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Polycom Inc – ‘424B1’ on 7/28/00

On: Friday, 7/28/00, at 8:27am ET · Accession #: 912057-0-33513 · File #: 333-40912

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 7/28/00  Polycom Inc                       424B1                  1:224K                                   Merrill Corp/FA

Prospectus — Rule 424(b)(1)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B1       Prospectus                                            71    364K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Basic net income (loss) per share Capitalization Cash and cash equivalents Common stock Comprehensive income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Operations Cost of net revenues Diluted net income (loss) per share Dividend Policy Experts General and administrative Index to Financial Statements Legal Matters Litigation reserve release Management Management's Discussion and Analysis of Financial Condition and Results of Operations Net income (loss) Net revenues Notes to Condensed Consolidated Financial Statements Notes to Consolidated Financial Statements Offering, The Price Range of Common Stock Prospectus Summary Provision for income taxes Report of Independent Accountants Research and development Revenue Recognition Risk Factors Sales and marketing Selected Consolidated Financial Data Selling Stockholder Special Note Regarding Forward-Looking Statements Stockholders' equity The Offering Underwriters Unearned stock-based compensation Use of Proceeds Video communications Voice communications Where You Can Find More Information
1	1st Page - Filing Submission
"	Common stock
3	Prospectus Summary
4	Video communications
5	Voice communications
8	The Offering
9	Risk Factors
17	Special Note Regarding Forward-Looking Statements
18	Use of Proceeds
"	Dividend Policy
"	Price Range of Common Stock
19	Capitalization
"	Stockholders' equity
20	Selected Consolidated Financial Data
21	Management's Discussion and Analysis of Financial Condition and Results of Operations
22	Net revenues
23	Cost of net revenues
24	Sales and marketing
25	Research and development
"	General and administrative
26	Provision for income taxes
28	Litigation reserve release
32	Management
35	Selling Stockholder
36	Underwriters
38	Legal Matters
"	Experts
"	Where You Can Find More Information
39	Index to Financial Statements
40	Report of Independent Accountants
41	Consolidated Balance Sheets
42	Consolidated Statements of Operations
44	Consolidated Statements of Cash Flows
45	Notes to Consolidated Financial Statements
"	Cash and cash equivalents
46	Revenue Recognition
49	Net income (loss)
"	Basic net income (loss) per share
"	Diluted net income (loss) per share
"	Comprehensive income
58	Unearned stock-based compensation
67	Notes to Condensed Consolidated Financial Statements

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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-40912
PROSPECTUS

2,600,000 SHARES

[LOGO]

COMMON STOCK
-----------------

POLYCOM, INC. IS OFFERING 1,600,000 SHARES OF ITS COMMON STOCK AND THE SELLING
STOCKHOLDER IS OFFERING 1,000,000 SHARES OF COMMON STOCK. WE WILL NOT RECEIVE
ANY OF THE PROCEEDS FROM THE SHARES OF COMMON STOCK SOLD BY THE SELLING
STOCKHOLDER.

-------------------

OUR COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"PLCM." ON JULY 27, 2000, THE REPORTED LAST SALE PRICE OF OUR COMMON STOCK ON
THE NASDAQ NATIONAL MARKET WAS $91 PER SHARE.

-------------------

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 11.

-------------------

PRICE $90 7/8 A SHARE
-------------------

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UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS POLYCOM, INC. STOCKHOLDER
--------------- ------------- ------------- -----------

PER SHARE.................... $90.875 $4.540 $86.335 $86.335
TOTAL........................ $236,275,000 $11,804,000 $138,136,000 $86,335,000

POLYCOM, INC. AND THE SELLING STOCKHOLDER HAVE GRANTED THE UNDERWRITERS THE
RIGHT TO PURCHASE UP TO AN ADDITIONAL 390,000 SHARES OF COMMON STOCK TO COVER
OVER-ALLOTMENTS.

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

MORGAN STANLEY & CO. INCORPORATED IS ACTING AS BOOK-RUNNING LEAD MANAGER FOR THE
OFFERING. MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO
PURCHASERS ON AUGUST 2, 2000.

-------------------

JOINT LEAD MANAGERS

MORGAN STANLEY DEAN WITTER THOMAS WEISEL PARTNERS LLC
-----------------

DAIN RAUSCHER WESSELS UBS WARBURG LLC

FIRST SECURITY VAN KASPER

JULY 27, 2000

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TABLE OF CONTENTS

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PAGE
----

Prospectus Summary.......................................... 5
Risk Factors................................................ 11
Special Note Regarding Forward-Looking Statements........... 19
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Price Range of Common Stock................................. 20
Capitalization.............................................. 21
Selected Consolidated Financial Data........................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Management.................................................. 34
Selling Stockholder......................................... 37
Underwriters................................................ 38
Legal Matters............................................... 40
Experts..................................................... 40
Where You Can Find More Information......................... 40
Index to Financial Statements............................... F-1

-------------------

You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We are offering to
sell shares of common stock and seeking offers to buy shares of common stock
only in jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
common stock.

In this prospectus "Polycom," "we," "us" and "our" refer to Polycom, Inc.
and its subsidiaries. Unless otherwise indicated, all information in this
prospectus assumes no exercise of the underwriters' over-allotment option.

424B1 3rd Page of 71 TOC 1st Previous Next ↓Bottom Just 3rd
PROSPECTUS SUMMARY

YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION CONCERNING OUR COMPANY, THE COMMON STOCK BEING SOLD IN THIS OFFERING
AND OUR FINANCIAL STATEMENTS APPEARING IN THIS PROSPECTUS AND IN THE DOCUMENTS
INCORPORATED BY REFERENCE IN THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY,
YOU SHOULD READ THE REST OF THIS PROSPECTUS, INCLUDING THE DOCUMENTS
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, BEFORE YOU INVEST IN OUR COMMON
STOCK. READ THIS ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS DESCRIBED
UNDER "RISK FACTORS."

OUR BUSINESS

We develop, manufacture and market high-quality, easy-to-use communications
equipment that enables enterprise users to access broadband network services and
leverage increased bandwidth to more conveniently conduct voice, video and data
communications. Our product lines include network access products and enterprise
voice and video communications equipment. Our NetEngine family of network access
products enables enterprises to more easily and cost-effectively utilize
broadband communications services. Our SoundStation, ViewStation and
StreamStation enterprise communications products enable businesses and other
organizations to utilize bandwidth-intensive voice and video applications to
more effectively communicate with employees, customers and partners. Within this
market, we are a technology and market share leader, with 45% of the group video
communications sector for the three months ended March 31, 2000, according to
research firm Telespan Publishing Corporation, or Telespan, and 73% of the North
American tabletop voice conferencing sector, according to research firm Frost &
Sullivan. The breadth of our Internet Protocol, or IP-enabled voice and video
and network access product lines enables us to provide enterprise customers with
a comprehensive broadband solution, whether they require communications products
for their wiring closets, meeting rooms or desktops. We believe that our
strategy of providing network access products, which facilitate bandwidth, and
voice and video products, which consume bandwidth, creates a synergistic demand
cycle across our entire product line.

We are leveraging our core technology expertise, strong brand and reputation
for quality to enter new, high-growth communications markets. For example, we
recently entered the desktop video market with the introduction of our ViaVideo
product line. We also have alliances with leading communications and technology
firms to ensure that our products meet the real-time, on-demand requirements of
enterprise users. For example, we have a joint development agreement with Cisco
Systems to develop and provide voice-over IP, or VoIP, communications products
and have formed similar co-branding, joint product development and OEM
relationships with leading companies such as Lucent Technologies, Nortel
Networks and Jetstream Communications.

We sell our network access and voice and video communications products
globally through a network of more than 250 channel partners, including leading
communications service providers, communications equipment providers, value
added resellers, computer distributors and retailers. We manufacture our
products through a low-cost, outsourced model, optimized for quality,
reliability and fulfillment agility. Our net revenues increased 71% from the
year ended December 31, 1998 to $200.1 million for the year ended December 31,
1999, of which 63% was attributable to video communications products, 34% to
voice communications products and 3% to network access products. Our net
revenues increased 63% from the quarter ended March 31, 1999 to $67.3 million
for the quarter ended March 31, 2000, of which 61% was attributable to video
communications products, 35% to voice communications products and 4% to network
access products.

OUR MARKETS AND PRODUCTS

In today's competitive markets, many enterprises require broadband
communications services capable of supporting high-speed, high-performance
applications, including Web browsing, file transfers, e-commerce and voice and
video communications. Prompted by regulatory changes and accelerated by

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increasing demand for bandwidth-intensive applications, more cost-effective
broadband access technologies, including digital subscriber line, or DSL, are
being rapidly deployed. While DSL was originally introduced as a high-speed data
service, recent technological advances have enabled communications service
providers to offer both data and voice services over a single DSL connection, a
technology called voice-over-DSL, or VoDSL. In order to access DSL and VoDSL
services, enterprise users require communications equipment located at the
customer premise. Enterprise users also require enterprise communications
equipment that is cost-effective, simple to install and configure and
interoperable with a wide range of central office network equipment. These
requirements are particularly important to small- and medium-sized enterprises
that lack the financial and technical resources to manage complex voice and data
networks.

NETWORK ACCESS

Our NetEngine product family consists of Integrated Access Devices, or IADs,
and DSL routers that enable the delivery of DSL and VoDSL services. Compact,
cost-effective and highly-integrated, our NetEngine products are suited for
small- and medium-sized businesses and remote office locations. Our NetEngine
products reside at the customer premise and aggregate voice, video and data
traffic for delivery to the service provider's broadband network. All of our
network access products feature extensive interoperability with leading DSL
equipment vendors, including Lucent Technologies, Nokia, Promatory
Communications, AccessLan Communications and Paradyne. In addition to selling
our NetEngine products under the Polycom brand, we also produce co-branded and
private label versions for leading companies, such as Lucent Technologies,
Nortel Networks, Jetstream Communications and AccessLan Communications.

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PRODUCT KEY FEATURES LIST PRICE
--------- ------------------------------------------------------------ ----------

NetEngine - Voice-over-DSL Integrated Access Device, or IAD $999-
6000 - Supports bundled voice and data services over DSL $1,499

NetEngine - DSL router enables high-speed data access $499
3300R - Supports Frame Relay and ATM network access
- Supports IP routing and transparent bridging

NetEngine - DSL data service unit $599
3300D - Enables enterprise users to upgrade their networks
without replacing
existing customer premise equipment

VIDEO COMMUNICATIONS

Enterprises have long sought technologies to facilitate more natural and
effective one-on-one and group communications among people separated by
distance. Several trends are driving the need for improved enterprise
collaboration, including the proliferation of branch offices, increased
telecommuting and the heightened importance of regular interaction of companies
with their employees, customers and partners. Until recently, the ability to
conduct effective voice and video communication was hindered by low bandwidth
connections and the lack of appropriate customer premise equipment. With the
increasing availability of broadband services, many enterprises are now seeking
communications equipment capable of utilizing bandwidth to enable real-time and
on-demand voice and video communications.

We offer a family of video communications products, media servers and
network management software that facilitate high-quality, unified voice and
video communications. Our ViewStation product family is comprised of
high-fidelity, cost-effective, easy-to-use group videoconferencing systems that
utilize advanced video and audio compression technologies along with
Internet-based functionality. We recently introduced our ViaVideo desktop video
communications appliance, which integrates a multimedia

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processor, camera and our full-duplex Acoustic Clarity Technology for two-way
video, voice and data transmission in a single device. Our ViaVideo appliance
offers enterprises of all sizes, as well as telecommuters, affordable, two-way,
high-quality video-over-IP networks. Our media server products include Web
conferencing servers and streaming servers, such as the StreamStation. The
StreamStation system enables users to view live or previously recorded Web
broadcasts using common browsers. Our Global Management System provides users of
our video communications products with a globally-accessible address book,
real-time conference monitoring and other network management features that can
be easily upgraded.

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PRODUCT KEY FEATURES LIST PRICE
------------- ------------------------------------------------------------ -------------

ViewStation - High-quality, enhanced video and sound delivered at 30 $3,999-
frames per second and up to 60 fields per second $18,999
- Embedded Web functionality
- IP and ISDN connectivity

ViaVideo+ - Business-quality video communications appliance for the $599
desktop personal computer
- Easy integration with existing IP networks
- Affordable and easy-to-install through a standard
universal serial bus, or USB, port

StreamStation - Enables live or on-demand Web broadcasts of streaming $8,999
content
- Supports Microsoft and Real Networks streaming media
players

Global - Standards-based addressing for video clients approximately
Management - Real-time, Web-based monitoring and management of video $250 per user
System network

---------
+ Scheduled to ship third quarter of 2000.

VOICE COMMUNICATIONS

Our voice communications products are high-quality, full-duplex, easy-to-use
conference phones. Our flagship SoundStation products have become the most
widely-adopted group voice conferencing products. Our SoundStation products
feature our patented Acoustic Clarity Technology and proprietary microphone and
speaker technology, which minimize background echoes, word clipping and
distortion. Our SoundPoint Pro product brings the voice quality of SoundStation
to the desktop and additionally provides a broad range of handset phone business
features. Both our SoundStation and SoundPoint conference phones are compatible
with international standards and are in use in more than 30 countries.

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PRODUCT KEY FEATURES LIST PRICE
------------ ------------------------------------------------------------ -----------

SoundStation - High-quality voiceconferencing speakerphone $499-$1,299
- Handset-quality voice over a speakerphone

SoundStation - All the features of the SoundStation $999-$2,799
Premier - High-fidelity speaker for larger rooms
- Intelligent microphones that track who is speaking

SoundPoint - Integrated, high-quality speakerphone $249-$299
Pro - Multi-functional handset

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OUR COMPETITIVE STRENGTHS

ESTABLISHED, HIGHLY-RECOGNIZABLE BRAND NAME. We provide the most
widely-deployed video and voice conferencing products in the world. Because of
the broad presence, distinctive look and superior features and performance of
our products, we believe we have a high degree of brand recognition and a
reputation for quality.

STRONG BASE OF LEADING STRATEGIC PARTNERS. We have alliances with other
leading communications and technology firms to enable us to offer our customers
comprehensive solutions to their broadband communications needs. For example, we
have entered into strategic alliances with Cisco Systems and Lucent Technologies
to develop IP-based telephony products. We have collaborated with Microsoft and
Real Networks to develop streaming media solutions, and with Nortel Networks and
Jetstream Communications to co-develop new products that enable VoDSL.

CORE TECHNOLOGY EXPERTISE. Through the design and introduction of multiple
product lines, we have developed a portfolio of core voice, video and data
technologies. In particular, we have extensive experience developing proprietary
software for the broadband voice and video communications markets. We also have
expertise in network protocols, industry standards and other technologies
including streaming media, Web-based communications, acoustics technology and
multimedia communications. Our development team currently has approximately 150
engineers and we have 49 issued patents worldwide for our products. We believe
that our core technology portfolio differentiates our solution, gives us a
competitive advantage in the marketplace and enables the rapid development of
new products.

GLOBAL SALES CHANNEL. We sell our products through a worldwide network of
more than 250 channel partners, which includes leading communications service
providers, communications equipment vendors, value added resellers, computer
distributors and retailers. Our service provider channel partners include
MCIWorldcom, Sprint, GTE, British Telecom and France Telecom. Our equipment
provider channel partners include Cisco Systems, Lucent Technologies, Nortel
Networks and Siemens. Other distribution partners include Ingram Micro, Seiko
Epson, Computer 2000 and Office Depot.

COMPREHENSIVE PRODUCT LINE. We believe that we are differentiated by our
broad product line, which includes both network access and voice and video
communications products. The breadth of our product line enables us to provide
enterprise customers with a comprehensive broadband solution, whether they
require communications products for their wiring closets, meeting rooms or
desktops. We also believe that our strategy of providing network access
products, which facilitate bandwidth, and voice and video communications
products, which consume bandwidth, creates a synergistic demand cycle across our
entire product line.

EFFICIENT MANUFACTURING MODEL. We maintain an agile, low-cost, outsourced
manufacturing model and have achieved a reputation for excellent product
quality. This manufacturing strategy enables us to accelerate production and
integration of newly-acquired product lines while maintaining high quality and
reliability.

OUR STRATEGY

LEVERAGE TECHNOLOGY ASSETS TO BROADEN MARKET FOCUS. We intend to continue
to leverage our core technology assets and brand name to enter new, high-growth
communications markets such as DSL access, VoDSL, desktop video and VoIP. For
example, we have entered the broadband DSL access and VoDSL markets with the
successful introduction of our NetEngine product line. We recently extended our
group video conferencing presence into the desktop video market with the
introduction of our ViaVideo product, which is scheduled to ship in the third
quarter of 2000. We are also working with Cisco Systems to develop VoIP desktop
communications products.

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EXPAND STRATEGIC RELATIONSHIPS. Given the rapid pace of technological
change in our marketplace, we intend to continue to partner with leading
communications and technology companies to ensure that our products meet the
rapidly changing demands of end users. We intend to pursue a variety of
relationships, including co-branding, joint product development and OEM
arrangements.

PURSUE STRATEGIC ACQUISITIONS AND INVESTMENTS. In January 1998, we
completed the acquisition of ViaVideo Communications, a development stage group
video communications products company. Since the acquisition, we have become the
leader in the group video communications market. In 1999, sales of our video
communications products were $125.6 million, representing 63% of our net
revenues. In December 1999, we acquired Atlas Communication Engines, a developer
of DSL integrated access devices, and introduced our NetEngine family of
products based upon the acquired technology in January 2000. We intend to
continue our strategy of investing in complementary technologies to expand our
broadband solutions.

CONTINUED GLOBAL EXPANSION. We have expanded our presence into
international markets. Our sales to Europe, the Middle East and Africa increased
150% from 1998 to 1999 and our sales to Asia increased 122% during the same
period. We intend to continue to pursue international growth opportunities,
leveraging our broad reaching distribution channels and globally-recognized
brand name.

RECENT DEVELOPMENTS

On July 19, 2000, we announced our operating results for the second quarter
ended June 30, 2000. Our second quarter consolidated net revenues were $77.5
million and our net income was $.31 per diluted share. In the second quarter of
1999, net revenues were $46.0 million with net income of $.18 per diluted share.
The 1999 second quarter information has been restated for the acquisition of
Atlas Communication Engines in December 1999 which has been accounted for as a
pooling of interests.

-------------------

We were incorporated in December 1990 in Delaware. Our principal executive
offices are located at 1565 Barber Lane, Milpitas, California 95035, and our
telephone number at this location is (408) 526-9000. Our World Wide Web address
is www.polycom.com. Information on our website does not constitute a part of
this prospectus.

Polycom and the Polycom logo are our registered trademarks. This prospectus
also includes other trade names, trademarks and service marks of us and of other
companies.

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THE OFFERING

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Common stock offered by us................... 1,600,000 shares
Common stock offered by the selling 1,000,000 shares
stockholder................................
Total...................................... 2,600,000 shares
Total common stock to be outstanding after
this offering.............................. 36,816,546 shares
Over-allotment option........................ 390,000 shares
Use of proceeds.............................. We intend to use the proceeds of this
offering for working capital and other
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol................ PLCM

The above information is based upon 35,216,546 shares outstanding as of
March 31, 2000. This information does not include 4,189,667 shares of common
stock subject to outstanding options and 770,819 shares of common stock reserved
for future issuance under our stock plans. Subsequent to March 31, 2000, we
reserved an additional 1,750,000 shares for issuance under our 1996 stock
incentive plan. See "Capitalization" for additional information concerning the
number of outstanding shares of our capital stock and stock options.

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $ 50,394 $116,886 $200,067 $41,314 $67,295
Gross profit................................................ 22,811 58,980 108,810 21,781 37,558
-------- -------- -------- ------- -------
Operating income (loss)..................................... (15,090) 16,402 41,229 8,892 16,496
-------- -------- -------- ------- -------
Income (loss) before provision for income taxes............. (13,924) 17,350 42,969 9,189 17,357
-------- -------- -------- ------- -------
Net income (loss)........................................... $(14,095) $ 15,601 $ 29,353 $ 7,740 $11,629
======== ======== ======== ======= =======
Net income (loss) per share:
Basic..................................................... $ (.66) $ .54 $ .90 $ .25 $ .34
======== ======== ======== ======= =======
Diluted................................................... $ (.66) $ .46 $ .81 $ .22 $ .31
======== ======== ======== ======= =======
Weighted average shares outstanding:
Basic..................................................... 21,489 28,810 32,536 30,925 34,459
Diluted................................................... 21,489 33,847 36,458 35,626 37,785

The following table presents our summary consolidated balance sheet data as
of March 31, 2000. The as adjusted data gives effect to the sale of 1,600,000
shares of common stock that we are offering under this prospectus at an offering
price of $90.875 per share after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.

[Download Table]

AS OF MARCH 31, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 63,568 $201,166
Working capital............................................. 96,001 233,599
Total assets................................................ 195,058 332,656
Stockholders' equity........................................ 133,680 271,278

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RISK FACTORS

YOU 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 WE ARE NOT PRESENTLY AWARE OF 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 YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT. IN ASSESSING THESE RISKS, YOU SHOULD ALSO REFER TO THE OTHER
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, INCLUDING
OUR FINANCIAL STATEMENTS AND RELATED NOTES.

OUR QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE
TO MAINTAIN OUR EXISTING GROWTH RATES.

Our quarterly operating results have fluctuated significantly in the past
and may vary significantly in the future as a result of a number of factors.
These factors include:

- market acceptance of new product introductions and product enhancements by
us or our competitors;

- our prices and those of our competitors' products;

- the timing and size of the orders for our products;

- the mix of products sold;

- 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.

Although we have had significant revenue growth in recent quarters,
fluctuations in our quarterly operating results due to these or other factors
could prevent us from sustaining these growth rates, and you should not use
these past results to predict future operating margins and results. In
particular, our quarterly revenues and operating results depend upon the volume
and timing of customer orders received during a given quarter, and the
percentage of each order which we are able to recognize as revenue during each
quarter, each of which is difficult to forecast. In addition, the majority of
our revenues in a given quarter historically has been recorded in the third
month of that quarter. If this trend continues, any failure or delay in the
closing of orders during the last part of a quarter will seriously harm our
business.

As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.

DIFFICULTY IN ESTIMATING CUSTOMER ORDERS COULD HARM OUR OPERATING RESULTS.

We typically ship products within a short time after we receive an order and
historically have had 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 end-user demand means that any quarter
could be significantly negatively impacted by lower end-user orders, which could
in turn 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 reseller
orders. Expense levels are based, in part, on these estimates. Since a majority
of our customer orders are received in the last month of a quarter, we are
limited in our ability to reduce expenses quickly if for any reason orders and
net revenues do not meet our

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expectations in a particular period. In addition, we have historically
experienced a lag in demand during the summer months, which adds to the level of
difficulty in predicting revenue levels.

WE DEPEND ON DISTRIBUTORS AND RESELLERS TO SELL OUR PRODUCTS, AND WE ARE SUBJECT
TO RISKS ASSOCIATED WITH THEIR INVENTORIES OF OUR PRODUCTS, THEIR PRODUCT
SELL-THROUGH AND THE SUCCESS OF THEIR BUSINESSES.

We sell a significant amount of our products to distributors and resellers
who 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
consists 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 an adequate amount of their inventory 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 and also negatively affect our net revenues. Also, if we
choose to eliminate or reduce stocking incentive programs, quarterly revenues
may fail to meet our expectations or be lower than historical levels.

Our revenue estimates are based largely on sales reports that the resellers
provide to us on a monthly basis. This data has been generally accurate in North
America but is less reliable outside of this region. To the extent that this
sales and channel inventory data is inaccurate in either North America or
outside of North America, we may not be able to make revenue estimates or may
find that our previous estimates are inaccurate.

Many of our distributors and resellers that carry multiple Polycom product
lines, and from whom we derive significant revenues, are undercapitalized. The
failure of these businesses to establish and sustain profitability or obtain
financing could have a significant negative effect on our future revenue levels.
The loss of distributors or resellers could harm our business. Lucent
Technologies, one of our larger resellers, has announced it will spin off its
business equipment division, known as Avaya Communication. We do not yet know
how this spin-off will affect us. In connection with this restructuring, if the
combined business from Lucent and Avaya yields a significant reduction in the
amount of orders to us, it could harm our business.

Late in the first quarter of 2000, we began shipping the ViewStation FX
product. The timing of this delivery date likely created confusion in our
reseller customer base and end-user customer market as these groups waited to
see if this new ViewStation product was more desirable than the existing
products. Therefore, the timing of this new product release likely had a
negative effect on our 2000 first quarter sales-in to resellers and sales-out to
end-users. We cannot assure you that a similar situation will not happen again.

WE MAY EXPERIENCE DELAYS IN PRODUCT INTRODUCTIONS AND OUR PRODUCTS MAY CONTAIN
DEFECTS WHICH COULD ADVERSELY AFFECT MARKET ACCEPTANCE FOR THESE PRODUCTS AND
OUR REPUTATION AND SERIOUSLY HARM OUR RESULTS OF OPERATIONS.

Since the beginning of 1998, our revenue growth has been due in large part
to new product introductions in the video communications product line. Although
we are continuing to introduce new products, such as the recently announced
ViaVideo, ViewStation 4000 and ViewStation FX, we cannot assure you that new
product releases will be timely or that they will be made at all. In fact, the
ViewStation FX was delayed from its original release date, which we believe
negatively affected our net revenues in the first quarter of 2000. Additionally,
we cannot assure you that any new or existing product introductions will be free
from defects or produce the revenue growth experienced in 1998 and 1999.

In the past we have experienced other 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 ramping issues. Similar delays occurred
during the introduction

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of the ShowStation IP, SoundStation Premier and 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 other product line
extensions could adversely affect market acceptance for these products and our
reputation and seriously harm our results of operations. Further, due to the
dynamic nature of the network access market sector, any delays in NetEngine
product line extensions would seriously harm our business.

WE HAVE LIMITED SUPPLY SOURCES FOR SOME KEY COMPONENTS OF OUR PRODUCTS, AND OUR
OPERATIONS COULD BE HARMED BY SUPPLY INTERRUPTIONS, COMPONENT DEFECTS OR
UNAVAILABILITY OF THESE COMPONENTS.

Some 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 some 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 these supplies. We have no supply commitments from our
suppliers and generally purchase components on a purchase order basis either
directly or through our contract manufacturers. We and our contract
manufacturers have had limited experience purchasing volume supplies of various
components for our product lines and some of the components included in our
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 seriously harmed. In particular, if we encounter development delays or
component shortages relating to our network access products, our business will
suffer. Moreover, our operating results would be seriously harmed 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 communications products are designed based
on integrated circuits produced by Philips and video equipment produced by Sony.
If we could no longer obtain integrated circuits or video equipment from these
suppliers, we would incur substantial expense and take substantial time in
redesigning our products to be compatible with components from other
manufacturers, and we cannot assure you that we would be successful in obtaining
these components from alternative sources in a timely or cost-effective manner.
Additionally, both Sony and Philips are our competitors in the video
communications 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. We also rely on the
introduction schedules of some key components in the development or launch of
new products, in particuar, our network access products. Any delays in the
availability of these key components could harm our business.

WE RELY ON THIRD-PARTY LICENSE AGREEMENTS AND TERMINATION OR IMPAIRMENT OF THESE
AGREEMENTS MAY CAUSE DELAYS OR REDUCTIONS IN PRODUCT INTRODUCTIONS OR SHIPMENTS,
WHICH WOULD HARM OUR BUSINESS.

We have licensing agreements with various suppliers for software
incorporated into our products. For example, we license video communications
source code from RADVision, Telesoft, Omnitel, Adtran and EBSNet, video
algorithm protocols from Real Networks and Ezenia!, development source code from
Digital Equipment and Philips Semiconductor, audio algorithms from Lucent
Technologies, communication software from DataBeam, digitizer and pen software
from Scriptel and Windows software from Microsoft. In addition, for our new
network access products, we have interoperability agreements with Jetstream
Communications and Tollbridge Technologies, and we depend significantly on these
agreements and our ability to secure similar licenses from other 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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LOWER THAN EXPECTED MARKET ACCEPTANCE OF OUR PRODUCTS AND PRICE COMPETITION
WOULD NEGATIVELY IMPACT OUR BUSINESS.

If our products are not accepted by the market, our profitability could be
harmed. For example, we lowered the price of the ShowStation IP by 23% effective
March 1999 due to market acceptance issues for this product. Similar price
reductions and demand issues could occur for any of our products which could
negatively impact our net revenues and profitability. Further, through the end
of 1999, growth rates of voice and video product sales from our sales channels
to end-users have been significant. Future growth rates for these and our other
products may not achieve these levels of growth, and sales of our video products
were down slightly in the first quarter of 2000 from the fourth quarter of 1999.

Our profitability could also be negatively affected in the future as a
result of continuing competitive price pressure in the conferencing equipment
and network access device markets. Although past 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 have the desired impact.

INTERNATIONAL SALES ARE ACCOUNTING FOR AN INCREASING PORTION OF OUR NET
REVENUES, AND RISKS INHERENT IN INTERNATIONAL SALES COULD HARM OUR BUSINESS.

International sales are accounting for an increasing portion of our net
revenues, and we anticipate that international sales will continue to account
for a significant portion of our net revenues for the foreseeable future.
International sales 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 any
new 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.

OUR BUSINESS COULD SUFFER AS A RESULT OF OUR INTEGRATION OF ATLAS COMMUNICATION
ENGINES OR OTHER ACQUIRED COMPANIES.

We completed the acquisition of Atlas Communication Engines, or Atlas, in
December 1999. The integration of Atlas' product offerings and operations with
our product offerings and operations and the coordination of the two companies'
sales and marketing efforts have required 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'
products not occur, or occur later or in an amount less than expected, the
higher operating expenses could harm our business. We may make additional
acquisitions in the future. Failure to achieve the anticipated benefits of any
acquisition or to successfully integrate the operations of

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the companies could also harm our business and results of operations.
Additionally, we cannot assure you that we will not incur material charges in
future quarters to reflect additional costs associated with any future
acquisitions we may make.

CONFLICTS WITH OUR CHANNEL PARTNERS COULD HURT SALES OF OUR PRODUCTS.

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. These relationships can create channel
conflicts with our other distributors who directly compete with the OEM partner,
which could adversely affect revenue from non-OEM channels. Because many of our
distributors also sell equipment that competes with our product lines, the
distributors could devote more attention to the other product lines, which could
harm our business. Further, other channel conflicts could arise which cause
distributors to devote resources to other non-Polycom communications equipment,
which would negatively affect our business or results of operations.

We currently have agreements with video communications equipment suppliers
under which these equipment suppliers resell our SoundPoint PC voice products
along with their video communications products. We compete with these equipment
suppliers in the voice conferencing market and, as such, we cannot assure you
that they will enter into future agreements to resell or supply any of our new
or enhanced conferencing products. Further, some of our current video products
and video products under development are directly competitive with the products
of these suppliers. As a consequence, competition between us and these suppliers
is likely to increase, resulting in a strain on the existing relationship
between the companies. Any such strain could limit the potential contribution of
these relationships to our business.

In addition, we depend on several key agreements, including our agreement
with Jetstream Communications in the network access products market. Conflicts
may occur in this evolving market as we seek other relationships. These
conflicts could harm our business.

OUR SUCCESS DEPENDS ON OUR ABILITY TO ASSIMILATE NEW TECHNOLOGIES IN OUR
PRODUCTS AND TO PROPERLY TRAIN OUR RESELLERS IN THE USE OF THOSE PRODUCTS.

The markets for voice and video communications products and network access
products are characterized by rapidly changing technology, evolving industry
standards and frequent new product introductions. The success of our new
products depends 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
circuit-switched to IP-based technologies 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. Further, we cannot assure you that
competing technologies developed by others will not render our products or
technologies obsolete or noncompetitive. The failure of our new voice, video and
network access product development efforts and any inability to service or
maintain the necessary third-party interoperability licenses would harm our
business and results of operations.

MANUFACTURING DISRUPTIONS OR CAPACITY CONSTRAINTS WOULD HARM OUR BUSINESS.

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

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products to Celestica, a third-party contract manufacturer. We use Celestica's
Thailand facilities, and should there be any disruption in services due to
natural disaster or economic or political difficulties in Thailand and Asia, or
for any other reason, such disruption would harm our business and results of
operations. Also, Celestica is currently the sole source manufacturer of these
product lines, and if this subcontractor experiences an interruption in
operations or otherwise suffers from capacity constraints, we would experience a
delay in shipping these products and we may not be able to meet any demand for
our products, either of which could negatively affect revenues in the quarter of
the disruption and harm our reputation. 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.

PRODUCT OBSOLESCENCE CAN NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.

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
cannot be sold at or above net realizable value. This situation occurred during
the first quarter of 2000 for the ShowStation IP when we recorded additional
excess and obsolescence charges. In addition, if the introduction of our
SoundPoint Pro product has a materially negative effect on the future sales of
our SoundPoint product, our net revenues could be reduced and an excess and
obsolescence issue concerning our SoundPoint inventory could result, which could
lower our profitability. The potential for new products to render existing
products obsolete or reduce the demand for existing products exists for every
one of our products. We cannot assure you that future inventory or other asset
writedowns will not happen. If future writedowns do occur, they could harm our
business.

OUR RECENT TRANSITION TO A NEW ENTERPRISE RESOURCE PLANNING SYSTEM COULD
ADVERSELY AFFECT OUR OPERATIONS.

We recently migrated our operations to a new enterprise resource planning
system which affects almost every facet of our business operations. Typically,
these conversions negatively affect a company's ability to conduct business
initially due to problems such as historical data conversion errors, the
required personnel training time associated with the new system, delays in
implementation or unforeseen technical problems during conversion. If problems
arise during this transition, we could experience 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.

FAILURE TO ADEQUATELY SERVICE AND SUPPORT OUR PRODUCTS COULD HARM OUR RESULTS OF
OPERATIONS.

Our recent growth has been due in large part to an expansion into product
lines with more complex technologies and protocols, including our recently
introduced network access products. This has increased the need for increased
product warranty and service capabilities. If we cannot develop and train our
internal support organization or maintain our relationship with our outside
technical support, it could harm our business.

OUR CASH FLOW COULD FLUCTUATE DUE TO OUR ABILITY TO COLLECT RECEIVABLES.

In 1999 and through the first three months of 2000, we initiated a
significant investment in Europe and Asia to expand our business in these
regions. 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 net revenues, as
happened in 1999 and through the first three months of 2000, accounts receivable
balances will likely increase over previous years. Additionally, sales in the
network access and video communications markets typically have longer payment
periods over

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our traditional experience in the voice communications market. Therefore, if
network access and video products constitute a greater percentage of net
revenues, accounts receivable balances will likely increase. These increases
would cause our days sales outstanding to increase over prior years and will
negatively affect future cash flows. Although we have been able to offset the
effects of these influences through additional incentives offered to resellers
at the end of the quarter in the form of prepaid discounts, these additional
incentives have lowered our profitability.

OUR STOCK PRICE FLUCTUATES AS A RESULT OF THE CONDUCT OF OUR BUSINESS AND STOCK
MARKET FLUCTUATIONS.

The market price of our common stock has experienced significant
fluctuations and may continue to fluctuate significantly. The market price of
our common stock may be significantly affected by a variety of factors,
including:

- statements or changes in opinions, ratings or earnings estimates made by
brokerage firms or industry analysts relating to the market in which we do
business or relating to us specifically;

- the announcement of new products or product enhancements by us or our
competitors;

- technological innovations by us or our competitors;

- quarterly variations in our results of operations;

- general market conditions or market conditions specific to particular
industries; and

- international macroeconomic factors.

In addition, in recent years the stock market has experienced extreme price
and volume fluctuations. These fluctuations have had a substantial effect on the
market prices for many high technology companies, such as Polycom. These
fluctuations are often unrelated to the operating performance of the specific
companies. See "Price Range of Common Stock."

BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.

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.

OUR RESELLER CUSTOMER CONTRACTS ARE TYPICALLY SHORT-TERM AND EARLY TERMINATIONS
OF OUR CONTRACTS MAY HARM OUR RESULTS OF OPERATIONS.

We do not typically enter into long-term contracts with our reseller
customers, and we cannot be certain as to future order levels from our reseller
customers. When we do enter into a long-term contract, the contract is generally
terminable at the convenience of the customer. In the event of an early
termination by one of our major customers, it is unlikely that we will be able
to rapidly replace that revenue source, which would harm our results of
operations.

FAILURE TO MANAGE OUR GROWTH MAY HARM OUR BUSINESS.

Our business has grown in recent years through both internal expansion and
acquisitions, and continued growth may cause a significant strain on our
infrastructure and internal systems. To manage our growth effectively, we must
continue to improve and expand our management information systems and continue
resource additions such as headcount, capital and processes in a timely and
efficient manner. We cannot assure you that resources will be available when we
need them or that we will have sufficient capital to fund these resource needs.
In addition, our success depends to a significant extent on the management
skills of our executive officers. If we are unable to manage growth effectively,
or we experience a shortfall in resources, our results of operations will be
harmed.

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IF WE FAIL TO SUCCESSFULLY COMPETE IN OUR MARKETS, OUR BUSINESS AND RESULTS OF
OPERATIONS WOULD BE SIGNIFICANTLY HARMED.

In the video communications market, our major competitors include
PictureTel, Tandberg, Sony, VCON and VTEL. Many of these companies have
substantial financial resources and production, marketing, engineering and other
capabilities 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 communications 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
communications equipment, 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.
In the voice communications equipment market segment, our major competitors
include ClearOne, SoundGear, NEC, Gentner and other companies that offer lower
cost, full-duplex speakerphones such as Lucent Technologies and Hello Direct.
Hello Direct, one of our resellers, offers a competitive product under the Hello
Direct name through an OEM relationship with Gentner. Most of these companies
have substantial financial resources and production, marketing, engineering and
other capabilities 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 than our voice communications products.
Our network access products have significant competition from Efficient
Networks, Netopia, 3Com and Cisco Systems.

We cannot assure you that we will be able to compete successfully against
our current or future competitors. 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 significantly harm our
results of operations.

WE RELY ON PATENTS, TRADEMARKS, COPYRIGHTS AND TRADE SECRETS TO PROTECT OUR
PROPRIETARY RIGHTS, WHICH MAY NOT BE SUFFICIENT TO PROTECT OUR INTELLECTUAL
PROPERTY.

We rely on a combination of patent, copyright, trademark and trade secret
laws and confidentiality procedures to protect our proprietary rights. Others
may independently develop similar proprietary information and techniques or gain
access to our intellectual property rights or disclose such technology. In
addition, we cannot assure you that any patent or registered trademark owned by
us 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 us, if at all. Furthermore,
others may develop similar products, duplicate our products or design around our
patents. 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. Litigation could result in
substantial costs and diversion of resources and could harm our business.

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WE FACE AND MIGHT IN THE FUTURE FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
THAT MIGHT BE COSTLY TO RESOLVE.

We have from time to time received, and may in the future receive,
communications from third parties asserting patent or other intellectual
property rights covering our products. For example, we have recently been named
(along with approximately 90 manufacturers or distributors of electronic or
semiconductor products) but not served in a complaint filed by the Lemelson
Medical, Education and Research Foundation alleging patent infringement by us.
If any litigation were to occur as a result of such allegations in the future,
and we do not prevail in any such litigation, our business may be adversely
affected.

In addition, our industry is characterized by uncertain and conflicting
intellectual property claims and vigorous protection and pursuit of intellectual
property rights or positions, which have on occasion resulted in significant and
often protracted and expensive litigation. In the past, we have been involved in
such litigation, which adversely affected our operating results. We cannot
assure you that intellectual property claims will not be made against us in the
future or that we will not be prohibited from using the technologies subject to
any such claims or be required to obtain licenses and make corresponding royalty
payments. In addition, the necessary management attention to and legal costs
associated with litigation can have a significant adverse effect on operating
results.

IF WE FAIL TO SUCCESSFULLY ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR BUSINESS
WILL BE HARMED.

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.

ANTI-TAKOVER EFFECTS OF PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND OUR
STOCKHOLDER RIGHTS PLAN COULD DELAY OR PREVENT AN ACQUISITION OF US.

Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, voting rights, preferences and
privileges and restrictions of those shares without the approval of our
stockholders. We have also implemented a stockholder rights plan. The rights of
the holders of common stock will be subject to, and may be harmed by, the rights
of the holders of any shares of preferred stock that may be issued in the
future. The issuance of preferred stock and the existence of our stockholder
rights plan may delay, defer or prevent a change in control, by making it more
difficult for a third party to acquire a majority of our stock. In addition, the
issuance of preferred stock could have a dilutive effect on our stockholders. We
have no present plans to issue shares of preferred stock.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under the sections entitled "Prospectus Summary,"
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this prospectus and in the documents
incorporated by reference in this prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terms such as "may," "could," "would," "might," "will," "should,"
"expect," "plan," "intend," "forecast," "anticipate," "believe," "estimate,"
"predict," "potential," "continue" or the negative of these terms or other
comparable terminology. The forward-looking statements contained in this
prospectus involve known and unknown risks, uncertainties and situations that
may cause our or our industry's actual results, level of activity, performance
or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these statements.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.

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USE OF PROCEEDS

Net proceeds to us from the sale of 1,600,000 shares of common stock offered
by us are estimated to be approximately $137.6 million after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $158.3 million. We will not
receive any proceeds from the sale of shares by the selling stockholder.

We intend to use the net proceeds of this offering primarily for general
corporate purposes, including working capital and capital expenditures. A
portion of the proceeds may also be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
However, we have no present agreements or commitments and are not currently
engaged in any negotiations with respect to any such transactions. We cannot
specify with certainty the particular uses for the net proceeds to be received
upon the completion of this offering. Accordingly, our management team will have
broad discretion in applying the net proceeds. Pending such uses, we intend to
invest the net proceeds of this offering in short-term, interest-bearing,
investment grade obligations.

DIVIDEND POLICY

We have never declared or paid any cash dividend on our capital stock and do
not anticipate paying any cash dividends on our capital stock in the foreseeable
future. We currently intend to retain future earnings, if any, for use in our
business.

PRICE RANGE OF COMMON STOCK

The following table presents the high and low sale prices per share for our
common stock, as reported by the Nasdaq National Market, for the periods
indicated.

[Enlarge/Download Table]

HIGH LOW
-------- --------

YEAR ENDED DECEMBER 31, 1998:
First Quarter............................................... $ 12 1/4 $ 4 3/4
Second Quarter.............................................. 17 5/8 10 3/8
Third Quarter............................................... 18 7 1/16
Fourth Quarter.............................................. 23 1/8 8 5/8

YEAR ENDED DECEMBER 31, 1999:
First Quarter............................................... 27 1/8 11 15/16
Second Quarter.............................................. 60 1/8 17 5/8
Third Quarter............................................... 50 26 15/16
Fourth Quarter.............................................. 67 11/16 42 5/8

YEAR ENDING DECEMBER 31, 2000:
First Quarter............................................... 133 53 1/2
Second Quarter.............................................. 112 52
Third Quarter (through July 27, 2000)....................... 100 1/2 78

A recent reported last sale price per share for our common stock on the
Nasdaq National Market is set forth on the cover page of this prospectus. On
March 31, 2000, there were approximately 285 holders of record of our common
stock.

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2000 as
adjusted to give effect to the sale of the 1,600,000 shares of common stock we
are offering under this prospectus at a public offering price of $90.875 per
share after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.

[Download Table]

MARCH 31, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)

Long-term debt.............................................. $ -- $ --
-------- --------

Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, none issued................................. -- --
Common stock, $0.0005 par value, 175,000,000 shares
authorized(1); 35,216,546 shares outstanding, actual;
36,816,546 shares outstanding, as adjusted.............. 18 18

Additional paid-in capital.................................. 106,080 243,678

Unrealized loss on marketable securities.................... (83) (83)

Unearned stock-based compensation........................... (1,661) (1,661)

Accumulated earnings........................................ 29,326 29,326
-------- --------

Total stockholders' equity.............................. 133,680 271,278
-------- --------

Total capitalization.................................. $133,680 $271,278
======== ========

---------

(1) In May 2000, our stockholders approved an increase in our authorized common
stock from 50,000,000 shares to 175,000,000 shares.

The outstanding share information excludes:

- 4,189,667 shares issuable upon exercise of outstanding stock options as of
March 31, 2000 with a weighted average exercise price of $22.12 per share;
and

- 770,819 shares reserved for issuance under our 1996 stock incentive plan
and employee stock purchase plan.

Subsequent to March 31, 2000, we reserved an additional 1,750,000 shares for
issuance under our 1996 stock incentive plan.

424B1 20th Page of 71 TOC 1st Previous Next ↓Bottom Just 20th
SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated balance sheet and
consolidated statement of operations data as of and for the fiscal years ended
December 31, 1995 through 1999 and for the three-month periods ended March 31,
1999 and 2000. The consolidated balance sheet data as of December 31, 1998 and
1999 and the consolidated statement of operations data for the fiscal years
ended December 31, 1997, 1998 and 1999 are based on audited financial statements
included elsewhere in this prospectus. The consolidated balance sheet data as of
December 31, 1995, 1996 and 1997 and the consolidated statement of operations
data for the fiscal years ended December 31, 1995 and 1996 are based on audited
financial statements not included in this prospectus. This data gives
retroactive effect to our acquisition of Atlas Communication Engines in
December 1999 which was accounted for as a pooling of interests. Our fiscal year
is a 52 or 53-week fiscal year. As a result, our fiscal year may not end as of
the same day as the calendar year. For convenience of presentation, the
consolidated financial statements have been shown as ending on December 31 and
March 31 of each applicable period. The information as of and for the three-
month periods is unaudited and has been prepared on the same basis as our annual
consolidated financial statements. In the opinion of management, this quarterly
information reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods presented. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2000, or any other future period.

[Enlarge/Download Table]

THREE MONTHS
ENDED MARCH
DECEMBER 31, 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues......................................... $25,073 $39,006 $ 50,394 $116,886 $200,067 $41,314 $67,295
Cost of net revenues................................. 10,944 18,987 27,583 57,906 91,257 19,533 29,737
------- ------- -------- -------- -------- ------- -------
Gross profit....................................... 14,129 20,019 22,811 58,980 108,810 21,781 37,558
Operating expenses:
Sales and marketing................................ 7,073 9,170 13,247 22,156 36,047 7,411 12,160
Research and development........................... 6,928 8,088 17,038 14,719 21,615 3,926 7,449
General and administrative......................... 1,820 2,310 7,019 5,518 8,269 1,552 3,296
Acquisition costs.................................. -- -- 597 185 1,650 -- --
Litigation reserve release......................... -- -- -- -- -- -- (1,843)
------- ------- -------- -------- -------- ------- -------
Total operating expenses......................... 15,821 19,568 37,901 42,578 67,581 12,889 21,062
------- ------- -------- -------- -------- ------- -------

Operating income (loss).............................. (1,692) 451 (15,090) 16,402 41,229 8,892 16,496
Interest income, net and other income................ 69 1,087 1,166 948 1,740 297 861
------- ------- -------- -------- -------- ------- -------

Income (loss) before taxes........................... (1,623) 1,538 (13,924) 17,350 42,969 9,189 17,357
Provision for income taxes........................... 12 108 171 1,749 13,616 1,449 5,728
------- ------- -------- -------- -------- ------- -------

Net income (loss).................................... $(1,635) $ 1,430 $(14,095) $ 15,601 $ 29,353 $ 7,740 $11,629
======= ======= ======== ======== ======== ======= =======

Basic net income (loss) per share.................... $ (.35) $ .10 $ (.66) $ .54 $ .90 $ .25 $ .34
======= ======= ======== ======== ======== ======= =======
Diluted net income (loss) per share.................. $ (.35) $ .07 $ (.66) $ .46 $ .81 $ .22 $ .31
======= ======= ======== ======== ======== ======= =======
Weighted average shares outstanding for basic net
income (loss) per share............................ 4,712 14,798 21,489 28,810 32,536 30,925 34,459
Weighted average shares outstanding for diluted net
income (loss) per share............................ 4,712 21,183 21,489 33,847 36,458 35,626 37,785

[Enlarge/Download Table]

AS OF DECEMBER 31, AS OF
---------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 6,269 $21,507 $17,747 $23,489 $ 60,767 $ 63,568
Working capital............................................. 7,797 29,676 22,023 46,417 86,324 96,001
Total assets................................................ 18,050 39,806 44,469 78,305 164,721 195,058
Notes payable, less current portion......................... 1,178 -- -- -- -- --
Convertible redeemable preferred stock...................... 22,360 -- -- -- -- --
Convertible preferred stock................................. -- 1,975 9,496 -- -- --
Total stockholders' equity (deficit)........................ (12,672) 33,033 26,927 53,928 113,270 133,680

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS. EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, AMONG
OTHER THINGS, STATEMENTS REGARDING OUR ANTICIPATED PRODUCT, CUSTOMER AND
GEOGRAPHIC REVENUE MIX, GROSS MARGINS AND OPERATING COSTS AND EXPENSES. OUR
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS AS WELL AS IN THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS
PROSPECTUS.

OVERVIEW

We were incorporated in December 1990. We were engaged principally in
research and development from inception through September 1992, when we began
volume shipments of our first voice communications product, the SoundStation.
Currently, our voice communications product line consists principally of the
SoundStation, SoundStation EX, SoundStation Premier, SoundStation Premier EX,
SoundPoint and SoundPoint Pro. In January 1998, we completed the acquisition of
ViaVideo, a development stage company that designed and developed high-quality,
low-cost, easy-to-use, group video communications systems. In February 1998, we
began customer shipments of the ViewStation product family, our video
communications equipment product line. Currently, our video communications
product line consists 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, a
privately-held, OEM supplier of IADs, and an emerging supplier of DSL routers.
In addition, Atlas also sold non-DSL custom communications products under OEM
arrangements. Atlas' line of IADs and DSL routers, which have become our network
access product line, provides voice and data over the rapidly-growing DSL
network.

Through March 31, 2000, we derived a majority of our net revenues from sales
of our ViewStation and SoundStation products. Although we expect IADs and DSL
routers 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.

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RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

The following table sets forth, as a percentage of net revenues,
consolidated statements of operations data for the periods indicated.

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
-------- -------- --------

Net revenues................................................ 100% 100% 100%
Cost of net revenues........................................ 55 50 46
--- --- ---
Gross profit............................................ 45 50 54
Operating expenses:
Sales and marketing....................................... 26 19 18
Research and development.................................. 34 12 11
General and administrative................................ 14 5 4
Acquisition costs......................................... 1 -- 1
--- --- ---
Total operating expenses................................ 75 36 34
--- --- ---
Operating income (loss)..................................... (30) 14 20
Interest income, net........................................ 2 1 1
Other income (expense)...................................... -- -- --
--- --- ---
Income (loss) before provision for income taxes............. (28) 15 21
Provision for income taxes.................................. -- 2 6
--- --- ---
Net income (loss)........................................... (28)% 13% 15%
=== === ===

NET REVENUES

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 communications products. This product line began shipping in February of
1998 and we have added various models since that time. Additionally, voice
communications product line sales volume increases also contributed to the
revenue growth. Further, while a majority of the growth was in North America, we
also experienced growth in Europe due to our increase in investment in this
region in 1999.

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 communications products which were not part of the prior year's revenue
stream. Additionally, voice communications 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 the Minnesota Mining and Manufacturing Company, or 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 1997, 1998 and 1999, we derived a substantial majority of our net
revenues from sales of our video communications and voice communications
products. Lucent Technologies accounted for 10%, 11% and 11% of net revenues in
1997, 1998 and 1999. 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, or revenues outside of North America, accounted
for 21%, 23% and 31% of net revenues for 1997, 1998, and 1999. See note 13 of
notes to consolidated financial statements for further information with regard
to our international sales. In 1999, we invested greater resources in

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Europe over 1998 which helped drive volumes and revenues up as a percentage of
our revenues. Within Europe, video revenues were the primary reason for the
increase. In addition, Asia also increased as a percentage of our net revenues.
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 net revenues for the foreseeable future, and we plan to
continue our expansion in 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 any new products
in North America and also because of the additional time required to make our
products ready for sale globally 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, or 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, our manufacturing organization, tooling
depreciation, warranty expense and an allocation of overhead expenses. The cost
of net revenues as a percentage of net revenues was 55% in 1997 compared to 50%
in 1998 and 46% in 1999. 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 $900,000 in revenue under this agreement in 1999
compared to $2.5 million in 1998. The margin improvement in 1998 from 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, our IAD and DSL equipment products, VoIP products and other
desktop products have a significantly higher cost of net revenue percentage than
our 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 our future cost of net revenues 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, cost variances associated with the manufacturing
ramp of new products, such as the ViewStation

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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 our 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, cost of net revenues as a
percentage of net revenues 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 revenues as a percentage of net
revenues on our direct sales than on sales through indirect channels. Because we
no longer sell our products through a direct sales force, profit margins will be
negatively impacted.

SALES AND MARKETING

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INCREASE
(DECREASE) FROM
YEAR ENDED DECEMBER 31, PRIOR YEAR
------------------------------------------ -------------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Expenses............................... $13,247 $22,156 $36,047 67% 63%
Percentage of net revenues............. 26% 19% 18% (7%) (1%)

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 from 1998 was primarily
related to increased advertising and promotional expenditures for our video and
voice communications products. Additionally, increased investment in our
worldwide sales effort and the resulting staff increases also contributed to the
increase from 1998. The increase in sales and marketing expenses in absolute
dollars in 1998 from 1997 was primarily related to increased investment in our
video communications sales effort. As mentioned previously, we first began
selling the ViewStation products in 1998 and, consequently, had little sales and
marketing expenses in 1997 associated with these products. Additionally,
increases in our voice communications sales efforts in 1998 have also
contributed to the overall increase from 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 expanded 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 our 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,
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 our service organization to provide expanded and
improved support for our products which will increase our sales and marketing
expenses.

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RESEARCH AND DEVELOPMENT

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Expenses............................... $17,038 $14,719 $21,615 (14%) 47%
Percentage of net revenues............. 34% 12% 11% (22%) (1%)

Research and development expenses consist primarily of compensation costs,
consulting fees, depreciation and an allocation of overhead expenses. Research
and development expenses increased in 1999 from 1998 due to increases in the
network access, video and voice product lines. The decrease in 1998 when
compared to 1997 was primarily attributable to higher development expenses for
our 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 our voice communications product line. In all
years presented, all research and development costs have been expensed as
incurred.

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, Massachusetts in
1999 in an attempt to broaden our recruiting of top technical talent.

GENERAL AND ADMINISTRATIVE

[Enlarge/Download Table]

Expenses.................................. $7,019 $5,518 $8,269 (21%) 50%
Percentage of net revenues................ 14% 5% 4% (9%) (1%)

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
from 1998 is due to increased staffing and infrastructure costs to support our
growth including the conversion to a new 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.

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ACQUISITION COSTS

We incurred expenses totaling $600,000, $200,000 and $1.7 million in 1997,
1998 and 1999. In 1997 and 1998, the costs incurred were related to the
acquisition of ViaVideo. In 1999, these costs were related to the acquisition of
Atlas in December 1999. 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, we cannot assure you 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 was $1.2 million, $1.0 million and $1.8 million for 1997, 1998 and
1999. The fluctuations in interest income, net are due primarily to changes in
average cash and investment balances throughout the year.

PROVISION FOR INCOME TAXES

In 1997, 1998 and 1999, the provision for income taxes was $200,000,
$1.7 million and $13.6 million. The provision for income taxes in 1997 and 1998
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 $300,000 in tax credit carryforwards as well as other
deferred tax assets arising from temporary differences. See note 12 of notes to
consolidated financial statements.

THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 2000

The following table sets forth, as a percentage of net revenues, condensed
consolidated statements of operations data for the periods indicated.

[Enlarge/Download Table]

THREE MONTHS
ENDED MARCH 31,
-------------------------
1999 2000
-------- --------

Net revenues................................................ 100% 100%
Cost of net revenues........................................ 47 44
--- ---
Gross profit............................................ 53 56
--- ---
Operating expenses:
Sales and marketing....................................... 18 18
Research and development.................................. 9 11
General and administrative................................ 4 5
Litigation reserve release................................ -- (3)
--- ---
Total operating expenses................................ 31 31
--- ---
Operating income............................................ 22 25
Interest income, net........................................ 1 1
Other income, net........................................... -- --
--- ---
Income before taxes......................................... 23 26
Provision for income taxes.................................. 4 9
--- ---
Net income.................................................. 19% 17%
=== ===

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NET REVENUES

Net revenues for the three months ended March 31, 2000 were $67.3 million,
an increase of $26.0 million, or 63%, as compared to the same period of 1999.
The increase was due primarily to an increased sales volume of video
communications products. In addition, sales volume increases in the voice
communications and network access product lines also contributed to the
improvement over 1999.

In the three months ended March 31, 1999 and 2000, we derived a substantial
majority of our net revenues from sales of our video communications and voice
communications products. See note 5 of notes to condensed consolidated financial
statements (unaudited) for business segment information. No customer accounted
for more than 10% of our net revenues in the period ended March 31, 2000. Lucent
Technologies accounted for 10% of net revenues in the three months ended
March 31, 1999. No other customer or reseller accounted for more than 10% of our
net revenues during the three months ended March 31, 1999.

International net revenues, or revenues outside of North America, accounted
for 25% and 37% of net revenues for the three months ended March 31, 1999 and
2000, respectively. The increase in the international percentage of our net
revenues was due primarily to increased sales in the European region as we
continue to invest capital and headcount resources in this region.

COST OF NET REVENUES

The cost of net revenues as a percentage of net revenues for the three
months ended March 31, 1999 and 2000 was 47% and 44%. The decrease in cost of
net revenues as a percentage of net revenues is attributable to a more favorable
product mix from increased shipments of higher margin video products, and
favorable material price improvements. These cost decreases were offset by a
write-down of certain media server inventory, including the ShowStation IP, to
net realizable value.

SALES AND MARKETING

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THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31, INCREASE
1999 2000 (DECREASE)
--------- --------- ----------
(DOLLARS IN THOUSANDS)

Expenses............................................... $7,411 $12,160 64%
Percentage of net revenues............................. 18% 18% 0%

The increase in sales and marketing expenses in absolute dollars in the
three months ended March 31, 2000 over the comparable period of 1999 was
primarily related to increased advertising and promotional expenditures for our
video communications and network access products. Additionally, an increase in
our investment in our worldwide sales efforts also contributed to the increase
over the comparable period of 1999.

RESEARCH AND DEVELOPMENT

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THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31, INCREASE
1999 2000 (DECREASE)
--------- --------- ----------
(DOLLARS IN THOUSANDS)

Expenses............................................... $3,926 $7,449 90%
Percentage of net revenues............................. 9% 11% 2%

Expense increases in video and voice communications and network access
product development contributed to the total increase in research and
development expenses for the three months ended

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March 31, 2000 over the comparable period of 1999. As of March 31, 2000, all
research and development costs have been expensed as incurred.

GENERAL AND ADMINISTRATIVE

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THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31, INCREASE
1999 2000 (DECREASE)
--------- --------- ----------
(DOLLARS IN THOUSANDS)

Expenses............................................... $1,552 $3,296 112%
Percentage of net revenues............................. 4% 5% 1%

The increase in general and administrative expenses in the three months
ended March 31, 2000 over the comparable period of 1999 is due to increased
staffing and infrastructure costs to support our growth including the conversion
to a new management information system as well as higher bad debt expense.

LITIGATION RESERVE RELEASE

On September 3, 1997, VTEL Corporation, or VTEL, filed a lawsuit in the
State District Court in Travis County, Texas against ViaVideo, one of our
subsidiaries, and its founders who were formerly employed by VTEL. On May 27,
1998, VTEL amended its suit to add us 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 we
answered the suit, denying in their entirety VTEL's allegations. On March 3,
2000, VTEL voluntarily dismissed the allegations against us and ViaVideo with
prejudice for no consideration. As a one-time item, the excess accrual
associated with the expenses we estimated we would incur in connection with this
lawsuit, totaling $1.8 million, was released to income since no further material
expenses will be incurred.

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 was $300,000 and $800,000 for the three months ended March 31, 1999
and 2000. The fluctuations in interest income, net are due primarily to changes
in average cash and investment balances throughout the year.

PROVISION FOR INCOME TAXES

In the three months ended March 31, 1999 and 2000, the provision for income
taxes was $1.4 million and $5.7 million. The increase in income taxes for the
current period over the same period last year was due to our increased
profitability offset by a reduction in the tax provision rate associated with
the recent development and implementation of our international structure.
Additionally, the valuation allowance established in prior years was reversed in
the three months ended March 31, 1999 due to our belief that the deferred tax
assets will more likely than not be realized.

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SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA

The following tables set forth our unaudited quarterly condensed
consolidated statements of income data for each of the five quarters ended
March 31, 2000, and this data expressed as a percentage of our net revenues for
each of these five quarters. This quarterly information is unaudited and has
been prepared on the same basis as our annual consolidated financial statements.
In the opinion of management, this quarterly information reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.

[Enlarge/Download Table]

THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net revenues...................................... $41,314 $45,981 $52,284 $60,488 $67,295
Cost of net revenues.............................. 19,533 20,833 23,661 27,230 29,737
------- ------- ------- ------- -------
Gross profit.................................... 21,781 25,148 28,623 33,258 37,558
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............................. 7,411 8,369 9,676 10,591 12,160
Research and development........................ 3,926 5,045 5,719 6,925 7,449
General and administrative...................... 1,552 1,942 2,198 2,577 3,296
Acquisition costs............................... -- -- -- 1,650 --
Litigation reserve release...................... -- -- -- -- (1,843)
------- ------- ------- ------- -------
Total operating expenses...................... 12,889 15,356 17,593 21,743 21,062
------- ------- ------- ------- -------
Operating income.................................. 8,892 9,792 11,030 11,515 16,496
Interest income, net.............................. 303 392 454 622 790
Other income (expense)............................ (6) (13) (10) (2) 71
------- ------- ------- ------- -------
Income before taxes............................... 9,189 10,171 11,474 12,135 17,357
Provision for income taxes........................ 1,449 3,667 4,252 4,248 5,728
------- ------- ------- ------- -------
Net income........................................ $ 7,740 $ 6,504 $ 7,222 $ 7,887 $11,629
======= ======= ======= ======= =======
Basic net income per share........................ $ .25 $ .20 $ .22 $ .24 $ .34
======= ======= ======= ======= =======
Diluted net income per share...................... $ .22 $ .18 $ .20 $ .21 $ .31
======= ======= ======= ======= =======
Weighted average shares outstanding for basic net
income per share................................ 30,925 32,594 33,071 33,542 34,459
Weighted average shares outstanding for diluted
net income per share............................ 35,626 36,295 36,679 37,232 37,785

[Enlarge/Download Table]

AS A PERCENTAGE OF NET REVENUES
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- ------------- ------------ ---------

Net revenues...................................... 100% 100% 100% 100% 100%
Cost of net revenues.............................. 47 46 45 45 44
------- ------- ------- ------- -------
Gross profit.................................... 53 54 55 55 56
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............................. 18 18 19 18 18
Research and development........................ 9 11 11 11 11
General and administrative...................... 4 4 4 4 5
Acquisition costs............................... -- -- -- 3 --
Litigation reserve release...................... -- -- -- -- (3)
------- ------- ------- ------- -------
Total operating expenses...................... 31 33 34 36 31
------- ------- ------- ------- -------
Operating income.................................. 22 21 21 19 25
Interest income, net.............................. 1 1 1 1 1
Other income (expense)............................ -- -- -- -- --
------- ------- ------- ------- -------
Income before taxes............................... 23 22 22 20 26
Provision for income taxes........................ 4 8 8 7 9
------- ------- ------- ------- -------
Net income........................................ 19% 14% 14% 13% 17%
======= ======= ======= ======= =======

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LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2000, our principal sources of liquidity included cash and
cash equivalents of $49.1 million, short-term investments of $14.5 million and
long-term investments of $15.3 million. Additionally, we have 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 March 31, 2000, we were in compliance with these covenants.

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.

We generated cash from operating activities totaling $9.1 million and
$11.2 million for the three months ended March 31, 1999 and 2000, respectively.
The improvement in cash from operating activities in the 2000 period over the
same period of 1999 was due primarily to the improvements in net income before
non-cash items and increases in accounts and taxes payable, offset somewhat by
higher growth in inventories, receivables and other assets.

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 the
Minnesota Mining and Manufacturing Company 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 during
this time was primarily the result of positive net income before considering
non-cash expenses such as depreciation and higher total current liabilities,
including accounts payable and taxes payable, offset by an increase in accounts
receivable, deferred taxes and inventory.

The total net change in cash and cash equivalents for the three months ended
March 31, 2000 was an increase of $13.1 million. The primary sources of cash
were $11.2 million from operating activities, $10.1 million from net sales and
maturities of investments and $4.0 million associated with the exercise of stock
options and purchases under our employee stock purchase plan. The primary uses
of cash during this same period were purchases of licenses of $8.3 million and
purchases of property, plant and equipment of $3.8 million. The positive cash
from operating activities was primarily the result of positive net income before
considering non-cash expenses such as depreciation and amortization and higher
total current liabilities, including accounts payable and taxes payable, offset
by an increase in inventories, accounts receivable, deferred taxes and other
assets.

Our material commitments consist of obligations under our operating leases.
We also maintain, from time to time, commercial letters of credit as payments
for the importation of certain products. These amounts do not exceed $300,000
and are outstanding less than 120 days.

We believe that our available cash and cash equivalents, short-term
investments, bank line of credit and the proceeds of this offering will be
sufficient to meet our operating expenses and capital requirements for at least
the next twelve months. 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, financing
will be obtainable on terms favorable to us 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.

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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and bank borrowings. We do not use derivative
financial instruments in our investment portfolio, and our investment portfolio
only includes highly liquid instruments with a maturity of no more than two
years.

We are subject to fluctuating interest rates that may impact, adversely or
otherwise, our results of operations or cash flows for our 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 our investment portfolio and debt
obligations as of March 31, 2000:

[Enlarge/Download Table]

EXPECTED MATURITY
--------------------------------------------------
2000 2001 2002 TOTAL
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT INTEREST RATES)

ASSETS
Cash and cash equivalents........................... $49,091 -- -- $49,091
Average interest rates............................ 2.79% -- -- 2.79%

Investments......................................... $18,789 $10,957 -- $29,746
Average interest rates............................ 4.98% 4.91% -- 4.95%
LIABILITIES
Bank line of credit................................. -- -- -- --
Average interest rates............................ 9.00% -- -- 9.00%

The estimated fair value of our cash and cash equivalents 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.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board, or FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," or
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 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, or 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 fourth fiscal
quarter of fiscal years 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.

In March 2000, the FASB issued FASB Interpretation No. 44, or FIN 44,
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain provisions cover specific events that
occurred after either December 15, 1998 or January 12, 2000. The adoption of
certain other provisions of FIN 44 prior to March 31, 2000 did not have a
material effect on our financial statements. We do not expect that the adoption
of the remaining provisions will have a material impact on our financial
statements.

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MANAGEMENT

Our executive officers and directors, and their ages and positions as of
July 12, 2000, are as follows:

[Enlarge/Download Table]

NAME AGE POSITION(S)
---- -------- ------------------------------------------------------------

Robert C. Hagerty.............. 48 Chairman of the Board of Directors, Chief Executive Officer
and President
Michael R. Kourey.............. 41 Senior Vice President, Finance and Administration, Chief
Financial Officer, Secretary and Director
Sunil K. Bhalla................ 43 Senior Vice President and General Manager, Voice
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, Video
Communications
Hans Schwarz................... 54 Senior Vice President and General Manager, Network Access
Products
Betsy S. Atkins................ 46 Director
John Seely Brown............... 60 Director
John A. Kelley................. 50 Director
Stanley J. Meresman............ 53 Director
William A. Owens............... 60 Director

Mr. Hagerty joined us in December 1996 as our President and Chief Operating
Officer and as a member of our board of directors. In July 1998, Mr. Hagerty was
named Chief Executive Officer, and in March 2000, Mr. Hagerty was named Chairman
of our board of directors. Prior to joining us, 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.

Mr. Kourey has been one of our directors since January 1999, has served as
our Senior Vice President, Finance and Administration since January 1999 and as
our Chief Financial Officer since January 1995. Mr. Kourey has served as our
Secretary since June 1993. He also served as Vice President, Finance and
Administration from January 1995 to January 1999, Vice President, Finance and
Operations from July 1991 to January 1995 and as our Treasurer from June 1993 to
March 1997. Prior to joining us, he was Vice President, Operations of Verilink
Corporation. 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.

Mr. Bhalla joined us in February 2000 as Senior Vice President and General
Manager, Voice Communications. Before joining us, 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. Mr. Bhalla holds an M.S. in
Mechanical/Systems Engineering and CAD/CAM from Lehigh University.

424B1 33rd Page of 71 TOC 1st Previous Next ↓Bottom Just 33rd
Mr. Bastian joined us in July 1997 as Senior Vice President, Worldwide
Sales. Before joining us, 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. Mr. Bastian holds a B.B.A. in Management from
Ohio University.

Mr. Falaki joined us 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 our customers. Mr. Falaki was formerly
Director of Performance Systems for PictureTel Corporation, a 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 nine 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.

Mr. Hagedorn joined us in September 1996 as the Senior Vice President,
Manufacturing. Mr. Hagedorn was formerly Vice President of Manufacturing for
Amati Communications, Inc., a 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.

Mr. Malloy joined us in January 1998 and is currently Senior Vice President
and General Manager, Video Communications. Mr. Malloy co-founded ViaVideo 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 an M.B.A. degree from the University of
California, Los Angeles.

Mr. Schwarz joined us in April 2000 as the Senior Vice President and General
Manager, Network Access Products. Mr. Schwarz previously served as Senior Vice
President for Product Management and Development at Auspex Systems, a developer
of advanced network content storage solutions. Prior to Auspex, he was
associated with Siemens for over 20 years. As senior vice president and general
manager for IP telephony and enterprise data networks for Siemens Information
and Communications Networks, Schwarz was responsible for the development of VoIP
enterprise communication systems. He also served as general manager for a
3Com/Siemens joint-venture IP telephony solutions start-up. Prior positions also
include vice president roles in Siemens Business Communications Inc., Siemens
Rolm, and BiiN Information Systems, as well as senior director and management
positions at Rolm Systems, a joint venture between Intel and Siemens, and the
Process Automation Division of Siemens AG.

Ms. Atkins has been one of our directors since April 1999. Ms. Atkins has
been a private investor since August 1993. Ms. Atkins served as President and
Chief Executive Officer of NCI, Inc. from 1990 to 1993. From 1989 to 1990,
Ms. Atkins was Vice President of Marketing and Sales for Ascend Communications
Corporation. Ms. Atkins is also a director of Lucent Technologies, Paradyne
Corporation, Olympic Steel, Inc., Selectica Corporation, and a number of private
companies. Ms. Atkins holds a B.A. from the University of Massachusetts.

Mr. Kelley has been one of our directors since March 2000. Mr. Kelley has
been President of Wholesale Markets for US West since May 1998. From 1995 to
April 1998, Mr. Kelley served as Vice President and General Manager of Large
Business and Government Accounts and President of Federal

424B1 34th Page of 71 TOC 1st Previous Next ↓Bottom Just 34th
Services for US West. Prior to joining US West, Mr. Kelley was the Area
President for Mead Corporation's Zellerbach Southwest Business Unit and Vice
President and General Manager for the Zellerbach Industrial Business Unit during
1991 to 1995. Mr. Kelley is also a director of InRoads of Colorado, a non-profit
mentoring program for talented, low-income students and a director of the
University of Southern California Center for Telecommunications Management.
Mr. Kelley holds a B.S. in Business from the University of Missouri.

Mr. Brown has been one of our directors since August 1999. Mr. Brown has
been the chief scientist at Xerox Corporation since 1992 and the director of its
Palo Alto Research Center since 1990. In addition, Mr. Brown is a co-founder of
the Institute for Research on Learning, a non-profit institute for addressing
learning problems, a member of the National Academy of Education and a fellow of
the American Association for Artificial Intelligence. Mr. Brown serves on the
boards of Varian Medical Systems, FX Palo Alto Laboratories, and Corning
Incorporated. Mr. Brown received a B.A. in Mathematics and Physics from Brown
University, an M.S. in mathematics from the University of Michigan and a Ph.D.
in Computer and Communications Sciences from the University of Michigan.

Mr. Meresman has been one of our directors since January 1995. Mr. Meresman
has been a private investor since August 1997. Mr. Meresman served as the Senior
Vice President, Finance and Chief Financial Officer of Silicon Graphics, Inc.
from May 1989 to May 1997. Prior to joining Silicon Graphics, Mr. Meresman was
Vice President, Finance and Administration, and Chief Financial Officer of
Cypress Semiconductor Corporation. Mr. Meresman is also a director of GRIC
Corporation and a number of private companies. Mr. Meresman holds a B.S. in
Industrial Engineering and Operations Research from the University of
California, Berkeley and an M.B.A. from Stanford University.

Mr. Owens has been one of our directors since August 1999. Mr. Owens has
been Co-Chief Executive Officer of Teledesic LLC, a satellite communications
company, since February 1999 and Vice Chairman since 1998. He is also the
Chairman and Chief Executive Officer of the affiliated Teledesic Holdings Ltd.
From 1996 to 1998, Mr. Owens was President, Chief Operating Officer and Vice
Chairman of Science Applications International Corporation, or SAIC, an
information technology systems integrator. From 1994 to 1996, he was Vice
Chairman of the Joint Chiefs of Staff. Mr. Owens holds a B.A. in Mathematics
from the U.S. Naval Academy, bachelor's and master's degrees in Politics,
Philosophy, and Economics from Oxford University and a master's in Management
from George Washington University.

424B1 35th Page of 71 TOC 1st Previous Next ↓Bottom Just 35th
SELLING STOCKHOLDER

The only stockholder selling shares of our common stock in the offering is
3M Financial Management Company, or 3M. As of July 26, 2000, this selling
stockholder beneficially owned approximately 2,000,000 shares of our common
stock, which is equal to approximately 5.6% of the outstanding shares of our
common stock. After the sale of 1,000,000 shares in this offering, 3M will own
approximately 2.8% of the outstanding shares of our common stock.

The number and percentage of shares beneficially owned is determined under
rules of the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under these rules, beneficial
ownership includes any shares as to which 3M has sole or shared voting power or
investment power and also any shares which 3M has the right to acquire within
sixty (60) days of July 26, 2000 through the exercise of any stock option or
other right.

424B1 36th Page of 71 TOC 1st Previous Next ↓Bottom Just 36th
UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Thomas Weisel Partners LLC, Dain
Rauscher Incorporated, UBS Warburg LLC and First Security Van Kasper are acting
as representatives, have severally agreed to purchase, and we and the selling
stockholder have agreed to sell to them, severally, the respective number of
shares of common stock set forth opposite the names of the underwriters below:

[Download Table]

NUMBER OF
NAME SHARES
---- ---------

Morgan Stanley & Co. Incorporated........................... 1,177,500
Thomas Weisel Partners LLC.................................. 706,500
Dain Rauscher Incorporated.................................. 235,500
UBS Warburg LLC............................................. 235,500
First Security Van Kasper................................... 35,000
First Union Securities, Inc................................. 35,000
Edward D. Jones & Co., L.P.................................. 35,000
Pacific Growth Equities, Inc................................ 35,000
Stifel, Nicolaus & Company, Incorporated.................... 35,000
H.C. Wainwright & Co., Inc.................................. 35,000
Wedbush Morgan Securities................................... 35,000
---------

Total............................................... 2,600,000
=========

The underwriters are offering the shares subject to their acceptance of the
shares from us and the selling stockholder and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of common stock offered by this
prospectus are subject to the approval of certain legal matters by their counsel
and to certain other conditions. The underwriters are obligated to take and pay
for all of the shares of common stock offered by this prospectus, other than
those covered by the underwriters' over-allotment option described below, if any
such shares are taken.

The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $2.95 a share under the public offering price. Any
underwriter may allow, and the dealers may reallow, a concession not in excess
of $.10 a share to other underwriters or to certain other dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.

We and the selling stockholder have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to an
aggregate of 390,000 additional shares of common stock at the public offering
price set forth on the cover page of this prospectus, less underwriting
discounts and commissions. The underwriters may exercise this option solely for
the purpose of covering over-allotments, if any, made in connection with this
offering of the shares common stock. To the extent this over-allotment option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of additional shares
of common stock as the number set forth next to each underwriter's name in the
preceding table bears to the total number of shares of common stock set forth
next to the names of all underwriters in the preceding table.

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Each of Polycom, our officers, directors and the selling stockholder, have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, during the period ending 90 days
after the date of this prospectus, they will not, directly or indirectly:

- Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock; or

- Enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock;

whether any such transaction described above is to be settled by delivery of
common stock or such other securities in cash or otherwise.

The restrictions described in the previous paragraph do not apply to:

- The sale to the underwriters of the shares of common stock under the
underwriting agreement;

- The issuance by us of shares of common stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date
of this prospectus which is described in the prospectus;

- The issuance of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans that are in existence
on the date of the prospectus and consistent with past practices; or

- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of this offering.

Morgan Stanley & Co. Incorporated has agreed that, 15 days after the
completion of this offering, it will release up to an aggregate of 100,000
shares held by some of our executive officers that are subject to the 90-day
lockup restriction. Promptly after the 90-day period following the date of this
prospectus, we have agreed to file a registration statement on Form S-3 covering
the resale of the remaining 1,000,000 shares of our common stock that will be
owned by 3M following the completion of this offering.

In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.

The underwriting agreement provides that we and the selling stockholder, and
the underwriters will indemnify each other against certain liabilities,
including liabilities under the Securities Act.

Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
several filed and completed public offerings of equity securities. Thomas Weisel
Partners does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.

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LEGAL MATTERS

The validity of the issuance of the shares of common stock we are offering
by this prospectus will be passed upon for us by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Fenwick & West LLP, Palo Alto, California.

EXPERTS

The consolidated financial statements as of December 31, 1999 and 1998 and
for each of the years in the three-year period ended December 31, 1999, included
in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We file reports, proxy statements and other information with the Commission,
in accordance with the Securities Exchange Act of 1934. You may read and copy
our reports, proxy statements and other information filed by us at the public
reference facilities of the Commission in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information about the public reference rooms. Our reports, proxy statements and
other information filed with the Commission are available to the public over the
Internet at the Commission's World Wide Web site at http://www.sec.gov.

The Commission allows us to "incorporate by reference" the information we
filed with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is considered to be a part of this prospectus, and information that we file
later with the Commission will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings made by us with the Commission under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act until our offering is complete.

- The description of the common stock in our Registration Statement on
Form 8-A filed on March 12, 1996, under Section 12(g) of the Exchange Act;

- The description of our Preferred Shares Rights Agreement in our
Registration Statement on Form 8-A filed on July 22, 1998, under
Section 12(g) of the Exchange Act;

- Our Annual Report on Form 10-K filed on March 29, 2000 for the fiscal year
ended December 31, 1999;

- Our Quarterly Report on Form 10-Q filed on May 17, 2000 for the quarter
ended April 2, 2000;

- Our Current Report on Form 8-K dated December 1, 1999, as amended on Form
8-K/A dated February 11, 2000; and

- Our Current Report on Form 8-K dated July 19, 2000.

Any statement contained in a document that is incorporated by reference will
be modified or superseded for all purposes to the extent that a statement
contained in this prospectus (or in any other document that is subsequently
filed with the Commission and incorporated by reference) modifies or is contrary
to that previous statement. Any statement so modified or superseded will not be
deemed a part of this prospectus except as so modified or superseded.

You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address: Investor Relations, Polycom, Inc., 1565
Barber Lane, Milpitas, California 95035, (408) 474-2000.

424B1 39th Page of 71 TOC 1st Previous Next ↓Bottom Just 39th
POLYCOM, INC.

INDEX TO FINANCIAL STATEMENTS

[Download Table]

PAGE
--------

Report of 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

Financial Statements (unaudited for periods ending March 31,
1999 and 2000):

Condensed Consolidated Balance Sheets as of December 31,
1999 and March 31, 2000................................... F-26

Condensed Consolidated Statements of Income for the Three
Month Periods Ended March 31, 1999 and March 31, 2000..... F-27

Condensed Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 1999 and March 31,
2000...................................................... F-28

Notes to Condensed Consolidated Financial Statements........ F-29

F-1

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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, 1998 and 1999, 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

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POLYCOM, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

[Download Table]

DECEMBER 31,
-------------------
1998 1999
-------- --------

ASSETS
Current assets:
Cash and cash equivalents............................... $18,006 $ 35,952
Short-term investments.................................. 5,483 24,815
Accounts receivable, net of allowance for doubtful
accounts of $871 and $1,304 in 1998 and 1999,
respectively.......................................... 25,168 47,445
Inventories............................................. 17,326 18,136
Deferred and refundable taxes........................... 2,594 9,059
Prepaid expenses and other current assets............... 2,217 2,368
------- --------
Total current assets................................ 70,794 137,775

Fixed assets, net....................................... 6,802 9,795
Noncurrent deferred taxes............................... -- 1,546
Long-term investments................................... -- 15,050
Other assets............................................ 709 555
------- --------
Total assets........................................ $78,305 $164,721
======= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $12,683 $ 26,433
Accrued payroll and related liabilities................. 3,505 4,031
Taxes payable........................................... 1,405 9,633
Other current liabilities............................... 6,784 11,354
------- --------
Total current liabilities........................... 24,377 51,451
------- --------

Commitments and contingencies (Note 8).................. -- --

Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized: 5,000,000 shares in 1998 and 1999
Issued and outstanding: none in 1998 and 1999......... -- --
Common stock, $0.0005 par value:
Authorized: 50,000,000 shares
Issued and outstanding: 31,097,583 shares in 1998 and
34,342,874 shares in 1999........................... 16 17
Additional paid-in capital.............................. 65,465 97,594
Unrealized loss on marketable securities................ -- (85)
Unearned stock-based compensation....................... -- (1,953)
Retained earnings (deficit)............................. (11,553) 17,697
------- --------
Total stockholders' equity.......................... 53,928 113,270
------- --------
Total liabilities and stockholders' equity........ $78,305 $164,721
======= ========

The accompanying notes are an integral part of these consolidated financial
statements

F-3

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POLYCOM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------

Net revenues................................................ $ 50,394 $116,886 $200,067
Cost of net revenues........................................ 27,583 57,906 91,257
-------- -------- --------
Gross profit.............................................. 22,811 58,980 108,810

Operating expenses:
Sales and marketing....................................... 13,247 22,156 36,047
Research and development.................................. 17,038 14,719 21,615
General and administrative................................ 7,019 5,518 8,269
Acquisition costs......................................... 597 185 1,650
-------- -------- --------
Total operating expenses................................ 37,901 42,578 67,581
-------- -------- --------
Operating income (loss)............................... (15,090) 16,402 41,229

Interest income, net........................................ 1,154 957 1,771
Other income (expense)...................................... 12 (9) (31)
-------- -------- --------
Income (loss) before provision for income taxes....... (13,924) 17,350 42,969

Provision for income taxes.................................. 171 1,749 13,616
-------- -------- --------
Net income (loss)..................................... $(14,095) $ 15,601 $ 29,353
======== ======== ========

Basic net income (loss) per share........................... $ (0.66) $ 0.54 $ 0.90
======== ======== ========
Diluted net income (loss) per share......................... $ (0.66) $ 0.46 $ 0.81
======== ======== ========

Shares used in Basic per share calculation.................. 21,489 28,810 32,536
Shares used in Diluted per share calculation................ 21,489 33,847 36,458

The accompanying notes are an integral part of these consolidated financial
statements

F-4

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POLYCOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

[Enlarge/Download Table]

PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED
---------------------- --------------------- PAID-IN STOCK-BASED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- --------- ---------- -------- ---------- ------------

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 (2,400)
Amortization of stock-based compensation......... -- -- -- -- -- 447
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 $(1,953)
========== ========= ========== === ======= =======

RETAINED
EARNINGS
OTHER (DEFICIT) TOTAL
-------- --------- --------

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 to outside
consultants.................................... -- -- 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...................... -- -- --
Amortization of stock-based compensation......... -- -- 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...................... $(85) $ 17,697 $113,270
==== ======== ========

The accompanying notes are an integral part of these consolidated financial
statements

F-5

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POLYCOM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------

Cash flows from operating activities:
Net income (loss)......................................... $(14,095) $15,601 $29,353
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 2,031 3,314 4,263
Provision for doubtful accounts......................... 30 400 433
Provision for excess and obsolete inventories........... 1,302 2,799 4,958
Tax benefit from exercise of stock options.............. -- 2,121 9,104
Value of stock-based compensation....................... 76 121 475
Loss on asset dispositions.............................. 308 6 --
Other non-cash adjustments.............................. 48 -- --
Changes in assets and liabilities:
Accounts receivable................................... (2,427) (16,895) (22,710)
Inventories........................................... (3,977) (9,910) (5,768)
Deferred taxes........................................ -- (2,594) (8,011)
Prepaid expenses and other current assets............. (2,055) 357 (497)
Accounts payable...................................... 7,338 856 13,750
Taxes payable......................................... 25 1,292 8,228
Accrued liabilities................................... 2,811 5,199 5,062
-------- ------- -------
Net cash provided by (used in) operating
activities........................................ (8,585) 2,667 38,640
-------- ------- -------

Cash flows from investing activities:
Acquisition of fixed assets............................... (3,623) (5,486) (7,222)
Purchase of investments................................... (7,154) (9,686) (44,735)
Proceeds from sale of investments......................... 12,071 9,387 10,268
Other..................................................... -- 27 500
-------- ------- -------
Net cash provided by (used in) investing
activities........................................ 1,294 (5,758) (41,189)
-------- ------- -------

Cash flows from financing activities:
Proceeds from issuance of common stock, net of repurchases
and issuance costs...................................... 504 9,752 5,598
Proceeds from exercise of warrants........................ -- -- 15,000
Dividends paid to S-Corporation shareholders.............. (157) (617) (103)
Proceeds from line of credit borrowings................... 2,558 9,601 --
Repayment of line of credit borrowings.................... (1,983) (10,226) --
Proceeds from issuance of preferred stock, net of issuance
costs................................................... 7,521 -- --
Repayment of stockholder notes receivable, net............ 5 24 --
-------- ------- -------
Net cash provided by financing activities........... 8,448 8,534 20,495
-------- ------- -------
Net increase in cash and cash equivalents................... 1,157 5,443 17,946
Cash and cash equivalents, beginning of period.............. 11,406 12,563 18,006
-------- ------- -------
Cash and cash equivalents, end of period.................... $ 12,563 $18,006 $35,952
======== ======= =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 141 $ 16 $ 77
Income taxes paid......................................... $ 40 $ 399 $ 4,289
Advertising barter trade credits.......................... $ -- $ 770 $ (770)

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING:
Capital leases............................................ $ 20 $ 113 $ 34
Capital contribution of S-Corp shareholders............... $ 423 $ 225 $ --
Conversion of preferred shares to common stock............ $ -- $ 9,496 $ --

The accompanying notes are an integral part of these consolidated financial
statements

F-6

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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.

F-7

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POLYCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.

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, 1997, 1998 and 1999 was $1.8 million,
$5.2 million and $9.2 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.

F-8

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POLYCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.

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."

F-9

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POLYCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 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.

F-10

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POLYCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The following table reconciles Polycom's previously reported revenue and
earnings to the restated amounts (in thousands):

[Enlarge/Download Table]

NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DEC. 31, 1997 DEC. 31, 1998 SEPT. 30, 1999
------------- ------------- --------------

Net revenues:
Polycom previously reported........................... $ 46,630 $111,696 $136,113
Atlas................................................. 3,764 5,190 3,466
-------- -------- --------
Restated net revenues................................. $ 50,394 $116,886 $139,579
======== ======== ========

Net income (loss):
Polycom previously reported........................... $(14,675) $ 14,759 $ 22,459
Atlas................................................. 580 842 (993)
-------- -------- --------
Restated net income (loss)............................ $(14,095) $ 15,601 $ 21,466
======== ======== ========

Basic net income (loss) per share:
Polycom previously reported........................... $ (0.73) $ 0.54 $ 0.73
Atlas................................................. 0.07 -- (0.06)
-------- -------- --------
Restated basic net income (loss) per share............ $ (0.66) $ 0.54 $ 0.67
======== ======== ========

Diluted net income (loss) per share:
Polycom previously reported........................... $ (0.73) $ 0.46 $ 0.65
Atlas................................................. 0.07 -- (0.06)
-------- -------- --------
Restated diluted net income (loss) per share.......... $ (0.66) $ 0.46 $ 0.59
======== ======== ========

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:

[Download Table]

DECEMBER 31,
-------------------
1998 1999
-------- --------

Net Income................................................ $15,601 $29,353
Unrealized loss on investments............................ -- (85)
------- -------
Comprehensive income...................................... $15,601 $29,268
======= =======

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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, 1998 and 1999 comprise (in thousands):

[Download Table]

FAIR COST
VALUE BASIS
-------- --------

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
======= =======

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
======= =======

All current investments as of December 31, 1998 and 1999 mature within one
year. Noncurrent investments mature within two years. During 1998 and 1999,
there were no realized gains or losses on the disposal of investments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. INVENTORIES:

Inventories consist of the following (in thousands)

[Download Table]

DECEMBER 31,
-------------------
1998 1999
-------- --------

Raw materials............................................. $ 1,601 $ 1,542
Finished goods............................................ 15,725 16,594
------- -------
Total inventories......................................... $17,326 $18,136
======= =======

5. FIXED ASSETS:

Fixed assets, net, consist of the following (in thousands):

[Download Table]

DECEMBER 31,
-------------------
1998 1999
-------- --------

Computer equipment and software........................... $ 6,507 $12,777
Equipment, furniture and fixtures......................... 3,866 4,456
Tooling equipment......................................... 4,700 4,732
Leasehold improvements.................................... 567 687
------- -------
15,640 22,652

Less accumulated depreciation and amortization............ 8,838 12,857
------- -------
$ 6,802 $ 9,795
======= =======

6. OTHER ACCRUED LIABILITIES:

Other accrued liabilities consist of the following (in thousands):

[Download Table]

DECEMBER 31,
-------------------
1998 1999
-------- --------

Accrued expenses and legal fees............................ $3,127 $ 5,202
Warranty reserve........................................... 1,721 2,814
Deferred service revenue................................... 270 1,247
Sales tax payable.......................................... 579 661
Employee stock purchase plan withholding................... 391 663
Other accrued liabilities.................................. 696 767
------ -------
$6,784 $11,354
====== =======

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. BUSINESS RISKS AND CREDIT CONCENTRATION: (CONTINUED)
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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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 $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):

[Download Table]

YEAR ENDING DECEMBER 31, LEASES
------------------------ --------

2000 $ 2,514
2001 2,751
2002 2,682
2003 2,781
2004 2,895
Thereafter.................................................. 5,929
-------
Minimum future lease payments............................... $19,552
=======

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, 1997, 1998 and 1999 was
$692,000, $1.3 million and $2.3 million, 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. CREDIT ARRANGEMENTS: (CONTINUED)
the time of renewal. The weighted average interest rates for the years ended
December 31, 1997, 1998 and 1999 were 9.3%, 8.4% and 8.1%, 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.

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.

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POLYCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY: (CONTINUED)
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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY: (CONTINUED)
Activity under the Plan is as follows (in thousands, except share and per
share data):

[Enlarge/Download Table]

OUTSTANDING OPTIONS
SHARES ------------------------------------------------------
AVAILABLE NUMBER EXERCISE AGGREGATE WEIGHTED AVG
FOR GRANT OF SHARES PRICE PRICE EXERCISE PRICE
---------- ---------- ------------ --------- --------------

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

As of December 31, 1997, 1998 and 1999, 1,894,287, 1,841,971, 1,173,731
outstanding options were exercisable at an aggregate average exercise price of
$1.43, $2.33, and $3.62, respectively. Of these options that were exercisable,
1,174,149, 677,066 and 369,319 as of December 31, 1997, 1998 and 1999,
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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY: (CONTINUED)

The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:

[Download Table]

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
------------- ----------- ----------- -------- ----------- --------

$ 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
========= =========

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):

[Enlarge/Download Table]

YEAR ENDING
------------------------------
1997 1998 1999
-------- -------- --------

Net income/(loss)--as reported.............................. $(14,095) $15,601 $29,353
Net income/(loss)--pro forma................................ $(18,828) $ 9,578 $17,238
Basic net income/(loss) per share--as reported.............. $ (0.66) $ 0.54 $ 0.90
Basic net income/(loss) per share--pro forma................ $ (0.88) $ 0.33 $ 0.53
Diluted net income/(loss) per share--as reported............ $ (0.66) $ 0.46 $ 0.81
Diluted net income/(loss) per share--pro forma.............. $ (0.88) $ 0.28 $ 0.47

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:

[Download Table]

Risk-free interest rate.............. 5.09%-5.66%
Expected life (yrs).................. 0.5
Expected dividends................... --
Expected volatility.................. 0.6-0.8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY: (CONTINUED)
The weighted average fair value of options granted pursuant to the Plans
were $3.06, $6.40 and $19.06 in 1997, 1998 and 1999, 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.

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.

[Download Table]

JANUARY 1999 JULY 1999
------------ ---------

Risk free interest rate................................ 5.09% 5.09%
Expected life (yrs).................................... 0.5 0.5
Expected dividend yield................................ -- --
Expected volatility.................................... 0.8 0.8

The weighted average fair value of purchase rights granted pursuant to the
Employee Stock Purchase Plan in 1998 and 1999 was $3.38 and $5.55, 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-based 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY: (CONTINUED)
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.

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

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POLYCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. EMPLOYEE BENEFITS PLANS: (CONTINUED)
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.

12. INCOME TAXES:

Income tax expense consists of the following (in thousands):

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------

CURRENT
U. S. Federal............................................... $171 $ 3,415 $20,460
Foreign..................................................... -- 35 337
State and local............................................. -- 893 817
---- ------- -------
Total current............................................... $171 $ 4,343 $21,614

DEFERRED
U. S. Federal............................................... $ -- $(2,594) $(6,538)
Foreign..................................................... -- -- (130)
State and local............................................. -- -- (1,330)
---- ------- -------
Total deferred.............................................. $ -- $(2,594) $(7,998)
---- ------- -------

Income tax expense.......................................... $171 $ 1,749 $13,616
==== ======= =======

The sources of income (loss) before the provision for income taxes are as
follows (in thousands):

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------

United States........................................... $(13,924) $17,262 $49,765
Foreign................................................. -- 88 (6,796)
-------- ------- -------
Income (loss) before provision for income taxes......... $(13,924) $17,350 $42,969
======== ======= =======

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POLYCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. INCOME TAXES: (CONTINUED)
The Company's tax provision differs from the provision computed using
statutory tax rates as follow (in thousands):

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------

Federal tax at statutory rate............................. $(4,931) $5,778 $15,039

State taxes, net of federal benefit....................... (51) 1,007 1,719
Nondeductible expenses.................................... 117 83 1,603
Alternative Minimum Tax................................... 38 -- --
Foreign losses at tax rates different than U.S............ -- -- 2,586
Change in valuation allowance............................. 6,094 (3,863) (7,679)
Current NOL and credit utilization........................ (837) (1,256) (2,183)
Other..................................................... (259) -- 2,531
------- ------ -------
Tax provision............................................. $ 171 $1,749 $13,616
======= ====== =======

The tax effects of temporary differences that give rise to the deferred tax
assets are presented below (in thousands):

[Enlarge/Download Table]

1997 1998 1999
-------- -------- --------

Fixed assets, principally due to differences in
depreciation............................................ $ 552 $1,998 $ 739
Other accrued liabilities................................. 3,627 5,123 7,938
Capitalized research expenditures......................... 334 246 --
Net operating loss carryforwards.......................... 4,746 2,553 1,681
Tax credit carryforwards.................................. 2,283 353 247
Other..................................................... -- -- --
Valuation allowance....................................... (11,542) (7,679) --
------- ------ -------
Net deferred tax asset.................................... $ -- $2,594 $10,605
======= ====== =======

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.

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POLYCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. BUSINESS SEGMENT INFORMATION: (CONTINUED)
The Company's net revenues are all denominated in U.S. dollars and are
summarized as follows (in thousands):

[Download Table]

YEAR ENDED DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------

United States.................................. $39,057 $ 89,217 $133,691
Canada......................................... 545 927 4,583
------- -------- --------
North America.................................. 39,602 90,144 138,274
Europe, Middle East & Africa................... 5,446 15,578 38,891
Asia........................................... 4,148 8,138 18,029
Caribbean & Latin America...................... 1,198 3,026 4,873
------- -------- --------
Total International............................ 10,792 26,742 61,793
------- -------- --------
$50,394 $116,886 $200,067
======= ======== ========

The percentage of total net revenues for the Video Communications, Voice
Communications and Network Access product lines were as follows:

[Enlarge/Download Table]

YEAR ENDED
DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------

Video communications....................................... 11% 48% 63%
Voice communications....................................... 81 48 34
Network access products.................................... 8 4 3
--- --- ---
Total net revenues......................................... 100% 100% 100%
=== === ===

Lucent Technologies, Inc. accounted for 10%, 11% and 11% of net revenue in
1997, 1998 and 1999, respectively.

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POLYCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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).

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------

Numerator--basic and diluted EPS
Net income (loss)..................................... $(14,095) $15,601 $29,353
======== ======= =======

Denominator--Basic EPS
Weighted average common stock outstanding............. 21,489 30,382 33,452
Shares subject to repurchase.......................... -- (1,572) (916)
-------- ------- -------
Total Shares used in calculation of Basic EPS........... 21,489 28,810 32,536
-------- ------- -------
Basic net income (loss) per share....................... $ (0.66) $ 0.54 $ 0.90
======== ======= =======

Denominator--Diluted EPS
Denominator--Basic EPS................................ 21,489 28,810 32,536
Effect of Dilutive Securities:
Common stock options................................ -- 2,694 2,795
Shares subject to repurchase........................ -- 1,572 916
Convertible warrants and preferred.................. -- 771 211
-------- ------- -------
Total Shares used in calculation of Diluted EPS......... 21,489 33,847 36,458
-------- ------- -------
Diluted net income (loss) per share..................... $ (0.66) $ 0.46 $ 0.81
======== ======= =======

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.

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-25

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POLYCOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

[Enlarge/Download Table]

DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 35,952 $ 49,091
Short-term investments.................................... 24,815 14,477
Accounts receivable, net of allowance for doubtful
accounts of $1,304 at December 31, 1999 and $1,439 at
March 31, 2000 47,445 52,758
Inventories............................................... 18,136 24,698
Deferred and refundable taxes............................. 9,059 11,715
Other current assets...................................... 2,368 4,640
-------- --------
Total current assets.................................... 137,775 157,379
Fixed assets, net........................................... 9,795 12,143
Long-term investments....................................... 15,050 15,269
Licenses.................................................... -- 8,182
Other assets................................................ 2,101 2,085
-------- --------
Total assets............................................ $164,721 $195,058
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 26,433 $ 33,829
Taxes payable............................................. 9,633 13,481
Accrued and other current liabilities..................... 15,385 14,068
-------- --------
Total current liabilities............................... 51,451 61,378
-------- --------
Stockholders' equity:
Common stock.............................................. 17 18
Additional paid-in capital................................ 97,594 106,080
Unrealized loss on marketable securities.................. (85) (83)
Unearned stock-based compensation......................... (1,953) (1,661)
Accumulated earnings...................................... 17,697 29,326
-------- --------
Total stockholders' equity.............................. 113,270 133,680
-------- --------
Total liabilities and stockholders' equity............ $164,721 $195,058
======== ========

The accompanying notes are an integral part of these condensed consolidated
financial statements

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POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

[Download Table]

THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
1999 2000
--------- ---------

Net revenues................................................ $41,314 $67,295
Cost of net revenues........................................ 19,533 29,737
------- -------
Gross profit.............................................. 21,781 37,558
------- -------

Operating expenses:
Sales and marketing....................................... 7,411 12,160
Research and development.................................. 3,926 7,449
General and administrative................................ 1,552 3,296
Litigation reserve release................................ -- (1,843)
------- -------
Total operating expenses................................ 12,889 21,062
------- -------

Operating income............................................ 8,892 16,496

Interest income, net........................................ 303 790
Other income (expense)...................................... (6) 71
------- -------
Income before provision for income taxes................ 9,189 17,357

Provision for income taxes.................................. 1,449 5,728
------- -------
Net income.................................................. $ 7,740 $11,629
======= =======

Basic net income per share.................................. $ 0.25 $ 0.34
======= =======
Diluted net income per share................................ $ 0.22 $ 0.31
======= =======

Weighted average shares outstanding for basic EPS........... 30,925 34,459
Weighted average shares outstanding for diluted EPS......... 35,626 37,785

The accompanying notes are an integral part of these condensed consolidated
financial statements

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POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

[Download Table]

THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
1999 2000
--------- ---------

Cash flows from operating activities:
Net income.................................................. $ 7,740 $11,629
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 901 1,487
Provision for doubtful accounts........................... -- 189
Provision for excess and obsolete inventories............. 1,301 1,044
Tax benefit from exercise of stock options................ 1,466 4,530
Amortization of stock-based compensation.................. 7 292
Changes in assets and liabilities:
Accounts receivable..................................... (4,653) (5,502)
Inventories............................................. 285 (7,606)
Deferred taxes.......................................... (3,157) (2,656)
Other assets............................................ (676) (2,117)
Accounts payable........................................ 4,312 7,396
Taxes payables.......................................... 1,943 3,848
Accrued and other liabilities........................... (349) (1,317)
------- -------
Net cash provided by operating activities................... 9,120 11,217
------- -------

Cash flows from investing activities:
Acquisition of fixed assets............................... (1,673) (3,835)
Purchase of licenses...................................... -- (8,321)
Proceeds from sale and maturity of investments............ 1,700 18,045
Purchases of investments.................................. (3,518) (7,924)
Other..................................................... 250 --
------- -------
Net cash used in investing activities....................... (3,241) (2,035)
------- -------

Cash flows from financing activities:
Proceeds from issuance of common stock.................... 1,613 3,957
Proceeds from exercise of warrants........................ 15,000 --
------- -------
Net cash provided by financing activities................... 16,613 3,957
------- -------

Net increase in cash and cash equivalents................... 22,492 13,139
Cash and cash equivalents, beginning of period.............. 18,006 35,952
------- -------
Cash and cash equivalents, end of period.................... $40,498 $49,091
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................... $ 1,107 $ 13

The accompanying notes are an integral part of these condensed consolidated
financial statements

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POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

The condensed consolidated balance sheet as of March 31, 2000, the condensed
consolidated statements of income for the three month periods ended March 31,
1999 and 2000 and condensed consolidated statements of cash flows for the three
month periods ended March 31, 1999 and 2000 have been prepared by the Company
without audit. The condensed consolidated balance sheet at December 31, 1999 has
been derived from the audited financial statements as of that date.

The preparation of financial statements in conformity with United States'
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 2000 and for all periods presented have been made.

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 period. However, for convenience of
presentation, the accompanying consolidated financial statements have been shown
as ending on March 31 and December 31 of each applicable period.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. These condensed financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Report on Form 10-K for the year ended December 31,
1999 filed with the Securities and Exchange Commission.

2. INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined in
a manner which approximates the first-in, first-out ("FIFO") method. Inventories
consisted of the following (in thousands):

[Download Table]

DEC. 31, MARCH 31,
1999 2000
-------- ---------

Raw Materials............................................... $ 1,542 $ 1,511
Finished Goods.............................................. 16,594 23,187
------- -------
$18,136 $24,698
======= =======

3. BANK LINE OF CREDIT

The Company has available a $15.0 million 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 (9.0% at March 31, 2000) or at an offshore interbank
offered rate (IBOR) plus 0.65% (approximately 6.5% to 7.2%, depending on the
term of the borrowings at March 31, 2000). 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

F-29

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POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

3. BANK LINE OF CREDIT (CONTINUED)
renewed by the Company for an additional year so long as certain liquidity
measures are met at the time of renewal.

4. PER SHARE INFORMATION

In accordance with the disclosure requirements of the Statement of Financial
Standards (SFAS) No. 128, a reconciliation of the numerator and denominator of
basic and diluted EPS is provided as follows (in thousands except per share
amounts).

[Download Table]

THREE MONTHS
ENDED MARCH 31,
-------------------
1999 2000
-------- --------

Numerator--basic and diluted EPS
Net income................................................ $7,740 $11,629
====== =======
Denominator--Basic EPS
Weighted average common stock outstanding................... 32,120 34,958
Shares subject to repurchase.............................. (1,195) (499)
------ -------
Total shares used in calculation of Basic EPS............... 30,925 34,459
====== =======
Basic net income per share.................................. $ 0.25 $ 0.34
Denominator--Diluted EPS
Denominator--Basic EPS.................................... 30,925 34,459
Effect of Dilutive Securities:
Common stock options.................................... 2,661 2,827
Shares subject to repurchase............................ 1,195 499
Convertible warrants and preferred...................... 845 --
------ -------
Total Shares used in calculation of Diluted EPS............. 35,626 37,785
====== =======
Diluted net income per share................................ $ 0.22 $ 0.31

5. 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. The percentage of total net revenues for the Video Communications,
Voice Communications and Network Access product lines were as follows:

[Download Table]

THREE MONTHS
ENDED MARCH
31,
-----------------------
1999 2000
-------- --------

Video communications........................................ 54% 61%
Voice communications........................................ 43 35
Network access products..................................... 3 4
--- ---
Total net revenues.......................................... 100% 100%
=== ===

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POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

6. LITIGATION

7. COMPREHENSIVE INCOME

In accordance with the disclosure requirements of SFAS No. 130, "Reporting
Comprehensive Income", the components of comprehensive income are as follows:

[Download Table]

THREE MONTHS
ENDED MARCH 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)

Net income.................................................. $7,740 $11,629
Decrease in unrealized loss on marketable securities........ -- 2
------ -------
Comprehensive income........................................ $7,740 $11,631
====== =======

8. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (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 fourth fiscal
quarter of fiscal years 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.

In March 2000, the FASB issued FASB Interpretation No. 44 (FIN
44) Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award, and (d) the

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POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

8. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain provisions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain other provisions of FIN 44 prior to March 31, 2000 did
not have a material effect on the financial statements. The Company does not
expect that the adoption of the remaining provisions will have a material effect
on the financial statements.

9. LICENSES

On March 3, 2000, Polycom entered into a patent licensing agreement with
VTEL Corporation (VTEL). VTEL provided a fully-paid up, royalty-free license to
three patents related to various videoconferencing technologies. In exchange for
these licenses, Polycom paid VTEL approximately $8.3 million and sublicensed to
VTEL a royalty-bearing patent for videoconferencing technology. The royalty, if
any, under the sublicense is payable to the patent holder not Polycom.

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B1’ Filing	Date	First	Last	Other Filings

	7/15/08	59
	12/31/00	18	21	10-K
	10/31/00	53	67
	8/2/00	1		8-K
Filed on:	7/28/00
	7/27/00	1	18
	7/26/00	35
	7/19/00	7	38	8-K
	7/12/00	32
	7/1/00	31	70
	6/30/00	7
	6/15/00	31	69
	5/17/00	38		10-Q
	4/2/00	38		10-Q
	3/31/00	3	70	DEF 14A
	3/29/00	38		10-K
	3/3/00	28	70
	2/11/00	38		8-K/A
	1/28/00	40
	1/12/00	31	70
	12/31/99	3	67	10-K
	12/15/99	31	69	8-K
	12/1/99	38	55	8-K, 8-K/A
	9/30/99	49
	3/31/99	3	67
	3/1/99	58
	1/1/99	23
	12/31/98	3	56	10-K
	12/15/98	31	70
	7/31/98	58
	7/22/98	38		8-A12G, 8-K
	7/15/98	58		8-K
	5/27/98	28	69
	1/2/98	48	54	8-K
	1/1/98	49
	12/31/97	20	63	10-K
	9/3/97	28	69
	3/28/97	58
	3/5/97	56
	1/1/97	43
	12/31/96	20	56	10-K
	3/12/96	38
	12/31/95	20
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Filing Submission 0000912057-00-033513 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Polycom Inc – ‘424B1’ on 7/28/00

On: Friday, 7/28/00, at 8:27am ET · Accession #: 912057-0-33513 · File #: 333-40912

Prospectus — Rule 424(b)(1)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Prospectus — Rule 424(b)(1)
Filing Table of Contents