ViaVideo Communications, Inc.,
were outstanding but subject to repurchase.
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 and 1999, an
additional 1,000,000 shares and 1,500,000 shares, respectively,
were reserved through a shareholder vote. The Plan supersedes the
1991 Stock Option Plan (91 Plan).
In 1996, ViaVideo Communications, Inc. reserved 887,763 shares of
common stock under the 1996 ViaVideo Communications, Inc. Stock
Option Plan (ViaVideo Plan) for issuance to employees of
ViaVideo. In 1997, an additional 710,210 shares were reserved
through a shareholder vote. The ViaVideo Plan was assumed by
Polycom pursuant to the Merger Agreement on January 2, 1998. All
remaining option shares available for grant and subsequent
cancellations of option shares under the ViaVideo Plan expired or
will expire as no additional option shares can be granted from the
ViaVideo Plan subsequent to the merger.
In 1996, Atlas Communication Engines, Inc. reserved 439,868 shares
of common stock under the 1996 Stock Incentive Plan (Atlas Plan)
for issuance to employees of Atlas. In 1997, an additional 175,947
shares were reserved through a shareholder vote. The Atlas Plan was
assumed by Polycom pursuant to the Merger Agreement on December 1,
1999. All remaining option shares available for grant and
subsequent cancellations of option shares under the Atlas Plan
expired or will expire as no additional option shares can be
granted from the Atlas Plan subsequent to the merger.
Under the terms of the Plan, the 91 Plan, the ViaVideo Plan, and
the Atlas 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 granted under the ViaVideo Plan and the 91
Plan are immediately exercisable, expire in ten years from the date
of grant, and the unvested 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. Options
granted under the Plan and the Atlas Plan expire ten years from the
date of grant and generally are only exercisable upon vesting.
Options granted under the Plan prior to December 1998 and under the
91 Plan 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. Options granted under the
ViaVideo Plan normally vest monthly for each month of service to
the Company until fully vested after four years. Options granted
under the Atlas Plan normally vest at 33% after completing one year
of service to the Company and the remaining amount in equal
quarterly installments over the next eight quarters until fully
vested after three years. For new options granted under the Plan
beginning in December 1998, the options normally vest at 25% after
completing one year of service to the Company and the remaining
amount equally over 36 months until fully vested after four years.
In addition, as a special bonus to employees, option grants that
become fully vested after one year of service to the Company
F-15
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
have been made under the Plan and the Atlas Plan. While there are
many option grants with vesting schedules different than those
described, generally vesting of options is consistent within each
of the plans.
Activity under the Plan is as follows (in thousands, except share
and per share data):
<TABLE>
<CAPTION>
Shares Outstanding Options
---------------- ----------------- -------------- ----------------
Available Number Exercise Aggregate Weighted Avg
for Grant of Shares Price Price Exercise Price
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996 2,783,521 1,589,803 $ 0.15-$ 9.00 $ 7,267 $ 4.57
Options reserved 1,710,210 --- --- --- ---
Options granted (4,103,422) 4,103,422 $ 0.08-$ 6.06 12,190 $ 2.97
Options exercised --- (361,378) $ 0.08-$ 4.75 (127) $ 0.35
Options canceled 802,561 (802,561) $ 0.08-$ 9.00 (4,343) $ 5.41
Shares repurchased 12,091 --- --- --- ---
-----------------------------------------------------------------------------------
Balances, December 31, 1997 1,204,961 4,529,286 $ 0.08-$ 9.00 $ 14,987 $ 3.31
Options reserved 175,947 --- --- --- ---
Options granted (1,031,694) 1,031,694 $ 2.85-$20.56 13,803 $ 13.38
Options exercised --- (791,180) $ 0.08-$ 9.00 (1,651) $ 2.09
Options canceled 389,405 (389,405) $ 0.15-$15.13 (1,996) $ 5.13
Options expired (227,768) --- --- --- ---
-----------------------------------------------------------------------------------
Balances, December 31, 1998 510,851 4,380,395 $ 0.08-$20.56 $ 25,143 $ 5.74
Options reserved 1,500,000 --- --- --- ---
Options granted (1,812,034) 1,812,034 $ 5.69-$63.88 61,682 $ 34.04
Options exercised --- (1,108,136) $ 0.08-$32.00 (4,572) $ 4.13
Options canceled 293,479 (293,479) $ 2.00-$45.00 (4,514) $ 15.38
Options expired (139,096) --- --- --- ---
-----------------------------------------------------------------------------------
Balances, December 31, 1999 353,200 4,790,814 $ 0.08-$63.88 $ 77,739 $ 16.23
</TABLE>
As of December 31, 1999, 1998 and 1997, 1,173,731, 1,841,971,
1,894,287 outstanding options were exercisable at an aggregate
average exercise price of $3.62, $2.33, and $1.43, respectively. Of
these options that were exercisable, 369,319, 677,066 and 1,174,149
as of December 31, 1999, 1998 and 1997, respectively, were unvested
and, the shares received on exercise would be subject to
repurchase. In addition, as of December 31, 1999, 60,541 shares of
common stock acquired under the Plan, the 91 Plan and ViaVideo Plan
("the Plans") were subject to repurchase.
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 $4.38 per share. The new options vest over a
five-year period beginning on March 5, 1997.
F-16
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The options outstanding and currently exercisable by exercise price
at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Yrs) Price Exercisable Price
--------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
$0.08 - $0.21 406,460 7.18 $0.15 406,460 $0.15
$0.23 - $0.57 107,676 6.13 $0.51 107,676 $0.51
$1.00 - $2.56 96,418 7.33 $2.21 96,418 $2.21
$2.56 - $6.38 1,842,994 7.45 $4.54 372,897 $3.82
$7.20 - $13.63 360,152 8.28 $10.49 136,129 $11.34
$15.13 - $25.00 531,019 8.96 $20.89 49,307 $16.62
$25.13 - $29.56 104,625 8.37 $26.95 4,844 $26.75
$32.00 - $34.94 994,770 9.40 $34.83 --- $0.00
$35.75 - $62.50 330,450 9.08 $47.49 --- $0.00
$63.88 - $63.88 16,250 9.92 $63.88 --- $0.00
------------------------------------------------- ------------------------------------
4,790,814 8.17 $16.23 1,173,731 $3.62
=============== ==================
</TABLE>
Consistent with the disclosure provisions of SFAS No. 123, the
Company's net income or loss and basic and diluted 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>
Year ended Year ended Year ended
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net income/(loss) - as reported $29,353 $15,601 $(14,095)
Net income/(loss) - pro forma $17,238 $9,578 $(18,828)
Basic net income/(loss) per share - as reported $0.90 $0.54 $(0.66)
Basic net income/(loss) per share - pro forma $0.53 $0.33 $(0.88)
Diluted net income/(loss) per share - as reported $0.81 $0.46 $(0.66)
Diluted net income/(loss) per share - pro forma $0.47 $0.28 $(0.88)
</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:
<TABLE>
<CAPTION>
<S> <C>
Risk-free interest rate 5.09% - 5.66%
Expected life (yrs) 0.5
Expected dividends ---
Expected volatility 0.6 - 0.8
</TABLE>
The weighted average fair value of options granted pursuant to the
Plans were $19.06, $6.40 and $3.06 in 1999, 1998 and 1997,
respectively.
The weighted average expected life was calculated based on the
vesting period and an aggregate exercise behavior. This exercise
behavior was based on historical exercise patterns. The risk-free
interest rate was calculated in accordance with the grant date and
expected life.
F-17
<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 11. Purchase periods
occur twice yearly and each effectively contains a 6-month option.
<TABLE>
<CAPTION>
January 1999 July 1999
---------------- ----------------
<S> <C> <C>
Risk free interest rate 5.09% 5.09%
Expected life (yrs) 0.5 0.5
Expected dividend yield --- ---
Expected volatility 0.8 0.8
</TABLE>
The weighted average fair value of purchase rights granted pursuant
to the Employee Stock Purchase Plan in 1999 and 1998 was $5.55 and
$3.38, respectively.
UNEARNED STOCK-BASED COMPENSATION:
In connection with certain stock option grants during 1999, the
Company recorded unearned stock-based compensation cost totaling
$2.4 million which is being recognized over the vesting period of
the related options of three years. Amortization expense associated
with unearned stock compensation totaled $447,000 for 1999.
WARRANTS:
In connection with a joint marketing and development agreement,
dated March 28, 1997, for the ShowStation IP, 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 were
due to expire in March 1999 and were exercised on March 1, 1999.
The warrants were valued at approximately $40,000 on the date of
grant using the Black-Scholes model. As of December 31, 1999, the
Company had no warrants outstanding.
PREFERRED SHARE PURCHASE RIGHTS PLAN:
On July 15, 1998, pursuant to a Preferred Shares Rights Agreement
between Polycom, Inc. and BankBoston N.A., as Rights Agent, the
Company's Board of Directors declared a dividend of one right to
purchase one one-thousandth of a share of the Company's Series A
Preferred Stock for each outstanding share of Common Stock, par
value of $0.0005 per share, of the Company. The dividend was
payable on July 31, 1998 to stockholders of record as of the close
of business on that day. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share of
Series A Preferred at an exercise price of $90.00, subject to
adjustment. The Rights become exercisable (the Distribution Date)
upon the earlier of: (i) fifteen days following the first date a
public announcement by the Company or an Acquiring Person that
an Acquiring Person has become such (the Shares Acquisition
Date) and (ii) fifteen days (or such later date as may be
determined by the Board of Directors) following the commencement
of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in a
person or group becoming an Acquiring Person. A person or group
of affiliated or associated persons that beneficially owns, or
has the right to acquire beneficial ownership of, 20% or more of
the outstanding Common Shares is referred to as an "Acquiring
Person." The Rights will expire on the earliest of (i) July 15,
2008 (the Final Expiration Date) or (ii) redemption or exchange
of the Rights as described below.
Unless the Rights are earlier redeemed, in the event that a person
becomes an Acquiring Person (a Triggering Event), each holder of
a Right which has not theretofore been exercised (other than Rights
beneficially owned by the Acquiring Person or any affiliate of the
Acquiring Person, which will thereafter be void) will thereafter
have the right to receive, upon exercise, Common Shares having a
value equal to two times the Purchase Price. The Company may
instead substitute cash, assets or other securities for the Common
Shares for which the Rights would have been exercisable.
F-18
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Similarly, unless the Rights are earlier redeemed, in the event
that, after a Triggering Event, (i) the Company is acquired in a
merger or other business combination transaction, or (ii) 50% or
more of the Company's assets or earning power are sold (other than
in transactions in the ordinary course of business), proper
provision must be made so that each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by
the Acquiring Person or any affiliate of the Acquiring Person,
which will thereafter be void) will thereafter have the right to
receive, upon exercise, shares of common stock of the acquiring
company having a value equal to two times the Purchase Price.
At any time after a Triggering Event and prior to the acquisition
by any person or entity of beneficial ownership of 50% or more of
the Company's outstanding Common Shares, the Board of Directors of
the Company may exchange the Rights (other than Rights owned by the
Acquiring Person), in whole or in part, at an exchange ratio of one
Common Share per Right.
At any time on or prior to the close of business on the earlier of
(i) the Shares Acquisition Date and (ii) the Final Expiration Date
of the Rights, the Company may redeem the Rights in whole, but not
in part, at a price of $0.005 per Right.
11. 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 through 1999. Beginning with fiscal year 2000,
however, the Company will match 50% of the first 3% of compensation
employees contribute to the 401(k) Plan, up to a maximum of $500
per participating employee per year.
EMPLOYEE STOCK PURCHASE PLAN:
Under the Employee Qualified Stock Purchase Plan, the Company can
grant stock purchase rights to all eligible employees during
offering periods of up to a maximum of 24 months with purchase
dates approximately every six months (beginning each February and
August). The Company has reserved 1,000,000 shares of common stock
for issuance under the plan. Shares are purchased through
employees' payroll deductions, up to a maximum of 15% of employees'
compensation, at purchase prices equal to 85% of the lesser of the
fair market value of the Company's common stock at either the date
of the employee's entrance to the offering period or the purchase
date. No participant may purchase more than 1,500 shares or $25,000
worth of common stock in any one calendar year.
F-19
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES:
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1999 1998 1997
------------------ ---------------- ---------------
<S> <C> <C> <C>
CURRENT
U. S. Federal $ 20,460 $ 3,415 $ 171
Foreign 337 35 ---
State and local 817 893 ---
------------------ ---------------- ---------------
Total current $ 21,614 $ 4,343 $ 171
DEFERRED
U. S. Federal $ (6,538) $ (2,594) $ ---
Foreign (130) --- ---
State and local (1,330) --- ---
------------------ ---------------- ---------------
Total deferred $ (7,998) $ (2,594) $ ---
------------------ ---------------- ---------------
Income tax expense $ 13,616 $ 1,749 $ 171
================== ================ ===============
</TABLE>
The sources of income (loss) before the provision for income taxes
are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1999 1998 1997
------------------ ---------------- ---------------
<S> <C> <C> <C>
United States $ 49,765 $ 17,262 $ (13,924)
Foreign (6,796) 88 ---
------------------ ---------------- ---------------
Income (loss) before provision for income taxes $ 42,969 $ 17,350 $ (13,924)
================== ================ ===============
</TABLE>
The Company's tax provision differs from the provision computed
using statutory tax rates as follow (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
------------ ------------- --------------
<S> <C> <C> <C>
Federal tax at statutory rate $ 15,039 $5,778 $(4,931)
State taxes, net of federal benefit 1,719 1,007 (51)
Nondeductible expenses 1,603 83 117
Alternative Minimum Tax - - 38
Foreign losses at tax rates different than U.S. 2,586 - -
Change in valuation allowance (7,679) (3,863) 6,094
Current NOL and credit utilization (2,183) (1,256) (837)
Other 2,531 - (259)
------------ ------------- --------------
Tax provision $ 13,616 $1,749 $ 171
============ ============= ==============
</TABLE>
F-20
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to the
deferred tax assets are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ------------- ------------
<S> <C> <C> <C>
Fixed assets, principally due to differences in
depreciation $ 739 $ 1,998 $ 552
Other accrued liabilities 7,938 5,123 3,627
Capitalized research expenditures --- 246 334
Net operating loss carryforwards 1,681 2,553 4,746
Tax credit carryforwards 247 353 2,283
Other --- --- ---
Valuation allowance --- (7,679) (11,542)
--------------- ------------- ------------
Net deferred tax asset $ 10,605 $ 2,594 $ ---
=============== ============= ============
</TABLE>
The valuation allowance established in prior years was reversed in
1999 due to the Company's belief that the deferred tax assets will
more likely than not be realized.
As of December 31, 1999, the Company has tax net operating loss
carryforwards for tax purposes of approximately $4,799,000 and tax
credit carryforwards of $247,000. These net operating loss
carryforwards expire in the years 2007 through 2015 and the tax
credit carryforwards have an unlimited carryover. The future
utilization of the Company's net operating loss and credit
carryforwards are subject to a certain limitation due to changes in
ownership that occurred in 1998.
13. BUSINESS SEGMENT INFORMATION:
The Company operates in one business segment, named Communications,
and markets its products in the United States and in foreign
countries through resellers. Assets outside the United States are
insignificant.
The Company's net revenues are all denominated in U.S. dollars and
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1999 1998 1997
-------------- --------------- -------------
<S> <C> <C> <C>
United States $ 133,691 $ 89,217 $ 39,057
Canada 4,583 927 545
----------- ------------ ----------
North America 138,274 90,144 39,602
Europe, Middle East & Africa 38,891 15,578 5,446
Asia 18,029 8,138 4,148
Caribbean & Latin America 4,873 3,026 1,198
-------------- --------------- -------------
Total International 61,793 26,742 10,792
-------------- --------------- -------------
$ 200,067 $ 116,886 $ 50,394
============== =============== =============
</TABLE>
F-21
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The percentage of total net revenues for the Video Communications,
Voice Communications and Network Access product lines were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Video communications 63% 48% 11%
Voice communications 34% 48% 81%
Network access products 3% 4% 8%
--------------------------------------
Total net revenues 100% 100% 100%
======================================
</TABLE>
Lucent Technologies, Inc. accounted for 11%, 11% and 10% of net
revenue in 1999, 1998 and 1997, respectively.
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,
--------------------------------------
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Numerator - basic and diluted EPS
Net income (loss) $29,353 $ 15,601 $ (14,095)
======================================
Denominator - Basic EPS
Weighted average common stock outstanding 33,452 30,382 21,489
Shares subject to repurchase (916) (1,572) ---
--------------------------------------
Total Shares used in calculation of Basic EPS 32,536 28,810 21,489
--------------------------------------
Basic net income (loss) per share $ 0.90 $ 0.54 $ (0.66)
======================================
Denominator - Diluted EPS
Denominator - Basic EPS 32,536 28,810 21,489
Effect of Dilutive Securities:
Common stock options 2,795 2,694 ---
Shares subject to repurchase 916 1,572 ---
Convertible warrants and preferred 211 771 ---
--------------------------------------
Total Shares used in calculation of Diluted EPS 36,458 33,847 21,489
--------------------------------------
Diluted net income (loss) per share $ 0.81 $ 0.46 $ (0.66)
======================================
</TABLE>
Stock options to purchase 4,529,286 shares of common stock at
prices ranging from $0.08 to $9.00 and 5,809,094 shares of
preferred stock were outstanding at December 31, 1997 but were not
included in the computation of diluted net loss per share as they
were antidilutive.
Associated with the joint marketing and development agreement
concerning the ShowStation IP with Minnesota, Mining and
Manufacturing Company ("3M"), 3M was granted 2,000,000 warrants
to purchase common stock at $7.50 per share. These warrants were
antidilutive at December 31, 1997 and, therefore, were not
considered in the Diluted EPS figure.
F-22
<PAGE>
POLYCOM,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENT:
On September 3, 1997, VTEL Corporation (VTEL) filed a lawsuit in
the State District Court in Travis County, Texas against ViaVideo
Communications, Inc., a subsidiary of Polycom, and its founders
(who were formerly employed by VTEL). On May 27, 1998, VTEL amended
its suit to add Polycom as a defendant. In the lawsuit, VTEL
alleged breach of contract, breach of confidential relationship,
disclosure of proprietary information and related allegations.
ViaVideo, its founders and Polycom answered the suit, denying in
their entirety VTEL's allegations. On March 3, 2000, VTEL
voluntarily dismissed the allegations against Polycom and ViaVideo
with prejudice for no consideration.
F-23
<PAGE>
POLYCOM, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants, on the
Financial Statement Schedule S-2
Schedule II - Valuation and Qualifying Accounts. S-3
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENTS SCHEDULE
To the Board of Directors
of Polycom, Inc
Our audits of the consolidated financial statements referred to in our report
dated January 28, 2000, except for note 15, which is as of March 3, 2000,
appearing on page F-2 of this Annual Report on Form 10-K also included an audit
of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
January 28, 2000
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 Period
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for Doubtful Accounts $ 871 $ 433 $ --- $ 1,304
Provision for Obsolete Inventory $ 2,378 $ 4,958 $ (594) $ 6,742
Tax Valuation Allowance $ 7,679 $ --- $ (7,679) $ ---
Year ended December 31, 1998
Allowance for Doubtful Accounts $ 471 $ 400 $ --- $ 871
Provision for Obsolete Inventory $ 2,419 $ 2,799 $ (2,840) $ 2,378
Tax Valuation Allowance $ 11,542 $ --- $ (3,863) $ 7,679
Year ended December 31, 1997
Allowance for Doubtful Accounts $ 436 $ 30 $ (5) $ 471
Provision for Obsolete Inventory $ 1,074 $ 1,368 $ (23) $ 2,419
Tax Valuation Allowance $ 5,448 $ 6,094 $ --- $11,542
</TABLE>
S-3
<PAGE>
LEASE
BY AND BETWEEN
TRINET ESSENTIAL FACILITIES XXVI,
A MARYLAND CORPORATION
AS LANDLORD
AND
POLYCOM, INC.,
A DELAWARE CORPORATION
AS TENANT
NOVEMBER ____ , 1999
--------------------
MILPITAS, CALIFORNIA
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
PAGE
----
<S> <C>
ARTICLE 1 REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 2 LEASED PREMISES, TERM AND POSSESSION . . . . . . . . . . . . . . . . . . .3
2.1 DEMISE OF LEASED PREMISES . . . . . . . . . . . . . . . . . . . . . . .3
2.2 RIGHT TO USE OUTSIDE AREAS . . . . . . . . . . . . . . . . . . . . . .3
2.3 LEASE COMMENCEMENT DATE AND LEASE TERM . . . . . . . . . . . . . . . .3
2.4 DELIVERY OF POSSESSION; DELAY; EARLY ACCESS . . . . . . . . . . . . . .3
2.5 TENANT IMPROVEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.6 SURRENDER OF POSSESSION . . . . . . . . . . . . . . . . . . . . . . . .5
ARTICLE 3 RENT, LATE CHARGES AND SECURITY DEPOSITS . . . . . . . . . . . . . . . . .5
3.1 BASE MONTHLY RENT . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3.2 ADDITIONAL RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3.3 YEAR-END ADJUSTMENTS; AUDITS . . . . . . . . . . . . . . . . . . . . .6
3.4 LATE CHARGE, AND INTEREST ON RENT IN DEFAULT . . . . . . . . . . . . .7
3.5 PAYMENT OF RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.6 PREPAID RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.7 SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE 4 USE OF LEASED PREMISES AND OUTSIDE AREA . . . . . . . . . . . . . . . . .8
4.1 PERMITTED USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
4.2 GENERAL LIMITATIONS ON USE . . . . . . . . . . . . . . . . . . . . . .8
4.3 NOISE AND EMISSIONS . . . . . . . . . . . . . . . . . . . . . . . . . .9
4.4 TRASH DISPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
4.5 PARKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
4.6 SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
4.7 COMPLIANCE WITH LAWS AND PRIVATE RESTRICTIONS . . . . . . . . . . . . 10
4.8 COMPLIANCE WITH INSURANCE REQUIREMENTS . . . . . . . . . . . . . . . 10
4.9 LANDLORD'S RIGHT TO ENTER . . . . . . . . . . . . . . . . . . . . . . 10
4.10 USE OF OUTSIDE AREAS . . . . . . . . . . . . . . . . . . . . . . . . 10
4.11 ENVIRONMENTAL PROTECTION . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 5 REPAIRS, MAINTENANCE, SERVICES AND UTILITIES . . . . . . . . . . . . . . 12
5.1 REPAIR AND MAINTENANCE . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.3 SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.4 ENERGY AND RESOURCE CONSUMPTION . . . . . . . . . . . . . . . . . . . 14
5.5 LIMITATION OF LANDLORD'S LIABILITY . . . . . . . . . . . . . . . . . 14
ARTICLE 6 ALTERATIONS AND IMPROVEMENTS . . . . . . . . . . . . . . . . . . . . . . 14
6.1 BY TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2 OWNERSHIP OF IMPROVEMENTS . . . . . . . . . . . . . . . . . . . . . . 15
6.3 ALTERATIONS REQUIRED BY LAW . . . . . . . . . . . . . . . . . . . . . 15
6.4 LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 7 ASSIGNMENT AND SUBLETTING BY TENANT . . . . . . . . . . . . . . . . . . 15
7.1 BY TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 MERGER, REORGANIZATION, OR SALE OF ASSETS . . . . . . . . . . . . . . 16
7.3 LANDLORD'S ELECTION . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.4 CONDITIONS TO LANDLORD'S CONSENT . . . . . . . . . . . . . . . . . . 17
7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTALS DEFINED . . . . . . . . . 18
7.6 PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.7 GOOD FAITH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.8 EFFECT OF LANDLORD'S CONSENT . . . . . . . . . . . . . . . . . . . . 19
i.
<PAGE>
7.9 OPTIONS PERSONAL . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.10 TENANT'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE 8 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY . . . . . . . . . . . 19
8.1 LIMITATION ON LANDLORD'S LIABILITY AND RELEASE . . . . . . . . . . . 19
8.2 TENANT'S INDEMNIFICATION OF LANDLORD . . . . . . . . . . . . . . . . 20
ARTICLE 9 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.1 TENANT'S INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.2 LANDLORD'S INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . 21
9.3 MUTUAL WAIVER OF SUBROGATION . . . . . . . . . . . . . . . . . . . . 22
ARTICLE 10 DAMAGE TO LEASED PREMISES . . . . . . . . . . . . . . . . . . . . . . 22
10.1 LANDLORD'S DUTY TO RESTORE . . . . . . . . . . . . . . . . . . . . . 22
10.2 INSURANCE PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . 23
10.3 LANDLORD'S RIGHT TO TERMINATE . . . . . . . . . . . . . . . . . . . . 23
10.4 TENANT'S RIGHT TO TERMINATE . . . . . . . . . . . . . . . . . . . . . 23
10.5 TENANT'S WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.6 ABATEMENT OF RENT . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE 11 CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.1 TENANT'S RIGHT TO TERMINATE . . . . . . . . . . . . . . . . . . . . . 24
11.2 LANDLORD'S RIGHT TO TERMINATE . . . . . . . . . . . . . . . . . . . . 24
11.3 RESTORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.4 TEMPORARY TAKING . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.5 DIVISION OF CONDEMNATION AWARD . . . . . . . . . . . . . . . . . . . 25
11.6 ABATEMENT OF RENT . . . . . . . . . . . . . . . . . . . . . . . . . . 25
11.7 TAKING DEFINED . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE 12 DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . 25
12.1 EVENTS OF TENANT'S DEFAULT . . . . . . . . . . . . . . . . . . . . . 25
12.2 LANDLORD'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . 26
12.3 LANDLORD'S DEFAULT AND TENANT'S REMEDIES . . . . . . . . . . . . . . 27
12.4 LIMITATION OF TENANT'S RECOURSE . . . . . . . . . . . . . . . . . . . 27
12.5 TENANT'S WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE 13 GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 28
13.1 TAXES ON TENANT'S PROPERTY . . . . . . . . . . . . . . . . . . . . . 28
13.2 HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
13.3 SUBORDINATION TO MORTGAGES . . . . . . . . . . . . . . . . . . . . . 29
13.4 TENANT'S ATTORNMENT UPON FORECLOSURE . . . . . . . . . . . . . . . . 29
13.5 MORTGAGEE PROTECTION . . . . . . . . . . . . . . . . . . . . . . . . 29
13.6 ESTOPPEL CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . 29
13.7 TENANT'S FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . 30
13.8 TRANSFER BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . 30
13.9 FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
13.10 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
13.11 ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
13.12 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
13.13 GENERAL WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
13.14 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE 14 CORPORATE AUTHORITY BROKERS AND ENTIRE AGREEMENT . . . . . . . . . . . 34
14.1 CORPORATE AUTHORITY . . . . . . . . . . . . . . . . . . . . . . . . . 34
14.2 BROKERAGE COMMISSIONS . . . . . . . . . . . . . . . . . . . . . . . . 34
14.3 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 34
14.4 LANDLORD'S REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE 15 OPTIONS TO EXTEND . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE 16 TELEPHONE SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
ii.
<PAGE>
LEASE
THIS LEASE, dated November , 1999 for reference purposes only, is made by
and between TRINET ESSENTIAL FACILITIES XXVI, INC., a Maryland corporation
("Landlord") and POLYCOM, INC., a Delaware corporation ("Tenant"), to be
effective and binding upon the parties as of the date the last of the designated
signatories to this Lease shall have executed this Lease (the "Effective Date of
this Lease").
ARTICLE 1
REFERENCE
1.1 REFERENCES. All references in this Lease (subject to any further
clarifications contained in this Lease) to the following terms shall have the
following meaning or refer to the respective address, person, date, time period,
amount, percentage, calendar year or fiscal year as below set forth:
Tenant's Address for Notice: Polycom, Inc.
1565 Barber Lane
Milpitas, California 95035
Tenant's Representative: Tom Perkins
Landlord's Address for Notices: c/o TriNet Corporate Realty Trust,
Inc.
One Embarcadero Center
Suite 3300
San Francisco, CA 94111
Landlord's Representative: Asset Management
Phone Number: (415) 391-4330
Intended Commencement Date: December 1, 1999
Rent Commencement Date: Earlier of February 1, 2000 or
Substantial Completion of Tenant
Improvements pursuant to Paragraph
2.5.
Intended Term: Approximately seven (7) years
Lease Expiration Date: January 31, 2007, unless earlier
terminated by Landlord in accordance
with the terms of this Lease, or
extended by Tenant pursuant to Article
15.
Options to Renew: Two (2) option(s) to renew, each for a
term of five (5) years
First Month's Prepaid Rent: $159,494.40
Tenant's Security Deposit: $190,166.40
Late Charge Amount: Five Percent (5%) of the Delinquent
Amount
Tenant's Required Liability
Coverage: $3,000,000 Combined Single Limit
Tenant's Broker(s): Phil Mahoney and Greg Cary of Cornish
& Carey Commercial
Property: That certain real property situated in
the City of Milpitas, County of Santa
Clam, State of California, together
with all
1.
<PAGE>
buildings and Improvements thereon,
which real property is shown on the
Site Plan attached hereto as Exhibit
"A" and is commonly known as or
otherwise described as follows: 1565
Barber Lane, Milpitas, California.
Building: That certain building within the
Property in which the Leased Premises
are located, which building is shown
outlined on Exhibit "A" hereto (the
"Building"). The Building is commonly
known as or otherwise described as
follows: 1565 Barber Lane, Milpitas,
California.
Outside Areas: The "Outside Areas" shall mean all
areas within the Property which are
located outside the buildings, such as
pedestrian walkways, parking areas,
landscaped area, open areas and
enclosed trash disposal areas.
Leased Premises: All the interior space within the
Building, including stairwells,
connecting walkways, and atriums,
consisting of approximately 102,240
square feet and, for purposes of this
Lease, agreed to contain said number
of square feet.
Base Monthly Rent: The term "Base Monthly Rent" shall
mean the following:
$133,934.40 per month from the Rent
Commencement Date until January 31,
2001. On February 1, 2001, and on
every February 1 thereafter during the
Lease Term, including the First
Extension Period and the Second
Extension Period, as applicable, Base
Monthly Rent shall be increased 3.5%.
Use: Systems development, research and
administration, light manufacturing,
and general office in conformity with
the municipal zoning requirements of
the City of Milpitas, California.
Tenant's Project
Proportionate Share: 100%
Tenant's Building
Proportionate Share: 100%
Exhibits: The term "Exhibits" shall mean the
Exhibits of this Lease which are
described as follows:
Exhibit "A" - Site Plan showing the
Property and delineating the Building
in which the Leased Premises are
located.
Exhibit "B" - Floor Plan outlining the
Leased Premises
Exhibit "C" - HVAC Specifications
Exhibit "D" - Form of Tenant Estoppel
2.
<PAGE>
ARTICLE 2
LEASED PREMISES, TERM AND POSSESSION
2.1 DEMISE OF LEASED PREMISES. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord for the Lease Term and upon the terms and subject to
the conditions of this Lease, that certain interior space described in Article 1
as the Leased Premises, reserving and excepting to Landlord the right to fifty
percent (50%) of all assignment consideration and excess rentals as provided in
Article 7 below. Tenant's lease of the Leased Premises, together with the
appurtenant right to use the Outside Areas as described in Paragraph 2.2 below,
shall be conditioned upon and be subject to the continuing compliance by Tenant
with (i) all the terms and conditions of this Lease, (ii) all Laws governing the
use of the Leased Premises and the Property, (iii) all Private Restrictions,
easements and other matters now of public record respecting the use of the
Leased Premises and Property, and (iv) all reasonable rules and regulations from
time to time established by Landlord.
2.2 RIGHT TO USE OUTSIDE AREAS. As an appurtenant right to Tenant's right
to the use and occupancy of the Leased Premises, Tenant shall have the
exclusive right to use the Outside Areas in conjunction with its use of the
Leased Premises solely for the purposes for which they were designated and
intended and for no other purposes whatsoever. Tenant's right to so use the
Outside Areas shall be subject to the limitations on such use as set forth in
this Lease and shall terminate concurrently with any termination of this
Lease.
2.3 LEASE COMMENCEMENT DATE AND LEASE TERM. Subject to Paragraph 2.4
below, the term of this Lease shall begin, and the Lease Commencement Date
shall be deemed to have occurred, upon actual delivery of the Leased Premises
to Tenant pursuant to Paragraph 2.4 (the "Lease Commencement Date"). The term
of this Lease shall in all events end on the Lease Expiration Date (as set
forth in Article 1). The Lease Term shall be that period of time commencing
on the Lease Commencement Date and ending on the Lease Expiration Date (the
"Lease Term").
2.4 DELIVERY OF POSSESSION; DELAY; EARLY ACCESS.
(a) Landlord shall deliver to Tenant possession of the Leased Premises on
the Intended Commencement Date, and Tenant shall accept such delivery of the
Leased Premises, which acceptance shall constitute agreement by Tenant that the
Leased Premises are in the condition required by this Lease, except for any
repairs or replacements of the roof, the heating, ventilating and air
conditioning systems, or other mechanical systems that are required due to
failure (excluding normal maintenance) during the first ninety (90) days
following the Lease Commencement Date. Landlord agrees to deliver the Leased
Premises water-tight and to deliver in good working order all existing plumbing,
lighting, heating, ventilating and air conditioning systems within the Leased
Premises. Except (i) as provided in the immediately foregoing sentence and (ii)
for the existing furniture, wiring and other items located within the premises,
Tenant shall accept the Leased Premises in "as-is" condition." In addition,
Tenant may elect, by providing written notice to Landlord within two (2)
business days following the date of this Lease, to purchase such existing items
(furniture, wiring, etc.) of the Building from Landlord for a price of one
hundred twenty-five thousand dollars ($125,000) to be paid upon deliver)., of
possession of the Leased Premises. In the event that Tenant does not elect to
purchase such furniture, Landlord shall remove all such furniture from the
Leased Premises prior to the delivery of possession of the Leased Premises or
the commencement of construction of any new tenant improvements on the Leased
Premises. Landlord represents to Tenant that Landlord has not received any
written notification from any local, state or federal authority regarding any
violation of or non-compliance with any applicable law, code or regulation
related to the Leased Premises. Landlord shall transfer to Tenant, to the extent
possible and in Landlord's possession, any warranties or service contracts for
systems in the Premises that Tenant is responsible to maintain during the Lease
Term pursuant to this Lease. Except as otherwise provided in this Section 2.4(a)
and Section 2.4(b) and except for provision of the Allowance and Supplemental
Allowance pursuant to Paragraph 2,5, Landlord shall have no obligation to
improve, or pay for the improvement of, the Leased Premises.
(b) Landlord shall, at its sole cost, replace the heating, ventilating
and air conditioning systems servicing the Building in accordance with the
specifications attached hereto as Exhibit C. Such replacement shall be completed
no later than February 1, 2000.
3.
<PAGE>
(c) Notwithstanding Paragraph 2.4(a), if Landlord is unable to deliver
possession of the Leased Premises to Tenant in the agreed condition on or before
the Intended Commencement Date, Landlord shall not be in default under this
Lease, nor shall this Lease be void, voidable or cancelable by Tenant until the
lapse of ninety (90) days after the Intended Commencement Date (the "delivery
grace period"); however, the delivery grace period above set forth shall be
extended for such number of days as Landlord may be delayed in delivering
possession of the Leased Premises to Tenant by reason of Force Majeure or the
action or inaction of Tenant. If Landlord is unable to deliver possession of the
Leased Premises in the agreed condition to Tenant within the described delivery,
grace period (including any extension thereof by reason of Force Majeure or the
actions or inactions of Tenant), then Tenant's sole remedy shall be to terminate
this Lease, and in no event shall Landlord be liable in damages to Tenant for
such delay. Tenant may not terminate this Lease at any time after the date
Landlord notifies Tenant that the Leased Premises have been put into the agreed
condition and are available for deliver), to Tenant, unless Landlord's notice is
not given in good faith.
(d) Upon execution of this Lease, Tenant shall be permitted early access
to the Leased Premises for the purpose of fixturing, furniture placement, tenant
improvement construction and communication cabling within the Leased Premises.
Commencement of such access shall constitute delivery of possession to Tenant of
the Leased Premises and all provisions of this Lease, except Tenant's obligation
to pay rent pursuant to Article 3, shall be in effect from and after such
commencement of access.
2.5 TENANT IMPROVEMENTS.
(a) Landlord shall provide Tenant with an improvement allowance of one
minion twenty-two thousand four hundred dollars ($1,022,400) (the "Allowance").
The Allowance shall be used to reimburse Tenant for direct costs incurred by
Tenant in designing, constructing and installing typical, generic improvements
in the Leased Premises (the "Tenant Improvements"); provided, however, (i) that
no more than three hundred six thousand seven hundred twenty dollars ($306,720)
of the Allowance shall be used to reimburse Tenant for costs incurred in
installing communication cabling in the Leased Premises, and (ii) that the
Allowance shall not be used to reimburse Tenant for any costs incurred by Tenant
in connection with signage, furniture or moving or for any third party
consulting or contracting fees (except Tenant's architectural and design
charges). The Tenant Improvements shall be designed, constructed and installed
in accordance with plans and specification to be approved in advance by
Landlord, which approval shall not be unreasonably withheld or delayed, and in
accordance with all applicable laws, ordinances and regulations, and shall be
constructed by a general contractor that is licensed in the State of California
and approved in advance by Landlord, which approval shall not be unreasonably
withheld or delayed. Tenant Improvement work may commence upon the completion
and execution of all required documentation and receipt of all required
approvals and permits. In addition, if requested by Tenant on or before the Rent
Commencement Date, Landlord shall provide Tenant with a supplemental improvement
allowance of five hundred eleven thousand two hundred dollars ($511,200) (the
"Supplemental Allowance"). If Tenant does not request the Supplemental Allowance
on or before the Rent Commencement Date, Tenant shall have no further right to
receive the Supplemental Allowance. The Supplemental Allowance shall be in
addition to any rent and other charges payable under this Lease and shall bc
payable by Tenant in equal monthly installments of principal and interest
sufficient fully to amortize the Supplemental Allowance over the remainder of
the Lease Term at an interest rate of ten percent (10%) per annum. Landlord
shall pay to Tenant the Allowance and the Supplemental Allowance, if any, when
Tenant provides to Landlord receipts for all Tenant Improvement work and
evidence that all such work has been completed free of all mechanics and
materialmen's liens.
(b) For purposes of this Lease, "Substantial Completion" of tenant
improvements shall occur upon completion of such improvements to the Leased
Premises in accordance with the plans and specification to be approved in
advance by Landlord, which approval shall not be unreasonably withheld or
delayed, with the exception of any normal punch list items or work that does not
interfere with Tenant's intended use of the Leased Premises.
2.6 SURRENDER OF POSSESSION. Immediately prior to the expiration or upon
the sooner termination of this Lease, Tenant shall remove all of Tenant's
signs from the exterior of the Building and shall remove all of Tenant's
equipment, trade fixtures, furniture, supplies, wall decorations and other
personal property from within the Leased Premises, the Building and the
Outside Areas, and shall vacate and surrender the Leased Premises, the
Building, the Outside Areas and the Properly to Landlord in the same
condition, broom clean, as existed at the Lease
4.
<PAGE>
Commencement Date, reasonable wear and tear excepted and excluding damage by
condemnation, fire or other peril. Tenant shall repair all damage to the Leased
Premises, the exterior of the Building and the Outside Areas caused by Tenant's
removal of Tenant's property. Tenant shall patch and refinish, to Landlord's
reasonable satisfaction, all penetrations made by Tenant or its employees to the
floor, walls or ceiling of the Leased Premises, whether such penetrations were
made with Landlord's approval or not. Tenant shall repair or replace all stained
or damaged ceiling tiles, wall coverings and floor coverings to the reasonable
satisfaction of Landlord. Tenant shall repair all damage caused by Tenant to the
exterior surface of the Building and the paved surfaces of the Outside Areas
and, where necessary, replace or resurface same. Additionally, to the extent
that Landlord shall have notified Tenant in writing at the time the improvements
were completed that it desired to have certain improvements removed at the
expiration or sooner termination of the Lease, Tenant shall, upon the expiration
or sooner termination of the Lease, remove any such improvements constructed or
installed by Landlord or Tenant and repair all damage caused by such removal. If
the Leased Premises, the Building, the Outside Areas and the Property are not
surrendered to Landlord in the condition required by this paragraph at the
expiration or sooner termination of this Lease, Landlord may, at Tenants
expense, so remove Tenant's signs, property and/or improvements not so removed
and make such repairs and replacements not so made or hire, at Tenant's expense,
independent contractors to perform such work. Tenant shall be liable to Landlord
for all costs incurred by Landlord in returning the Leased Premises, the
Building and the Outside Areas to the required condition, together with interest
on all costs so incurred from the date paid by Landlord at the then maximum rate
of interest not prohibited or made usurious by law until paid. In addition to
Tenant's obligations set forth in Paragraph 13.2, Tenant shall pay to Landlord
the amount of all costs so incurred plus such interest thereon, within ten (10)
days of Landlord's billing Tenant for stone. Tenant shall indemnify Landlord
against loss or liability resulting from delay by Tenant in surrendering the
Leased Premises, including, without limitation, any claims made by any
succeeding Tenant or any losses to Landlord with respect to lost opportunities
to lease to succeeding tenants.
ARTICLE 3
RENT, LATE CHARGES AND SECURITY DEPOSITS
3.1 BASE MONTHLY RENT. Commencing on the Rent Commencement Date (as
determined pursuant to Article 2 above) and continuing throughout the Lease
Term, Tenant shall pay to Landlord, without prior demand therefor, in advance
on the first day of each calendar month, the amount set forth as "Base
Monthly Rent" in Article 1 (the "Base Monthly Rent").
3.2 ADDITIONAL RENT. Commencing on the Rent Commencement Date (as
determined pursuant Article 2 above) and continuing throughout the Lease
Term, in addition to the Base Monthly Rent and to the extent not required by
Landlord to be contracted for and paid directly by Tenant, Tenant shall pay
to Landlord as additional rent (the "Additional Rent") the following amounts:
(a) An amount equal to all Property Operating Expenses (as defined in
Article 13) incurred by Landlord. Payment shall be made by whichever of the
following methods (or combination of methods) is (are) from time to time
designated by Landlord:
(i) Landlord may forward invoices or bills for such expenses to
Tenant, and Tenant shall, no later than ten (10) days prior to the due date, pay
such invoices or bills and deliver satisfactory evidence of such payment to
Landlord, and/or
(ii) Landlord may bill to Tenant, on a periodic basis not more
frequently than monthly, the amount of such expenses (or group of expenses) as
paid or incurred by Landlord, and Tenant shall pay to Landlord the amount of
such expenses within ten days after receipt of a written bill therefor from
Landlord, and/or
(iii) Landlord may deliver to Tenant Landlord's reasonable
estimate of any given expense (such as Landlord's Insurance Costs or Real
Property Taxes), or group of expenses, which it anticipates will be paid or
recurred for the ensuing calendar or fiscal year, as Landlord may determine, and
Tenant shall pay to Landlord an amount equal to the estimated amount of such
expenses for such year in equal monthly installments during such year with the
installments of Base Monthly Rent.
5.
<PAGE>
Landlord reserves the right, to change from time to time the methods of billing
Tenant for any given expense or group of expenses or the periodic basis on which
such expenses are billed.
(b) Landlord's share of the consideration received by Tenant upon certain
assignments and sublettings as required by Article 7.
(c) Any legal fees and costs that Tenant is obligated to pay or reimburse
to Landlord pursuant to Article 13; and
(d) Any other charges or reimbursements due Landlord from Tenant pursuant
to the terms of this Lease.
Notwithstanding the foregoing, Landlord may elect by written notice to Tenant to
have Tenant pay Real Property Taxes or any portion thereof directly to the
applicable taxing authority, in which case Tenant shall make such payments and
deliver satisfactory evidence of payment to Landlord no later than ten (10) days
before such Real Property Taxes become delinquent.
3.3 YEAR-END ADJUSTMENTS; AUDITS. If Landlord shall have elected to bill
Tenant for the Property Operating Expenses (or any group of such expenses) on
an estimated basis in accordance with the provisions of Paragraph 3.2(a)(iii)
above, Landlord shall furnish to Tenant within three months following the end
of the applicable calendar or fiscal year, as the case may be, a statement
setting forth (i) the amount of such expenses paid or recurred during the
just ended calendar or fiscal year, as appropriate, and (ii) the amount that
Tenant has paid to Landlord for credit against such expenses for such period.
If Tenant shall have paid more than its obligation for such expenses for the
stated period, Landlord shall, at its election, either (i) credit the amount
of such overpayment toward the next ensuing payment or payments of Additional
Rent that would otherwise be due or (ii) refund in cash to Tenant the amount
of such overpayment. If such year-end statement shall show that Tenant did
not pay its obligation for such expenses in full, then Tenant shall pay to
Landlord the amount of such underpayment within ten (10) days from Landlord's
bluing of same to Tenant. The provisions of this Paragraph shall survive the
expiration or sooner termination of this Lease. In the event Tenant objects
in writing to any such year-end statement or other billing for Additional
Rent within sixty (60) days after receipt of such statement or billing, then
Tenant shall have the right, during the six (6) month period following
delivery, of such statement or billing, at Tenant's sole cost, to review in
Landlord's offices Landlord's records relevant to such statement or billing.
Such review shall be carried out only by a "Big Five" accounting firm (i.e.,
PricewaterhouseCoopers, KMPG Peat Marwick, Ernst & Young, Deloitte & Touche
and Arthur Andersen or their successors) and not by any other person, and
shall be subject to Landlord's reasonable audit procedures. No person
conducting such an audit shall be compensated on a "contingency" or other
incentive basis. If, as of the date sixty (60) days after Tenant's receipt of
such year-end statement or billing, Tenant shall not have objected thereto in
writing, or if, during the six (6) month period following delivery of such
statement or billing, Tenant shall not have carried out a review of
Landlord's records, then such year-end statement or billing, as the case may
be, shall be final and binding upon Landlord and Tenant, and Tenant shall
have no further right to object to such statement or billing. If Tenant
timely delivers a written objection to a year-end statement or billing and,
within such six (6) month period, Tenant conducts an audit and delivers to
Landlord a written statement specifying objections to such annual statement,
then Tenant and Landlord shall meet to attempt to resolve such objection
within ten (10) days after delivery of the objection statement. If such
objection is not resolved within such tell (10) day period, then either party
shall have the right, at any time within sixty (60) days after the expiration
of such ten (10) day period, to require that the dispute be submitted to
binding arbitration under the rules of the American Arbitration Association.
If neither Landlord nor Tenant commences an arbitration proceeding within
such sixty (60) day period, then the year-end statement or other billing in
question shall be final and binding on Landlord and Tenant. Notwithstanding
that any such dispute remains unresolved, Tenant shall be obligated to pay
Landlord all amounts payable in accordance with this Paragraph 3 (including
any disputed amount). The audit and arbitration procedures set forth in this
Paragraph 3.3 shall be Tenant's exclusive remedy with respect to the
calculation of the amount of Tenant's obligations under Paragraph 3.2.
3.4 LATE CHARGE, AND INTEREST ON RENT IN DEFAULT.. Tenant acknowledges
that the late payment by Tenant of any monthly installment of Base Monthly
Rent or any Additional Rent will cause Landlord to incur certain costs and
expenses not contemplated under this Lease, the exact amounts of which are
extremely difficult or impractical to fix. Such costs and expenses will
include without limitation, administration and collection costs and
processing and
6.
<PAGE>
accounting expenses. Therefore, if any installment of Base Monthly Rent is not
received by Landlord from Tenant within ten (10) calendar days after the same
becomes due, Tenant shall immediately pay to Landlord a late charge in amount
equal to the amount set forth in Article 1 as the "Late Charge Amount," and if
any Additional Rent is not received by Landlord within ten (10) calendar days
after same becomes due, Tenant shall immediately pay to Landlord a late charge
in an amount equal to 5% of the Additional Rent not so paid. Landlord and Tenant
agree that this late charge represents a reasonable estimate of such costs and
expenses and is fair compensation to Landlord for the anticipated loss Landlord
would suffer by reason of Tenant's failure to make timely payment. In no event
shall this provision for a late charge be deemed to grant to Tenant a grace
period or extension of time within which to pay any rental installment or
prevent Landlord from exercising any right or remedy available to Landlord upon
Tenant's failure to pay each renal installment due under this Lease when due,
including the right to terminate this Lease. If any rent remains delinquent for
a period in excess of ten (10) calendar days, then, in addition to such late
charge, Tenant shall pay to Landlord interest on any rent that is not so paid
from the date due until paid at the then maximum rate of interest not prohibited
or made usurious by Law.
3.5 PAYMENT OF RENT. Except as specifically provided otherwise in this
Lease, all rent shall be paid in lawful money of the United States, without
any abatement, reduction or offset for any reason whatsoever, to Landlord at
such address as Landlord may designate from time to time. Tenant's obligation
to pay Base Monthly Rent and all Additional Rent shall be appropriately
prorated at the commencement and expiration of the Lease Term. The failure by
Tenant to pay any Additional Rent as required pursuant to this Lease when due
shall be treated the same as a failure by Tenant to pay Base Monthly, and
Landlord shall have the same rights and remedies against Tenant as Landlord
would have had Tenant failed to pay the Base Monthly Rent when due.
3.6 PREPAID RENT. Tenant shall, upon execution of this Lease, pay to
Landlord the amount set forth in Article 1 as "First Month's Prepaid Rent" as
prepayment of rent for credit against the first payment of Base Monthly Rent
due hereunder.
3.7 SECURITY DEPOSIT. Upon Tenant's execution of this Lease, Tenant shall
deposit with Landlord the amount set forth in Article I as the "Security
Deposit" as security for the performance by Tenant of the terms of this Lease
to be performed by Tenant, and not as prepayment of rent. Landlord may apply
such portion or portions of the Security Deposit as are reasonably necessary
for the following purposes: (i) to remedy any default by Tenant in the
payment of Base Monthly Rent or Additional Rent or a late charge or interest
on defaulted rent, or any other monetary payment obligation of Tenant under
this Lease; (ii) to repair damage to the Leased Premises, the Building or the
Outside Areas caused or permitted to occur by Tenant; (iii)to clean and
restore and repair the Leased Premises, the Building or the Outside Areas
following their surrender to Landlord if not surrendered in the condition
required pursuant to the provisions of Article 2, and (iv) to remedy any
other default of Tenant to the extent permitted by Law including, without
limitation, paying in full on Tenant's behalf any sums claimed by materialmen
or contractors of Tenant to be owing to them by Tenant for work done or
improvements made at Tenant's request to the Leased Premises. In this regard,
Tenant hereby waives any restriction on the uses to which the Security
Deposit may be applied as contained in Section 1950.7(c) of the California
Civil Code and/or any successor statute. In the event the Security Deposit or
any portion thereof is so used, Tenant shall pay to Landlord, promptly upon
demand, an amount in cash sufficient to restore the Security Deposit to the
full original san. If Tenant fails to promptly restore the Security Deposit
and if Tenant shall have paid to Landlord any sums as "Last Month's Prepaid
Rent," Landlord may, in addition to any other remedy Landlord may have under
this Lease, reduce the amount of Tenant's Last Month's Prepaid Rent by
transferring all or portions of such Last Month's Prepaid Rent to Tenant's
Security Deposit until such Security Deposit is restored to the amount set
forth in Article 1. Landlord shall not be deemed a trustee of the Security
Deposit. Landlord may use the Security Deposit in Landlord's ordinary
business and shall not be required to segregate it from Landlord's general
accounts. Tenant shall not be entitled to any interest on the Security
Deposit. If Landlord transfers the Building or the Property during the Lease
Term, Landlord may pay the Security Deposit to any subsequent owner in
conformity with the provisions of Section 1950.7 of the California Civil Code
and/or any successor statute, in which event the transferring landlord shall
be released from all liability for the return of the Security Deposit. Tenant
specifically grants to Landlord (and Tenant hereby waives the provisions of
California Civil Code Section 1950.7 to the contrary) a period of ninety (90)
days following a surrender of the Leased Premises by Tenant to Landlord
within which to inspect the Leased Premises, make required restorations and
repairs, receive and verify workmen's billings therefor, and prepare a final
accounting with respect to the Security Deposit. In no event shall the
Security Deposit or any portion thereof, be considered prepaid rent.
7.
<PAGE>
ARTICLE 4
USE OF LEASED PREMISES AND OUTSIDE AREA
4.1 PERMITTED USE. Tenant shall be entitled to use the Leased Premises
solely for the "Permitted Use" as set forth in Article 1 and for no other
purpose whatsoever. Tenant shall continuously and without interruption use
the Leased Premises for such purpose for the entire Lease Term, and
additionally if the Leased Premises are partially or fully sublet, then the
Leased Premises shall be considered in use. Any discontinuance of such use
for a period of twelve (12) consecutive months shall be, at Landlord's
election, a default by Tenant under the terms of this Lease. Tenant shall
have the right to use the Outside Areas in conjunction with its Permitted Use
of the Leased Premises solely for the purposes for which they were designed
and intended and for no other purposes whatsoever.
4.2 GENERAL LIMITATIONS ON USE. Tenant shall not do or permit anything to
be done in or about the Leased Premises, the Building, the Outside Areas or
the Property which does or could (i) jeopardize the structural integrity of
the Building or (ii) cause damage to any part of the Leased Premises, the
Building, the Outside Areas or the Property. Tenant shall not operate any
equipment within the Leased Premises which does or could (i) injure, vibrate
or shake the Leased Premises or the Building, (ii) damage, overload or impair
the efficient operation of any electrical, plumbing, heating, ventilating or
air conditioning systems within or sentencing the Leased Premises or the
Building, or (iii) damage or impair the efficient operation of the sprinkler
system (if any) within or servicing the Leased Premises or the Building.
Tenant shall not install any equipment or antennas on or make any
penetrations of the exterior walls or roof of the Building. Tenant shall not
affix any equipment to or make any penetrations or cuts in the floor,
ceiling, walls or roof of the Leased Premises. Tenant shall not place any
loads upon the floors, walls, ceiling or roof systems which could endanger
the structural integrity of the Building or damage its floors, foundations or
supporting structural components. Tenant shall not place any explosive,
flammable or harmful fluids or other waste materials in the drainage systems
of the Leased Premises, the Building, the Outside Areas or the Property.
Tenant shall not drain or discharge any fluids in the landscaped areas or
across the paved areas of the Property. Tenant shall not use any of the
Outside Areas for the storage of its materials, supplies, inventory or
equipment and all such materials, supplies, inventory or equipment shall at
all times be stored within the Leased Premises. Tenant shall not commit nor
permit to be committed any waste in or about the Leased Premises, the
Building, the Outside Areas or the Property.
4.3 NOISE AND EMISSIONS. All noise generated by Tenant in its use of the
Leased Premises shall be confined or muffled so that it does not interfere
with the businesses of or annoy the occupants and/or users of adjacent
properties. All dust, fumes, odors and other emissions generated by Tenant's
use of the Leased Premises shall be sufficiently dissipated in accordance
with sound environmental practice and exhausted from the Leased Premises in
such a manner so as not to interfere with the businesses of or annoy the
occupants and/or users of adjacent properties, or cause any damage to the
Leased Premises, the Building, the Outside Areas or the Property or any
component part thereof or the property of adjacent property owners.
4.4 TRASH DISPOSAL. Tenant shall provide trash bills or other adequate
garbage disposal facilities within the trash enclosure areas provided or
permitted by Landlord outside the Leased Premises sufficient for the interim
disposal of all of its trash, garbage and waste. All such trash, garbage and
waste temporarily stored in such areas shall be stored in such a manner so
that it is not visible from outside of such areas, and Tenant shall cause
such trash, garbage and waste to be regularly removed from the Property in a
clean, safe and neat condition free and clear of all trash, garbage, waste
and/or boxes, pallets and containers containing same at all times.
4.5 PARKING. Tenant shall have the exclusive right to park in three
hundred forty-nine (349) parking spaces on the legal parcel on which the
Building is located as shown on the site plan attached as Exhibit A hereto
and in no other location on the Property. Tenant shall not, at any time, park
or permit to be parked any recreational vehicles, inoperative vehicles or
equipment in the Outside Areas or on any portion of the Property. Tenant
agrees to assume responsibility for compliance by its employees and invitees
with the parking provisions contained herein. If Tenant or its employees park
any vehicle within the Property in violation of these provisions, then
Landlord may, upon prior written notice to Tenant giving Tenant one (1) day
(or any applicable statutory, notice period, if longer than one (1) day) to
remove such vehicle(s), in addition to any other remedies Landlord may have
under this Lease, charge
8.
<PAGE>
Tenant, as Additional Rent, and Tenant agrees to pay, as Additional Rent, One
Hundred Dollars ($100) per day for each day or partial day that each such
vehicle is so parked within the Property.
4.6 SIGNS. Tenant shall not place or install on or within any portion of
the Leased Premises, the exterior of the Building, the Outside Areas or the
Property any sign, advertisement, banner, placard, or picture which is
visible from the exterior of the Leased Premises provided, however, that
Tenant shall have the right, and Landlord shall use reasonable efforts to
assist Tenant, in exercising the right, to place one (1) sign on the front
entry building facade and one (1) monument sign on the Property, as long as
such signs comply in all respects with all applicable laws, ordinances and
regulations. Tenant shall not place or install on or within any portion of
the Leased Premises, the exterior of the Building, the Outside Areas or the
Property any business identification sign which is visible from the exterior
of the Leased Premises until Landlord shall have approved in writing (which
approval shall not be unreasonably withheld or delayed) the location, size,
content, design, method of attachment and material to be used in the making
of such sign; PROVIDED, HOWEVER, that so long as such signs are normal and
customary business directional or identification signs within the Building,
Tenant shall not be required to obtain Landlord's approval. Any sign, once
approved by Landlord, shall be installed at Tenant's sole cost and expense
and only in strict compliance with Landlord's approval, using a person
approved by Landlord to install same. Landlord may remove any signs (which
have not been approved in writing by Landlord), advertisements, banners,
placards or pictures so placed by Tenant on or within the Leased Premises,
the exterior of the Building, the Outside Areas or the Property and charge to
Tenant the cost of such removal, together with any costs incurred by Landlord
to repair any damage caused thereby, including any cost incurred to restore
the surface (upon which such sign was so affixed) to its original condition.
Tenant shall remove all of Tenant's signs, repair any damage caused thereby,
and restore the surface upon which the sign was affixed to its original
condition, all to Landlord's reasonable satisfaction, upon the termination of
this Lease.
4.7 COMPLIANCE WITH LAWS AND PRIVATE RESTRICTIONS. Tenant shall abide by
and shall promptly observe and comply with, at its sole cost and expense, all
Laws and Private Restrictions respecting the use and occupancy of the Leased
Premises, the Building, the Outside Areas or the Property including, without
limitation, all Laws governing the use and/or disposal of hazardous materials
(Tenant's obligations with respect to hazardous materials being governed by
Section 4.11), and shall defend with competent counsel, indemnify and hold
Landlord harmless from any claims, damages or liability resulting from
Tenant's failure to so abide, observe, or comply. Tenant's obligations
hereunder shall survive the expiration or sooner termination of this Lease.
4.8 COMPLIANCE WITH INSURANCE REQUIREMENTS. With respect to any insurance
policies required or permitted to be carried by Landlord in accordance with
the provision of this Lease, copies of which have been or will, upon Tenant's
written request therefor, be provided to Tenant, Tenant shall not conduct nor
permit any other person to conduct any activities nor keep, store or use (or
allow any other person to keep, store or use) any item or thing within the
Leased Premises, the Building, the Outside Areas or the Property which (i) is
prohibited under the terms of any such policies, (ii) could result in the
termination of the coverage afforded under any of such policies, (iii) could
give to the insurance carrier the right to cancel any of such policies, or
(iv) could cause an increase in the rates (over standard rates) charged for
the coverage afforded under any of such policies. Tenant shall comply with
all requirements of any insurance company, insurance underwriter, or Board of
Fire Underwriters which are necessary to maintain, at standard rates, the
insurance coverages carried by either Landlord or Tenant pursuant to this
Lease.
4.9 LANDLORD'S RIGHT TO ENTER. Landlord and its agents shall have the
right to enter the Leased Premises during normal business hours after giving
Tenant twenty-four (24) hours notice and subject to Tenant's reasonable
security measures for the purpose of (i) inspecting the same; (ii) showing
the Leased Premises to prospective purchasers, mortgagees or tenants; (iii)
making necessary alterations, additions or repairs; and (iv) performing any
of Tenant's obligations when Tenant has failed to do so. Landlord shall have
the right to enter the Leased Premises during normal business hours (or as
otherwise agreed), subject to Tenant's reasonable security measures, for
purposes of supplying any maintenance or services agreed to be supplied by
Landlord. Landlord shall have the right to enter the Outside Areas during
normal business hours for purposes of (i) inspecting the exterior of the
Building and the Outside Areas; (ii) posting notices of nonresponsibility
(and for such purposes Tenant shall provide Landlord at least thirty days'
prior written notice of any work to be performed on the Leased Premises); and
(iii) supplying any services to be provided by Landlord. Any entry into the
Leased Premises or the Outside Areas obtained by Landlord in accordance with
this paragraph shall not under any circumstances be construed or deemed
9.
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to be a forcible or unlawful entry into, or a detainer of, the Leased Premises,
or an eviction, actual or constructive of Tenant from the Leased Premises or any
portion thereof, but only so long as Landlord, in making any such entry, uses
reasonable efforts to minimize interference with Tenant's business operations.
4.10 USE OF OUTSIDE AREAS. Tenant, in its use of the Outside Areas, shall
at all times keep the Outside Areas in a safe condition free and clear of all
materials, equipment, debris, trash (except within existing enclosed trash
areas), inoperable vehicles, and other items which are not specifically
permitted by Landlord to be stored or located thereon by Tenant. If, in the
opinion of Landlord, unauthorized persons are using any of the Outside Areas
by reason of, or under claim of, the express or implied authority or consent
of Tenant, then Tenant, upon demand of Landlord, shall restrain, to the
fullest extent then allowed by Law, such unauthorized use, and shall initiate
such appropriate proceedings as may be required to so restrain such use.
4.11 ENVIRONMENTAL PROTECTION. Tenant's obligations under this Section
4.11 shall survive the expiration or termination of this Lease.
(a) As used herein, the term "Hazardous Materials" shall mean any toxic
or hazardous substance, material or waste or any pollutant or infectious or
radioactive material, including but not bruited to those substances, materials
or wastes regulated now or in the future under any of the following statutes or
regulations and any and all of those substances included within the definitions
of "hazardous substances," "hazardous materials," "hazardous waste," "hazardous
chemical substance or mixture," "imminently hazardous chemical substance or
mixture," "toxic substances," "hazardous air pollutant," "toxic pollutant," or
"solid waste" in the (a) Comprehensive Environmental Response, Compensation and
Liability Act of 1990 ("CERCLA" or "Superfund"), as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"), 42 U.S.C. Section 9601 ET
SEQ., (b) Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C.
Section 6901 ET SEQ., (c) Federal Water Pollution Control Act ("FSPCA"), 33
U.S.C. Section 1251 ET SEQ., (d) Cleat Air Act ("CAA"), 42 U.S.C. Section 7401
ET SEQ., (e) Toxic Substances Control Act ("TSCA"), 14 U.S.C. Section 2601 ET
SEQ., (f) Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, ET
SEQ., (g) Carpenter-Presley-Tanner Hazardous Substance Account Act California
Superfund"), Cal. Health & Safety Code 25300 ET SEQ., (h) California Hazardous
Waste Control Act, Cal. Health & Safety code Section 25100 ET SEQ., (i)
Porter-Cologne Water Quality Control Act ("Porter-Cologne Act"), Cal. Water Code
Section 13000 ET SEQ., (j) Hazardous Waste Disposal Land Use Law, Cal. Health &
Safety codes Section 25220 ET SEQ., (k) Safe Drinking Water and Toxic
Enforcement Act of 1986 ("Proposition 65"), Cal. Health & Safety code Section
25249.5 ET SEQ., (1) Hazardous Substances Underground Storage Tank Law, Cal.
Health & Safely code Section 25280 ET SEQ., (m) Air Resources Law, Cal. Health &
Safety Code Section 39000 ET SEQ., and (n) regulations promulgated pursuant to
said laws or any replacement thereof, or as similar terms are defined in the
federal, state and local laws, statutes, regulations, orders or rules. Hazardous
Materials shall also mean any and all other biohazardous wastes and substances,
materials and wastes which are, or in the future become, regulated under
applicable Laws for the protection of health or the environment, or which are
classified as hazardous or toxic substances, materials or wastes, pollutants or
contaminants, as defined, listed or regulated by any federal, state or local
law, regulation or order or by common law decision, including, without
limitation, (i) trichloroethylene, tetrachloroethylene, perchloroethylene and
other chlorinated solvents, (ii) any petroleum products or fractions thereof,
(iii) asbestos, (iv) polychlorinated biphenyls, (v) flammable explosives, (vi)
urea formaldehyde, (vii) radioactive materials and waste, and (viii) materials
and wastes that are harmful to or may threaten human health, ecology or the
environment.
(b) Notwithstanding anything to the contrary in this Lease, Tenant, at
its sole cost, shall comply with all Laws relating to the storage, use and
disposal of Hazardous Materials; PROVIDED, HOWEVER, that Tenant shall not be
responsible for contamination of the Leased Premises by Hazardous Materials
existing as of the date the Leased Premises are delivered to Tenant (whether
before or after the Scheduled Delivery Date) unless caused by Tenant, nor shall
Tenant be responsible for contamination of the Leased Premises caused by
Hazardous Materials which migrate to the Property through groundwater
contamination originating from off-site sources. Tenant shall not store, use or
dispose of any Hazardous Materials except for those Hazardous Materials listed
in a Hazardous Materials management plan ("HMMP") which Tenant shall deliver to
Landlord upon execution of this Lease and update at least annually with Landlord
("Permitted Materials") which may be used, stored and disposed of provided (i)
such Permitted Materials are used, stored, transported, and disposed of in
strict compliance with applicable laws, (ii) such Permitted Materials shall he
limited to the materials listed on and may he used only in the quantifies
specified in the HMMP, and (iii) Tenant shall provide Landlord with copies of
all material safety data sheets and other documentation required under
applicable Laws in connection with Tenant's use of Permitted Materials as and
when
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such documentation is provided to any regulatory authority having jurisdiction,
in no event shall Tenant cause or permit to be discharged into the plumbing or
sewage system of the Building or onto the land underlying or adjacent to the
Building any Hazardous Materials. Tenant shall be solely responsible for and
shall defend, indemnify, and hold Landlord and its agents harmless from and
against all claims, costs and liabilities, including attorneys' fees and costs,
arising out of or in connection with Tenant's storage, use and/or disposal of
Hazardous Materials. If the presence of Hazardous Materials on the Leased
Premises caused or permitted by Tenant results in contamination or deterioration
of water or soil, then Tenant shall promptly take any and all action necessary
to clean up such contamination, but the foregoing shall in no event be deemed to
constitute permission by Landlord to allow the presence of such Hazardous
Materials. At any time prior to the expiration of the Lease Term if Tenant has a
reasonable basis to suspect that there has been any release or the presence of
Hazardous Materials in the ground or ground water on the Premises which did not
exist upon commencement of the Lease Term, Tenant shall have the right to
conduct appropriate tests of water and soil and to deliver to Landlord the
results of such tests to demonstrate that no contamination in excess of
permitted levels has occurred as a result of Tenant's use of the Leased
Premises. Tenant shall further be solely responsible for, and shall defend,
indemnify, and hold Landlord and its agents harmless from and against all
claims, costs and liabilities, including attorneys' fees and costs, arising out
of or in connection with any removal, cleanup and restoration work and materials
required hereunder to return the Leased Premises and any other property of
whatever nature to their condition existing prior to the appearance of the
Hazardous Materials stored, used and/or disposed of by Tenant.
(c) Upon termination or expiration of the Lease, Tenant at its sole
expense shall cause all Hazardous Materials placed in or about the Leased
Premises, the Building and/or the Property by Tenant; its agents, contractors,
or invitees, and all installations (whether interior or exterior) made by or on
behalf of Tenant relating to the storage, use, disposal or transportation of
Hazardous Materials to be removed from the property and transported for use,
storage or disposal in accordance and compliance with all Laws and other
requirements respecting Hazardous Materials used or permitted to be used by
Tenant. Tenant shall apply for and shall obtain from all appropriate regulatory
authorities (including any applicable fire department or regional water quality
control board) all permits, approvals and clearances necessary for the closure
of the Property and shall take all other actions as may be required to complete
the closure of the Building and the Property. In addition, prior to vacating the
Premises, Tenant shall undertake and submit to Landlord an environmental site
assessment from all environmental consulting company reasonably acceptable to
Landlord which site assessment shall evidence Tenant's compliance with this
Paragraph 4.11.
(d) At any time prior to expiration of the Lease term, subject to
reasonable prior notice (not less than forty-eight (48) hours) and Tenant's
reasonable security requirements and provided such activities do not
unreasonably interfere wilt the conduct of Tenant's business at the Leased
Premises, Landlord shall have the right to enter in and upon the Property,
Building and Leased Premises in order to conduct appropriate tests of water and
soil to determine whether levels of any Hazardous Materials in excess of legally
permissible levels has occurred as a result of Tenant's use thereof. Landlord
shall furnish copies of all such test results and reports to Tenant and, at
Tenant's option and cost, shall permit split sampling for testing and analysis
by Tenant. Such testing shall be at Tenant's expense if Landlord has a
reasonable basis for suspecting and confirms the presence of Hazardous Materials
in the soil or surface or ground water in, on, under, or about the Property, the
Building or the Leased Premises, which has been caused by or resulted from the
activities of Tenant, its agents, contractors, or invitees.
(e) Landlord may voluntarily cooperate in a reasonable manner with the
efforts of all governmental agencies in reducing actual or potential
environmental damage. Tenant shall not be entitled to terminate this Lease or to
any reduction in or abatement of rent by reason of such compliance or
cooperation. Tenant agrees at all times to cooperate fully with the requirements
and recommendations of governmental agencies regulating, or otherwise involved
in, the protection of the environment.
ARTICLE 5
REPAIRS, MAINTENANCE, SERVICES AND UTILITIES
5.1 REPAIR AND MAINTENANCE. Except in the case of damage to or destruction of
the Leased Premises, the Building, the Outside Areas or the Property caused by
an act of God or other peril, in which case the provisions of
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Article 10 shall control, the parties shall have the following obligations and
responsibilities with respect to the repair and maintenance of the Leased
Premises, the Building, the Outside Areas, and the Property.
(a) Tenant's Obligations. Tenant shall, at all times during the Lease
Term and at its sole cost and expense, regularly clean and continuously keep and
maintain in good order, condition and repair the Leased Premises and every part
thereof including, without limiting the generality of the foregoing, (i) all
interior walls, floors and ceilings, (ii) all windows, doors and skylights,
(iii) all electrical wiring, conduits, conductors and fixtures, (iv) all
plumbing, pipes, sinks, toilets, faucets and drains, (v) all lighting fixtures,
bulbs and lamps and all heating, ventilating and air conditioning equipment, and
(vi) all entranceways to the Leased Premises. Tenant, if requested to do so by
Landlord, shall hire, at Tenant's sole cost and expense, a licensed heating,
ventilating and air conditioning contractor to regularly and periodically (not
less frequently than every three months) inspect and perform required
maintenance on the heating, ventilating and air conditioning equipment and
systems serving the Leased Premises, or alternatively, Landlord may, at its
election, contract in its own name for such regular and periodic inspections of
and maintenance on such heating, ventilating and air conditioning equipment and
systems and charge to Tenant, as Additional Rent, the cost thereof. Tenant, if
requested to do so by Landlord, shall hire, at Tenant's sole cost and expense, a
licensed roofing contractor to regularly and periodically (not less frequently
than every three months) inspect and perform required maintenance on the roof of
the Leased Premises, or alternatively, Landlord may, at its election, contract
in its own name for such regular and periodic inspections of and maintenance on
the roof and charge to Tenant, as Additional Rent, the cost thereof. Tenant
shall, at all times during the Lease Term, keep in a clean and safe condition
the Outside Areas. Tenant shall regularly and periodically sweep and clean the
driveways and parking areas. Tenant shall, at its sole cost and expense, repair
all damage to the Leased Premises, the Building, the Outside Areas or the
Property caused by the activities of Tenant, its employees, invitees or
contractors promptly following written notice from Landlord to so repair such
damages. If Tenant shall fail to perform the required maintenance or fail to
make repairs required of it pursuant to this paragraph within a reasonable
period of time following notice from Landlord to do so, then Landlord may, at
its election and without waiving any other remedy it may otherwise have under
this Lease or at law, perform such maintenance or make such repairs and charge
to Tenant, as Additional Rent, the costs so incurred by Landlord for same. All
glass within or a part of the Leased Premises, both interior and exterior, is at
the sole risk of Tenant and any broken glass shall promptly be replaced by
Tenant at Tenant's expense with glass of the same kind, size and quality.
(b) Landlord's Obligation. Landlord shall, at all times during the Lease
Term, at its sole cost and expense and without right of reimbursement from
Tenant, maintain in good condition and repair the foundation, roof structure,
load-bearing and exterior walls of the Building
5.2 UTILITIES. Tenant shall arrange at its sole cost and expense and in
its own name, for the supply of gas and electricity to the Leased Premises.
In the event that such services are not separately metered, Tenant shall, at
its sole expense, cause such meters to be installed. Landlord shall maintain
the water meter(s) in its own name; provided, however, that if at any time
during the Lease Term Landlord shall require Tenant to put the water service
in Tenant's name, Tenant shall do so at Tenant's sole cost. Tenant shall be
responsible for determining if the local supplier of water, gas and
electricity can supply the needs of Tenant and whether or not the existing
water, gas and electrical distribution systems within the Building and the
Leased Premises are adequate for Tenant's needs. Tenant shall be responsible
for determining If the existing sanitary and storm sewer systems now
servicing the Leased Premises and the Properly are adequate for Tenant's
needs. Tenant shall pay all charges for water, gas, electricity and storm and
sanitary sewer services as so supplied to the Leased Premises, irrespective
of whether or not the services are maintained in Landlord's or Tenant's name.
5.3 SECURITY. Tenant acknowledges that Landlord has not undertaken any
duty whatsoever to provide security for the Leased Premises, the Building,
the Outside Areas or the Property and, accordingly, Landlord is not
responsible for the security of same or the protection of Tenant's property
or Tenant's employees, invitees or contractors. To the extent Tenant
determines that such security or protection services are advisable or
necessary, Tenant shall arrange for and pay the costs of providing same.
5.4 ENERGY AND RESOURCE CONSUMPTION. Landlord may voluntarily cooperate in
a reasonable matter with the efforts of governmental agencies and/or utility
suppliers in reducing energy or other resource consumption within the
Property. Tenant shall not be entitled to terminate this Lease or to any
reduction in or abatement of rent
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by reason of such compliance or cooperation. Tenant agrees at all times to
cooperate fully with Landlord and to abide by all reasonable rules established
by Landlord (i) in order to maximize the efficient operation of the electrical,
heating, ventilating and air conditioning systems and all other energy or other
resource consumption systems with the Properly and/or (ii) in order to comply
with the requirements and recommendations of utility suppliers and governmental
agencies regulating the consumption of energy and/or other resources.
5.5 LIMITATION OF LANDLORD'S LIABILITY. Landlord shall not be liable to
Tenant for injury to Tenant, its employees, agents, invitees or contractors,
damage to Tenant's property, or loss of Tenant's business or profits, nor
shall Tenant be entitled to terminate this Lease or to any reduction in or
abatement of rent by reason of (i) Landlord's failure to provide security
services or systems within the Property for the protection of the Leased
Premises, the Building or the Outside Areas, or the protection of Tenant's
property or Tenant's employees, invitees, agents or contractors, or (ii)
Landlord's failure to perform any maintenance or repairs to the Leased
Premises, the Building, the Outside Areas or the Property until Tenant shall
have first notified Landlord, in writing, of the need for such maintenance or
repairs, and then only after Landlord shall have had a reasonable period of
time following its receipt of such notice within which to perform such
maintenance or repairs, or (iii) any failure, interruption, rationing or
other curtailment in the supply of water, electric current, gas or other
utility service to the Leased Premises, the Building, the Outside Areas or
the Property from whatever cause (other than Landlord's active negligence or
willful misconduct), or (iv) the unauthorized intrusion or entry into the
Leased Premises by third parties (other than Landlord).
ARTICLE 6
ALTERATIONS AND IMPROVEMENTS
6.1 BY TENANT. Tenant shall not make any alterations to or modifications
of the Leased Premises or construct any improvements within the Leased
Premises until Landlord shall have first approved, in writing, the plans and
specifications therefor, which approval shall not be unreasonably withheld.
Without limiting the generality of the foregoing, Tenant acknowledges that it
shall be reasonable for Landlord to withhold its consent to any modification,
alteration or improvement if, in Landlord's reasonable judgment, such
modification, alteration or improvement would adversely affect the structure
of the Building, any of the Building's systems, the appearance of the
Building or the value or utility of the Building or the Property. All such
modifications, alterations or improvements, once so approved, shall be made,
constructed or installed by Tenant at Tenant's expense (including all permit
fees and governmental charges related thereto), using a licensed contractor
first approved by Landlord, in substantial compliance with the
Landlord-approved plans and specifications therefor. All work undertaken by
Tenant shall be done in accordance with all Laws and in a good and
workmanlike matter using new materials of good quality. Tenant shall not
commence the making of any such modifications or alterations or the
construction of any such improvements until (i) all required governmental
approvals and permits shall have been obtained, (ii) all requirements
regarding insurance imposed by this Lease have been satisfied, (iii) Tenant
shall have given Landlord at lease five (5) business days prior written
notice of its intention to commence such work so that Landlord may post and
the notices of non-responsibility, and (iv) if requested by Landlord, Tenant
shall have obtained contingent liability and broad form builder's risk
insurance in pal amount satisfactory to Landlord in its reasonable discretion
to cover any perils relating to the proposed work not covered by insurance
carried by Tenant pursuant to Article 9. In no event shall Tenant make any
modification, alterations or improvements whatsoever to the Outside Areas or
the exterior or structural components of the Building including, without
limitation, any cuts or penetrations in the floor, roof or exterior walls of
the Leased Premises. As used in this Article, the term "modifications,
alterations and/or improvements" shall include, without limitation, the
installation of additional electrical outlets, overhead lighting fixtures,
drains, sinks, partitions, doorways, or the like. Notwithstanding the
foregoing, Tenant, without Landlord's prior written consent (but subject it
the other terms and conditions of this Article 6), shall be permitted to make
alterations to the Premises which do not affect the structure of the Building
or the Premises, do not affect the plumbing, electrical, mechanical or other
systems of the Building and do not affect the appearance of the Premises
viewed from the exterior, provided that: (a) such alterations do not exceed
$25,000 individually or $100,000 in the aggregate, (b) Tenant shall timely
provide Landlord the notice required pursuant to Paragraph 4.9 above, (c)
Tenant shall notify Landlord in writing within thirty (30) days of completion
of the alteration and deliver to Landlord a set of the plans and
specifications therefor, either "as built" or marked to show construction
changes made, and (d) Tenant shall, upon Landlord's request, remove the
alteration at the termination of the Lease and restore the Leased Premises to
their condition prior to such alteration.
13.
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6.2 OWNERSHIP OF IMPROVEMENTS. All modifications, alterations and
improvements made or added to the Leased Premises by Tenant (other than
Tenant's inventory, equipment, movable furniture, wall decorations and trade
fixtures) shall be deemed real property and a part of the Leased Premises,
but shall remain the property of Tenant during the Lease. Any such
modifications, alterations or improvements, once completed, shall not be
altered or removed from the Leased Premises during the Lease Term without
Landlord's written approval first obtained in accordance with the provisions
of Paragraph 6.1 above. At the expiration or sooner termination of this
Lease, all such modifications, alterations and improvements other than
Tenant's inventory, equipment, movable furniture, wall decorations and trade
fixtures, shall automatically become the property of Landlord and shall be
surrendered to Landlord as part of the Leased Premises as required pursuant
to Article 2, unless Landlord shall require Tenant to remove any of such
modifications, alterations or improvements in accordance with the provisions
of Article 2, in which case Tenant shall so remove same. Landlord shall have
no obligations to reimburse Tenant for all or any portion of the cost or
value of any such modifications, alterations or improvements so surrendered
to Landlord. All modifications, alterations or improvements which are
installed or constructed on or attached to the Leased Premises by Landlord
and/or at Landlord's expense shall be deemed real property and a part of the
Leased Premises and shall be property of Landlord. All lighting, plumbing,
electrical, heating, ventilating and air conditioning fixtures, partitioning,
window coverings, wall coverings and floor coverings installed by Tenant
shall be deemed improvements to the Leased Premises and not trade fixtures of
Tenant.
6.3 ALTERATIONS REQUIRED BY LAW. Tenant shall make all modifications,
alterations and improvements to the Leased Premises, at its sole cost, that
are required by any Law because of (i) Tenant's use or occupancy of the
Leased Premises, the Building, the Outside Areas or the Property, (ii)
Tenant's application for any permit or governmental approval, or (iii)
Tenant's making of any modifications, alterations or improvements to or
within the Leased Premises. If Landlord shall, at any time during the Lease
Term, be required by any governmental authority to make any modifications,
alterations or improvements to the Building or the Property, the cost
incurred by Landlord in making such modifications, alterations or
improvements, including interest at a rate equal to the greater of (a) 12%,
or (b) the sum of that rate quoted by Wells Fargo Bank, N.T. & S.A. from time
to time as its prime rate, plus two percent (2%) ("Wells Prime Plus Two"),
shall be amortized by Landlord over the useful life of such modifications,
alterations or improvements, as determined in accordance with generally
accepted accounting principles, and the monthly amortized cost of such
modifications, alterations and improvements as so amortized shall be
considered a Property Maintenance Cost.
6.4 LIENS. Tenant shall keep the Property and every part thereof free from
any lien, and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant, its agents, employees
or contractors relating to rim Property. If any such claim of lien is
recorded against Tenant's interest in this Lease, the Property or any part
thereof, Tenant shall bond against, discharge or otherwise cause such lien to
be entirely released within ten days after the same has been recorded.
Tenant's failure to do so shall be conclusively deemed a material default
under the terms of this Lease.
ARTICLE 7
ASSIGNMENT AND SUBLETTING BY TENANT
7.1 BY TENANT. Tenant shall not sublet the Leased Premises or any portion
thereof or assign its interest in this Lease, whether voluntarily or by
operation of Law, without Landlord's prior written consent which shall not be
unreasonably withheld; provided, however, that Landlord's consent shall not
be required for Tenant to sublet the Leased Premises or any portion thereof
or to assign its interest in this Lease to any wholly owned subsidiary of
Tenant as long as Tenant promptly provides Landlord with written notice of
any such sublet or assignment. Any attempted subletting or assignment without
Landlord's prior written consent, at Landlord's election, shall constitute a
default by Tenant under the terms of this Lease. The acceptance of rent by
Landlord from any person or entity other than Tenant, or the acceptance of
rent by Landlord from Tenant with knowledge of a violation of the provisions
of this paragraph, shall not be deemed to be a waiver by Landlord of any
provision of this Article or this Lease or to be a consent to any subletting
by Tenant or any assignment of Tenant's interest in this Lease. Without
limiting the circumstances in which it may be reasonable for Landlord to
withhold its consent to an assignment or subletting, Landlord and Tenant
acknowledge that it shall be reasonable for Landlord to withhold its consent
in the following instances:
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(a) in Landlord's reasonable judgment, the use of the Premises by the
proposed assignee or sublessee would entail any alterations which would lessen
the value of the leasehold improvements in the Premises or would require
increased services by Landlord;
(b) in Landlord's reasonable judgment, the financial worth of the
proposed assignee does not meet the credit standards applied by Landlord;
(c) the proposed assignee or sublessee (or any of its affiliates) has
been in material default under a lease, has been in litigation with a previous
landlord, or in the ten years prior to the assignment or sublease has riled for
bankruptcy protection, has been the subject of an involuntary bankruptcy, or has
been adjudged insolvent;
(d) Landlord has experienced a previous default by or is in litigation
with the proposed assignee or sublessee;
(e) in Landlord's reasonable judgment, the Premises, or the relevant part
thereof, will be used in a manner that will violate any negative covenant as to
use contained in this Lease;
(f) the use of the Premises by the proposed assignee or sublessee will
violate any applicable law, ordinance or regulation;
(g) the proposed assignment or sublease fails to include all of the terms
and provisions required to be included therein pursuant to this Article 7;
(h) Tenant is in default of a monetary obligation or material
non-monetary obligation of Tenant under this Lease (after the giving of notice
where notice is required and the expiration of applicable cure periods), and
such default is susceptible of being cured but has not been cured by Tenant, or
Tenant has defaulted under this Lease on three or more occasions during the 12
months preceding the date that Tenant shall request consent; or
(i) in the case of a subletting of less than the entire Premises, if the
subletting would result in the division of the Building into more than two
tenant spaces or would require improvements to be made outside of the Premises.
7.2 MERGER, REORGANIZATION, OR SALE OF ASSETS. Any dissolution, merger,
consolidation, recapitalization or other reorganization of Tenant, or the
sale or other transfer in the aggregate over the Lease Term of a controlling
percentage of the capital stock of Tenant (excluding transfers of stock in a
public company where stock is traded over a national exchange or Nasdaq), or
the sale or transfer of all or a substantial portion of the assets of Tenant,
shall be deemed a voluntary assignment of Tenant's interest in this Lease;
provided that, a merger, consolidation, recapitalization, reorganization or
sale of assets shall not require Landlord's consent hereunder if (i) Tenant's
tangible net worth (determined in accordance with generally accepted
accounting principles) immediately after such transaction is not less than
Tenant's tangible net worth immediately prior to such transaction, (ii) in
the event of a merger, the surviving entity assumes all obligations of Tenant
under this Lease, and (iii) in the event of a sale of assets or stock of
Tenant, the parent entity, if required by Landlord, assumes in writing all
obligations of Tenant under this Lease. The phrase "controlling percentage"
means the ownership of and the right to vote stock possessing more than fifty
percent of the total combined voting power of all classes of Tenant's capital
stock issued, outstanding and entitled to vote for the election of directors.
If Tenant is a partnership, a withdrawal or change, voluntary, involuntary or
by operation of Law, of any general partner, or the dissolution of the
partnership, shall be deemed a voluntary assignment of Tenant's interest in
this Lease.
7.3 LANDLORD'S ELECTION. If Tenant shall desire to assign its interest
under the Lease or to sublet the Leased Premises, Tenant must first notify
Landlord, in writing, of its intent to so assign or sublet, at least thirty
(30) days in advance of the date it intends to so assign its interest in this
Lease or sublet the Leased Premises but not sooner than one hundred eighty
days in advance of such date, specifying in detail the terms of such proposed
assignment or subletting, including the name of the proposed assignee or
sublessee, the properly assignee's or sublessee's intended use of the Leased
Premises, current financial statements (including a balance sheet, income
statement and statement of cash flow, all prepared in accordance with
generally accepted accounting principles) of such proposed assignee or
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sublessee, the form of documents to be used in effectuating such assignment or
subletting and such other information as Landlord may reasonably request.
Landlord shall have a period of ten (10) business days following receipt of such
notice and the required information within which to do one of the following: (i)
consent to such requested assignment or subletting subject to Tenant's
compliance with the conditions set forth in Paragraph 7.4 below, or (ii) refuse
to so consent to such requested assignment or subletting, provided that such
consent shall not be unreasonably refused, or (iii) in the event the portion of
the Leased Premises that is the subject of the proposed assignment or subletting
is fifty percent (50%) or more (including all) of the Leased Premises, terminate
this Lease as to such portion. During such ten (10) business day period, Tenant
covenants and agrees to supply to Landlord, promptly upon request, all necessary
or relevant information which Landlord may reasonably request respecting such
proposed assignment or subletting and/or the proposed assignee or sublessee.
7.4 CONDITIONS TO LANDLORD'S CONSENT. If Landlord elects to consent, or
shall have been ordered to so consent by a court of competent jurisdiction,
to such requested assignment or subletting, such consent shall be expressly
conditioned upon the occurrence of each of the conditions below set forth,
and any purported assignment or subletting made or ordered prior to the full
and complete satisfaction of each of the following conditions shall be void
and, at the election of Landlord, which election may be exercised at any time
following such a purported assignment or subletting but prior to the
satisfaction of each of the stated conditions, shall constitute a material
default by Tenant under this Lease until cured by satisfying in full each
such condition by the assignee or sublessee. The conditions are as follows:
(a) Landlord having approved in form and substance the assignment or
sublease agreement and any ancillary documents, which approval shall not be
unreasonably withheld by Landlord if the requirements of this Article 7 are
otherwise complied with.
(b) Each such sublessee or assignee having agreed, in writing
satisfactory to Landlord and its counsel and for the benefit of Landlord, to
assume, to be bound by, and to perform the obligations of this Lease to be
performed by Tenant which relate to space being subleased.
(c) Tenant having fully and completely performed all of its obligations
under the terms of this Lease through and including the date of such assignment
or subletting.
(d) Tenant having reimbursed to Landlord all reasonable costs and
reasonable attorneys' fees incurred by Landlord in conjunction with the
processing and documentation of any such requested subletting or assignment.
(e) Tenant having delivered to Landlord a complete and fully-executed
duplicate original of such sublease agreement or assignment agreement (as
applicable) and all related agreements.
(f) Except in the case of (i) an assignment or sublease to a company
which controls, is controlled by, or under common control with Tenant, (ii) an
assignment in connection with a merger or sale of assets, or (iii) a transfer of
a controlling percentage of the capital stock of Tenant, Tenant having paid, or
having agreed in writing to pay as to future payments, to Landlord fifty percent
(50%) of all assignment consideration or excess rentals to be paid to Tenant or
to any other on Tenant's behalf or for Tenant's benefit for such assignment or
subletting as follows:
(i) If Tenant assigns its interest under this Lease and if all or
a portion of the consideration for such assignment is to be paid by the assignee
at the time of the assignment, that Tenant shall have paid to Landlord and
Landlord shall have received an amount equal to fifty percent (50%) of the
assignment consideration so paid or to be paid (whichever is the greater) at the
time of the assignment by the assignee; or
(ii) If Tenant assigns its interest under this Lease and if Tenant
is to receive all or a portion of the consideration for such assignment in
future installments, that Tenant and Tenant's assignee shall have entered into a
written agreement with and for the benefit of Landlord satisfactory to Landlord
and its counsel whereby Tenant and Tenant's assignee jointly agree to pay to
Landlord an amount equal to fifty percent (50%) of all such future assignment
consideration installments to be paid by such assignee as and when such
assignment consideration is so paid.
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(iii) If Tenant subleases the Leased Premises, that Tenant and
Tenant's sublessee shall have entered into a written agreement with and for the
benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and
Tenant's sublessee jointly agree to pay to Landlord fifty percent (50%) of all
excess rentals to be paid by such sublessee as and when such excess rentals are
so paid.
7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTALS DEFINED. For purposes of
this Article, including any amendment to this Article by way of addendum or
other writing, the term "assignment consideration" shall mean all
consideration to be paid by the assignee to Tenant or to any other party on
Tenant's behalf or for Tenant's benefit as consideration for such assignment,
after deduction of any leasing commissions paid by Tenant, but without
deduction for any other costs or expenses (including, without limitation,
tenant improvements, capital improvements, building upgrades, permit fees,
attorneys' fees, and other consultants' fees) incurred by Tenant in
connection with such assignment, and the term "excess rentals" shall mean all
consideration to be paid by the sublessee to Tenant or to any other party on
Tenant's behalf or for Tenant's benefit for the sublease of the Leased
Premises in excess of the rent due to Landlord under the terms of this Lease
for the same period, after deduction for any leasing commissions paid by
Tenant, but without deduction for any other costs or expenses (including,
without limitation, tenant improvements, capital improvements, building
upgrades, permit fees, attorneys' fees, and other consultants' fees) incurred
by Tenant in connection with such sublease. Tenant agrees that the potion of
any assignment consideration and/or excess rentals arising from any
assignment or subletting by Tenant which is to be paid to Landlord pursuant
to this Article now is and shall then be the properly of Landlord and not the
property of Tenant.
7.6 PAYMENTS. All payments required by this Article to be made to Landlord
shall be made in cash in full as and when they become due. At the time
Tenant, Tenant's assignee or sublessee makes each such payment to Landlord,
Tenant or Tenant's assignee or sublessee, as the case may be, shall deliver
to Landlord an itemized statement in reasonable detail showing the method by
which the amount due Landlord was calculated and certified by the party
making such payment as line and correct.
7.7 GOOD FAITH. The rights granted to Tenant by this Article are granted
in consideration of Tenant's express covenant that all pertinent allocations
which are made by Tenant between the rental value of the Leased Premises and
the value of any of Tenant's personal property which may be conveyed or
leased generally concurrently with and which may reasonably be considered a
part of the same transaction as the permitted assignment or subletting shall
be made fairly, honestly and in good faith. If Tenant shall breach this
covenant, Landlord may immediately declare Tenant to be in default under the
terms of this Lease and terminate this Lease and/or exercise any other rights
and remedies Landlord would have under the terms of this Lease in the case of
a material default by Tenant under this Lease.
7.8 EFFECT OF LANDLORD'S CONSENT. No subletting or assignment, even with
the consent of Landlord, shall relieve Tenant of its personal and primary
obligation to pay rent and to perform all of the other obligations to be
performed by Tenant hereunder. Consent by Landlord to one or more assignments
of Tenant's interest in this Lease or to one or more sublettings of the
Leased Premises shall not be deemed to be a consent to any subsequent
assignment or subletting. If Landlord shall have been ordered by a court of
competent jurisdiction to consent to a requested assignment or subletting, or
such an assignment or subletting shall have been ordered by a court of
competent jurisdiction over the objection of Landlord, such assignment or
subletting shall not be binding between the assignee (or sublessee) and
Landlord until such time as all conditions set forth in Paragraph 7.4 above
have been fully satisfied (to the extent not then satisfied) by the assignee
or sublessee, including, without limitation, the payment to Landlord of all
agreed assignment considerations and/or excess rentals then due Landlord.
7.9 OPTIONS PERSONAL. If Landlord consents to an assignment or subletting
hereunder and this Lease contains any renewal options, expansion options,
rights of first refusal, rights of first negotiation or any other rights or
options pertaining to additional space in the Building or the Property, such
rights and/or options shall not run to the assignee or subtenant, it being
agreed by the parties hereto that any such rights and options are personal to
the original Tenant named herein and may not be transferred. Notwithstanding
the foregoing, such rights and options shall be transferable and run to the
assignee or subtenant in connection with any of the following: (i) an
assignment or sublease to a company which controls, is controlled by, or
under common control with Tenant, (ii) an assignment
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in connection with a merger or sale of assets, or (iii) a transfer of a
controlling percentage of the capital stock of Tenant.
7.10 TENANT'S REMEDIES. Notwithstanding any contrary provision of law,
including California Civil Code section 1995.310, Tenant shall have no right,
and Tenant hereby waives and relinquishes any right, to cancel or terminate
this Lease in the event Landlord is determined to have unreasonably withheld
or delayed its consent to a proposed Transfer.
ARTICLE 8
LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY
8.1 LIMITATION ON LANDLORD'S LIABILITY AND RELEASE. Landlord shall not be
liable to Tenant for, and Tenant hereby releases Landlord and its partners,
principals, members, officers, agents, employees, lenders, attorneys, and
consultants from, any and all liability, whether in contract, tort or on any
other basis, for any injury to or any damage sustained by Tenant, Tenant's
agents, employees, contractors or invitees, any damage to Tenant's property,
or any loss to Tenant's business, loss of Tenant's profits or other financial
loss of Tenant resulting from or attributable to the condition of, the
management of, the repair or maintenance of, the protection of, the supply of
services or utilities to, the damage in or destruction of the Leased
Premises, the Building, the Properly or the Outside Areas, including without
limitation (i) the failure, interruption, rationing or other curtailment or
cessation in the supply of electricity, water, gas or other utility service
to the Property, the Building or the Leased Premises; (ii) the vandalism or
forcible entry into the Building or the Leased Premises; (iii) the
penetration of water into or onto any portion of the Leased Premises; (ix,)
the failure to provide security and/or adequate lighting in or about the
Property, the Building or the Leased Premises, (v) the existence of any
design or construction defects within the Property, the Building or the
Leased Premises; (vi) the failure of any mechanical systems to function
properly (such as the HVAC systems); (vii) the blockage of access to any
portion of the Property, the Building or the Leased Promises, except that
Tenant does not so release Landlord from such liability to the extent such
damage was proximately caused by Landlord's or its agent's or employee's
active negligence, willful misconduct; or Landlord's failure to perform an
obligation expressly undertaken pursuant to this Lease after a reasonable
period of time shall have lapsed following receipt of written notice from
Tenant to so perform such obligation. In this regard, Tenant acknowledges
that it is fully apprised of the provisions of Law relating to releases, and
particularly to those provisions contained in Section 1542 of the California
Civil Code which reads as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
Notwithstanding such statutory provision, and for the purpose of implementing a
full and complete release and discharge, Tenant hereby (i) waives the benefit of
such statutory provision and (ii) acknowledges that, subject to the exceptions
specifically set forth herein, the release and discharge set forth in this
paragraph is a full and complete settlement and release and discharge of all
claims and is intended to include in its effect, without limitation, all claims
which Tenant, as of the date hereof, does not know of or suspect to exist in its
favor.
8.2 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant shall defend with
competent counsel satisfactory to Landlord any claims made or legal actions
filed or threatened against Landlord with respect to the violation of any
Law, or the death, bodily injury, personal injury, property damage, or
interference with contractual or property rights suffered by any third part),
occurring within the Leased Premises or resulting from Tenant's use or
occupancy of the Leased Premises, the Building or the Outside Areas, or
resulting from Tenant's activities in or about the Leased Premises, the
Building, the Outside Areas or the Property, and Tenant shall indemnify and
hold Landlord, Landlord's partners, principals, members, employees, agents
and contractors harmless from any loss liability, penalties, or expense
whatsoever (including any loss attributable to vacant space which otherwise
would have been leased, but for such activities) resulting therefrom, except
to the extent proximately caused by the active negligence or willful
misconduct of Landlord or its agents or employees. This indemnity agreement
shall survive the expiration of this Lease.
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ARTICLE 9
INSURANCE
9.1 Tenant's Insurance. Tenant shall maintain insurance complying with all
of the following:
(a) Tenant shall procure, pay for and keep in full force and effect, at
all times during the Lease Term, the following:
(i) Comprehensive general liability insurance insuring Tenant
against liability for personal injury, bodily injury, death and damage to
property occurring within the Leased Premises, or resulting from Tenant's use or
occupancy of the Leased Premises, the Building, the Outside Areas or the
Property, or resulting from Tenant's activities in or about the Leased Premises
or the Property, with coverage in all amount equal to Tenant's Required
Liability Coverage (as set forth in Article 1), which insurance shall contain a
"broad form liability" endorsement insuring Tenant's performance of Tenant's
obligations to indemnify Landlord as contained in this Lease.
(ii) Fire and property damage insurance in so-called "fire and
extended coverage" form insuring Tenant against loss from physical damage to
Tenant's personal property, inventory, trade fixtures and improvements within
the Leased Premises with coverage for the full actual replacement cost thereof;
(iii) Plate glass insurance, at actual replacement cost;
(iv) Pressure vessel insurance, if applicable;
(v) Product liability insurance (including, without limitation, if
food and/or beverages are distributed, sold and/or consumed within the Leased
Premises, to the extent obtainable, coverage for liability arising out of the
distribution, sale, use or consumption of food and/or beverages (including
alcoholic beverages, if applicable) at the Leased Premises for not less than
Tenant's Required Liability Coverage (as set forth in Article 1);
(vi) Workers' compensation insurance and any other employee
benefit insurance sufficient to comply with all laws; and
(vii) With respect to making of alterations or the construction of
improvements or the like undertaken by Tenant, contingent liability and
builder's risk insurance, in an amount and with coverage reasonably satisfactory
to Landlord.
(b) Each policy of liability insurance required to be carried by Tenant
pursuant to this paragraph or actually carried by Tenant with respect to the
Leased Premises or the Property: (i) shall, except with respect to insurance
required by subparagraph (a)(vi) above, name Landlord, and such others as are
designated by Landlord, as additional insureds; (ii) shall be primary insurance
providing that the insurer shall be liable for the full amount of the loss, up
to and including the total amount of liability set forth in the declaration of
coverage, without the right of contribution from or prior payment by any other
insurance coverage of Landlord; (iii) shall be in a form reasonably satisfactory
to Landlord; (iv) shall be carried with companies reasonably acceptable to
Landlord with Best's ratings of at least A and XI; (v) shall provide that such
policy shall not be subject to cancellation, lapse or change except after at
least thirty days prior written notice to Landlord, and (vi) shall contain a
so-called "severability" or "cross liability" endorsement. Each policy of
property insurance maintained by Tenant with respect to the Leased Premises or
the Property or any property therein (i) shall provide that such policy shall
not be subject to cancellation, lapse or change except after at least thirty
days prior written notice to Landlord and (ii) shall contain a waiver and/or a
permission to waive by the insurer of any right of subrogation against Landlord,
its partners, principals, members, officers, employees, agents and contractors,
which might arise by reason of any payment under such policy or by reason of any
act or omission of Landlord, its partners, principals, members, officers,
employees, agents and contractors.
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(c) Prior to the time Tenant or any of its contractors enters the Leased
Premises, Tenant shall deliver to Landlord, with respect to each policy of
insurance required to be carried by Tenant pursuant to this Article, a copy of
such policy (appropriately authenticated by the insurer as having been issued,
premium paid) or a certificate of the insurer certifying in form satisfactory to
Landlord that a policy has been issued, premium paid, providing the coverage
required by this Paragraph and containing the provisions specified herein. With
respect to each renewal or replacement of an), such insurance the requirements
of this Paragraph must be complied with not less than thirty days prior to the
expiration or cancellation of the policies being renewed or replaced. Landlord
may, at any time and from time to time, inspect and/or copy any and all
insurance policies required to be carried by Tenant pursuant to this Article. If
Landlord's Lender, insurance broker, advisor or counsel reasonably determines at
any time that the amount of coverage set forth in Paragraph 9. l(a) for any
policy of insurance Tenant is required to carry pursuant to this Article is not
adequate, then Tenant shall increase the amount of coverage for such insurance
to such greater amount as Landlord's Lender, insurance broker, advisor or
counsel reasonably deems adequate.
9.2 LANDLORD'S INSURANCE. With respect to insurance maintained by Landlord:
(a) Landlord shall maintain, as the minimum coverage required of it by
this Lease, fire and property damage insurance in so-called "fire and extended
coverage" form insuring Landlord (and such others as Landlord may designate)
against loss from physical damage to the Building with coverage of not less than
one hundred percent (100%) of the full actual replacement cost thereof and
against loss of rents for a period of not less than six months. Such fire and
properly damage insurance, at Landlord's election but without any requirements
on Landlord's behalf to do so, (i) may be written in so-called "all risk" forth,
excluding only those perils commonly excluded from such coverage by Landlord's
then property damage insurer; (ii) may provide coverage for physical damage to
the improvements so insured for up to the entire full actual replacement cost
thereof; (iii)may be endorsed to cover loss or damage caused by any additional
perils against which Landlord may elect to insure, including earthquake and/or
flood; and/or (iv) may provide coverage for loss of rents for a period of up to
twelve months. Landlord shall not be required to cause such insurance to cover
any of Tenant's personal property, inventory, and trade fixtures, or any
modifications, alterations or improvements made or constructed by Tenant to or
within the Leased Premises. Landlord shall use commercially reasonable efforts
to obtain such insurance at competitive rates.
(b) Landlord shall maintain comprehensive general liability insurance
insuring Landlord (and such others as are designated by Landlord) against
liability for personal injury, bodily injury, death, and damage to property
occurring in, on or about, or resulting from the use or occupancy of the
Property, or any portion thereof, with combined single limit coverage of at
least Three Minion Dollars ($3,000,000). Landlord may carry such greater
coverage as Landlord or Landlord's Lender, insurance broker, advisor or counsel
may from time to time determine is reasonably necessary for the adequate
protection of Landlord and the Property.
(c) Landlord may maintain any other insurance which in the opinion of its
insurance broker, advisor or legal counsel is prudent in carry under the given
circumstances, provided such insurance is commonly carried by owners of properly
similarly situated and operating under similar circumstances.
9.3 MUTUAL WAIVER OF SUBROGATION. Landlord hereby releases Tenant, and
Tenant hereby releases Landlord and its respective partners, principals,
members, officers, agents, employees and servants, from any and all liability
for loss, damage or injury to the property of the other in or about the
Leased Premises or the Property which is caused by or results from a peril or
event or happening which is covered by insurance actually carried and in
force at the time of the loss by the party sustaining such loss; PROVIDED,
HOWEVER, that such waiver shall be effective only to the extent permitted by
the insurance covering such loss and to the extent such insurance is not
prejudiced thereby.
ARTICLE 10
DAMAGE TO LEASED PREMISES
10.1 LANDLORD'S DUTY TO RESTORE. if the Leased Premises, the Building or
the Outside Area are damaged by any peril after the Effective Date of this
Lease, Landlord shall restore the same, as and when required by this
paragraph, unless this Lease is terminated by Landlord pursuant to Paragraph
10.3 or by Tenant pursuant to
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Paragraph 10.4. If this Lease is not so terminated, then upon the issuance of
all necessary governmental permits, Landlord shall commence and diligently
prosecute to completion the restoration of the Leased Premises, the Building or
the Outside Area, as the case may be, to the extent then allowed by law, to
substantially the same condition in which it existed as of the Lease
Commencement Date. Landlord's obligation to restore shall be limited to actual
receipt of insurance proceeds plus any additional amounts contributed by Tenant
at Tenant's election and to the improvements constructed by Landlord. Landlord
shall have no obligation to restore any improvements made by Tenant to the
Leased Premises or any of Tenant's personal properly, inventory or trade
fixtures. Upon completion of the restoration by Landlord, Tenant shall forthwith
replace or fully repair all of Tenant's personal property, inventory, trade
fixtures and other improvements constructed by Tenant to like or similar
conditions as existed at the time immediately prior to such damage or
destruction.
10.2 INSURANCE PROCEEDS. All insurance proceeds available from the fire
and property damage insurance canted by Landlord shall be paid to and become
the property of Landlord. If this Lease is terminated pursuant to either
Paragraph 10.3 or 10.4, all insurance proceeds available from insurance
carded by Tenant which cover loss of property that is Landlord's property or
would become Landlord's property on termination of this Lease shall be paid
to and become the property of Landlord, and the remainder of such proceeds
shall be paid to and become the property of Tenant. If this Lease is not
terminated pursuant to either Paragraph 10.3 or 10.4, all insurance proceeds
available from insurance carried by Tenant which cover loss to property that
is Landlord's property shall be paid to and become the property of Landlord,
and all proceeds available from such insurance which cover loss to property
which would only become the property of Landlord upon the termination of this
Lease shall be paid to and remain the property of Tenant. The determination
of Landlord's property and Tenant's property shall be made pursuant to
Paragraph 6.2.
10.3 LANDLORD'S RIGHT TO TERMINATE. Landlord shall have the option to
terminate this Lease in the event any of the following occurs, which option
may be exercised only by delivery to Tenant of a written notice of election
to terminate within thirty days after the date of such damage or destruction:
(a) The Building is damaged by any peril covered by valid and collectible
insurance actually carried by Landlord and in force at the time of such damage
or destruction (an "insured peril") to such an extent that the estimated cost to
restore the Building exceeds the lesser of (i) the insurance proceeds available
from insurance actually castled by Landlord, plus the deductible amount
specified in such insurance policy, or (ii) fifty percent of the then actual
replacement cost thereof;
(b) The Building is damaged by an uninsured peril, which peril Landlord
was not required to insure against pursuant to the provisions of Article 9 of
this Lease.
(c) The Building is damaged by any peril and, because of the laws then in
force, the Building (i) cannot be restored at reasonable cost or (ii) If
restored, cannot be used for the same use being made thereof before such damage.
Notwithstanding Landlord's election to terminate this Lease pursuant to
clauses (a) or (b) of this Section 10.3, Tenant shall have the right to continue
this Lease in full force and effect by contributing to the cost of restoring the
Building any and all amounts by which such cost exceeds the available insurance
proceeds (in the case of an insured peril) or the entire amount of such cost (in
the case of an uninsured peril), which right shall be exercised only by delivery
to Landlord of a written notice of Tenant's election to contribute within seven
(7) days after receipt of Landlord's written notice of election to terminate
pursuant to this Section 10.3.
10.4 TENANT'S RIGHT TO TERMINATE. If the Leased Premises, the Building or
the Outside Area are damaged by any peril and Landlord does not elect to
terminate this Lease or is not entitled to terminate this Lease pursuant to
this Article, then as soon as reasonably practicable, Landlord shall furnish
Tenant with the written opinion of Landlord's architect or construction
consultant as to when the restoration work required of Landlord may be
complete. Tenant shall have the option to terminate this Lease in the event
any of the following occurs, which option may be exercised only by delivery
to Landlord of a written notice of election to terminate within seven days
after Tenant receives from Landlord the estimate of the time needed to
complete such restoration (which estimate Landlord shall deliver within
thirty (30) days following the date of damage):
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(a) If the time estimated to substantially complete the restoration
exceeds nine (9) months from and after the date the architect's or construction
consultant's written opinion is delivered;
(b) If the damage occurred within twelve months of the last day of the
Lease Term and the time estimated to substantially complete the restoration
exceeds one hundred eighty days from and after the date such restoration is
commenced.
10.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of
Paragraph 10.4 above, captioned "Tenant's Right To Terminate", are intended
to supersede and replace the provisions contained in California Civil Code,
Section 1932, Subdivision 2, and California Civil Code, Section 1934, and
accordingly, Tenant hereby waives the provisions of such Civil Code Sections
and the provisions of any successor Civil Code Sections or similar laws
hereinafter enacted.
10.6 ABATEMENT OF RENT. In the event of damage to the Leased Premises
which does not result in the termination of this Lease, the Base Monthly Rent
(and any Additional Rent) shall be temporarily abated during the period of
restoration in proportion to the degree to which Tenant's use of the Leased
Premises is impaired by such damage.
ARTICLE 11
CONDEMNATION
11.1 TENANT'S RIGHT TO TERMINATE. Except as otherwise provided in
Paragraph 11.4 below regarding temporary takings, Tenant shall have the
option to terminate this Lease if, as a result of any taking, (i) all of the
Leased Premises is taken, or (ii) twenty-five percent (25%) or more of the
rentable area Leased Premises is taken and the pint of the Leased Premises
that remains cannot, within a reasonable period of time, be made reasonably
suitable for the continued operation of Tenant's business. Tenant must
exercise such option within a reasonable period of time, to be effective on
the later to occur of (i) the date that possession of that portion of the
Leased Premises that is condemned is taken by the condemnor or (ii) the date
Tenant vacated the Leased Premises.
11.2 LANDLORD'S RIGHT TO TERMINATE. Except as otherwise provided in
Paragraph 11.4 below regarding temporary takings, Landlord shall have the
option to terminate this Lease if, as a result of any taking, (i) all of the
Leased Premises is taken, (ii) twenty-five percent (25%) or more of the
Leased Premises is taken and the part of the Leased Premises that remains
cannot, within a reasonable period of time, be made reasonably suitable for
the continued operation of Tenant's business, or (iii) because of the laws
then in force, the Leased Premises may not be used for the same use being
made before such taking, whether or not restored as required by Paragraph
11.3 below. Any such option to terminate by Landlord must be exercised within
a reasonable period of time, to be effective as of the date possession is
taken by the condemnor.
11.3 RESTORATION. If any part of the Leased Premises or the Building is
taken and this Lease is not terminated, then Landlord shall, to the extent
not prohibited by laws then in force, repair any damage occasioned thereby to
the remainder thereof to a condition reasonably suitable for Tenant's
continued operations and otherwise, to the extent practicable, in the manner
and to the extent provided in Paragraph 10.1.
11.4 TEMPORARY TAKING. If a portion of the Leased Premises is temporarily
taken for a period of one year or less and such period does not extend beyond
the Lease Expiration Date, this Lease shall remain in effect, If any portion
of the Leased Premises is temporarily taken for a period which exceeds one
year or which extends beyond the Lease Expiration Date, then the rights of
Landlord and Tenant shall be determined in accordance with Paragraphs 11.1
and 11.2 above.
11.5 DIVISION OF CONDEMNATION AWARD. Any award made for any taking of the
Property, the Building, or the Leased Premises, or any portion thereof, shall
belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all
of its right, title and interest in any such award; PROVIDED, HOWEVER, that
Tenant shall be entitled to receive any portion of the award that is made
specifically (i) for the taking of personal property, inventory or trade i
fixtures belonging to Tenant, (ii) for the interruption of Tenant's business
or its moving costs, or (iii) for the value of
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any leasehold improvements installed and paid for by Tenant. The rights of
Landlord and Tenant regarding any condemnation shall be determined as provided
in this Article, and each party hereby waives the provisions of Section 1265.130
of the California Code of Civil Procedure, and the provisions of any similar law
hereinafter enacted, allowing either party to petition the Supreme Court to
terminate this Lease and/or otherwise allocate condemnation awards between
Landlord and Tenant in the event of a taking of the Leased Premises.
11.6 ABATEMENT OF RENT. In the event of a taking of the Leased Premises
which does not result in a termination of this Lease (other than a temporary
taking), then, as of the date possession is taken by the condemning
authority, the Base Monthly Rent shall be reduced in the same proportion that
the area of that part of the Leased Premises so taken (less any addition to
the area of the Leased Premises by reason of any reconstruction) bears to the
area of the Leased Premises immediately prior to such taking.
11.7 TAKING DEFINED. The term "taking" or "taken" as used in this Article
11 shall mean any transfer or conveyance of all or any portion of the
Property to a public or quasi-public agency or other entity having the power
of eminent domain pursuant to or as a result of the exercise of such power by
such an agency, including any inverse condemnation and/or any sale or
transfer by Landlord of all or any portion of the Property to such an agency
under threat of condemnation or the exercise of such power.
ARTICLE 12
DEFAULT AND REMEDIES
12.1 EVENTS OF TENANT'S DEFAULT. Tenant shall be in default of its
obligations under this Lease if any of the following events ("Events of
Default") occur:
(a) Tenant shall have failed to pay Base Monthly Rent or any regularly
scheduled Additional Rent when due. and such failure continues for more than
three (3) days after Landlord gives written notice thereof to Tenant; provided,
however, flint after the second such failure in a calendar year, only the
passage of time, but no further notice, shall be required to establish an Event
of Default in the same calendar year; or
(b) Tenant shall have failed to pay any other Additional Rent or other
amount of money or charge payable by Tenant hereunder as and when such
additional rent or amount or charge becomes due and payable and such failure
continues for more than ten (10) days after Landlord gives written notice
thereof to Tenant; provided, however, that, after the second such failure in a
calendar year, only the passage of time, but no further notice, shall be
required to establish an Event of Default in the same calendar year; or
(c) Tenant shall have failed to perform any term, covenant or condition
of this Lease (except those requiring the payment of Base Monthly Rent or
Additional Rent, which failures shall be governed by subparagraphs (a) and (b)
above) within fifteen (15) days after written notice from Landlord to Tenant
specifying the nature of such failure and requesting Tenant to perform same;
provided, however, that if, by the nature of such term, covenant or condition,
such failure cannot reasonably be cured within such period of fifteen (15) days,
an Event of Default shall not exist as long as Tenant commences with due
diligence and dispatch the curing of such failure within such period of fifteen
(15) days and, having so commenced, thereafter prosecutes with diligence and
dispatch and completes the curing of such failure within a reasonable time; or
(d) Tenant shall have sublet the Leased Premises or assigned or
encumbered its interest in this Lease in violation of the provisions contained
in Article 7, whether voluntarily or by operation of law; or
(e) Tenant shall have abandoned the Leased Premises; or
(f) Tenant or any guarantor of this Lease shall have permitted or
suffered the sequestration or attachment of, or execution on, or the appointment
of a custodial or receiver with respect to, all or any substantial part of the
property or assets of Tenant (or such guarantor) or any property or asset
essential to the conduct of Tenant's (or such guarantor's) business, and Tenant
(or such guarantor) shall have failed to obtain a return or release
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of the same within thirty days thereafter, or prior to sale pursuant to such
sequestration, attachment or levy, whichever is earlier; or
(g) Tenant or any guarantor of this Lease shall have made a general
assignment of all or a substantial part of its assets for the benefit of its
creditors; or
(h) Tenant or any guarantor of this Lease shall have allowed (or sought)
to have entered against it a decree or order which: (i) grants or constitutes an
order for relief, appointment of a trustee, or condemnation or a reorganization
plan under the bankruptcy laws of the United States; (ii) approves as properly
filed a petition seeking liquidation or reorganization under said bankruptcy
laws or any other debtor's relief law or similar statute of the United States or
any state thereof; or (iii) otherwise directs the winding up or liquidation of
Tenant; provided, however, if any decree or order was entered without Tenant's
consent or over Tenant's objection, Landlord may not terminate riffs Lease
pursuant to this Subparagraph if such decree or order is rescinded or reversed
within thirty days after its original entry.
12.2 LANDLORD'S REMEDIES. In the event of any default by Tenant, and
without limiting Landlord's right to indemnification as provided in Article
8.2, Landlord shall have the following remedies, in addition to all other
rights and remedies provided by law or otherwise provided in this Lease, to
which Landlord may resort cumulatively, or in the alternative:
(a) Landlord may, at Landlord's election, keep this Lease in effect and
enforce, by an action at law or in equity, all of its rights and remedies under
this Lease including, without limitation, (i) the right to recover the rent trod
other sums as they become due by appropriate legal action, (ii) the right to
make payments required by Tenant, or perform Tenant's obligations and be
reimbursed by Tenant for the cost thereof with interest at the then maximum rate
of interest not prohibited by law from the date the sum is paid by Landlord
until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive
relief and specific performance to prevent Tenant from violating the terms of
this Lease and/or to compel Tenant to perform its obligations under this Lease,
as the case may be.
(b) Landlord may, at Landlord's election, terminate this Lease by giving
Tenant written notice of termination, in which event this Lease shall terminate
on the date set forth for termination in such notice. Any termination under this
subparagraph shall not relieve Tenant from its obligation to pay to Landlord all
Base Monthly Rent and Additional Rent then or thereafter due, or any other sums
due or thereafter accruing to Landlord, or from any claim against Tenant for
damages previously accrued or then or thereafter accruing, in no event shall any
one or more of the following actions by Landlord, in the absence of a written
election by Landlord to terminate this Lease constitute a termination of this
Lease:
(i) Appointment of a receiver or keeper in order to protect
Landlord's interest hereunder;
(ii) Consent to any subletting of the Leased Premises or
assignment of this Lease by Tenant, whether pursuant to the provisions hereof or
otherwise; or
(iii) Any action taken by Landlord or its partners, principals,
members, officers, agents, employees, or servants, which is intended to mitigate
the adverse effects of any breach of this Lease by Tenant, including, without
limitation, any action taken to maintain and preserve the Leased Premises on any
action taken to relet the Leased Premises or any portion thereof for the account
at Tenant and in the name of Tenant.
(c) In the event Tenant breaches this Lease and abandons the Leased
Premises, Landlord may terminate this Lease, but this Lease shall not terminate
unless Landlord gives Tenant written notice of termination. If Landlord does not
terminate this Lease by giving written notice of termination, Landlord may
enforce all its rights and remedies under this Lease, including the right and
remedies provided by California Civil Code Section 1951.4 ("lessor may continue
lease in effect after lessee's breach and abandonment and recover rent as it
becomes due, If lessee has right to sublet or assign, subject only to reasonable
limitations"), as in effect on the Effective Date of this Lease.
(d) In the event Landlord terminates this Lease, Landlord shall be
entitled, at Landlord's election, to the rights and remedies provided in
California Civil Code Section 1951.2, as in effect on the Effective Date of this
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Lease. For purposes of computing damages pursuant to Section 1951.2, an interest
rate equal to the maximum rate of interest then not prohibited by law shall be
used where permitted. Such damages shall include, without limitation:
(i) The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided,
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco, at the time of award plus one percent; and
(ii) Any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease, or which in the ordinary course of fixings would be likely to
result therefrom, including without limitation, the following: (i) expenses for
cleaning, repairing or restoring the Leased Premises, (ii) expenses for
altering, remodeling or otherwise improving the Leased Premises for the purpose
of reletting, including removal of existing leasehold improvements and/or
installation of additional leasehold improvements (regardless of how the same is
funded, including reduction of rent, a direct payment or allowance to a new
tenant, or otherwise), (iii) broker's fees allocable to the remainder of the
term of this Lease, advertising costs and other expenses of reletting the Leased
Premises; (iv) costs of carrying and maintaining the Leased Premises, such as
taxes, insurance premiums, utility charges and security precautions, (v)
expenses incurred in removing, disposing of and/or storing any of Tenant's
personal property, inventory or trade fixtures remaining therein; (vi)
reasonable attorney's fees, expert witness fees, court costs and other
reasonable expenses incurred by Landlord (but not limited to taxable costs) in
reletting possession of the Leased Premises, establishing damages hereunder, and
releasing the Leased Premises; and (vii) any other expenses, costs or damages
otherwise incurred or suffered as a result of Tenant's default.
12.3 LANDLORD'S DEFAULT AND TENANT'S REMEDIES. In the event Landlord fails
to perform its obligations under this Lease, Landlord shall nevertheless not
be in default under the terms of this Lease until such time as Tenant shall
have first given Landlord written notice specifying the nature of such
failure to perform its obligations, and then only after Landlord shall have
had thirty (30) days following its receipt of such notice within which to
perform such obligations; PROVIDED THAT, if longer than thirty (30) days is
reasonably required in order to perform such obligations, Landlord shall have
such longer period. In the event of Landlord's default as above set forth,
then, and only then, Tenant may then proceed in equity or at law to compel
Landlord to perform its obligations and/or to recover damages proximately
caused by such failure to perform (except as and to the extent Tenant has
waived its right to damages as provided in this Lease).
12.4 LIMITATION OF TENANT'S RECOURSE. Tenant's recourse shall be limited to
Landlord's interest in the Property. In addition, if Landlord is a
corporation, trust, partnership, joint venture, limited liability company,
unincorporated association, or other form of business entity, Tenant agrees
that (i) the obligations of Landlord under this Lease shall not constitute
personal obligations of the officers, directors, trustees, partners, joint
venturers, members, owners, stockholders, or other principals of such
business entity, and (ii) Tenant shall have no recourse to the assets of such
officers, directors, trustees, pampers, joint venturers, members, owners,
stockholders or principals. Additionally, if Landlord is a partnership or
limited liability company, then Tenant covenants and agrees:
(a) No partner or member of Landlord shall be sued or named as a part),
in any suit or action brought by Tenant with respect to any alleged breach of
this Lease (except to the extent necessary to secure jurisdiction over the
partnership and then only for that sole purpose);
(b) No service of process shall be made against any partner or member of
Landlord except for the sole propose of securing jurisdiction over the
partnership; and
(c) No writ of execution will ever be levied against the assets of any
partner or member of Landlord other than to the extent of his or her interest in
the assets of the partnership or limited liability company constituting
Landlord.
Tenant further agrees that each of the foregoing covenants and agreements shall
be enforceable by Landlord and by any partner or member of Landlord and shall be
applicable to any actual or alleged misrepresentation or nondisclosure made
regarding this Lease or the Leased Premises or any actual or alleged failure,
default or breach of
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any covenant or agreement either expressly or implicitly contained in this Lease
or imposed by statute or at common law.
12.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of
Paragraph 12.3 above are intended to supersede and replace the provisions of
California Civil Code Sections 1932(1), 1941 and 1942, and accordingly,
Tenant hereby waives the provisions of California Civil Code Sections
1932(1), 1941 and 1942 and/or any similar or successor law regarding Tenant's
right to terminate this Lease or to make repairs and deduct the expenses of
such repairs from the rent due under this Lease.
ARTICLE 13
GENERAL PROVISIONS
13.1 TAXES ON TENANT'S PROPERTY. Tenant shall pay before delinquency any
and all taxes, assessments, license fees, use fees, permit fees and public
charges of whatever nature or description levied, assessed or imposed against
Tenant or Landlord by a governmental agency arising out of, caused by reason
of or based upon Tenant's estate in this Lease, Tenant's ownership of
property, improvements made by Tenant to the Leased Premises or the Outside
Areas, improvements made by Landlord for Tenant's use within the Leased
Premises or the Outside Areas, Tenant's use (or estimated use) of public
facilities or services or Tenant's consumption (or estimated consumption) of
public utilities, energy, water or other resources (collectively, "Tenant's
Interest"). Upon demand by Landlord, Tenant shall furnish Landlord with
satisfactory evidence of these payments, If any such taxes, assessments, fees
or public charges are levied against Landlord, Landlord's property, the
Building or the Property, or if the assessed value of the Building or the
Property is increased by the inclusion therein of a value placed upon
Tenant's Interest, regardless of the validity thereof, Landlord shall have
the right to require Tenant to pay such taxes, and if not paid and
satisfactory evidence of payment delivered to Landlord at least ten days
prior to delinquency, then Landlord shall have the right to pay such taxes on
Tenant's behalf and to invoice Tenant for the same. Tenant shall, within the
earlier to occur of (a) fifty (30) days of the date it receives an invoice
from Landlord setting forth the amount of such taxes, assessments, fees, or
public charge so levied, or (b) the due date of such invoice, pay to
Landlord, as Additional Rent, the amount set forth in such invoice. Failure
by Tenant to pay the amount so invoiced within such time period shall be
conclusively deemed a default by Tenant under this Lease. Tenant shall have
the right to bring suit in any court of competent jurisdiction to recover
from the taking authority the amount of any such taxes, assessments, fees or
public charges so paid.
13.2 HOLDING OVER. This Lease shall terminate without further notice on the
Lease Expiration Date (as set forth in Article 1). Any holding over by Tenant
after expiration of the Lease Term shall neither constitute a renewal nor
extension of this Lease nor give Tenant any rights in or to the Leased
Premises except as expressly provided in this Paragraph. Any such holding
over to which Landlord has consented shall be construed to be a tenancy from
month to month, on the same terms and conditions herein specified insofar as
applicable, except that the Base Monthly Rent shall be increased to an amount
equal to one hundred fifty percent (150%) of the Base Monthly Rent payable
during the last full month immediately preceding such holding over.
13.3 SUBORDINATION TO MORTGAGES. This Lease is subject to and subordinate
to all ground leases, mortgages and deeds of trust which affect the Building
or the Property and which are of public record as of the Effective Date of
this Lease, and to all renewals, modifications, consolidations, replacements
and extensions thereof. However, if the lessor under any such ground lease or
any lender holding any such mortgage or deed of trust shall advise Landlord
that it desires or requires this Lease to be made prior and superior thereto,
then, upon written request of Landlord to Tenant, Tenant shall promptly
execute, acknowledge and deliver any and all customary or reasonable
documents or instruments which Landlord and such lessor or lender deems
necessary or desirable to make this Lease prior thereto. Tenant hereby
consents to Landlord's ground leasing the land underlying the Building or the
Property and/or encumbering the Building or the Property as security for
future loans on such terms as Landlord shall desire, all of which future
ground leases, mortgages or deeds of trust shall be subject to and
subordinate to this Lease. However, if any lessor under any such future
ground lease or any lender holding such future mortgage or deed of trust
shall desire or require that this Lease be made subject to and subordinate to
such future ground lease, mortgage or deed of trust, then Tenant agrees,
within ten days after Landlord's written request therefor, to execute,
acknowledge and deliver to Landlord any and all documents or instruments
requested by Landlord or by such lessor or lender as may be necessary or
proper to assure the subordination of this Lease to such future ground lease,
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mortgage or deed of trust, but only if such lessor or lender agrees to recognize
Tenant's rights under this Lease and agrees not to disturb Tenant's quiet
possession of the Leased Premises so long as Tenant is not in default under this
Lease. If Landlord assigns the Lease as security for a loan, Tenant agrees to
execute such documents as are reasonably requested by the lender and to provide
reasonable provisions in the Lease protecting such lender's security interest
which are customarily required by institutional lenders making loans secured by
a deed of trust.
13.4 TENANT'S ATTORNMENT UPON FORECLOSURE. Tenant shall, upon request,
attorn (i) to any purchaser of the Building or the Property at any
foreclosure sale or private sale conducted pursuant to any security
instruments encumbering the Building or the Property, (ii) to any grantee or
transferee designated in any deed given in lieu of foreclosure of any
security interest encumbering the Building or the Property, or (iii) to the
lessor under an underlying ground lease of the land underlying the Building
or the Property, should such ground lease be terminated; provided that such
purchaser, grantee or lessor recognizes Tenant's rights under this Lease.
13.5 MORTGAGEE PROTECTION. In the event of any default on the part of
Landlord, Tenant will give notice by registered mail to any Lender or lessor
under any underlying ground lease who shall have requested, in writing, to
Tenant that it be provided with such notice, and Tenant shall offer such
Lender or lessor a reasonable opportunity to cure the default; including time
to obtain possession of the Leased Premises by power of sale or judicial
foreclosure or other appropriate legal proceedings if reasonably necessary to
effect a cure.
13.6 ESTOPPEL CERTIFICATE. Tenant will, following any request by Landlord,
promptly execute and deliver to Landlord an estoppel certificate in the form
attached as Exhibit D (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, (ii) stating the date to which the rent and other charges are
paid in advance, if any, (iii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the pat of Landlord hereunder, or
specifying such defaults if any are claimed, and (iv) certifying such other
information about this Lease as may be reasonably requested by Landlord, its
Lender or prospective lenders, investors or purchasers of the Building or the
Property. Tenant's failure to execute and deliver such estoppel certificate
within ten (10) days after Landlord's request therefor shall be a material
default by Tenant under this Lease, and Landlord shall have all of the rights
and remedies available to Landlord as Landlord would otherwise have in the
case of any other material default by Tenant, including the right to
terminate this Lease and sue for damages proximately caused thereby, it being
agreed and understood by Tenant that Tenant's failure to so deliver such
estoppel certificate in a timely manner could result in Landlord being unable
to perform committed obligations to other third parties which were made by
Landlord in reliance upon this covenant of Tenant. Landlord and Tenant intend
that any statement delivered pursuant to this paragraph may be relied upon by
any Lender or purchaser or prospective Lender or purchaser of the Building,
the Property, or any interest in them.
13.7 TENANT'S FINANCIAL INFORMATION. Tenant shall, within ten business days
after Landlord's request therefor, deliver to Landlord a copy of Tenant's
(and any guarantor's) current financial statements (including a balance
sheet, income statement and statement of cash flow, all prepared in
accordance with generally accepted accounting principles) and any such other
information reasonably requested by Landlord regarding Tenant's financial
condition. Landlord shall be entitled to disclose such financial statements
or other information to its Lender, to any present or prospective principal
of or investor in Landlord, or to any prospective Lender or purchaser of the
Building, the Property, or any portion thereof or interest therein. Any such
financial statement or other reformation which is marked "confidential" or
"company secrets" (or is otherwise similarly marked by Tenant) shall be
confidential and shall not be disclosed by Landlord to any third party except
as specifically provided in this paragraph, unless the same becomes a part of
the public domain without the fault of Landlord.
13.8 TRANSFER BY LANDLORD. Landlord and its successors in interest shall
have the right to transfer their interest in the Building, the Property, or
any portion thereof at any time and to any person or entity. In the event of
any such transfer, the Landlord originally named herein (and in the case of
any subsequent transfer, the transferor), from the date of such transfer, (i)
shall be automatically relieved, without any further act by any person or
entity, of all liability for the performance of the obligations of the
Landlord hereunder which may accrue after the date of such transfer and(ii)
shall be relieved of all liability for the performance of the obligations of
the Landlord hereunder which have accrued before the date of transfer if its
transferee agrees to assume and perform all such prior
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obligations of the Landlord hereunder. Tenant shall attorn to any such
transferee. After the date of any such transfer, the term "Landlord" as used
herein shall mean the transferee of such interest in the Building or the
Property.
13.9 FORCE MAJEURE, The obligations of each of the parties under this Lease
(other than the obligations to pay money) shall be temporarily excused if
such party is prevented or delayed in performing such obligations by reason
of any strikes, lockouts or labor disputes; government restrictions,
regulations, controls, action or inaction; civil commotion; or extraordinary
weather, fire or other acts of God.
13.10 NOTICES. Any notice required or desired to be given by a party
regarding this Lease shall be in writing and shall be personally served, or
in lieu of personal service may be given by reputable overnight courier
service, postage prepaid, addressed to the other party as follows:
IF TO LANDLORD: TriNet Milpitas Associates, LLC
c/o TriNet Corporate Realty Trust, Inc.
One Embarcadero Center
Suite 3300
San Francisco, CA 94111
Attention: Asset Management
with a copy to: Pillsbury Madison & Sutro LLP
235 Montgomery Street, 14th Floor
San Francisco, CA 94104
Attention: Glenn Q. Snyder, Esq.
IF TO TENANT: Polycom, Inc.
1565 Barber Lane
Milpitas, California 95035
Attention: Tom Perkins
with a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Min Road
Palo Alto, California 94304-1050
Attention: Bradford C. O'Brien, Esq.
Any notice given in accordance with the foregoing shall be deemed received upon
actual receipt or refusal to accept delivery.
13.11 ATTORNEYS' FEES. In the event any party shall bring any action,
arbitration proceeding or legal proceeding alleging a breach of any provision
of this Lease, to recover rent, to terminate this Lease, or to enforce,
protect, determine or establish any term or covenant of this Lease or rights
or duties hereunder of either party, the prevailing party shall be entitled
to recover from the non-prevailing party as a part of such action or
proceeding, or in a separate action for that purpose brought within one year
from the determination of such proceeding, reasonable attorneys' fees, expert
witness fees, court costs and other reasonable expenses incurred by the
prevailing party.
13.12 DEFINITIONS. Any term that is given a special meaning by any
provision in this Lease shall, unless otherwise specifically stated, have
such meaning wherever used in this Lease or in any Addenda or amendment
hereto. In addition to the terms defined in Article 1, the following terms
shall have the following meanings:
(a) REAL PROPERTY TAXES. The term "Real Property Tax" or "Real Property
Taxes" shall each mean Tenant's Project Percentage Share of (i) all taxes,
assessments, levies and other charges of any kind or nature whatsoever, general
and special, foreseen and unforeseen (including all instruments of principal and
interest required to pay any general or special assessments for public
improvements and any increases resulting from reassessments caused by any change
in ownership or new construction), now or hereafter imposed by any governmental
or quasi-governmental authority or special district having the direct or
indirect power to tax or levy assessments, which are levied or assessed for
whatever reason against the Property or any portion thereof, or
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Landlord's interest herein, or the fixtures, equipment and other property, of
Landlord that is an integral part of the Property and located thereon, or
Landlord's business of owning, leasing or managing the Property or the gross
receipts, income or rentals from the Properly, (ii) all charges, levies or fees
imposed by any governmental authority against Landlord by reason of or based
upon the use of or number of parking spaces within the Property, the amount of
public services or public utilities used or consumed (E.G. water, gas,
electricity, sewage or waste water disposal) at the Property, the number of
person employed by tenants of the Property, the size (whether measured in area,
volume, number of tenants or whatever) be the value of the Property, or the type
of use or uses conducted within the Property, and all costs and fees (including
attorneys' fees) reasonably incurred by Landlord in contesting any Real Property
Tax and in negotiating with public authorities as to any Real Property Tax, and
(iii) all tax increases due to improvements made to the Leased Premises by
Tenant or by Landlord on behalf of Tenant. If, at any time during the Lease
Term, the taxation or assessment of the Property prevailing as of the Effective
Date of this Lease shall be altered so that in lieu of or in addition to any the
Real Property Tax described above there shall be levied, awarded or imposed
(whether by reason of a change in the method of taxation or assessment, creation
of a new tax or charge, or any other cause) an alternate, substitute, or
additional use or charge (i) on the value, size, use or occupancy of the
Property or Landlord's interest therein or (ii) on or measured by the gross
receipts, income or rentals from the Property, or on Landlord's business of
owning, leasing or managing the Property or (iii) computed in any manner with
respect to the operation of the Property, then any such tax or charge, however
designated, shall be included within the meaning of the terms "Real Property
Tax" or "Real Property Taxes" for purposes of this Lease. If any Real Properly
Tax is partly based upon property or rents unrelated to the Property, then only
that part of such Real Property Tax that is fairly allocable to the Property
shall be included within the meaning of the terms "Real Property Tax" or "Real
Property Taxes." Notwithstanding the foregoing, the terms "Real Properly Tax" or
"Real Property Taxes" shall not include estate, inheritance, transfer, gift or
franchise taxes of Landlord or the federal or state income tax imposed on
Landlord's income from all sources.
(b) LANDLORD'S INSURANCE COSTS. The term "Landlord's Insurance Costs"
shall mean Tenant's Project Proportionate Share of the costs to Landlord to
carry and maintain the policies of fire and property damage insurance for the
Building and the Property and general liability and any other insurance required
or permitted to be carried by Landlord pursuant to Article 9, together with any
deductible amounts paid by Landlord upon the occurrence of any insured casualty
or loss, but excluding any earthquake insurance policy deducible amounts in
excess of five percent (5%) of the cost of the Building.
(c) PROPERTY MAINTENANCE COSTS. The term "Property Maintenance Costs"
shall mean Tenant's Project Proportionate Share of all costs and expenses
(except Landlord's Insurance Costs, Real Properly Taxes and Building Maintenance
Costs) paid or incurred by Landlord in protecting, operating, maintaining,
repairing and preserving the Property and all parts thereof, including without
limitation, (i) professional management fees of 3% gross receivables (including
recoverable expenses), (ii) the amortizing portion of any costs incurred by
Landlord in the making of any modifications, alterations or improvements
required by any governmental authority as set forth in Article 6, which are so
amortized during the Lease Term, and (iii) such other costs as may be paid or
incurred with respect to operating, maintaining, and preserving the Property,
such as repairing and resurfacing paved areas, and repairing and replacing, when
necessary, electrical, plumbing, heating, ventilating and air conditioning
systems serving the Building.
(d) BUILDING MAINTENANCE COSTS. The term "Building Maintenance Costs"
shall mean Tenant's Building Proportionate Share of all capital expenditures
allocable to the Building and of all other costs as may be insurance with
respect to operating, maintaining and preserving the Building, including,
without limitation, repair and resurfacing the exterior surfaces of the Building
(including costs) and repairing and replacing, when necessary, electrical
plumbing, heating, ventilating and air conditioning systems serving the
Building, and excluding costs incurred by Landlord in performing its obligations
under Paragraph 5. l(b). All such capital expenditures and other costs incurred
by Landlord in excess of twenty-five thousand dollars ($25,000) per project,
including interest at a rate of twelve percent (12%), shall be amortized by
Landlord over the useful life of such capital items, as determined in accordance
with generally accepted accounting principles. All such capital expenditures and
other costs incurred by Landlord up to and including twenty-five thousand
($25,000) per project shall not be amortized and shall be included in their
entirety as Building Maintenance Costs as and when incurred.
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(e) PROPERTY OPERATING EXPENSES. The term "Properly Operating Expenses"
shall mean and include all Real Property Taxes, plus all Landlord's Insurance
Costs, plus all Property Maintenance Costs and Building Maintenance Costs but
shall exclude the following costs and expenses: (i) costs related to remediation
of Hazardous Materials; (ii) costs resulting from damage caused by the active
negligence or willful misconduct of Landlord or its agents or employees; and
(iii) expense reserves, depreciation, and any other non-cash item not currently
paid.
(f) LAW. The term "Law" shall mean any judicial decisions and any
statute, constitution, ordinance, resolution, regulation, rule, administrative
order, or other requirements of any municipal, county, state, federal, or other
governmental agency or authority having jurisdiction over the parties to this
Lease, the Leased Premises, the Building or the Property, or any of them, in
effect either at the Effective Date of this Lease or at any time during the
Lease Term, including, without limitation, any regulation, order, or policy of
any quasi-official entity or body (e.g. a board of fire examiners or a public
utility or special district).
(g) LENDER. The term "Lender" shall mean the holder of any promissory
note or other evidence of indebtedness secured by the Property or any portion
thereof.
(h) PRIVATE RESTRICTIONS. The term "Private Restrictions" shall mean (as
they may exist from time to time) any and all covenants, conditions and
restrictions, private agreements, easements, and any other recorded documents or
instruments affecting the use of the Property, the Building, the Leased
Premises, or the Outside Areas.
(i) RENT. The term "Rent" shall meal collectively Base Monthly Rent and
all Additional Rent.
13.13 GENERAL WAIVERS. One party's consent to or approval of any act by
the other party requiring the first party's consent or approval shall not be
deemed to waive or render unnecessary the first party's consent to or
approval of any subsequent similar act by the other party. No waiver of any
provision hereof, or any waiver of any breach of any provision hereof, shall
be effective unless in writing and signed by the waiving party. The receipt
by Landlord of any rent or payment with or without knowledge of the breach of
any other provision hereof shall not be deemed a waiver of any such breach.
No waiver of any provision of this Lease shall be deemed a continuing waiver
unless such waiver specifically states so in writing and is signed by both
Landlord and Tenant. No delay or omission in the exercise of any right or
remedy accruing to either party upon any breach by the other party, under
this Lease shall impair such right or remedy or be construed as a waiver of
any such breach theretofore or thereafter occurring. The waiver by either
party of any breach of any provision of this Lease shall not be deemed to be
a waiver of any subsequent breach of the same or any other provisions herein
contained.
13.14 MISCELLANEOUS. Should any provisions of this Lease prove to be
invalid or illegal, such invalidity or illegality shall in no way affect,
impair or invalidate any other provisions hereof, and such remaining
provisions shall remain in full force and effect. Time is of the essence with
respect to the performance of every provision of this Lease in which time of
performance is a factor. Any copy of this Lease which is executed by the
parties shall be deemed an original for all purposes. This Lease shall,
subject to the provisions regarding assignment, apply to and bind the
respective heirs, successors, executors, administrators and assigns of
Landlord and Tenant. The term "party" shall mean Landlord or Tenant as the
context implies. If Tenant consists of more than one person or entity, then
all members of Tenant shall be jointly and severally liable hereunder. This
Lease shall be construed and enforced in accordance with the Laws of the
State in which the Leased Premises are located. The captions in this Lease
are for convenience only and shall not be construed in the construction or
interpretation of any provision hereof. When the context of this Lease
requires, the neuter gender includes the masculine, the feminine, a
partnership, corporation, limited liability company, joint venture, or other
form of business entity, and the singular includes the plural. The terms
"must," "shall," "will," and "agree" are mandatory. The term "may" is
permissive. When a party is required to do something by this Lease, it shall
do so at its sole cost and expense without right of reimbursement from the
other party unless specific provision is made therefor. Where Landlord's
consent is required hereunder, the consent of any Lender shall also be
required if Landlord is contractually obligated to obtain the consent of such
Lender pursuit to such Lender's loan documents. Landlord and Tenant shall
both be deemed to have drafted this Lease, and the rule of construction flint
a document is to be construed against the drafting party shall not be
employed in the construction or interpretation of this Lease. Where Tenant is
obligated not to perform any act or is not permitted to perform any act,
Tenant is also obligated to restrain any others reasonably within its
control, including agents, invitees, contractors, subcontractors and
employees, from performing such act. Landlord
30.
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shall not become or be deemed a partner or a joint venturer with Tenant by
reason of any of the provisions of this Lease.
ARTICLE 14
CORPORATE AUTHORITY
BROKERS AND ENTIRE AGREEMENT
14.1 CORPORATE AUTHORITY. If Tenant is a corporation, each individual
executing this Lease on behalf of such corporation represents and warrants
that Tenant is validly formed and duly authorized and existing, that Tenant
is qualified to do business in the State in which the Leased Premises are
located, that Tenant has the full right and legal authority to enter into
this Lease, and that he or she is duly authorized to execute and deliver this
Lease on behalf of Tenant in accordance with its terms. Tenant shall, within
thirty days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of its board of directors authorizing or ratifying the
execution of this Lease and if Tenant fails to do so, Landlord at its sole
election may elect to terminate this Lease.
14.2 BROKERAGE COMMISSIONS. Tenant represents, warrants and agrees that it
has not had any dealings with any real estate broker(s), leasing agent(s),
finder(s) or salesmen, other than the Brokers (as named in Article 1) with
respect to the lease by it of the Leased Premises pursuant to this Lease, and
that it will assume all obligations and responsibility with respect to the
payment of such Brokers, and that it will indemnify, defend with competent
counsel, and hold Landlord harmless from any liability for the payment of any
real estate brokerage commissions, leasing commissions or finder's fees
claimed by any other real estate broker(s), leasing agent(s), finder(s), or
salesmen to be earned or due and payable by reason of Tenant's agreement or
promise (implied or otherwise) to pay (or to have Landlord pay) such a
commission or finder's fee by reason of its leasing the Leased Premises
pursuant to this Lease.
14.3 ENTIRE AGREEMENT. This Lease and the Exhibits (as described in
Article 1), which Exhibits are by this reference incorporated herein,
constitute the entire agreement between the parties, and there are no other
agreements, understandings or representations between the parties relating to
the lease by Landlord of the Leased Premises to Tenant, except as expressed
herein. No subsequent changes, modifications or additions to this Lease shall
be binding upon the parties unless in writing and signed by both Landlord and
Tenant.
14.4 LANDLORD'S REPRESENTATIONS. Tenant acknowledges that neither Landlord
nor any of its agents made any representations or warranties respecting the
Property, the Building or the Leased Premises, upon which Tenant relied in
entering into the Lease, which are not expressly set forth in this Lease.
Tenant further acknowledges that neither Landlord nor any of its agents made
any representations as to (i) whether the Leased Premises may be used for
Tenant's intended use under existing Law, or (ii) the suitability of the
Leased Premises for the conduct of Tenant's business, or (iii) the exact
square footage of the Leased Premises, and that Tenant relies solely upon its
own investigations with respect to such matters. Tenant expressly waives any
and all claims for damage by reason of any statement, representation,
warranty, promise or other agreement of Landlord or Landlord's agent(s), if
any, not contained in this Lease or in any Exhibit attached hereto.
ARTICLE 15
OPTIONS TO EXTEND
15.1 So long as Polycom, Inc. (and, to the extent provided in Section 7.9,
its successors and assigns in connection with transfers to affiliates,
transfers in connection with mergers or sales of assets, or transfers of a
controlling percentage of its capital stock) is the Tenant hereunder and
occupies more than fifty percent (50%) of the Leased Premises, and subject to
the condition set forth in clause (b) below, Tenant shall have two options to
extend the term of this Lease with respect to the entirety of the Premises,
the first for a period of five (5) years from the Lease Expiration Date (the
"First Extension Period"), and the second (the "Second Extension Period") for
a period of five (5) years from the expiration of the First Extension Period,
subject to the following conditions:
31.
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(a) Each option to extend shall be exercised, if at all, by notice of
exercise given to Landlord by Tenant not less than two hundred seventy (270)
days prior to the Lease Expiration Date of the Lease Term or the expiration of
the First Extension Period, as applicable;
(b) Anything herein to the contrary notwithstanding, if Tenant is in
default of a monetary obligation or material non-monetary obligation (after
written notice has been given and cure periods, if applicable, have expired),
either at the time Tenant exercises either extension option or on the
commencement date of the First Extension Period or the Second Extension Period,
as applicable, Landlord shall have, in addition to all of Landlord's other
rights and remedies provided in this Lease, the right to terminate such
option(s) to extend upon notice to Tenant.
15.2 In the event the applicable option is exercised in a timely fashion,
the Lease shall be extended for the term of the applicable extension period
upon all of the terms and conditions of this Lease, provided that the Base
Monthly Rent for each extension period shall be the "Fair Market Rent" for
the Leased Premises, increased after 12 months in accordance with Article 1.
For purposes hereof, "Fair Market Rent" shall mean the base rent for the
Premises, based upon the rental rate per square foot that an unaffiliated
landlord and tenant would agree to for a lease on the terms of this Lease for
the relevant Extension Period for comparable premises in the vicinity of the
Property, determined pursuant to the process described below. In no event,
however, shall any adjustment of Base Monthly Rent pursuant to this paragraph
result in a decrease of the Base Monthly Rent for the Premises below the
amount due from Tenant for the preceding portion of the initial Lease Term
(or the First Extension Period, if applicable) for which Base Monthly Rent
had been fixed.
15.3 Within 30 days after receipt of Tenant's notice of exercise, Landlord
shall notify Tenant in writing of Landlord's estimate of the Base Monthly
Rent for the applicable extension period, based on the provisions of
Paragraph 15.2 above. Within 30 days after receipt of such notice from
Landlord, Tenant shall have the right either to (i) accept Landlord's
statement of Base Monthly Rent as the Base Monthly Rent for the applicable
extension period; or (ii) elect to arbitrate Landlord's estimate of Fair
Market Rent, such arbitration to be conducted pursuant to the provisions
hereof. Failure on the part of Tenant to require arbitration of Fair Market
Rent within such 30-day period shall constitute acceptance of the Base
Monthly Rent for the applicable extension period as calculated by Landlord.
If Tenant elects arbitration, the arbitration shall be concluded within 90
days after the date of Tenant's election, subject to extension for an
additional 30-day period if a third arbitrator is required and does not act
in a timely manner. To the extent that arbitration has not been completed
prior to the expiration of any preceding period for which Base Monthly Rent
has been determined, Tenant shall pay Base Monthly Rent at the rote
calculated by Landlord, with the potential for an adjustment to be made once
Fair Market Rent is ultimately determined by arbitration.
15.4 In the event of arbitration, the judgment or the award rendered in any
such arbitration may be entered in any court having jurisdiction and shall be
final and binding between the parties. The arbitration shall be conducted and
determined in the City and County of San Francisco in accordance with the
then prevailing roles of the American Arbitration Association or its
successor for arbitration of commercial disputes except to the extent that
the procedures mandated by such roles shall be modified as follows:
(a) Tenant shall make demand for arbitration in writing within 30 days
after service of Landlord's determination of Fair Market Rent given under
Paragraph 15.3 above, specifying therein the name and address of the person to
act as the arbitrator on its behalf. The arbitrator shall be qualified as a real
estate appraiser familiar with the Fair Market Rent of similar industrial,
research and development, or office space in the Silicon Valley area who would
qualify as an expert witness over objection to give opinion testimony addressed
to the issue in a court of competent jurisdiction. Failure on the part of Tenant
to make a proper demand in a timely matter for such arbitration shall constitute
a waiver of the right thereto. Within 15 days after the service of the demand
for arbitration, Landlord shall give notice to Tenant, specifying the name and
address of the person designated by Landlord to act as arbitrator on its behalf
who shall be similarly qualified. If Landlord fails to notify Tenant of the
appointment of its arbitrator, within or by the time above specified, then the
arbitrator appointed by Tenant shall be the arbitrator to determine the issue.
(b) In the event that two arbitrators are chosen pursuant to Paragraph
15.4(a) above, the arbitrators so chosen shall, within 15 days after the second
arbitrator is appointed determine the Fair Market Rent. If the two
32.
<PAGE>
arbitrators shall be unable to agree upon a determination of Fair Market Rent
within such 15-day period, they, themselves, shall appoint a third arbitrator,
who shall be a competent and impartial person with qualifications similar to
those required of the first two arbitrators pursuant to Paragraph 15.4(a). In
the event they are unable to agree upon such appointment within seven days after
expiration of such 15-day period, the third arbitrator shall be selected by the
parties themselves, if they can agree thereon, within a further period of 15
days. If the parties do not so agree, then either party, on behalf of both, may
request appointment of such a qualified person by the then Chief Judge of the
United States District Court having jurisdiction over the County of Santa Clara,
acting in his private and not in his official capacity, and the driver party
shall not raise any question as to such Judge's full power and jurisdiction to
entertain the application for and make the appointment. The three arbitrators
shall decide the dispute if it has not previously been resolved by following the
procedure set forth below.
(c) Where all issue cannot be resolved by agreement between the two
arbitrators selected by Landlord and Tenant or settlement between the parties
during Ore course of arbitration, the issue shall be resolved by the three
arbitrators within 15 days of the appointment of the third arbitrator in
accordance with the following procedure. The arbitrator selected by each of the
parties shall state in writing his determination of the Fair Market Rent
supported by the reasons therefor with counterpart copies to each part),. The
arbitrators shall arrange for a simultaneous exchange of such proposed
resolutions. The role of the third arbitrator shall be to select which of the
two proposed resolutions most closely approximates his determination of Fair
Market Rent. The third arbitrator shall have no right to propose a middle ground
or any modification of either of the two proposed resolutions. The resolution he
chooses as most closely approximating his determination shall constitute the
decision of the arbitrators and be fired and binding upon the parties.
(d) In the event of a failure, refusal or inability of any arbitrator to
act, his successor shall be appointed by him, but in the case of the third
arbitrator, his successor shall be appointed in the same manner as provided for
appointment of the third arbitrator. The arbitrators shall decide the issue
within 15 days after the appointment of the third arbitrator. Any decision in
which the arbitrator appointed by Landlord and the arbitrator appointed by
Tenant concur shall be binding and conclusive upon the parties. Each party shall
pay the fee and expenses of its respective arbitrator and both shall share the
fee and expenses of the third arbitrator, if any, and the attorneys' fees and
expenses of counsel for the respective parties and of witnesses shall be paid by
the respective party engaging such counsel or calling such witnesses.
(e) The arbitrators shall have the right to consult experts and competent
authorities to obtain factual information or evidence pertaining to a
determination of Fair Market Rent, but any such consultation shall be made in
the presence of both parties with full right on their part to cross-examine. The
arbitrators shall render their decision and award in writing with counterpart
copies to each party. The arbitrators shall have no power to modify the
provisions of this Lease.
ARTICLE 16
TELEPHONE SERVICE
Notwithstanding any other provision of riffs Lease to the contrary:
(a) So long as the entirety of the Leased Premises is leased to Tenant:
(i) Landlord shall have no responsibility for providing to Tenant
any telephone equipment, including wiring, within the Leased Premises or for
providing telephone service or connections from the utility to the Leased
Premises; and
(ii) Landlord makes no warranty as to the quality, continuity or
availability of the telecommunications services in the Building, and Tenant
hereby waives any claim against Landlord for any actual or consequential damages
(including damages for loss of business) in the event Tenant's
telecommunications services in any way are interrupted, damaged or rendered less
effective, except to rite extent caused by the grossly negligent or willful act
or omission by Landlord, its agents or employees. Tenant accepts the telephone
equipment (including, without limitation, the INC, as defined below) in its
"AS-IS" condition, and Tenant shall be solely responsible for contracting with a
reliable third part), vendor to assume responsibility for the maintenance and
repair thereof (which
33.
<PAGE>
contract shall contain provisions requiring such vendor to inspect the INC
periodically (the frequency of such inspections to be determined by such vendor
based on its experience and professional judgment), and requiring such vendor to
meet local and federal requirements for telecommunications material and
workmanship). Landlord shall not be liable to Tenant and Tenant waives all
claims against Landlord whatsoever, whether for personal injury, property
damage, loss of use of the Leased Premises, or otherwise, due to the
interruption or failure of telephone services to the Leased Premises. Tenant
hereby holds Landlord harmless and agrees to indemnify, protect and defend
Landlord from and against any liability for any damage, loss or expense due to
any failure or interruption of telephone service to the Leased Premises for any
reason. Tenant agrees to obtain loss of rental insurance adequate to cover any
damage, loss or expense occasioned by the interruption of telephone service.
(b) At such time as the entirety of the Leased Premise is no longer
leased to Tenant, Landlord shall in its sole discretion have the right, by
written notice to Tenant, to elect to assume limited responsibility for INC, as
provided below, and upon such assumption of responsibility by Landlord, This
subparagraph (b) shall apply prospectively.
(i) Landlord shall provide Tenant access to such quantity of pairs
in the Building intra-building network cable ("INC") as is determined to be
available by Landlord in its reasonable discretion. Tenant's access to the INC
shall be solely by arrangements made by Tenant, as Tenant may elect, directly
with Pacific Bell or Landlord (or such vendor as Landlord may designate), and
Tenant shall pay all reasonable charges as may be imposed in connection
therewith. Pacific Bell's charges shall be deemed to be reasonable. Subject to
the foregoing, Landlord shall have no responsibility for providing to Tenant any
telephone equipment, including wiring, within the Leased Premises or for
providing telephone service or connections from the utility to the Leased
Premises, except as required by law.
(ii) Tenant shall not alter, modify, add to or disturb any
telephone wiring in the Leased Premises or elsewhere in the Building without the
Landlord's prior written consent. Tenant shall be liable to Landlord for any
damage to the telephone wiring in the Building due to the act, negligent or
otherwise, of Tenant or any employee, contractor or other agent of Tenant.
Tenant shall have no access to the telephone closets within the Building, except
in the manner and under procedures established by Landlord. Tenant shall
promptly notify Landlord of any actual or suspected failure of telephone service
to the Leased Premises.
(iii) All costs incurred by Landlord for the installation,
maintenance, repair and replacement of telephone wiring in the Building shall be
a Property Maintenance Cost.
(iv) Landlord makes no warranty as to the quality, continuity or
availability of the telecommunications services in the Building, and Tenant
hereby waives any claim against Landlord for any actual or consequential damages
(including damages for loss of business) in the event Tenant's
telecommunications services in any way are interrupted, damaged or rendered less
effective, except to the extent caused by the actively negligent or willful act
or omission by Landlord, its agents or employees. Tenant acknowledges that
Landlord meets its duty of care to Tenant with respect to the Building INC by
contracting with a reliable third party vendor to assume responsibility for the
maintenance and repair thereof (which contract shall contain provisions
requiring such vendor to inspect the INC periodically (the frequency of such
inspections to be determined by such vendor based on its experience and
professional judgment), and requiring such vendor to meet local and federal
requirements for telecommunications material and workmanship). Subject to the
foregoing, Landlord shall not be liable to Tenant and Tenant waives all claims
against Landlord whatsoever, whether for personal injury, property damage, loss
of use of the Leased Premises, or otherwise, due to the interruption or failure
of telephone services to the Leased Premises. Tenant hereby holds Landlord
harmless and agrees to indemnify, protect and defend Landlord from and against
any liability for any damage, loss or expense due to any failure or interruption
of telephone service to the Leased Premises for any reason. Tenant agrees to
obtain loss of rental insurance adequate to cover any damage, loss or expense
occasioned by the interruption of telephone service.
34.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the respective dates below set forth with the intent to be legally bound thereby
as of the Effective Date of this Lease first above set forth.
LANDLORD:
TRINET ESSENTIAL FACILITIES XXVI,
INC., a Maryland
corporation
Dated: 12/1/99 By: /s/ XXX
--------------------- ---------------------------------------
Title: VICE PRESIDENT
------------------------------------
TENANT:
POLYCOM, INC., a Delaware corporation
Dated: 11/30/99 By: /s/ XXX
--------------------- ---------------------------------------
Title: CFO
------------------------------------
Dated: 11/30/99 By: /s/ XXX
--------------------- ---------------------------------------
Title: PRESIDENT & CEO
------------------------------------
35.
<PAGE>
EXHIBIT A
1565 Barber Lane
Map
<PAGE>
EXHIBIT B
1565; BARBER LANE, MILPITAS
First Floor
[Floorplan]
<PAGE>
EXHIBIT C
ROOF-MOUNTED MECHANICAL EQUIPMENT REPLACEMENT
1565 BARBER LANE MILPITAS, CALIFORNIA
SCOPE OF WORK
The scope of work includes the removal of forty (40) existing HVAC units and
replacement with forty (40) new HVAC units of equal tonnage. The project is
intended to be an "in kind" replacement of the existing HVAC units, and is not
an upgrade of the building's existing cooling capacity. The project does not
include modifications to the existing air distribution system, which may be
required to supply conditioned air to the tenant's reconfigured interior space.
Redistribution of the existing interior ducting and controls is the
responsibility of the tenant. The project generally consists of the following:
a) Disconnect gas, electric, and plumbing service from the existing units.
b) Remove the existing air conditioning units for the site.
c) Structurally support the roof as per specification.
d) Install new curbs to new structural supports.
e) Install forty (40) new air conditioning units to the roof curbing.
f) Re-connect existing gas lines with new gas valves.
g) Reconnect electrical with new disconnects.
h) Reconnect plumbing to proper drainage point (reusing existing).
i) Start up new systems.
EQUIPMENT INVENTORY
The following is a schedule and description of the new HVAC package units
included in the Roof-Mounted Mechanical Equipment Replacement Project:
<TABLE>
<CAPTION>
UNIT ID QUANTITY (NO. UNITS) CAPACITY (TONS PER UNIT)
- --------------------------------------------------------------------------------
<S> <C> <C>
A1 5 15
- --------------------------------------------------------------------------------
A2 14 5
- --------------------------------------------------------------------------------
A3 3 7.5
- --------------------------------------------------------------------------------
A4 5 25
- --------------------------------------------------------------------------------
A5 11 3
- --------------------------------------------------------------------------------
A6 1 4
- --------------------------------------------------------------------------------
A7 1 20
- --------------------------------------------------------------------------------
TOTAL 40 349.5 Tons total
- --------------------------------------------------------------------------------
</TABLE>
The new HVAC package equipment consists of high efficiency gas/electric units
with special factory installed options (FIOPS). FIOPS included down flow airflow
with an economizer and communication interface; power exhaust; and a return and
supply air smoke detector.
EXCLUSIONS
Additional items not included in the Roof-Mounted Mechanical Equipment
Replacement Project are as follows:
a) Permits or fees of any kind.
b) Interior air system modifications or repair.
c) Gas or electrical modifications other than specified.
d) Control system replacement or repair.
e) Structural engineering.
f) Compensate piping other than specified.
<PAGE>
EXHIBIT D
FORM OF TENANT ESTOPPEL
TENANT ESTOPPEL CERTIFICATE
To: TriNet Essential Facilities XXVI, Inc.
c/o TriNet Corporate Realty Trust, Inc.
One Embarcadero Center, Suite 3300
San Francisco, CA 94111
ATTN: Asset Management
--------------------------
--------------------------
--------------------------
ATTN:
-------------------
Re: Lease, dated as of November___, 1999 between Polycom, Inc., a
Delaware corporation, as tenant (the original named tenant under
the Lease, together with such tenant's successors and assigns,
being hereinafter referred to collectively as the "Tenant"), and
TriNet Essential Facilities XXVI, a Maryland corporation
("Landlord"), covering certain premises known by the street
address 1565 Barber Lane in the City of Milpitas, County of Santa
Clara, State of California (the "Leased Premises"), as amended as
noted on attached Schedule A (collectively, the "Lease")
Gentlemen:
The undersigned Tenant hereby represents, warrants and certifies to
___________________("___________") and Landlord, that:
1. The Lease has not been modified, changed, altered or amended in any
respect, either orally or in writing, except as may be indicated on Schedule A
attached hereto, and constitutes the entire agreement between Tenant and
Landlord affecting Tenant's leasing of the Leased Premises. A true and correct
copy of the Lease is attached as Schedule B. The Lease is in full force and
effect and is not subject to any contingencies or conditions not set forth in
the Lease.
2. The term of the Lease commenced on,______________ ,_________ and will
expire on ______________,__________ ; the Tenant has two (2) options to renew
the Lease Term each for a period of five (5) years.
3. The monthly base rent payable under the Lease as of the current month
is $ _______ Tenant has paid all fixed and additional rent and other sums which
are due and
<PAGE>
payable under the Lease through the date hereof, and Tenant has not made and
will not make any prepayments of fixed rent for more than one month in advance.
There are no presently unexpired rental concessions or abatements due under the
Lease except as set forth on Schedule A attached hereto. Tenant has no credits,
offsets, abatements, defenses, counterclaims or deductions against any rental or
other payments due under the Lease or with respect to its performance of the
other terms and conditions of the Lease, and has asserted no claims against
Landlord.
4. Tenant has paid to Landlord a security deposit in the amount of
$___ . Landlord is the beneficiary under a letter of Credit in the amount of
$___ required by the Lease as additional security. Tenant has not made any
other payments to Landlord as a security deposit, advance or prepaid rent.
5. Landlord has completed, and, if required under the Lease, paid for,
any and all tenant work required under the Lease and Tenant has accepted the
Leased Premises. Tenant is not entitled to any further payment or credit for
tenant work.
6. To Tenant's best knowledge, Landlord is not in default in the
performance of any of the terms of the Lease, nor is there now any fact or
condition which, with notice or lapse of time or both, will become such a
default. Tenant has not delivered to Landlord any notice of default with respect
to the Landlord's obligations under the Lease.
7. Tenant is in actual possession of the entire Leased Premises and, to
Tenant's best knowledge, is not in any respect in default under any of the terms
and conditions of the Lease, nor is there now any fact or condition which, with
notice or lapse of time or both, will become such a default. Tenant has not
received from Landlord any notice of default with respect to the Tenant's
obligations under the Lease.
8. Tenant has not assigned, transferred, mortgaged or otherwise
encumbered its interest under the Lease, nor subleased any of the Leased
Premises, nor permitted any person or entity to use the Leased Premises, except
as otherwise indicated on Schedule A annexed hereto.
9. Except as expressly provided in the Lease, Tenant:
(i) does not have any right to renew or extend the term of the
lease,
(ii) does not have any right to cancel or surrender the Lease
prior to the expiration of the term of the Lease,
(iii) does not have any option or rights of first refusal or
first offer to purchase or lease all or any part of the
Leased Premises or the real property of which the Leased
Premises are a part,
(iv) does not have any right, title or interest with respect to
the Leased Premises other than as lessee under the lease,
and
<PAGE>
(v) does not have any right to relocate into other property
owned by Landlord or any of landlord's affiliates.
10. There has not been filed by or against Tenant a petition in
bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors,
any petition seeking reorganization or arrangement under the bankruptcy laws of
the United States, or any state thereof, or any other action brought under said
bankruptcy laws with respect to Tenant.
11. If Tenant is required to provide insurance coverage under the Lease,
Tenant has not given or received written notice that Tenant's insurance coverage
will be canceled or will not be renewed.
12. Tenant is not aware of any material defects or deficiencies in the
systems, elements or components of the Leased Premises. Tenant has not received
any written notice, citation or other claim alleging any material violation of
any applicable building, zoning, land use, environmental, anti-pollution,
health, fire, safety, access accommodations for the physically handicapped,
subdivision, energy and resource conservation or similar laws, statutes, rules,
regulations or ordinances, or any covenants, conditions and restrictions
applicable to the Leased Premises.
13. To the best knowledge of Tenant, any and all brokerage and leasing
commissions relating to and/or resulting from Tenant's execution and delivery of
the Lease and occupancy of the Leased Premises have been paid in full.
14. The individual executing this Tenant Estoppel Certificate on behalf
of Tenant represents and warrants that he has the power and the authority to
execute this Tenant Estoppel Certificate on behalf of Tenant.
15. This Tenant Estoppel Certificate shall inure to the benefit of
___________ and Landlord and their respective nominees, successors, assigns,
participants and designees and shall be binding upon Tenant and its successors
and assigns.
Dated this ______ day of _________________ , ______.
Tenant: _________________________ , a ________________
By: _______________________
Its: ______________________
<PAGE>
Exhibit 21.1 Subsidiaries of the Registrant
Entity Name Country
Polycom, Inc. (Parent) United States of America
Atlas Communication Engines, Inc. United States of America
ViaVideo Communications, Inc. United States of America
Polycom Global, LLC United States of America
Polycom Global, Inc. Barbados
Polycom, K.K. Japan
Polycom Hong Kong Limited Hong Kong
Polycom Solutions Pte. Ltd. Singapore
Polycom Global Pty. Ltd. Australia
Polyspan, Ltd. United Kingdom
Polyspan, B.V. Netherlands
Polyspan, S.A.R.L. France
Polyspan, GmbH Germany
Polyspan, AS Norway
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of Polycom, Inc. on Forms S-8 (Registration file Nos. 333-45351,
333-43059, 333-86681 and 333-93419) of our report dated January 28, 2000, except
for Note 15, which is as of March 3, 2000, relating to the financial statements
and financial statement schedules, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 29, 2000
<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 Robert C. Hagerty 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/ Robert C. Hagerty Chairman of the Board of Directors, March 29, 2000
- ------------------------------------
Robert C. Hagerty Chief Executive Officer and President
(Principal Executive Officer)
/s/ Michael R. Kourey Senior Vice President, Finance and March 29, 2000
- ------------------------------------
Michael R. Kourey Administration, Chief Financial
Officer, Secretary and Director
(Principal Financial and Accounting
Officer)
/s/ Betsy Atkins Director March 29, 2000
- ------------------------------------
Betsy Atkins
/s/ Brian L. Hinman Director March 29, 2000
- ------------------------------------
Brian L. Hinman
/s/ John A. Kelly Director March 29, 2000
- ------------------------------------
John A. Kelly
/s/ Stanley J. Meresman Director March 29, 2000
- ------------------------------------
Stanley J. Meresman
/s/ William Owens Director March 29, 2000
- ------------------------------------
William Owens
/s/ John Seely Brown Director March 29, 2000
- ------------------------------------
John Seely Brown
/s/ James R. Swartz Director March 29, 2000
- ------------------------------------
James R. Swartz
</TABLE>
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 35,952
<SECURITIES> 24,815
<RECEIVABLES> 48,749
<ALLOWANCES> 1,304
<INVENTORY> 18,136
<CURRENT-ASSETS> 137,775
<PP&E> 22,652
<DEPRECIATION> 12,857
<TOTAL-ASSETS> 164,721
<CURRENT-LIABILITIES> 51,451
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 113,253
<TOTAL-LIABILITY-AND-EQUITY> 164,721
<SALES> 200,067
<TOTAL-REVENUES> 200,067
<CGS> 91,257
<TOTAL-COSTS> 91,257
<OTHER-EXPENSES> 65,408<F1>
<LOSS-PROVISION> 433
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 42,969
<INCOME-TAX> 13,616
<INCOME-CONTINUING> 29,353
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,353
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.81
<FN>
<F1>INCLUDES 1,650 K OF ACQUISITION COSTS
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
ANNUAL FINANCIAL STATEMENTS RESTATED FOR POOLING TRANSACTION WITH ATLAS
COMMUNICATION ENGINES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 18,006 12,563 11,406
<SECURITIES> 5,483 5,184 10,101
<RECEIVABLES> 26,039 9,144 6,722
<ALLOWANCES> 871 471 446
<INVENTORY> 17,326 10,215 7,540
<CURRENT-ASSETS> 70,794 39,565 36,449
<PP&E> 15,640 10,292 7,016
<DEPRECIATION> 8,838 5,741 3,769
<TOTAL-ASSETS> 78,305 44,469 39,806
<CURRENT-LIABILITIES> 24,377 17,542 6,773
<BONDS> 0 0 0
0 0 0
0 5 2
<COMMON> 16 12 13
<OTHER-SE> 53,912 26,910 33,018
<TOTAL-LIABILITY-AND-EQUITY> 78,305 44,469 39,806
<SALES> 116,886 50,394 39,006
<TOTAL-REVENUES> 116,886 50,394 39,006
<CGS> 57,906 27,583 18,987
<TOTAL-COSTS> 57,906 27,583 18,987
<OTHER-EXPENSES> 41,230<F1> 36,705<F2> 18,478
<LOSS-PROVISION> 400 30 3
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 17,350 (13,924) 1,538
<INCOME-TAX> 1,749 171 108
<INCOME-CONTINUING> 15,601 (14,095) 1,430
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 15,601 (14,095) 1,430
<EPS-BASIC> 0.54 (0.66) 0.10
<EPS-DILUTED> 0.46 (0.66) 0.07
<FN>
<F1>INCLUDES 185K OF ACQUISITION COSTS
<F2>INCLUDES 597K OF ACQUISTION COSTS
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
QUARTERLY FINANCIAL STATEMENTS RESTATED FOR POOLING TRANSACTION WITH ATLAS
COMMUNICATION ENGINES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1998
DEC-31-1998
<PERIOD-START> JAN-01-1997 APR-01-1997 JUL-01-1997 JAN-01-1998
APR-01-1998
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 MAR-31-1998
JUN-30-1998
<CASH> 12,983 22,074 21,268 14,380
14,091
<SECURITIES> 8,454 5,003 1,752 6,466
5,983
<RECEIVABLES> 5,935 5,624 8,112 11,905
16,941
<ALLOWANCES> 448 455 471 471
471
<INVENTORY> 7,802 8,280 9,308 10,983
16,028
<CURRENT-ASSETS> 36,118 42,002 41,745 46,623
55,135
<PP&E> 7,749 8,474 9,393 11,381
12,948
<DEPRECIATION> 4,205 4,657 5,170 6,384
7,185
<TOTAL-ASSETS> 40,031 46,194 46,328 52,058
61,576
<CURRENT-LIABILITIES> 8,403 9,203 11,845 16,780
22,540
<BONDS> 0 0 0 0
0
0 0 0 0
0
2 5 5 0
0
<COMMON> 13 13 13 16
16
<OTHER-SE> 31,613 36,973 34,465 35,262
39,020
<TOTAL-LIABILITY-AND-EQUITY> 40,031 46,194 46,328 52,058
61,576
<SALES> 10,888 12,248 13,957 19,093
27,866
<TOTAL-REVENUES> 10,888 12,248 13,957 19,093
27,866
<CGS> 5,899 6,862 7,630 9,800
14,280
<TOTAL-COSTS> 5,899 6,862 7,630 9,800
14,280
<OTHER-EXPENSES> 6,671 7,478<F1> 8,816<F2> 8,764<F3>
9,896
<LOSS-PROVISION> 3 7 20 0
0
<INTEREST-EXPENSE> 0 0 0 0
0
<INCOME-PRETAX> (1,685) (2,099) (2,509) 529
3,690
<INCOME-TAX> 36 47 28 7
151
<INCOME-CONTINUING> (1,721) (2,146) (2,537) 522
3,539
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (1,721) (2,146) (2,537) 522
3,539
<EPS-BASIC> (0.08) (0.10) (0.12) 0.02
0.12
<EPS-DILUTED> (0.08) (0.10) (0.12) 0.02
0.10
<FN>
<F1>INCLUDES 340K OF ACQUISITION COSTS
<F2>INCLUDES 133K OF ACQUISITION COSTS
<F3>INCLUDES 185K OF ACQUISITION COSTS
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
QUARTERLY FINANCIAL STATEMENTS RESTATED FOR POOLING TRANSACTION WITH ATLAS
COMMUNICATION ENGINES, INC. AND IS QUALIFIED IN ITS ENRTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999 DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1998 JAN-01-1999 APR-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1998 MAR-31-1999 JUN-30-1999 SEP-30-1999
<CASH> 13,558 40,498 37,005 38,644
<SECURITIES> 7,035 7,301 16,211 15,859
<RECEIVABLES> 21,771 30,692 34,574 40,702
<ALLOWANCES> 871 871 1,041 1,089
<INVENTORY> 15,279 15,740 19,605 19,641
<CURRENT-ASSETS> 59,704 98,847 112,981 119,514
<PP&E> 14,583 17,313 19,167 20,903
<DEPRECIATION> 7,993 9,739 10,715 11,647
<TOTAL-ASSETS> 66,960 110,037 127,176 139,581
<CURRENT-LIABILITIES> 21,895 30,283 37,706 40,024
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 16 17 17 17
<OTHER-SE> 45,049 79,737 89,453 99,540
<TOTAL-LIABILITY-AND-EQUITY> 66,960 110,037 127,176 139,581
<SALES> 33,140 41,314 45,981 52,284
<TOTAL-REVENUES> 33,140 41,314 45,981 52,284
<CGS> 16,392 19,533 20,833 23,661
<TOTAL-COSTS> 16,392 19,533 20,833 23,661
<OTHER-EXPENSES> 10,865 12,592 14,807 17,101
<LOSS-PROVISION> 400 0 170 48
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> 5,483 9,189 10,171 11,474
<INCOME-TAX> 201 1,449 3,667 4,252
<INCOME-CONTINUING> 5,282 7,740 6,504 7,222
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 5,282 7,740 6,504 7,222
<EPS-BASIC> 0.18 0.25 0.20 0.22
<EPS-DILUTED> 0.15 0.22 0.18 0.20
</TABLE>
