nanitem 14 exhibits financial statement schedules reports form 10k following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 1997 1996 three years period ended december 31 1997 2 financial statement schedule see item 8 following financial statement schedule registration filed part report schedule ii valuation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits following exhibits filed part incorporated reference report 1 confidential treatment requested certain portions documents b reports form 8k report form 8k filed january 2 1998 regarding polycoms acquisition viavideo communications inc effective january 2 1998 also disclosed datapoint corporation filed complaint contesting patent infringement us patents related videoconferencing polycom inc viavideo communications inc named putative class members datapoint motion class action certification along 500 companies c exhibits see item 14a3 financial statement schedules see items 8 14a2 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city san jose state california 13th day march 1998 polycom inc brian l hinman michael r kourey brian l hinman michael r kourey chairman board vice president finance chief executive officer administration chief financial officer secretary power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint brian l hinman michael r kourey lawful attorneysinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 amended report signed following persons capacities dates indicated polycom inc index consolidated financial statements page report coopers lybrand llp independent accountants consolidated balance sheets consolidated statements operations consolidated statements stockholders equitydeficit consolidated statements cash flows notes consolidated financial statements report independent accountants board directors polycom inc stockholders audited accompanying consolidated balance sheets polycom inc subsidiary december 31 1997 1996 related consolidated statements operations stockholders equity deficit cash flows three years period ended december 31 1997 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statements presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position polycom inc subsidiary december 31 1997 1996 consolidated results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles coopers lybrand llp san jose california january 20 1998 except note 15b date february 19 1998 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders equity deficit thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 formation business company polycom inc subsidiary company delaware corporation engaged development manufacturing marketing teleconferencing equipment companys products distributed serviced globally company sells products direct sales force maintains marketing sales relationships major telecommunications carriers valueadded resellers telecommunications suppliers catalog distributors leading videoconferencing equipment supplier telecommunications specialists 2 summary selected accounting policies fiscal year company uses 5253 week fiscal year result fiscal year may end day calendar year convenience presentation accompanying consolidated financial statements shown ending december 31 applicable period reclassifications certain financial statements items reclassified conform current years format principles consolidation consolidated financial statements include accounts company wholly owned subsidiary significant intercompany balances transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents company considers highly liquid investments original maturities 90 days less time purchase cash equivalents shortterm investments shortterm investments classified available sale carried fair value unrealized holding gains losses securities reported net related taxes separate component stockholders equity realized gains losses sales securities reported earnings computed using specific identification cost method inventories stated lower cost market cost determined standard cost basis approximates firstin firstout fifo method appropriate consideration given obsolescence excessive levels deterioration factors evaluating net realizable value polycom inc notes consolidated financial statements fixed assets fixed assets stated cost less accumulated depreciation amortization depreciation provided straightline basis estimated useful lives assets two three years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three five years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses included results operations carrying value longlived assets company writes carrying value longlived assets fair market value carrying value considered impaired value considered impaired carrying amount exceeds undiscounted future net cash flows generated assets revenue recognition company recognizes revenue gross product sales less provision estimated future customer returns upon shipment customer upon fulfillment acceptance terms significant contractual obligations remain outstanding 1997 company recognized 30 million revenue related certain deliverables detailed first agreement 3m amounts recognized revenue agreement approximates amount would recognized using percentage completion methodology research development expenditures research development expenditures charged operations incurred advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily magazine advertisements agency fees direct production costs advertising expense years ended december 31 1997 1996 1995 1835000 1570000 1281000 respectively income taxes income taxes accounted statement financial accounting standards 109 sfas 109 accounting income taxes sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled valuation allowances established necessary reduce deferred tax assets amount expected realized translation foreign currencies companys foreign consolidated subsidiary considered extension us operation functional currency us dollar accordingly monetary assets liabilities translated year polycom inc notes consolidated financial statements end exchange rates nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation cost revenue translated historical rates foreign exchange gains losses significant date recorded results operations computation net incomeloss per share company adopted statement financial standards 128 sfas 128 earnings per share accordingly prior period eps figures restated sfas 128 requires net income loss per share presented two calculations basic eps diluted eps basic net income loss per share computed using weighted average number common shares outstanding periods represented diluted net income loss per share computed using common dilutive common equivalent shares outstanding periods represented common equivalent shares including shares issued stock option plan subject repurchase excluded computation fully diluted net loss per share effect antidilutive fair value financial instruments carrying amounts certain companys financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm investments separately disclosed elsewhere based quoted market prices similar instruments stock based compensation statement financial accounting standards 123 sfas 123 accounting stockbased compensation encourages require companies record compensation cost stockbased compensation plans fair value company chosen continue account employee stock options using intrinsic value method prescribed apb opinion 25 accounting stock issued employees accordingly compensation cost stock options measured excess quoted market price companys stock date grant amount employee must pay acquire stock recent pronouncements june 1997 fasb issued sfas 130 reporting comprehensive income sfas 130 establishes standards reporting display comprehensive income components full set generalpurpose financial statements comprehensive income defined change equity business enterprise period transactions events circumstances nonowner sources impact adopting sfas 130 effective polycom 1998 determined june 1997 fasb issued sfas 131 disclosures segments enterprise related information sfas 131 requires publiclyheld companies report financial information key revenueproducing segments entity information available utilized chief operation decisionmaker specific information reported individual segments includes profit loss certain revenue expense items total assets reconciliation segment financial information amounts reported financial statements would provided sfas 131 effective polycom 1998 impact adoption determined polycom inc notes consolidated financial statements 3 shortterm investments shortterm investments december 31 1997 1996 comprise thousands 1997 1996 realized gains losses disposal shortterm investments 4 inventories consist following thousands 5 fixed assets fixed assets net consist following thousands 6 business risks credit concentration company sells limited number products serve audioconferencing dataconferencing videoconferencing markets substantial majority companys net revenues derived sales polycom inc notes consolidated financial statements soundstation products serve audioconferencing market factor adversely affecting demand supply soundstation products could materially adversely affect companys business financial performance although company begin volume shipments new showstation ip product 1998 market dataconferencing products beginning emerge assurance develop sufficiently enable company achieve broad commercial acceptance showstation products additionally viewstation products including 128kbps version began shipping february 1998 384512kbps version targeted first customer shipment april 1998 companys first videoconferencing offer assurance polycom succeed market currently company subcontracts manufacturing soundstation premier viewstation products one subcontractor asia soundpoint product manufactured one subcontractor china showstation product manufactured one us subcontractor company believes number alternative contract manufacturers could produce companys products event reduction interruption supply could take significant period time qualify alternative subcontractor commence manufacturing effect reduction interruption supply results operations would material additionally asian economy gone recent problems yet material impact supply polycom product subcontractors used region however economic problems asia persist could create interruption supply could materially adversely affect results operations companys cash equivalents maintained two international investment management companies invested form demand deposit accounts money market accounts commercial paper government securities company markets products distributors endusers throughout world management performs ongoing credit evaluations companys customers maintains allowance potential credit losses historically experienced significant losses related individual customers group customers particular geographic area expansion polycoms product offerings including showstation ip viewstation may increase companys credit risk customers place larger orders new products assurance companys credit loss experience remain near historic levels 7 commitments contingencies time company subject variety disputes litigation normal course business including suits related intellectual property contract law personal injury employee relations opinion management matters company currently involved aggregate material adverse effect companys financial statements license agreement company entered agreement license software incorporated showstation products agreement company obligated pay annual minimum license fees ranging 15000 35000 year 2001 company may cancel agreement time provided company paid minimum 200000 connection agreement december 31 1997 company paid 225000 minimum license fees polycom inc notes consolidated financial statements leases company leases certain office facilities equipment noncancelable leases expiring 1998 2001 future minimum lease payments follows thousands december 1994 company amended headquarters office lease agreement expanded facilities lease expanded facilities terminated sooner option may exercised company terms lease company responsible related maintenance taxes insurance may 1997 company entered three year operating lease us distribution repair center livermore california lease associated building expire may 31 2000 allows earlier termination company rent expense years ended december 31 1997 1996 1995 598000 475000 433000 respectively 8 credit arrangements company available revolving line credit bank lesser 5000000 sum 80 eligible domestic trade accounts receivable 50 foreign trade accounts receivable defined less sum aggregate outstanding face amount letters credit issued line credit expires october 1999 agreement allows additional facility 50 million borrowing convert term loan outstanding amount upon request polycom payment associated fees borrowings line subject certain financial covenants restrictions indebtedness equity distributions financial guarantees business combinations related items borrowings line credit bear interest lenders current prime rate 85 december 31 1997 1996 borrowing rate lenders current index rate plus 1 925 december 31 1996 weighted average interest rates years ended december 31 1997 1996 1995 93 95 92 respectively borrowings collateralized substantially assets company must meet certain financial ratios well maintain minimum tangible net worth quarterly maximum cumulative losses agreements also require company provide certain financial information lender periodic basis restrict company paying cash dividends without banks consent 9 stockholders equity preferred stock march 1996 company authorized 18095690 shares preferred stock polycom inc notes consolidated financial statements initial public offering conversion preferred stock april 1996 company principal stockholder issued 2500000 150000 shares common stock respectively initial public offering connection initial public offering outstanding shares preferred stock converted aggregate 13069857 shares common stock additionally 22500 shares common stock issued upon net exercise warrants preferred stock option plan 1996 board directors reserved 3125000 shares common stock 1996 stock option plan issuance employees directors company 1997 additional 1000000 shares reserved shareholder vote 1996 plan supersedes 1991 stock option plan terms plan options may granted prices lower fair market value date grant determined board directors options immediately exercisable upon vesting expire ten years date grant shares issued upon exercise options generally subject right repurchase company upon termination employment company option shares subject repurchase normally vest 20 completing one year service company remaining amount equally 48 months fully vested five years certain shares held founder company vest follows 20 date grant 625 remaining shares equal installments upon expiration three months service completed thereafter activity plan follows thousands except share per share data december 31 1997 1996 1995 options purchase 458861 613113 140029 outstanding options exercisable aggregate average exercise price 324 210 021 respectively 33771 shares common stock acquired plan subject repurchase polycom inc notes consolidated financial statements march 1997 company implemented option cancellation regrant program employees executive officers holding stock options exercise prices per share excess 450 outstanding options covering aggregate 223200 shares exercise prices excess 450 per share canceled new options number shares granted exercise price 4375 per share new options vest fiveyear period beginning march 5 1997 consistent provisions sfas 123 companys net income loss net income loss per share would adjusted pro forma amounts indicated thousands except per share amounts impact pro forma net income loss per share net income loss table may indicative effect future years options vest several years company continues grant stock options new employees policy may continue fair value option grant estimated date grant using multiple options approach blackscholes model following weighted average assumptions subgroup weighted average fair value options granted 1997 1996 1995 270 417 077 respectively weighted average expected life calculated based vesting period exercise behavior subgroup group represents higher paid employees group b represents lower paid employees riskfree interest rate calculated accordance grant date expected life calculated subgroup options outstanding currently exercisable exercise price december 31 1997 follows polycom inc notes consolidated financial statements company also estimated fair value purchase rights issued employee stock purchase plan rights plan also evaluated using blackscholes optionpricing model companys plan described note 10 purchase periods occur twice yearly effectively contains 6month option weighted average fair value options granted pursuant employee stock purchase plan 1997 204 warrants connection joint marketing development agreement next generation dataconferencing product polycom granted 3m warrants purchase 2000000 shares companys common stock exercise price 750 per share warrants expire march 1999 may extended march 2000 depending delivery polycoms first product developed agreement warrants valued approximately 40000 using blackscholes model 10 employee benefits plans 401 k plan company 401 k plan 401k plan covers substantially employees eligible employee may elect contribute 401k plan payroll deductions 20 compensation subject current statutory limitations company discretion board directors may make matching contributions 401k plan done since inception 401k plan employee stock purchase plan 1997 employee qualified stock purchase plan company grant stock purchase rights eligible employees offering periods maximum 24 months exercise dates approximately every six months beginning february august company reserved 500000 shares common stock issuance plan shares purchased employees payroll deductions exercise prices equal 85 lesser fair market value companys common stock either first day offering period last day offering period participant may purchase 25000 worth common stock one calendar year 11 income taxes companys tax provision differs provision computed using statutory increased tax rates follow thousands polycom inc notes consolidated financial statements tax effects temporary differences give rise significant portions deferred tax assets presented thousands due uncertainty surrounding realization favorable tax attributes future tax returns company placed valuation allowance otherwise recognizable net deferred tax assets valuation allowance increased 1997 954000 decreased 172000 1996 increased 1140000 1995 december 31 1997 company federal tax net operating loss carryforwards tax purposes approximately 4100000 federal tax credit carryforwards 1400000 net operating loss carryforwards expire years 2007 2012 tax credit carryforwards expire years 2007 2020 company state tax credit carryforwards approximately 550000 expire years 2007 2012 future utilization companys net operating loss carryforwards may subject certain limitations upon certain changes ownership 12 notes receivable stockholders 1996 1995 company issued five notes receivable purchases common stock option plan totaling 17000 154000 respectively notes issued 1997 december 31 1997 remaining balance notes 24000 loans bear interest ranging 598 733 per annum mature july 2004 july 2005 polycom inc notes consolidated financial statements 13 business segment information company operates one industry segment markets products north america foreign countries direct sales organization resellers companys export net revenues denominated us dollars summarized follows thousands individual customers comprise 10 companys net revenues follows customers 1996 individual customers comprised 10 companys net revenues 14 earnings per share eps disclosures accordance disclosure requirements sfas 128 reconciliation numerator denominator basic diluted eps provided follows thousands except per share amounts polycom inc notes consolidated financial statements stock options purchase 3076446 shares common stock prices ranging 015 900 outstanding december 31 1997 included computation diluted net income loss per share antidilutive january 1998 company completed merger viavideo communications inc viavideo transaction accounted pooling interests transaction increased polycom outstanding shares approximately 87 million shares additional 11 million shares registered convert existing stock options viavideo polycom stock options february 1998 associated first joint marketing development agreement minnesota mining manufacturing company 3m exercised option first offer purchased additional 10 million shares companys common stock connection aforementioned agreement 3m granted 2000000 warrants purchase common stock 750 per share warrants antidilutive december 31 1997 could dilute basic eps future 15 subsequent event acquisition viavideo communications inc january 2 1998 company completed acquisition viavideo communications inc viavideo whereby wholly owned subsidiary polycom inc merged viavideo development stage company designs develops high quality low cost easy use group videoconferencing systems utilize advanced video audio compression technologies along internetwebbased features approximately 87 million shares polycom common stock exchanged issued outstanding capital stock viavideo addition outstanding stock options purchase viavideo common stock converted options purchase approximately 11 million shares polycom common stock transaction accounted pooling interests december 31 1997 polycom outstanding nontrade receivable viavideo amount 503000 outstanding payable viavideo amount 117000 amounts associated joint service agreement polycom viavideo whereby companies incurred charges behalf various engineering marketing administrative efforts combined results operations periods prior merger follows thousands viavideo communications began operations september 1996 viavideo communications inc viavideo involved certain lawsuits alleging breach contract breach confidential relationship patents related allegations viavideo vigorously defend claims related claims damages litigation inherently uncertain viavideo believes ultimate resolution matters beyond provided balance sheet december 31 1997 viavideo material adverse effect companys financial position b 3m exercise right first offer february 19 1998 3m exercised right first offer option associated first agreement 3m purchased approximately one million shares polycom common stock consideration approximately 76 million result purchase 3m owns approximately 35 outstanding polycom common stock polycom inc index financial statement schedule page report coopers lybrand llp independent accountants financial statement schedule s2 schedule ii valuation qualifying accounts s3 s1 report independent accountants board directors polycom inc stockholders report consolidated financial statements polycom inc subsidiary included page form 10k connection audits financial statements also audited related financial statement schedule listed index page s1 form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp san jose california january 20 1998 s2 schedule ii polycom inc valuation qualifying accounts thousands uncollectible accounts writtenoff disposal unusable damaged raw materials s3item 14 exhibits financial statement schedules reports form 10k following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 1998 1997 three years period ended december 31 1998 2 financial statement schedule see item 8 following financial statement schedule registration filed part report schedule ii valuation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits following exhibits filed part incorporated reference report 1 confidential treatment requested certain portions documents b reports form 8k applicable c exhibits see item 14a3 financial statement schedules see items 8 14a2 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city san jose state california 12th day march 1999 polycom inc robert c hagerty michael r kourey robert c hagerty michael r kourey chief executive officer vice president finance administration president chief financial officer secretary power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint robert c hagerty michael r kourey lawful attorneysinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 amended report signed following persons capacities dates indicated polycom inc index consolidated financial statements report independent accountants january 20 1999 except note 16 march 2 1999 board directors polycom inc polycom inc stockholders opinion accompanying consolidated balance sheets related consolidated statements operations stockholders equity deficit cash flows present fairly material respects financial position polycom inc subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp san jose california polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statement stockholders equity deficit thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 formation business company polycom inc subsidiaries company delaware corporation engaged development manufacturing marketing teleconferencing equipment companys products distributed serviced globally company sells products direct sales force maintains marketing sales relationships major telecommunications carriers valueadded resellers telecommunications suppliers catalog distributors telecommunications specialists 2 summary significant accounting policies fiscal year company uses 5253 week fiscal year result fiscal year may end day calendar year convenience presentation accompanying consolidated financial statements shown ending december 31 applicable period due timing 1998 53 week fiscal year consequently first quarter 1998 14 weeks rather usual 13 weeks reclassifications certain financial statements items prior years financial statements reclassified conform current years format principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents shortterm investments shortterm investments classified available sale carried fair value unrealized holding gains losses securities reported net related taxes separate component stockholders equity realized gains losses sales securities reported earnings computed using specific identification cost method inventories stated lower cost market cost determined standard cost basis approximates firstin firstout fifo method appropriate consideration given obsolescence excessive levels deterioration factors evaluating net realizable value f 7 polycom inc notes consolidated financial statements fixed assets fixed assets stated cost less accumulated depreciation amortization depreciation provided straightline basis estimated useful lives assets one three years tooling equipment stated cost less accumulated depreciation tooling equipment depreciated estimated life product three years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three five years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses included results operations carrying value longlived assets company writes carrying value longlived assets fair market value carrying value considered impaired value considered impaired carrying amount exceeds undiscounted future net cash flows generated assets revenue recognition company recognizes revenue gross product sales less provision estimated future customer returns upon shipment reseller enduser customer upon fulfillment acceptance terms significant contractual obligations remain outstanding 1998 company recognized 25 million revenue related certain deliverables detailed second agreement 3m 1997 company recognized 30 million revenue related certain deliverables detailed first agreement 3m amounts recognized revenue agreements approximate amounts would recognized using percentage completion methodology research development expenditures research development expenditures charged operations incurred advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily magazine advertisements agency fees direct production costs advertising expense years ended december 31 1998 1997 1996 5221000 1835000 1570000 respectively advertising barter trade credits reflected prepaid assets stated net book value 770000 december 31 1998 income taxes income taxes accounted statement financial accounting standards 109 sfas 109 accounting income taxes sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled valuation allowances established necessary reduce deferred tax assets amount expected realized translation foreign currencies companys foreign consolidated subsidiary considered extension us operation functional currency us dollar accordingly monetary assets liabilities translated year f 8 polycom inc notes consolidated financial statements end exchange rates nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation cost revenue translated historical rates foreign exchange gains losses significant date recorded results operations computation net incomeloss per share company calculates net incomeloss per share using guidelines statement financial accounting standards 128 sfas 128 earnings per share sfas 128 requires net income loss per share presented two calculations basic eps diluted eps basic net income loss per share computed using weighted average number common shares outstanding periods represented diluted net income loss per share computed using common dilutive common equivalent shares outstanding periods represented common equivalent shares including shares issued stock option plan subject repurchase excluded computation fully diluted net loss per share effect antidilutive fair value financial instruments carrying amounts certain companys financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm investments separately disclosed elsewhere based quoted market prices similar instruments stock based compensation statement financial accounting standards 123 sfas 123 accounting stockbased compensation encourages require companies record compensation cost stockbased compensation plans fair value company chosen continue account employee stock options using intrinsic value method prescribed apb opinion 25 accounting stock issued employees accordingly compensation cost stock options measured excess quoted market price companys stock date grant amount employee must pay acquire stock acquisition viavideo communications inc january 2 1998 company completed acquisition viavideo communications inc viavideo whereby wholly owned subsidiary polycom inc merged viavideo development stage company designed developed high quality low cost easy use group videoconferencing systems utilize advanced video audio compression technologies along internetwebbased features approximately 87 million shares polycom common stock exchanged issued outstanding capital stock viavideo addition outstanding stock options purchase viavideo common stock converted options purchase approximately 11 million shares polycom common stock transaction treated pooling interests financial reporting purposes consequently prior period figures restated combined entity existed periods presented intercompany transactions two companies eliminated consolidation polycom viavideo fiscal year end december 31 activity start current fiscal period merger date material adjustments required conform accounting policies two companies f 9 polycom inc notes consolidated financial statements following table reconciles polycoms previously reported revenue earnings 1997 1996 restated amounts thousands comprehensive income effective january 1 1998 company adopted provisions statement financial accounting standards 130 sfas 130 reporting comprehensive income sfas 130 establishes standards reporting comprehensive income components financial statements comprehensive income defined includes changes equity net assets period nonowner sources date company transactions required reported comprehensive income loss compared reported net income loss segment information june 1997 financial accounting standards board fasb issued statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information statement establishes standards way companies report information operating segments annual financial statements also establishes standards related disclosures products services geographical areas major customers accordance provisions sfas 131 company determined separately reportable operating segments recent pronouncements march 1998 american institute certified public accountants issued statement position sop 981 software internal use provides guidance accounting cost computer software developed obtained internal use sop 981 effective financial statements fiscal years beginning december 15 1998 company expect adoption sop 981 material impact consolidated financial statements june 1998 fasb issued statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities company required adopt sfas 133 fiscal 2000 sfas 133 established methods accounting derivative financial instruments f 10 polycom inc notes consolidated financial statements hedging activities related instruments well hedging activities company yet determined effect sfas 133 operations financial position company 3 shortterm investments shortterm investments december 31 1998 1997 comprise thousands shortterm investments december 31 1998 1997 mature within one year 1998 1997 realized gains losses disposal shortterm investments 4 inventories consist following thousands 5 fixed assets fixed assets net consist following thousands f 11 polycom inc notes consolidated financial statements 6 accrued liabilities accrued liabilities consist following thousands 7 business risks credit concentration company sells limited number products serve conferencing equipment market substantial majority companys net revenues derived sales soundstation viewstation products factor adversely affecting demand supply soundstation viewstation products could materially adversely affect companys business financial performance although company begin volume shipments new webstation product 1999 market dataconferencing products beginning emerge assurance develop sufficiently enable company achieve broad commercial acceptance dataconferencing products assurance polycom succeed market currently company subcontracts manufacturing audioconferencing videoconferencing product lines one subcontractor asia showstation ip product manufactured one us subcontractor company believes number alternative contract manufacturers could produce companys products event reduction interruption supply could take significant period time qualify alternative subcontractor commence manufacturing effect reduction interruption supply results operations would material additionally asian economy gone recent problems yet material impact supply polycom product subcontractor used region however economic problems asia persist could create interruption supply could materially adversely affect results operations companys cash equivalents maintained two international investment management companies two commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations companys customers maintains allowance potential credit losses historically experienced significant losses related individual customers group customers particular geographic area expansion polycoms product offerings may increase companys credit risk customers place larger orders new products assurance companys credit loss experience remain near historic levels f 12 polycom inc notes consolidated financial statements 8 commitments contingencies litigation september 3 1997 vtel corporation vtel filed lawsuit u district court travis county texas viavideo subsidiary polycom founders formerly employed vtel may 27 1998 vtel amended suit add polycom defendant lawsuit vtel alleges breach contract breach confidential relationship disclosure proprietary information related allegations viavideo polycom answered suit denying entirety vtels allegations viavideo polycom found infringed upon proprietary rights vtel third party companies could required pay damages cease sales infringing products discontinue products injunctive relief court may determine would material adverse effect polycoms business financial condition results operations april 22 1998 polycom filed declaratory relief action vtel superior court santa clara county california seeking declaration polycom infringed proprietary rights vtel subsequently filed response polycom voluntarily dismissed without prejudice california action agreed litigate claims texas trial date presently scheduled company vigorously defend vtel claim litigation inherently uncertain polycom believes ultimate resolution matter beyond provided consolidated balance sheet december 31 1998 material adverse effect companys financial position october 2 1997 datapoint corporation filed complaint intel corporation infringement two us patents related videoconferencing network technology us district court dallas texas november 25 1997 complaint amended include several additional defendants datapoint also filed motion certification action class action ruling occurred relative motion class action certification although neither polycom subsidiary viavideo served defendant datapoint complaints polycom viavideo named putative class members datapoint motion class action certification along 500 companies third quarter 1998 company notified case dismissed stipulation order entered court effect standby letter credit company 300000 standby letter credit issued guarantee certain companys contractual obligations company also maintains time commercial letters credit payments importation certain products amounts exceed 100000 outstanding less 120 days may 1997 bank issued standby letter credit one viavideos major suppliers 335000 letter credit expired april 1998 secured viavideos certificate deposit similar amount deposited bank august 1997 bank issued standby letter credit one viavideos major suppliers 75000 letter credit expired july 1998 secured viavideos certificate deposit similar amount deposited bank license agreement company entered agreement license software incorporated dataconferencing products agreement company obligated pay annual minimum license fees ranging 15000 35000 year 2001 company may cancel agreement time provided company paid minimum 200000 connection agreement december 31 1998 company paid 275000 minimum license fees february 1999 company renegotiated f 13 polycom inc notes consolidated financial statements terms contract paid lump sum figure 195000 terms new contract company obligation regarding fees associated licensed software leases company leases certain office facilities equipment noncancelable operating leases expiring 1999 2002 future minimum lease payments follows thousands december 1998 company extended headquarters office lease agreement one year lease due expire december 1999 terms lease company responsible related maintenance taxes insurance january 1998 company leased 23000 square feet office space austin texas video engineering marketing operations lease expires december 1999 terms lease company responsible related maintenance taxes insurance may 1997 company entered three year operating lease us distribution repair center livermore california lease associated building expire may 31 2000 allows earlier termination company rent expense years ended december 31 1998 1997 1996 1159000 666000 483000 respectively 9 credit arrangements company available revolving line credit bank lesser 5000000 sum 80 eligible domestic trade accounts receivable 50 foreign trade accounts receivable defined less sum aggregate outstanding face amount letters credit issued line credit expires october 1999 agreement allows additional facility 50 million borrowing convert term loan outstanding amount upon request polycom payment associated fees borrowings line subject certain financial covenants restrictions indebtedness equity distributions financial guarantees business combinations related items borrowings line credit bear interest lenders current prime rate 775 december 31 1998 85 december 31 1997 weighted average interest rates years ended december 31 1998 1997 1996 84 93 95 respectively december 31 1997 viavideo communications bank credit agreement provided revolving line credit 750000 outstanding balance line credit december 31 1997 625000 interest rate equal banks prime rate plus 075 925 december 31 1997 line collateralized substantially assets viavideo outstanding balance paid full 1998 line closed borrowings collateralized substantially assets company must meet certain financial ratios well maintain minimum tangible net worth quarterly maximum cumulative losses agreements also require company provide certain financial information lender periodic basis restrict company paying cash dividends without banks consent f 14 polycom inc notes consolidated financial statements 10 stockholders equity preferred stock march 1996 company authorized 18095690 shares preferred stock may 1998 company reduced authorized shares preferred stock 5000000 december 31 1997 company 7102104 authorized shares convertible preferred stock 5809094 shares outstanding 1998 outstanding convertible preferred shares converted common stock merger polycom viavideo communications common stock december 31 1998 1118595 shares common stock stemming founder stock viavideo communications inc outstanding subject repurchase stock option plan 1996 board directors reserved 3125000 shares common stock 1996 stock option plan issuance employees directors company 1997 additional 1000000 shares reserved shareholder vote plan supersedes 1991 stock option plan 1996 viavideo communications inc reserved 887763 shares common stock 1996 viavideo communications inc stock option plan viavideo plan issuance employees viavideo 1997 additional 710210 shares reserved shareholder vote viavideo plan assumed polycom pursuant merger agreement january 2 1998 remaining option shares available grant subsequent cancellations option shares viavideo plan expired expire additional option shares granted viavideo plan subsequent merger terms plan 1991 stock option plan viavideo plan options may granted prices lower fair market value date grant determined board directors options granted viavideo plan 1991 stock option plan immediately exercisable expire ten years date grant unvested shares issued upon exercise options generally subject right repurchase company upon termination employment company options granted plan expire ten years date grant generally exercisable upon vesting options granted plan 1991 stock option plan normally vest 20 completing one year service company remaining amount equally 48 months fully vested five years options granted viavideo plan normally vest monthly month service company fully vested four years new options granted plan beginning december 1998 options vest 25 completing one year service company remaining amount equally 36 months fully vested four years several option grants vesting schedules different described generally vesting options consistent within plans f 15 polycom inc notes consolidated financial statements activity plan follows thousands except share per share data december 31 1998 1997 1996 1610590 1809378 609890 outstanding options exercisable aggregate average exercise price 267 157 209 respectively options exercisable 721029 1214119 411663 unvested therefore subject repurchase december 31 1998 1997 1996 respectively addition december 31 1998 146852 shares common stock acquired plan subject repurchase march 1997 company implemented option cancellation regrant program employees executive officers holding stock options exercise prices per share excess 450 outstanding options covering aggregate 223200 shares exercise prices excess 450 per share canceled new options number shares granted exercise price 4375 per share new options vest fiveyear period beginning march 5 1997 consistent provisions sfas 123 companys net income loss basic diluted net income loss per share would adjusted pro forma amounts indicated thousands except per share amounts impact pro forma net income loss per share net income loss table may indicative effect future years options vest several years company continues grant stock options new employees policy may continue f 16 polycom inc notes consolidated financial statements fair value option grant estimated date grant using multiple options approach blackscholes model following weighted average assumptions weighted average expected life calculated based vesting period aggregate exercise behavior exercise behavior based historical exercise patterns riskfree interest rate calculated accordance grant date expected life options outstanding currently exercisable exercise price december 31 1998 follows company also estimated fair value purchase rights issued employee stock purchase plan rights plan also evaluated using blackscholes optionpricing model companys plan described note 11 purchase periods occur twice yearly effectively contains 6month option weighted average fair value purchase rights granted pursuant employee stock purchase plan 1998 1997 238 204 respectively warrants connection joint marketing development agreement dated march 28 1997 showstation ip polycom granted 3m warrants purchase 2000000 shares companys common stock exercise price 750 per share warrants due expire march 1999 exercised march 1 1999 warrants valued approximately 40000 using blackscholes model f 17 polycom inc notes consolidated financial statements preferred share purchase rights plan july 15 1998 pursuant preferred shares rights agreement polycom inc bankboston na rights agent companys board directors declared dividend one right purchase one onethousandth share companys series preferred stock outstanding share common stock par value 00005 per share company dividend payable july 31 1998 stockholders record close business day right entitles registered holder purchase company one onethousandth share series preferred exercise price 9000 subject adjustment rights become exercisable distribution date upon earlier fifteen days following first date public announcement company acquiring person acquiring person become shares acquisition date ii fifteen days later date may determined board directors following commencement announcement intention make tender offer exchange offer consummation would result person group becoming acquiring person group affiliated associated persons beneficially owns right acquire beneficial ownership 20 outstanding common shares referred acquiring person rights expire earliest july 15 2008 final expiration date ii redemption exchange rights described unless rights earlier redeemed event person becomes acquiring person triggering event holder right theretofore exercised rights beneficially owned acquiring person affiliate acquiring person thereafter void thereafter right receive upon exercise common shares value equal two times purchase price company may instead substitute cash assets securities common shares rights would exercisable similarly unless rights earlier redeemed event triggering event company acquired merger business combination transaction ii 50 companys assets earning power sold transactions ordinary course business proper provision must made holder right theretofore exercised rights beneficially owned acquiring person affiliate acquiring person thereafter void thereafter right receive upon exercise shares common stock acquiring company value equal two times purchase price time triggering event prior acquisition person entity beneficial ownership 50 companys outstanding common shares board directors company may exchange rights owned acquiring person whole part exchange ratio one common share per right time prior close business earlier shares acquisition date ii final expiration date rights company may redeem rights whole part price 0005 per right 11 employee benefits plans 401 k plan company 401 k plan 401k plan covers substantially employees eligible employee may elect contribute 401k plan payroll deductions 20 compensation subject current statutory limitations company discretion board directors may make matching contributions 401k plan done since inception 401k plan f 18 polycom inc notes consolidated financial statements employee stock purchase plan 1997 employee qualified stock purchase plan company grant stock purchase rights eligible employees offering periods maximum 24 months purchase dates approximately every six months beginning february august company reserved 500000 shares common stock issuance plan shares purchased employees payroll deductions purchase prices equal 85 lesser fair market value companys common stock either date employees entrance offering period purchase date participant may purchase 1500 shares 25000 worth common stock one calendar year 12 income taxes companys tax provision differs provision computed using statutory increased tax rates follow thousands tax effects temporary differences give rise significant portions deferred tax assets presented thousands 1998 company established valuation allowance portion deferred tax assets due uncertainty surrounding realization assets given companys recent return profitability strong competition picturetel largest competitor videoconferencing market lack backlog sales cycle 1997 1996 due uncertainty surrounding realization certain deferred tax assets including net operating loss credit carryforwards company determined valuation allowance appropriate december 31 1998 company federal tax net operating loss carryforwards tax purposes approximately 7295000 federal tax credit carryforwards 353000 net operating loss carryforwards expire years 2007 2015 tax credit carryforwards expire years 2007 2021 f 19 polycom inc notes consolidated financial statements future utilization companys net operating loss credit carryforwards subject certain limitation due changes ownership occurred 1998 13 notes receivable stockholders 1996 1995 company issued five notes receivable purchases common stock option plan totaling 17000 154000 respectively notes issued 1998 1997 loans bore interest ranging 598 733 per annum mature july 2004 july 2005 entire balance notes paid full 1998 december 31 1997 remaining aggregate balance notes 24000 14 business segment information company operates one business segment markets products united states foreign countries resellers direct sales organization companys export net revenues denominated us dollars summarized follows thousands individual customers comprise 10 companys net revenues follows f 20 polycom inc notes consolidated financial statements 15 earnings per share eps disclosures accordance disclosure requirements sfas 128 reconciliation numerator denominator basic diluted eps provided follows thousands except per share amounts stock options purchase 4199717 shares common stock prices ranging 008 900 5809094 shares preferred stock outstanding december 31 1997 included computation diluted net income loss per share antidilutive associated first joint marketing development agreement minnesota mining manufacturing company 3m granted 2000000 warrants purchase common stock 750 per share warrants antidilutive december 31 1997 therefore considered diluted eps figure 16 subsequent event 3m exercise warrants march 1 1999 3m exercised warrants 2000000 shares polycom inc common stock 750 per share total consideration 150 million warrants associated first agreement 3m result purchase 3m owns approximately 9 outstanding polycom common stock f 21 polycom inc index financial statement schedule s1 report independent accountants board directors polycom inc stockholders report consolidated financial statements polycom inc subsidiaries included page form 10k connection audits financial statements also audited related consolidated financial statement schedule form 10k opinion consolidated financial statement schedule referred considered relation basic consolidated financial statements taken whole presents fairly material respects information required included therein pricewaterhousecoopers llp san jose california january 20 1999 s2 schedule ii polycom inc valuation qualifying accounts thousands uncollectible accounts writtenoff disposal unusable damaged raw materials s3 consent independent accountants consent incorporation reference registration statements polycom inc forms s8 registration file nos 33345351 33343059 reports dated january 20 1999 audits consolidated financial statements polycom inc subsidiaries december 31 1998 1997 three years period ended december 31 1998 audit consolidated financial statement schedule reports included annual report form 10k pricewaterhousecoopers llp san jose california march 12 1999 s4item 14 exhibits financial statement schedules reports form 10k following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 1999 1998 three years period ended december 31 1999 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule ii valuation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits following exhibits filed part incorporated reference report exhibit description 21 agreement plan reorganization dated june 11 1997 among polycom inc venice acquisition viavideo communications inc incorporated herein reference exhibit 21 form 8k filed registrant commission august 13 1997 22 amendment 1 agreement plan reorganization dated september 2 1997 among registrant venice acquisition corporation viavideo communications inc incorporated herein reference exhibit 22 form 8k filed registrant commission january 16 1998 23 agreement plan reorganization among polycom inc periscope acquisition corporation atlas communication engines inc dated november 18 1999 incorporated herein reference exhibit 21 form 8k filed registrant commission december 15 1999 31 amended restated certificate incorporation polycom inc incorporated herein reference exhibit registrants definitive proxy statement schedule 14a filed securities exchange commission april 21 1998 32 amended restated bylaws polycom inc incorporated herein reference exhibit 34 registrants 1996 s1 41 reference made exhibits 31 32 42 specimen common stock certificate incorporated herein reference 42 exhibit 42 registrants 1996 s1 43 amended restated investor rights agreement dated may 17 1995 among registrant investors named therein incorporated herein reference exhibit 43 registrants 1996 s1 44 preferred shares rights agreement dated july 15 1998 polycom inc bankboston na including certificate designation form rights certificate summary rights attached thereto exhibits b c respectively incorporated herein reference exhibit 1 registrants form 8a filed securities exchange commission july 22 1998 101 form indemnification agreement entered registrant directors officers incorporated herein reference exhibit 101 registrants 1996 s1 102 registrants 1991 stock option plan forms agreements thereunder 102 incorporated herein reference exhibit 102 registrants 1996 s1 103 registrants 1996 stock incentive plan forms agreements thereunder amended restated march 5 1997which incorporated herein reference exhibit 103 registrants 1996 s1 exhibit 991 registrants registration statement form s8 registration 33343059 104 registrants employee stock purchase plan forms agreements thereunder incorporated herein reference exhibit 104 registrants 1996 s1 105 lease agreement registrant orchard investment company number 701 dated june 24 1993 amended regarding space located 2584 junction avenue incorporated herein reference exhibit 105 registrants 1996 s1 106 amended restated development volume purchase distribution agreement dated december 22 1995 picturetel corporation polycom inc incorporated herein reference exhibit 106 registrants 1996 s1 1071 sublicense agreement dated march 31 1994 databeam corporation polycom inc incorporated herein reference exhibit 107 registrants 1996 s1 1081 amended restated general distribution agreement dated february 14 1996 databeam corporation polycom inc incorporated herein reference exhibit 108 registrants 1996 s1 1091 volume purchase agreement dated march 1 1994 amended scriptel corporation polycom inc incorporated herein reference exhibit 1010 registrants 1996 s1 10101 volume purchase agreement dated march 29 1996 scriptel corporation polycom inc incorporated herein reference exhibit 1011 registrants 1996 s1 1011 stock pledge agreement note secured stock pledge agreement dated june 9 1995 polycom inc patrick p day incorporated herein reference exhibit 101 registrants form 10q dated may 14 1997 1012 series preferred stock purchase agreement amended restated investor rights agreement dated may 17 1995 incorporated herein reference exhibit 1013 registrants 1996 s1 10131 joint marketing development agreement stock warrant agreement dated march 28 1997 polycom inc minnesota mining manufacturing company incorporated herein reference exhibit 102 registrants form 10q dated may 14 1997 10141 joint marketing development agreement dated june 10 1997 polycom inc minnesota mining manufacturing company amended june 10 1997 incorporated herein reference exhibit 101 registrants form 10q dated august 13 1997 1015 lease agreement registrant joseph eda pell revocable trust dated may 12 1997 regarding space located arroyo business center livermore california incorporated herein reference exhibit 1015 registrants form 10k dated march 13 1998 1016 stock pledge agreement note secured stock pledge agreement dated march 17 1997 incorporated herein reference exhibit 101 registrants form 10q dated may 14 1997 1017 viavideo communications inc 1996 stock optionstock issuance plan related agreements incorporated reference exhibit 42 registrants registration statement form s8 registration 33345351 1018 lease agreement registrant trinet essential facilities xxvi dated december 1 1999 regarding space located 1565 barber lane filed herein 211 subsidiaries registrant filed herein 231 consent independent accountants filed herein 241 power attorney filed herein 271 financial data schedule filed herein 272 financial data schedule annual restatement 1998 1997 1996 pooling transaction atlas communication engines inc filed herein 273 financial data schedule quarterly restatement 1999 1998 1997 pooling transaction atlas communication engines inc first second third quarter 1997 first second quarter 1998 filed herein 274 financial data schedule quarterly restatement 1999 1998 1997 pooling transaction atlas communication engines inc third quarter 1998 first second third quarter 1999 filed herein 1 confidential treatment requested certain portions documents b reports form 8k report form 8k filed december 15 1999 regarding polycoms acquisition atlas communication engines inc effective december 1 1999 report form 8ka filed february 11 2000 providing update concerning polycoms acquisition atlas communication engines inc effective december 1 1999 update clarified financial statements atlas pro forma financial information relating merger specified items 7a b form 8k required filed merger meet conditions specified sections 210305b2i 2101101 respectively regulation sx c exhibits see item 14a3 financial statement schedules see items 8 14a2 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city san jose state california 29th day march 2000 polycom inc robert c hagerty michael r kourey robert c hagerty michael r kourey chairman board directors senior vice president finance administration chief executive officer president chief financial officer secretary polycom inc index consolidated financial statements report independent accountants board directors polycom inc polycom inc stockholders opinion accompanying consolidated balance sheets related consolidated statements operations stockholders equity cash flows present fairly material respects financial position polycom inc subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp san jose california january 28 2000 except note 15 march 3 2000 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 formation business company polycom inc subsidiaries company delaware corporation develops manufactures markets full range premiumquality mediarich communication tools network solutions companys products distributed serviced globally company sells products marketing sales relationships wide network valueadded resellers telecommunications equipment distributors wireline equipment manufacturers telecommunication service providers retailers 2 summary significant accounting policies fiscal year company uses 5253 week fiscal year result fiscal year may end day calendar year convenience presentation accompanying consolidated financial statements shown ending december 31 applicable period due timing 1998 53 week fiscal year consequently first quarter 1998 14 weeks rather usual 13 weeks reclassifications certain items prior years financial statements reclassified conform current years format principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents investments classified available sale securities carried fair value unrealized holding gains losses securities reported net related taxes separate component stockholders equity realized gains losses sales securities reported earnings computed using specific identification cost method inventories stated lower cost market cost determined standard cost basis approximates firstin firstout fifo method appropriate consideration given obsolescence excessive levels deterioration factors evaluating net realizable value polycom inc notes consolidated financial statements fixed assets fixed assets stated cost less accumulated depreciation amortization depreciation provided straightline basis estimated useful lives assets one three years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three five years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations carrying value longlived assets company writes carrying value longlived assets fair market value carrying value considered impaired value considered impaired carrying amount exceeds undiscounted future net cash flows generated assets revenue recognition company recognizes revenue gross product sales less provision estimated future customer returns upon shipment customer upon fulfillment acceptance terms significant contractual obligations remain outstanding collection considered probable additionally company recognizes extended service revenue life service contract 1998 company recognized 25 million revenue related certain deliverables detailed joint development marketing agreement 3m concerning viewstation product line 1997 company recognized 30 million revenue related certain deliverables detailed joint development marketing agreement 3m concerning showstation ip amounts recognized revenue agreements approximate amounts would recognized using percentage completion methodology research development expenditures research development expenditures charged operations incurred advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily magazine advertisements agency fees direct production costs advertising expense years ended december 31 1999 1998 1997 92 million 52 million 18 million respectively 1998 company traded inventory advertising barter trade credits reflected prepaid assets stated net book value 770000 december 31 1998 revenue recognized transaction 1999 inventory returned exchange return barter credits therefore net book value advertising barter trade credits zero december 31 1999 income taxes income tax expense based pretax financial accounting income deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled valuation allowances established necessary reduce deferred tax assets amount expected realized translation foreign currencies companys foreign subsidiaries functional currency us dollar accordingly monetary assets liabilities translated yearend exchange rates nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation cost revenue translated historical rates foreign exchange gains losses significant date recorded results operations polycominc notes consolidated financial statements computation net income loss per share basic net income loss per share computed using weighted average number common shares outstanding periods represented diluted net income loss per share computed using common dilutive common equivalent shares outstanding periods represented common equivalent shares including shares issued stock option plan subject repurchase excluded computation fully diluted net loss per share effect antidilutive fair value financial instruments carrying amounts certain companys financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values investments disclosed elsewhere based quoted market prices similar instruments stockbased compensation statement financial accounting standards 123 sfas 123 accounting stockbased compensation encourages require companies record compensation cost stockbased compensation plans fair value company chosen continue account employee stock options using intrinsic value method prescribed apb opinion 25 accounting stock issued employees complies disclosure provisions sfas 123 accordingly compensation cost stock options measured excess quoted market price companys stock date grant amount employee must pay acquire stock recognized vesting period generally three five years company accounts stock issued nonemployees accordance provisions sfas 123 emerging issues task force issue 9618accounting equity instruments issued employees acquiring conjunction selling goods services software internal use march 1998 american institute certified public accountants issued statement position sop 981 software internal use provides guidance accounting cost computer software developed obtained internal use company adopted sop 981 1999 adoption material impact companys financial position results operations acquisitions december 1 1999 company completed acquisition atlas communication engines inc atlas whereby wholly owned subsidiary polycom inc merged atlas designed developed marketed sold high quality dsl customer premise equipment internet access devices primarily oem basis approximately 13 million shares polycom common stock exchanged issued outstanding capital stock atlas addition outstanding stock options purchase atlas common stock converted options purchase approximately 05 million shares polycom common stock transaction treated pooling interests financial reporting purposes consequently prior period figures restated combined entity existed periods presented intercompany transactions two companies eliminated consolidation polycom atlas fiscal year end december 31 adjustments related primarily fixed asset capitalization depreciation inventory accounting made conform align accounting policies two companies january 2 1998 company completed acquisition viavideo communications inc viavideo whereby whollyowned subsidiary polycom inc merged viavideo development stage company designed developed high quality low cost easy use group polycominc notes consolidated financial statements videoconferencing systems utilize advanced video audio compression technologies along internetwebbased features approximately 87 million shares polycom common stock exchanged issued outstanding capital stock viavideo addition outstanding stock options purchase viavideo common stock converted options purchase approximately 11 million shares polycom common stock transaction treated pooling interests financial reporting purposes consequently prior period figures restated combined entity existed periods presented intercompany transactions two companies eliminated consolidation polycom viavideo fiscal year end december 31 activity start fiscal 1998 merger date material adjustments required conform accounting policies two companies following table reconciles polycoms previously reported revenue earnings restated amounts thousands comprehensive income effective january 1 1998 company adopted provisions statement financial accounting standards 130 sfas 130 reporting comprehensive income sfas 130 establishes standards reporting comprehensive income components financial statements comprehensive income defined includes changes equity net assets period nonowner sources components comprehensive income follows polycominc notes consolidated financial statements recent pronouncements june 1998 fasb issued statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities sfas 133 established methods accounting derivative financial instruments hedging activities related instruments well hedging activities effective fiscal years beginning june 15 2000 amended sfas 137 although company believe sfas 133 material effect operations financial position company yet fully determined statements impact december 1999 securities exchange commission issued staff accounting bulletin sab 101 revenue recognition outlines basic criteria must met recognize revenue provides guidance presentation revenue disclosure related revenue recognition policies financial statements filed securities exchange commission effective date pronouncement second quarter fiscal year beginning december 15 1999 company believes adopting sab 101 material impact companys financial position results operations 3 investments december 31 1999 1998 comprise thousands current investments december 31 1999 1998 mature within one year noncurrent investments mature within two years 1999 1998 realized gains losses disposal investments polycominc notes consolidated financial statements 4 inventories consist following thousands 5 fixed assets fixed assets net consist following thousands 6 accrued liabilities accrued liabilities consist following thousands 7 business risks credit concentration company sells limited number products serve communications equipment market substantial majority companys net revenues derived sales soundstation viewstation products factor adversely affecting demand supply soundstation viewstation products could materially adversely affect companys business financial performance polycominc notes consolidated financial statements currently company subcontracts manufacturing majority products one subcontractor asia company believes number alternative contract manufacturers could produce companys products event reduction interruption supply could take significant period time qualify alternative subcontractor commence manufacturing effect reduction interruption supply results operations would material additionally asian economy gone recent problems yet material impact supply polycom product subcontractor used region however economic problems asia persist could create interruption supply could materially adversely affect results operations companys cash equivalents investments maintained three international investment management companies five commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations companys customers maintains allowance potential credit losses expansion polycoms product offerings may increase companys credit risk customers place larger orders new products assurance companys credit loss experience remain near historic levels 8 commitments contingencies litigation september 3 1997 vtel corporation vtel filed lawsuit state district court travis county texas viavideo communications inc subsidiary polycom founders formerly employed vtel may 27 1998 vtel amended suit add polycom defendant lawsuit vtel alleged breach contract breach confidential relationship disclosure proprietary information related allegations viavideo founders polycom answered suit denying entirety vtels allegations see note 15 subsequent events standby letter credit company several standby letters credit totaling approximately 200000 issued guarantee certain companys foreign office lease obligations contractual obligations company also maintains time commercial letters credit payments importation certain products amounts exceed 300000 outstanding less 120 days company 300000 standby letter credit issued 1997 guarantee certain companys contractual obligation letter credit canceled october 1999 may 1997 bank issued standby letter credit one viavideos major suppliers 335000 letter credit expired april 1998 secured viavideos certificate deposit similar amount deposited bank august 1997 bank issued standby letter credit one viavideos major suppliers 75000 letter credit expired july 1998 secured viavideos certificate deposit similar amount deposited bank license agreement company entered agreement license software incorporated webbased products agreement company obligated pay annual minimum license fees ranging 15000 polycominc notes consolidated financial statements 35000 year 2001 company could cancel agreement time provided paid minimum 200000 connection agreement december 31 1998 company paid 275000 minimum license fees february 1999 company renegotiated terms contract paid lump sum figure 195000 terms new contract company obligation regarding fees associated licensed software leases company leases certain office facilities equipment noncancelable operating leases expiring 2000 2007 future minimum lease payments follows thousands november 1999 company leased 102240 square feet office space headquarters location milpitas california lease due expire january 2007 terms lease company responsible related maintenance taxes insurance material facility leases company responsible related maintenance taxes insurance rent expense years ended december 31 1999 1998 1997 23 million 13 million 692000 respectively 9 credit arrangements company available 150 million bank revolving line credit agreement bank borrowings line unsecured bear interest banks prime rate 850 december 31 1999 offshore interbank offered rate ibor plus 065 approximately 63 71 depending term borrowings december 31 1999 borrowings line subject certain financial covenants restrictions liquidity indebtedness financial guarantees business combinations profitability levels related items line expires october 31 2000 may renewed company additional year long certain liquidity measures met time renewal weighted average interest rates years ended december 31 1999 1998 1997 81 84 93 respectively prior october 1999 company revolving line credit bank lesser 5000000 sum 80 eligible domestic trade accounts receivable 50 foreign trade accounts receivable defined less sum aggregate outstanding face amount letters credit issued line credit expired october 1999 borrowings line subject certain financial covenants restrictions indebtedness equity distributions financial guarantees business combinations related items collateralized substantially companys assets december 31 1997 viavideo communications bank credit agreement provided revolving line credit 750000 outstanding balance line credit december 31 1997 625000 interest rate equal banks prime rate plus 075 925 december 31 1997 line collateralized substantially assets viavideo outstanding balance paid full 1998 line closed polycominc notes consolidated financial statements balances outstanding mentioned lines credit periods presented 10 stockholders equity preferred stock march 1996 company authorized 18095690 shares preferred stock may 1998 company reduced authorized shares preferred stock 5000000 december 31 1997 company 7102104 authorized shares convertible preferred stock 5809094 shares outstanding 1998 outstanding convertible preferred shares converted common stock merger polycom viavideo communications december 31 1999 company shares preferred stock outstanding common stock december 31 1999 539941 shares common stock stemming primarily founder stock viavideo communications inc outstanding subject repurchase stock option plan 1996 board directors reserved 3125000 shares common stock 1996 stock option plan issuance employees directors company 1997 1999 additional 1000000 shares 1500000 shares respectively reserved shareholder vote plan supersedes 1991 stock option plan 91 plan 1996 viavideo communications inc reserved 887763 shares common stock 1996 viavideo communications inc stock option plan viavideo plan issuance employees viavideo 1997 additional 710210 shares reserved shareholder vote viavideo plan assumed polycom pursuant merger agreement january 2 1998 remaining option shares available grant subsequent cancellations option shares viavideo plan expired expire additional option shares granted viavideo plan subsequent merger 1996 atlas communication engines inc reserved 439868 shares common stock 1996 stock incentive plan atlas plan issuance employees atlas 1997 additional 175947 shares reserved shareholder vote atlas plan assumed polycom pursuant merger agreement december 1 1999 remaining option shares available grant subsequent cancellations option shares atlas plan expired expire additional option shares granted atlas plan subsequent merger terms plan 91 plan viavideo plan atlas plan options may granted prices lower fair market value date grant determined board directors options granted viavideo plan 91 plan immediately exercisable expire ten years date grant unvested shares issued upon exercise options generally subject right repurchase company upon termination employment company options granted plan atlas plan expire ten years date grant generally exercisable upon vesting options granted plan prior december 1998 91 plan normally vest 20 completing one year service company remaining amount equally 48 months fully vested five years options granted viavideo plan normally vest monthly month service company fully vested four years options granted atlas plan normally vest 33 completing one year service company remaining amount equal quarterly installments next eight quarters fully vested three years new options granted plan beginning december 1998 options normally vest 25 completing one year service company remaining amount equally 36 months fully vested four years addition special bonus employees option grants become fully vested one year service company polycominc notes consolidated financial statements made plan atlas plan many option grants vesting schedules different described generally vesting options consistent within plans activity plan follows thousands except share per share data december 31 1999 1998 1997 1173731 1841971 1894287 outstanding options exercisable aggregate average exercise price 362 233 143 respectively options exercisable 369319 677066 1174149 december 31 1999 1998 1997 respectively unvested shares received exercise would subject repurchase addition december 31 1999 60541 shares common stock acquired plan 91 plan viavideo plan plans subject repurchase march 1997 company implemented option cancellation regrant program employees executive officers holding stock options exercise prices per share excess 450 outstanding options covering aggregate 223200 shares exercise prices excess 450 per share canceled new options number shares granted exercise price 438 per share new options vest fiveyear period beginning march 5 1997 polycominc notes consolidated financial statements options outstanding currently exercisable exercise price december 31 1999 follows consistent disclosure provisions sfas 123 companys net income loss basic diluted net income loss per share would adjusted pro forma amounts indicated thousands except per share amounts impact pro forma net income loss per share net income loss table may indicative effect future years options vest several years company continues grant stock options new employees policy may continue fair value option grant estimated date grant using multiple options approach blackscholes model following weighted average assumptions weighted average fair value options granted pursuant plans 1906 640 306 1999 1998 1997 respectively weighted average expected life calculated based vesting period aggregate exercise behavior exercise behavior based historical exercise patterns riskfree interest rate calculated accordance grant date expected life polycominc notes consolidated financial statements company also estimated fair value purchase rights issued employee stock purchase plan rights plan also evaluated using blackscholes optionpricing model companys plan described note 11 purchase periods occur twice yearly effectively contains 6month option weighted average fair value purchase rights granted pursuant employee stock purchase plan 1999 1998 555 338 respectively unearned stockbased compensation connection certain stock option grants 1999 company recorded unearned stockbased compensation cost totaling 24 million recognized vesting period related options three years amortization expense associated unearned stock compensation totaled 447000 1999 warrants connection joint marketing development agreement dated march 28 1997 showstation ip polycom granted 3m warrants purchase 2000000 shares companys common stock exercise price 750 per share warrants due expire march 1999 exercised march 1 1999 warrants valued approximately 40000 date grant using blackscholes model december 31 1999 company warrants outstanding preferred share purchase rights plan july 15 1998 pursuant preferred shares rights agreement polycom inc bankboston na rights agent companys board directors declared dividend one right purchase one onethousandth share companys series preferred stock outstanding share common stock par value 00005 per share company dividend payable july 31 1998 stockholders record close business day right entitles registered holder purchase company one onethousandth share series preferred exercise price 9000 subject adjustment rights become exercisable distribution date upon earlier fifteen days following first date public announcement company acquiring person acquiring person become shares acquisition date ii fifteen days later date may determined board directors following commencement announcement intention make tender offer exchange offer consummation would result person group becoming acquiring person group affiliated associated persons beneficially owns right acquire beneficial ownership 20 outstanding common shares referred acquiring person rights expire earliest july 15 2008 final expiration date ii redemption exchange rights described unless rights earlier redeemed event person becomes acquiring person triggering event holder right theretofore exercised rights beneficially owned acquiring person affiliate acquiring person thereafter void thereafter right receive upon exercise common shares value equal two times purchase price company may instead substitute cash assets securities common shares rights would exercisable polycominc notes consolidated financial statements similarly unless rights earlier redeemed event triggering event company acquired merger business combination transaction ii 50 companys assets earning power sold transactions ordinary course business proper provision must made holder right theretofore exercised rights beneficially owned acquiring person affiliate acquiring person thereafter void thereafter right receive upon exercise shares common stock acquiring company value equal two times purchase price time triggering event prior acquisition person entity beneficial ownership 50 companys outstanding common shares board directors company may exchange rights owned acquiring person whole part exchange ratio one common share per right time prior close business earlier shares acquisition date ii final expiration date rights company may redeem rights whole part price 0005 per right 11 employee benefits plans 401 k plan company 401 k plan 401k plan covers substantially employees eligible employee may elect contribute 401k plan payroll deductions 20 compensation subject current statutory limitations company discretion board directors may make matching contributions 401k plan done 1999 beginning fiscal year 2000 however company match 50 first 3 compensation employees contribute 401k plan maximum 500 per participating employee per year employee stock purchase plan employee qualified stock purchase plan company grant stock purchase rights eligible employees offering periods maximum 24 months purchase dates approximately every six months beginning february august company reserved 1000000 shares common stock issuance plan shares purchased employees payroll deductions maximum 15 employees compensation purchase prices equal 85 lesser fair market value companys common stock either date employees entrance offering period purchase date participant may purchase 1500 shares 25000 worth common stock one calendar year polycominc notes consolidated financial statements 12 income taxes income tax expense consists following thousands sources income loss provision income taxes follows thousands companys tax provision differs provision computed using statutory tax rates follow thousands polycominc notes consolidated financial statements tax effects temporary differences give rise deferred tax assets presented thousands valuation allowance established prior years reversed 1999 due companys belief deferred tax assets likely realized december 31 1999 company tax net operating loss carryforwards tax purposes approximately 4799000 tax credit carryforwards 247000 net operating loss carryforwards expire years 2007 2015 tax credit carryforwards unlimited carryover future utilization companys net operating loss credit carryforwards subject certain limitation due changes ownership occurred 1998 13 business segment information company operates one business segment named communications markets products united states foreign countries resellers assets outside united states insignificant companys net revenues denominated us dollars summarized follows thousands polycominc notes consolidated financial statements percentage total net revenues video communications voice communications network access product lines follows lucent technologies inc accounted 11 10 net revenue 1999 1998 1997 respectively 14 earnings per share eps disclosures accordance disclosure requirements sfas 128 reconciliation numerator denominator basic diluted eps provided follows thousands except per share amounts stock options purchase 4529286 shares common stock prices ranging 008 900 5809094 shares preferred stock outstanding december 31 1997 included computation diluted net loss per share antidilutive associated joint marketing development agreement concerning showstation ip minnesota mining manufacturing company 3m granted 2000000 warrants purchase common stock 750 per share warrants antidilutive december 31 1997 therefore considered diluted eps figure polycominc notes consolidated financial statements 15 subsequent event september 3 1997 vtel corporation vtel filed lawsuit state district court travis county texas viavideo communications inc subsidiary polycom founders formerly employed vtel may 27 1998 vtel amended suit add polycom defendant lawsuit vtel alleged breach contract breach confidential relationship disclosure proprietary information related allegations viavideo founders polycom answered suit denying entirety vtels allegations march 3 2000 vtel voluntarily dismissed allegations polycom viavideo prejudice consideration polycom inc index financial statement schedule s1 report independent accountants financial statements schedule board directors polycom inc audits consolidated financial statements referred report dated january 28 2000 except note 15 march 3 2000 appearing page annual report form 10k also included audit financial statement schedule listed item 14a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp san jose california january 28 2000 s2 schedule ii polycom inc valuation qualifying accounts thousands s3item 14 exhibits financial statement schedules reports form 10k athe following documents filed part report 1financial statements see item 8 polycom inc consolidated financial statements december 31 2000 1999 three years period ended december 31 2000 2financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3exhibits following exhibits filed part incorporated reference report exhibit description 21 agreement plan reorganization dated june 11 1997 among polycom inc venice acquisition viavideo communications inc incorporated herein reference exhibit 21 form 8k filed registrant commission august 13 1997 22 amendment 1 agreement plan reorganization dated september 2 1997 among registrant venice acquisition corporation viavideo communications inc incorporated herein reference exhibit 22 form 8k filed registrant commission january 16 1998 23 agreement plan reorganization among polycom inc periscope acquisition corporation atlas communication engines inc dated november 18 1999 incorporated herein reference exhibit 21 form 8k filed registrant commission december 15 1999 24 agreement plan merger reorganization among polycom inc merger sub ltd accord networks ltd dated december 5 2000 amended january 25 2001 incorporated herein reference exhibit 21 form s4 filed registrant commission december 20 2000 amended 31 amended restated certificate incorporation polycom inc incorporated herein reference exhibit 31 registrants registration statement form s3 filed securities exchange commission july 6 2000 32 1 amended restated bylaws polycom inc 41 reference made exhibits 31 32 42 specimen common stock certificate incorporated herein reference exhibit 42 registrants 1996 s1 43 amended restated investor rights agreement dated may 17 1995 among registrant investors named therein incorporated herein reference exhibit 43 registrants 1996 s1 44 preferred shares rights agreement dated july 15 1998 amended march 2 2001 polycom inc fleet bank na fka bankboston na including certificate designation form rights certificate summary rights attached thereto exhibits b c respectively incorporated herein reference exhibit 1 registrants form 8aa filed securities exchange commission march 2 2001 101 form indemnification agreement entered registrant directors officers incorporated herein reference exhibit 101 registrants 1996 s1 102 registrants 1991 stock option plan forms agreements thereunder incorporated herein reference exhibit 102 registrants 1996 s1 103 registrants 1996 stock incentive plan forms agreements thereunder amended restated march 5 1997 incorporated herein reference exhibit 103 registrants 1996 s1 exhibit 991 registrants registration statement form s8 registration 33343059 104 registrants employee stock purchase plan forms agreements thereunder incorporated herein reference exhibit 104 registrants 1996 s1 105 amended restated development volume purchase distribution agreement dated december 22 1995 picturetel corporation polycom inc incorporated herein reference exhibit 106 registrants 1996 s1 106 2 sublicense agreement dated march 31 1994 databeam corporation polycom inc incorporated herein reference exhibit 107 registrants 1996 s1 107 2 amended restated general distribution agreement dated february 14 1996 databeam corporation polycom inc incorporated herein reference exhibit 108 registrants 1996 s1 108 2 volume purchase agreement dated march 1 1994 amended scriptel corporation polycom inc incorporated herein reference exhibit 1010 registrants 1996 s1 109 2 volume purchase agreement dated march 29 1996 scriptel corporation polycom inc incorporated herein reference exhibit 1011 registrants 1996 s1 1010 2 joint marketing development agreement stock warrant agreement dated march 28 1997 polycom inc minnesota mining manufacturing company incorporated herein reference exhibit 102 registrants form 10q dated may 14 1997 1011 2 joint marketing development agreement dated june 10 1997 polycom inc minnesota mining manufacturing company amended june 10 1997 incorporated herein reference exhibit 101 registrants form 10q dated august 13 1997 1012 lease agreement registrant joseph eda pell revocable trust dated may 12 1997 regarding space located arroyo business center livermore california incorporated herein reference exhibit 1015 registrants form 10k dated march 13 1998 1013 viavideo communications inc 1996 stock optionstock issuance plan related agreements incorporated reference exhibit 42 registrants registration statement form s8 registration 33345351 1014 lease agreement registrant trinet essential facilities xxvi dated december 1 1999 regarding space located 1565 barber lane incorporated reference exhibit 1018 registrants form 10k dated march 29 2000 1015 1 lease agreement registrant wjt llc dated february 19 2001 regarding space located 4750 willow road 211 1 subsidiaries registrant 231 1 consent independent accountants 241 1 power attorney included page 42 annual report form 10k 1filed herewith 2confidential treatment requested certain portions documents b reports form 8k registrant filed current report form 8k dated december 5 2000 announcing entered agreement acquire accord networks ltd c exhibits see item 14a3 financial statement schedules see items 8 14a2 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city milpitas state california 12th day march 2001 polycom inc robert c hagerty robert c hagerty chairman board directors chief executive officer president michael r kourey michael r kourey senior vice president finance administration chief financial officer secretary power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint robert c hagerty michael r kourey lawful attorneysinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 amended report signed following persons capacities dates indicated signature title date robert c hagerty robert c hagerty chairman board directors chief executive officer president principal executive officer march 12 2001 michael r kourey michael r kourey senior vice president finance administration chief financial officer secretary director principal financial accounting officer march 12 2001 betsy atkins betsy atkins director march 12 2001 john seely brown john seely brown director march 12 2001 john kelley john kelley director march 12 2001 stanley j meresman stanley j meresman director march 12 2001 william owens william owens director march 12 2001 polycom inc index consolidated financial statements report independent accountants board directors stockholders polycom inc opinion consolidated financial statements listed index appearing item 14 1 page 39 present fairly material respects financial position polycom inc subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america addition opinion financial statement schedules listed accompanying index appearing item 14 2 page 39 present fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedules responsibility companys management responsibility express opinion financial statements financial statement schedules based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp san jose california january 18 2001 except note 15 february 28 2001 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements income thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 formation business company polycom inc subsidiaries company delaware corporation develops manufactures markets highquality easytouse communications equipment enables enterprise users access broadband network services leverage increased bandwidth conveniently conduct voice video data communications companys products distributed serviced globally company sells products marketing sales relationships wide network value added resellers telecommunications equipment distributors wireline equipment manufacturers telecommunication service providers retailers 2 summary significant accounting policies fiscal year company uses 5253 week fiscal year result fiscal year may end day calendar year convenience presentation accompanying consolidated financial statements shown ending december 31 applicable period due timing 1998 53 week fiscal year consequently first quarter 1998 14 weeks rather usual 13 weeks reclassifications certain items prior years consolidated financial statements reclassified conform current years format principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents investments companys investments comprised us state municipal government obligations foreign domestic public corporate debt securities investments maturities less one year considered shortterm carried fair value nearly investments held companys name five major financial institutions specific identification method used determine cost securities disposed realized gains loses reflected interest income net december 31 2000 1999 companys investments classified availableforsale unrealized gains losses investments included separate component accumulated comprehensive loss stockholders equity company also investments private companies investments included investments companys balance sheet carried cost less impairment loss company monitors investments impairment makes appropriate reductions carrying value necessary 2000 company determined value investments became impaired reduced carrying amount 59 million inventories stated lower cost market cost determined standard cost basis approximates firstin firstout fifo method appropriate consideration given obsolescence excessive levels deterioration factors evaluating net realizable value fixed assets fixed assets stated cost less accumulated depreciation amortization depreciation provided straightline basis estimated useful lives assets one three years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three five years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations impairment longlived assets longlived assets certain identifiable intangible assets held used reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset eventual disposition measurement impairment loss longlived assets certain identifiable intangible assets management expects hold use based fair value asset longlived assets certain identifiable intangible assets disposed reported lower carrying amount fair value less costs sell revenue recognition company recognizes revenue gross product sales definite arrangement exists upon shipment customer upon fulfillment acceptance terms significant contractual obligations remain outstanding price fixed determinable collection considered probable company accrues warranty costs sales returns coop advertising allowances upon shipments based upon experience additionally company recognizes extended service revenue life service contract 1998 company recognized 25 million revenue related certain deliverables detailed joint development marketing agreement 3m concerning viewstation product line amounts recognized revenue agreement approximate amounts would recognized using percentage completion methodology research development expenditures research development expenditures charged operations incurred software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2000 1999 1998 142 million 92 million 52 million respectively 1998 company traded inventory advertising barter trade credits reflected prepaid assets stated net book value 770000 december 31 1998 revenue recognized transaction 1999 inventory returned exchange return barter credits fully reserved therefore net book value advertising barter trade credits zero december 31 2000 1999 income taxes income tax expense based pretax financial accounting income deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled valuation allowances established necessary reduce deferred tax assets amount expected realized translation foreign currencies companys foreign subsidiaries functional currency us dollar accordingly monetary assets liabilities translated yearend exchange rates nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations computation net income per share basic net income per share computed using weighted average number common shares outstanding periods represented diluted net income per share computed using common dilutive common equivalent shares outstanding periods represented common equivalent shares including shares issued stock option plan subject repurchase excluded computation fully diluted net loss per share effect antidilutive fair value financial instruments carrying amounts certain companys financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm longterm investments disclosed footnote 3 based quoted market prices similar instruments stockbased compensation statement financial accounting standards 123 sfas 123 accounting stockbased compensation encourages require companies record compensation cost stockbased compensation plans fair value company chosen continue account employee stock options using intrinsic value method prescribed apb opinion 25 accounting stock issued employees complies disclosure provisions sfas 123 accordingly compensation cost stock options measured excess quoted market price companys stock date grant amount employee must pay acquire stock recognized vesting period generally three five years company accounts stock issued nonemployees accordance provisions sfas 123 emerging issues task force issue 9618 accounting equity instruments issued employees acquiring conjunction selling goods services march 2000 financial accounting standards board fasb issued fasb 44 fin44 accounting certain transactions involving stock compensation interpretation apb opinion 25 fin 44 clarifies application opinion 25 definition employee purposes applying opinion 25 b criteria determining whether plan qualifies non compensatory plan c accounting consequence various modifications terms previously fixed stock option award accounting exchange stock compensation awards business combination fin 44 effective july 1 2000 certain provisions cover specific events occur either december 15 1998 january 12 2000 adoption provisions fin 44 material effect financial statements acquisitions december 1 1999 company completed acquisition atlas communication engines inc atlas whereby wholly owned subsidiary polycom inc merged atlas designed developed marketed sold high quality digital subscriber line dsl customer premise equipment internet access devices primarily oem basis approximately 26 million shares polycom common stock exchanged issued outstanding capital stock atlas addition outstanding stock options purchase atlas common stock converted options purchase approximately 10 million shares polycom common stock transaction treated pooling interests financial reporting purposes consequently prior period figures restated combined entity existed periods presented intercompany transactions two companies eliminated consolidation polycom atlas fiscal year end december 31 adjustments related primarily fixed asset capitalization depreciation inventory accounting made conform align accounting policies two companies january 2 1998 company completed acquisition viavideo communications inc viavideo whereby whollyowned subsidiary polycom merged viavideo development stage company designed developed high quality low cost easy use group videoconferencing systems utilize advanced video audio compression technologies along internetwebbased features approximately 174 million shares polycom common stock exchanged issued outstanding capital stock viavideo addition outstanding stock options purchase viavideo common stock converted options purchase approximately 22 million shares polycom common stock transaction treated pooling interests financial reporting purposes consequently prior period figures restated combined entity existed periods presented intercompany transactions two companies eliminated consolidation polycom viavideo fiscal year end december 31 activity start fiscal 1998 merger date material adjustments required conform accounting policies two companies comprehensive income comprehensive income defined includes changes equity net assets period nonowner sources components comprehensive income follows recent pronouncements june 1998 financial accounting standards board fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 133 amended sfas 138 established methods accounting derivative financial instruments hedging activities related instruments well hedging activities effective fiscal years beginning june 15 2000 adopted pronouncement january 1 2001 adoption material impact consolidated financial position results operations cash flows december 1999 securities exchange commission issued staff accounting bulletin sab 101 revenue recognition outlines basic criteria must met recognize revenue provide guidance presentation revenue disclosure related revenue recognition policies financial statements filed securities exchange commission effective date pronouncement fourth quarter fiscal year beginning december 15 1999 adoption sab 101 material impact consolidated financial position results operations cash flows 3 investments december 31 2000 1999 comprise thousands shortterm investments december 31 2000 1999 mature within one year longterm investments mature within two years 2000 1999 realized gains losses disposal investments 4 inventories consist following thousands 5 fixed assets fixed assets net consist following thousands 6 accrued liabilities accrued liabilities consist following thousands 7 business risks credit concentration company sells limited number products serve communications equipment market substantial majority companys net revenues derived sales viewstation soundstation network access products factor adversely affecting demand supply products could materially adversely affect companys business financial performance currently company subcontracts manufacturing majority products one subcontractor asia company believes number alternative contract manufacturers could produce companys products event reduction interruption supply could take significant period time qualify alternative subcontractor commence manufacturing effect reduction interruption supply results operations would material certain key components used products currently available one source others available limited number sources additionally asian economy gone recent problems yet material impact supply polycom product subcontractor component suppliers used region however economic problems asia persist could create interruption supply could materially adversely affect results operations companys cash equivalents investments maintained five international investment management companies six commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations companys customers maintains allowance potential credit losses expansion polycoms product offerings may increase companys credit risk customers place larger orders new products assurance companys credit loss experience remain near historic levels december 31 2000 two customers individually accounted 10 accounts receivable december 31 1999 single customer accounted 10 accounts receivable company investments securities private companies classified balance sheet investments addition company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect companys consolidated results operations financial position cash flows 8 commitments contingencies litigation september 3 1997 vtel corporation vtel filed lawsuit state district court travis county texas viavideo communications inc subsidiary polycom founders formerly employed vtel may 27 1998 vtel amended suit add polycom defendant lawsuit vtel alleged breach contract breach confidential relationship disclosure proprietary information related allegations viavideo founders polycom answered suit denying entirety vtels allegations march 3 2000 vtel voluntarily dismissed allegations polycom viavideo prejudice consideration remaining balance accrual associated expenses estimated incurred connection lawsuit totaling 18 million released since material expenses incurred standby letter credit company several standby letters credit totaling approximately 100000 issued guarantee certain companys foreign office lease obligations contractual obligations company also maintains time commercial letters credit payments importation certain products amounts exceed 100000 outstanding less 120 days company 300000 standby letter credit issued 1997 guarantee certain companys contractual obligation letter credit canceled october 1999 license agreement march 3 2000 polycom entered patent licensing agreement vtel corporation vtel provided fullypaid royaltyfree license three patents related various videoconferencing technologies exchange licenses polycom paid vtel approximately 83 million sublicensed vtel royaltybearing patent videoconferencing technology royalty sublicense payable patent holder polycom amortization licenses computed using straightline method economic lives respective licenses generally five years leases company leases certain office facilities equipment noncancelable operating leases expiring 2001 2010 future minimum lease payments follows thousands company leases 102240 square feet office space headquarters location milpitas california lease due expire january 2007 terms lease company responsible related maintenance taxes insurance material facility leases company responsible related maintenance taxes insurance rent expense years ended december 31 2000 1999 1998 48 million 23 million 13 million respectively 9 credit arrangements company available 150 million bank revolving line credit agreement bank borrowings line unsecured bear interest banks prime rate 95 december 31 2000 offshore interbank offered rate ibor plus 065 approximately 67 75 depending term borrowings december 31 2000 borrowings line subject certain financial covenants restrictions liquidity indebtedness financial guarantees business combinations profitability levels related items line expires october 31 2002 may renewed company additional year long certain liquidity measures met time renewal weighted average interest rates years ended december 31 2000 1999 1998 92 81 84 respectively prior october 1999 company revolving line credit bank lesser 5000000 sum 80 eligible domestic trade accounts receivable 50 foreign trade accounts receivable defined less sum aggregate outstanding face amount letters credit issued line credit expired october 1999 borrowings line subject certain financial covenants restrictions indebtedness equity distributions financial guarantees business combinations related items collateralized substantially companys assets balances outstanding mentioned lines credit company compliance applicable financial covenants restrictions periods presented 10 stockholders equity public stock offering august 2000 company completed public offering 5608976 shares common stock price 45438 per share shares sold approximately 35 million shares sold company net proceeds approximately 1483 million balance shares sold selling stockholder company using net proceeds sale primarily general corporate purposes including working capital expenditures stock split august 2 2000 company announced board directors approved twoforone split companys common stock split effected stock dividend august 31 2000 payable stockholders record august 15 2000 references share per share amounts periods presented adjusted give effect stock split preferred stock march 1996 company authorized 18095690 shares preferred stock may 1998 company reduced authorized shares preferred stock 5000000 december 31 1997 company 7102104 authorized shares convertible preferred stock 5809094 shares outstanding 1998 outstanding convertible preferred shares converted common stock merger polycom viavideo communications december 31 2000 company shares preferred stock outstanding common stock december 31 2000 1999 69502 1079882 shares respectively common stock outstanding subject repurchase shares resulted founder stock viavideo communications inc viavideo employee stock options stock option plan 1996 board directors reserved 6250000 shares common stock 1996 stock option plan issuance employees directors company 1997 1999 2000 additional 2000000 shares 3000000 shares 3500000 shares respectively reserved approved stockholders plan supersedes 1991 stock option plan 91 plan 1996 viavideo communications inc reserved 1775526 shares common stock 1996 viavideo communications inc stock option plan viavideo plan issuance employees viavideo 1997 additional 1420420 shares reserved approved stockholders viavideo plan assumed polycom january 2 1998 pursuant agreement plan reorganization among polycom venice acquisition corporation viavideo communications inc dated june 11 1997 amended september 2 1997 remaining option shares available grant subsequent cancellations option shares viavideo plan expired expire additional option shares granted viavideo plan subsequent merger 1996 atlas communication engines inc reserved 879736 shares common stock 1996 stock incentive plan atlas plan issuance employees atlas 1997 additional 351894 shares reserved approved stockholders atlas plan assumed polycom december 1 1999 pursuant agreement plan reorganization among polycom periscope acquisition corporation atlas communication engines inc dated november 18 1999 remaining option shares available grant subsequent cancellations option shares atlas plan expired expire additional option shares granted atlas plan subsequent merger terms plan 91 plan viavideo plan atlas plan options may granted prices lower fair market value date grant determined board directors options granted viavideo plan 91 plan immediately exercisable expire ten years date grant unvested shares issued upon exercise options generally subject right repurchase company upon termination employment company options granted plan atlas plan expire ten years date grant generally exercisable upon vesting options granted plan prior december 1998 91 plan normally vest 20 completing one year service company remaining amount equally 48 months fully vested five years options granted viavideo plan normally vest monthly month service company fully vested four years options granted atlas plan normally vest 33 completing one year service company remaining amount equal quarterly installments next eight quarters fully vested three years new options granted plan beginning december 1998 options normally vest 25 completing one year service company remaining amount equally 36 months fully vested four years addition special grant employees option grants become fully vested one year service company made plan atlas plan many option grants vesting schedules different described generally vesting options consistent within plans activity plan follows thousands except share per share data december 31 2000 1999 1998 2330543 2347462 3683942 outstanding options exercisable aggregate average exercise price 857 181 117 respectively options exercisable 109083 738638 1354132 december 31 2000 1999 1998 respectively unvested shares received exercise would subject repurchase addition december 31 2000 69502 shares common stock acquired viavideo plan subject repurchase options outstanding currently exercisable exercise price december 31 2000 follows consistent disclosure provisions sfas 123 companys net income basic diluted net income per share would adjusted pro forma amounts indicated thousands except per share amounts impact pro forma net income per share net income table may indicative effect future years options vest several years company continues grant stock options new employees fair value option grant estimated date grant using multiple options approach blackscholes model following weighted average assumptions weighted average fair value options granted pursuant plans 2278 952 320 2000 1999 1998 respectively weighted average fair value purchase rights granted pursuant employee stock purchase plan 2000 1999 1998 573 278 169 respectively company also estimated fair value purchase rights issued employee stock purchase plan rights plan also evaluated using blackscholes optionpricing model companys plan described note 11 purchase periods occur twice yearly effectively contains 6month option unearned stockbased compensation connection certain stock option grants 1999 company recorded unearned stockbased compensation cost totaling 24 million recognized vesting period related options three years amortization expense associated unearned stock compensation totaled 845000 447000 zero 2000 1999 1998 respectively approximately 498000 unearned stock based compensation reversed 2000 upon cancellation unvested stock option grants resulting termination certain employees warrants connection joint marketing development agreement dated march 28 1997 showstation ip polycom granted 3m warrants purchase 4000000 shares companys common stock exercise price 375 per share warrants due expire march 1999 exercised march 1 1999 warrants valued approximately 40000 date grant using blackscholes model december 31 2000 company warrants outstanding preferred share rights purchase plan july 15 1998 pursuant preferred shares rights agreement polycom inc bankboston na rights agent companys board directors declared dividend one right purchase one onethousandth share companys series preferred stock outstanding share common stock par value 00005 per share company dividend payable july 31 1998 stockholders record close business day right entitles registered holder purchase company one onethousandth share series preferred exercise price 40000 subject adjustment october 2000 companys board directors approved amendment preferred share rights agreement increase exercise price right 9000 40000 amendment implemented subsequent yearend rights become exercisable distribution date upon earlier fifteen days following first date public announcement company acquiring person acquiring person become shares acquisition date ii fifteen days later date may determined board directors following commencement announcement intention make tender offer exchange offer consummation would result person group becoming acquiring person group affiliated associated persons beneficially owns right acquire beneficial ownership 20 outstanding common shares referred acquiring person rights expire earliest july 15 2008 final expiration date ii redemption exchange rights described unless rights earlier redeemed event person becomes acquiring person triggering event holder right theretofore exercised rights beneficially owned acquiring person affiliate acquiring person thereafter void thereafter right receive upon exercise common shares value equal two times purchase price company may instead substitute cash assets securities common shares rights would exercisable similarly unless rights earlier redeemed event triggering event company acquired merger business combination transaction ii 50 companys assets earning power sold transactions ordinary course business proper provision must made holder right theretofore exercised rights beneficially owned acquiring person affiliate acquiring person thereafter void thereafter right receive upon exercise shares common stock acquiring company value equal two times purchase price time triggering event prior acquisition person entity beneficial ownership 50 companys outstanding common shares board directors company may exchange rights owned acquiring person whole part exchange ratio one common share per right time prior close business earlier shares acquisition date ii final expiration date rights company may redeem rights whole part price 0005 per right 11 employee benefits plans 401k plan company 401k plan 401k plan covers substantially employees eligible employee may elect contribute 401k plan payroll deductions 20 compensation subject current statutory limitations company discretion board directors may make matching contributions 401k plan beginning fiscal year 2000 company matched 50 first 3 compensation employees contribute 401k plan maximum 500 per participating employee per year fiscal year 2001 maximum increased 1000 per participating employee per year employee stock purchase plan employee qualified stock purchase plan company grant stock purchase rights eligible employees offering periods maximum 24 months purchase dates approximately every six months beginning february august company reserved 2000000 shares common stock issuance plan shares purchased employees payroll deductions maximum 15 employees compensation purchase prices equal 85 lesser fair market value companys common stock either date employees entrance offering period purchase date participant may purchase 3000 shares 25000 worth common stock one calendar year 12 income taxes income tax expense consists following thousands sources income provision income taxes follows thousands companys tax provision differs provision computed using statutory tax rates follow thousands tax effects temporary differences give rise deferred tax assets presented thousands valuation allowance established prior years reversed 1999 due companys belief deferred tax assets likely realized december 31 2000 company tax net operating loss carryforwards tax purposes approximately 20052000 tax credit carryforwards 8312000 net operating loss carryforwards expire years 2007 2020 tax credit carryforwards expire years 2007 2020 portion future utilization companys net operating loss credit carryforwards subject certain limitations due change ownership occurred 1998 company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2000 cumulative amount earnings upon us income taxes provided approximately 13000000 december 31 2000 unrecognized deferred tax liability earnings approximately 4000000 13 business segment information company operates one business segment named communications markets products united states foreign countries resellers longlived assets outside united states insignificant companys net revenues denominated us dollars summarized follows thousands percentage total net revenues video communications voice communications network access products follows customer accounted 10 companys net revenues 2000 lucent technologies inc accounted 11 companys net revenues 1999 1998 14 earnings per share eps disclosures accordance disclosure requirements sfas 128 reconciliation numerator denominator basic diluted eps provided follows thousands except per share amounts 2000 1999 1998 733628 200068 427521 options respectively weighted average basis excluded computation earnings per share since option exercise price greater average market price common shares period 15 subsequent event acquisition accord networks ltd february 28 2001 company completed acquisition accord networks ltd accord leading provider nextgeneration richmedia network products enable internet protocol ip network voice video communications customer premises service provider markets terms merger polycom exchange approximately 63 million shares common stock outstanding accord shares assume accord options warrants exercisable approximately 15 million shares polycom common stock exchange assumption occur rate 03065 polycom shares accord share transaction accounted pooling interests accordingly polycoms historical consolidated financial statement presented future reports restated include accounts results operations accord following unaudited pro forma data summarizes combined results operations polycom accord combination consummated december 31 2000 polycom inc supplementary financial data unaudited thousands except per share amounts historical financial information restated reflect acquisitions accounted pooling interests see note 1 consolidated financial statements areflects twoforone stock split effective august 31 2000 bnet income net income per share include acquisition costs 17 million pro forma net income diluted net income per share excluding costs net tax 11 million 90 million 012 respectively cnet income net income per share include litigation reserve release benefits 18 million pro forma net income diluted net income per share excluding benefits net tax 12 million 104 million 014 respectively dnet income net income per share include acquisition costs investments adjustment costs 78 million pro forma net income diluted net income per share excluding costs net tax 52 million 174 million 022 respectively polycom inc index financial statement schedule s1 schedule ii polycom inc valuation qualifying accounts thousands s2 special note regarding forwardlooking statements item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common stock item 6 selected consolidated financial data selected consolidated financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial ownership management item 13 certain relationships related transactions part iv item 14 exhibits financial statement schedules reports form 10k signatures polycom inc index consolidated financial statements polycom inc notes consolidated financial statements polycom inc supplementary financial data unaudited polycom inc index financial statement schedule ii polycom inc valuation qualifying accounts thousandsitem 14 exhibits financial statement schedules reports form 10k following documents filed part report 1financial statements see item 8 polycom inc consolidated financial statements december 31 2001 2000 three years period ended december 31 2001 2financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits following exhibits filed part incorporated reference report exhibit description 21 agreement plan merger reorganization dated december 5 2000 among registrant merger sub ltd accord networks ltd incorporated herein reference exhibit 21 form 8k filed registrant securities exchange commission december 12 2000 22 agreement plan merger dated may 24 2001 among registrant pharaoh acquisition corp picturetel corporation incorporated herein reference exhibit 21 registrants registration statement form s4 registration 33363252 filed commission june 18 2001 23 addendum agreement plan merger dated may 24 2001 among registrant pharaoh acquisition corp picturetel corporation incorporated herein reference exhibit 12d4 amendment 6 schedule filed commission october 3 2001 31 amended restated certificate incorporation polycom inc incorporated herein reference exhibit 2 registrants registration statement form 8aa filed commission january 29 2002 32 amended restated bylaws polycom inc incorporated herein reference exhibit 32 registrants annual report form 10k filed commission march 12 2001 41 reference made exhibits 31 32 42 specimen common stock certificate incorporated herein reference exhibit 42 registrants registration statement form s1 registration 33302296 filed commission march 12 1996 s1 43 amended restated investor rights agreement dated may 17 1995 among registrant investors named therein incorporated herein reference exhibit 43 registrants 1996 s1 44 preferred shares rights agreement dated july 15 1998 amended march 2 2001 polycom inc fleet bank na fka bankboston na including certificate designation form rights certificate summary rights attached thereto exhibits b c respectively incorporated herein reference exhibit 1 registrants form 8aa filed commission march 2 2001 101 form indemnification agreement entered registrant directors officers incorporated herein reference exhibit 101 registrants 1996 s1 102 registrants 1996 stock incentive plan amended forms agreements thereunder incorporated herein reference exhibit 103 registrants 1996 s1 exhibit 41 registrants registration statement form s8 filed commission may 31 2001 registration 33361952 103 registrants 1996 employee stock purchase plan forms agreements thereunder incorporated herein reference exhibit 104 registrants 1996 s1 104 viavideo communications inc 1996 stock optionstock issuance plan related agreements incorporated herein reference exhibit 42 registrants registration statement form s8 registration 33345351 105 lease agreement registrant trinet essential facilities xxvi dated december 1 1999 regarding space located 1565 barber lane milpitas california incorporated herein reference exhibit 1018 registrants annual report form 10k filed commission march 29 2000 106 lease agreement registrant wjt llc dated february 19 2001 regarding space located 4750 willow road pleasanton california incorporated herein reference exhibit 1015 registrants annual report form 10k filed commission march 12 2001 107 accord networks ltd 1995 employee share ownership option plan form agreement thereunder incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 108 accord networks ltd share ownership option plan 2000 form agreement thereunder incorporated herein reference exhibit 42 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 109 accord networks ltd 2000 share option plan form agreement thereunder incorporated herein reference exhibit 43 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 1010 accord networks ltd 2000 nonemployee director stock option plan form agreement thereunder incorporated herein reference exhibit 44 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 1011 circa communications ltd stock option plan related agreements incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33359820 filed commission april 30 2001 1012 form change control severance agreement chief executive officer chief financial officer registrant effective march 28 2001 incorporated herein reference exhibit 101 registrants quarterly report form 10q filed commission may 16 2001 1013 form change control severance agreement management registrant chief executive officer chief financial officer effective march 28 2001 incorporated herein reference exhibit 102 registrants quarterly report form 10q filed commission may 16 2001 10141 amendment 1 lease registrant wjt llc dated october 5 2001 regarding space located 4750 willow road pleasanton california 1015 picturetel corporation 1998 acquisition stock option plan form nonstatutory stock option incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33372544 filed commission october 31 2001 1016 polycom inc 2001 nonstatutory stock option plan form agreement thereunder incorporated herein reference exhibit 101 registrants quarterly report form 10q filed commission november 13 2001 1017 atlanta signal processors incorporated 1997 incentive stock plan forms stock option grant exercise agreement employee shareholder agreement incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33376312 filed commission january 4 2002 10181 lease agreement picturetel corporation 100 minuteman limited partnership dated october 10 1995 amended regarding space located 100 minuteman rd andover massachusetts 10191 summary arrangement registrant robert c hagerty 2111 subsidiaries registrant 2311 consent independent accountants 2411 power attorney included page 58 annual report form 10k indicates management contract compensatory plan arrangement 1filed herewith b reports form 8k october 19 2001 registrant filed current report form 8k commission dated october 12 2001 reporting issuance press release october 12 2001 announcing completion initial offering period registrants offer exchange cash common stock registrant outstanding shares picturetel corporation picturetel common stock exchange offer ii issuance press release october 17 2001 announcing successful completion subsequent offering period exchange offer iii issuance press release october 18 2001 announcing completion merger whollyowned subsidiary registrant picturetel pursuant picturetel became whollyowned subsidiary registrant financial statements pro forma financial information required filed connection current report form 8k previously filed part registrants registration statement form s4 amended registration 33363252 c exhibits see item 14a3 financial statement schedules see items 8 14a2 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city milpitas state california 1st day march 2002 polycom inc robert c hagerty michael r kourey robert c hagerty chairman board directors chief executive officer president michael r kourey senior vice president finance administration chief financial officer secretary power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint robert c hagerty michael r kourey lawful attorneysinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 amended report signed following persons capacities dates indicated signature title date robert c hagerty robert c hagerty chairman board directors chief executive officer president principal executive officer march 1 2002 michael r kourey michael r kourey senior vice president finance administration chief financial officer secretary director principal financial accounting officer march 1 2002 betsy atkins betsy atkins director march 1 2002 john seely brown john seely brown director march 1 2002 john kelley john kelley director march 1 2002 stanley j meresman stanley j meresman director march 1 2002 william owens william owens director march 1 2002 polycom inc index consolidated financial statements report independent accountants board directors stockholders polycom inc opinion accompanying consolidated balance sheets related consolidated statements operations stockholders equity cash flows present fairly material respects financial position polycom inc subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states america addition opinion financial statement schedule presents fairly material aspects information set forth therein read conjunction related consolidated financial statements financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp san jose california january 23 2002 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 formation business company polycom inc subsidiaries company delaware corporation develops manufactures markets services comprehensive line highquality easytouse communications equipment enables enterprise users effectively conduct video voice data communications companys products distributed serviced globally company sells products marketing sales relationships wide network valueadded resellers telecommunications equipment distributors wireline equipment manufacturers telecommunication service providers retailers 2 summary significant accounting policies fiscal year company uses 5253 week fiscal year result fiscal year may end day calendar year convenience presentation accompanying consolidated financial statements shown ending december 31 applicable period reclassifications certain items prior years consolidated financial statements reclassified conform current years format principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated consolidated financial statements company prepared give retroactive effect merger accord networks ltd february 28 2001 treated pooling interests financial reporting purposes use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents investments companys investments comprised us state municipal government obligations foreign domestic public corporate debt equity securities investments maturities less one year considered shortterm carried fair value nearly investments held companys name limited number major financial institutions specific identification method used determine cost securities disposed realized gains loses reflected interest income net december 31 2001 2000 companys investments classified availableforsale unrealized gains losses investments included separate component cumulative comprehensive income loss stockholders equity company also investments private companies investments included longterm assets companys consolidated balance sheets carried cost less impairment loss company monitors investments impairment makes appropriate reductions carrying value fair value determined less reported value 2001 2000 company determined value investments impaired reduced carrying amount 32 million 59 million respectively inventories stated lower cost market cost determined standard cost basis approximates firstin firstout fifo method appropriate consideration given obsolescence excessive levels deterioration factors evaluating net realizable value fixed assets fixed assets stated cost less accumulated depreciation amortization depreciation provided straightline basis estimated useful lives assets one seven years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three twelve years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations impairment longlived assets longlived assets including identifiable intangible assets held used reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset eventual disposition measurement impairment loss longlived assets management expects hold use based fair value asset longlived assets disposed reported lower carrying amount fair value less costs sell revenue recognition company recognizes revenue hardware product sales including freight charges accordance sec staff accounting bulletin 101 revenue recognition financial statements statement financial accounting standards sfas 48 revenue recognition right return exists company recognizes software revenue accordance sop 972 software revenue recognition amended sop 989 modification sop 972 software revenue recognition respect certain transactions guidelines company recognizes revenue transactions persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable payment reasonably assured company accrues warranty costs hardware products sales returns coop advertising allowances upon shipments based upon experience additionally company recognizes extended service revenue hardware products life service contract research development expenditures research development expenditures charged operations incurred software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2001 2000 1999 117 million 149 million 100 million respectively income taxes income tax expense based pretax financial accounting income deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled valuation allowances established necessary reduce deferred tax assets amount expected realized translation foreign currencies financial statements companys foreign subsidiaries operate functional currency us dollar translated us dollars yearend exchange rates monetary assets liabilities nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations assets liabilities companys foreign subsidiaries local currency functional currency translated us dollars exchange rates effect balance sheet date income expense accounts translated average exchange rates year translation gains losses significant date recorded cumulative comprehensive income loss within stockholders equity foreign exchange contracts company subsidiaries entered foreign currency forward contracts hedge specific intercompany foreign currency receivable transactions forward contracts involve agreements purchase sell foreign currencies specific rates future dates company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties one largest us banks ranked assets order minimize credit risk companys hedging activities subject company exchange rate risk gains losses contracts designed offset losses gains intercompany foreign currency receivable transactions hedged carrying amount forward contracts fair value determined obtaining quoted market prices gains losses forward contracts recognized reporting period offset gain loss hedged item period underlying transactions settled december 31 2001 company contracts maturing february 6 2002 march 6 2002 purchase 769000 925000 respectively british pounds japanese yen computation net income loss per share basic net income loss per share computed using weighted average number common shares outstanding excluding shares issued stock option plan subject repurchase periods represented diluted net income per share computed using common dilutive common equivalent shares outstanding periods represented common equivalent shares including shares issued stock option plan subject repurchase excluded computation fully diluted net loss per share effect antidilutive fair value financial instruments carrying amounts certain companys financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm longterm investments based quoted market prices similar instruments stockbased compensation permitted sfas 123 accounting stockbased compensation company accounts employee stockbased compensation accordance accounting principles board opinion 25 apb 25 accounting stock issued employees fasb interpretation 44 fin 44 accounting certain transactions involving stockbased compensation interpretation apb opinion 25 related interpretations accounting stockbased compensation plans stockbased compensation related nonemployees based fair value related stock options accordance sfas 123 interpretations expense associated stockbased compensation amortized vesting period individual award recent pronouncements july 2001 fasb issued statement financial accounting standards 141 sfas 141 business combinations sfas 141 requires purchase method accounting business combinations initiated june 30 2001 eliminates poolingofinterests method company adopted pronouncement beginning picturetel corporation acquisition completed october 18 2001 july 2001 fasb issued statement financial accounting standards 142 sfas 142 goodwill intangible assets effective fiscal years beginning december 15 2001 sfas 142 changes accounting goodwill amortization method impairment approach addition standard includes provisions upon adoption reclassification certain existing recognized intangibles goodwill reassessment useful lives existing recognized intangibles reclassification certain intangibles previously reported goodwill testing impairment existing goodwill intangibles existing goodwill intangibles company adopt pronouncement january 1 2002 result adoption 63 million goodwill amortized ratably march 2004 cease company adopted nonamortization provision goodwill contained within pronouncement new acquisitions beginning picturetel corporation acquisition completed october 18 2001 sfas 142 requires goodwill tested annually impairment using twostep process first step identify potential impairment transition step must measured beginning fiscal year however company six months date adoption complete first step second step goodwill impairment test measures amount impairment loss measured beginning year adoption must completed end companys fiscal year intangible assets deemed indefinite life tested impairment using onestep process compares fair value carrying amount asset beginning fiscal year pursuant requirements sfas 142 completed first quarter 2002 loss resulting first step impairment test reflected cumulative effect change accounting principle first quarter 2002 company yet determined effect impairment tests companys consolidated financial position results operations cash flows august 2001 fasb issued statement financial accounting standards 144 sfas 144 accounting impairment disposal longlived assets effective fiscal years beginning december 15 2001 sfas 144 supersedes fasb statement 121 accounting impairment disposal longlived assets longlived assets disposed accounting reporting provisions relating disposal segment business accounting principles board opinion 30 company currently assessing impact sfas 144 companys consolidated financial position results operations cash flows september 2001 fasb emerging issues task force eitf issued eitf issue 0109 accounting consideration given vendor customer reseller vendors products codification eitf issues 0025 vendor income statement characterization consideration paid reseller vendors products 0014 accounting certain sales incentives 0022 accounting points certain timeor volumebased sales incentive offers free products services delivered future eitf 0025 codified eitf 0109 established treatment statement operations vendor consideration resellers vendors products eitf 0025 0109 effective interim yearend periods beginning december 15 2001 years ended december 31 2001 2000 85 million 95 million respectively cooperative advertising consideration charged reduction revenue company currently assessing impact adoption issue consolidated financial position results operations cash flows 3 acquisitions picturetel corporation october 18 2001 company completed acquisition picturetel corporation picturetel leader visual collaboration exchange 01177 shares polycom common stock 311 cash outstanding share picturetel common stock total approximately 66 million shares companys common stock net 363557 treasury shares obtained acquisition approximately 183 million cash exchanged outstanding shares picturetels common stock primary reason acquisition factors contributed recognition goodwill polycom expects better equipped financial technological operational marketing resources capabilities necessary compete communications market addition polycom expects expand product service offerings reducing costs economies scale addition company assumed outstanding options warrants became exercisable approximately 12 million shares companys common stock acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date since october 18 2001 results operations picturetel included companys condensed consolidated statements income accompanying consolidated financial statements reflect purchase price approximately 413 million consisting cash polycom common stock valued using average fair value polycoms outstanding common stock may 22 2001 may 29 2001 five trading days surrounding date acquisition agreement announced fair value options warrant assumed polycom acquisition costs directly related acquisition follows thousands purposes computing estimated fair value options warrants assumed blackscholes pricing model used following assumptions fair value polycoms stock 2774 expected life 55 years riskfree rate 55 expected dividend yield 0 volatility 90 following summary preliminary allocation purchase price acquisition picturetel thousands purchase price allocation preliminary company currently evaluating various matters related acquisition including assessing fair value certain facilities costs assets liabilities amount allocated purchased inprocess research development intangible assets determined management using independent appraisal income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development estimated net free cash flows generated inprocess research development projects discounted rates ranging 30 40 percent relation stage completion technical risks associated achieving technological feasibility inprocess research development projects expensed upon acquisition technological feasibility established future alternative uses existed reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside companys control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product cost effectively goodwill originating acquisition picturetel amortized accordance guidance contained statement financial accounting standard 142 sfas 142 goodwill intangible assets none goodwill expected deductible tax purposes intangible assets amortized estimated useful lives three years year ended december 31 2001 amortization associated acquisition totaled approximately 29 million following unaudited pro forma financial information reflects results operations two years ended december 31 2001 acquisition occurred january 1 2000 pro forma results exclude purchased inprocess research development impairment licenses arising acquisition picturetel 55 million due nonrecurring nature pro forma financial information included nonrecurring items incurred picturetel follows 145 million nonrecurring charges incurred 2001 153 million nonrecurring gains 423 million non recurring charges 2000 pro forma results prepared comparative purposes purport indicative operating results would acquisition actually taken place january 1 2000 may indicative future operating results unaudited thousands except per share amounts circa communications ltd april 2 2001 company completed acquisition privatelyheld development stage circa communications ltd circa leading developer voice internet protocol voip telephony products exchange 665884 shares common stock assumption outstanding options exercisable 248597 shares polycom common stock aggregate value 98 million 40 million cash preferred stock plus acquisition costs approximately 08 million additional 421555 shares polycom common stock issuable upon successful completion certain revenue based earnout thresholds acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date since april 2 2001 results operations circa included companys consolidated statements income company recorded unearned stockbased compensation approximately 780000 associated unvested stock options issued employees conjunction acquisition amount included component stockholders equity amortized vesting period options following summary allocation purchase price acquisition circa thousands amount allocated purchased inprocess research development determined independent appraisal using established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside companys control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product cost effectively goodwill acquired intangible assets primarily representing existing partnerships acquired workforce amortized estimated useful lives three years year ended december 31 2001 amortization goodwill unearned stockbased compensation intangible assets associated acquisition totaled approximately 32 million following unaudited pro forma financial information reflects results operations three years ended december 31 2001 acquisition occurred january 1 1999 pro forma results prepared comparative purposes purport indicative operating results would acquisition actually taken place january 1 1999 may indicative future operating results unaudited thousands except per share amounts accord networks ltd february 28 2001 company completed acquisition accord networks ltd accord leading provider nextgeneration richmedia network products enable internet protocol ip network voice video communications customer premises service provider markets terms merger polycom exchanged approximately 65 million shares common stock outstanding accord shares assumed accord options exercisable approximately 13 million shares polycoms common stock exchange assumption rate 03065 polycom shares accord share transaction treated pooling interests financial reporting purposes consequently companys historical consolidated financial statements restated combined entity existed periods presented intercompany transactions two companies eliminated consolidation company accord fiscal year ends december 31 adjustments required conform accounting policies two companies primarily associated classification expenses insignificant following table reconciles companys original revenues earnings combined thousands except per share data atlanta signal processors inc november 30 2001 company completed acquisition atlanta signal processors inc aspi manufacturer voice products installed voice systems market exchange 49 million cash outstanding aspi shares assumption outstanding options exercisable 30687 shares polycom common stock aggregate value 09 million plus acquisition costs approximately 02 million acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date consolidated financial statements include operating results business date acquisition pro forma results operations presented effects acquisition material individual basis amounts allocated inprocess research development determined independent appraisal using established valuation techniques hightechnology communications equipment industry expensed upon acquisition technological feasibility established future alternative uses existed goodwill originating acquisition amortized accordance sfas 142 intangible assets amortized straightline basis periods exceeding three years year ended december 31 2001 amortization associated acquisition totaled 114000 company recorded unearned stockbased compensation approximately 754000 associated unvested stock options issued employees conjunction acquisition amount included component stockholders equity amortized vesting period options consistent guidance stated fin 44 summary purchase transactions outlined follows thousands atlas communication engines inc december 1 1999 company completed acquisition atlas communication engines inc atlas whereby wholly owned subsidiary company merged atlas designed developed marketed sold high quality digital subscriber line dsl customer premise equipment internet access devices primarily original equipment manufacturer oem basis approximately 26 million shares companys common stock exchanged issued outstanding capital stock atlas addition outstanding stock options purchase atlas common stock converted options purchase approximately 10 million shares companys common stock transaction treated pooling interests financial reporting purposes consequently prior period figures restated combined entity existed periods presented intercompany transactions two companies eliminated consolidation company atlas fiscal year end december 31 adjustments related primarily fixed asset capitalization depreciation inventory accounting made conform align accounting policies two companies 4 acquisitionrelated charges years ended december 31 2001 2000 1999 related completion acquisitions atlas accord circa picturetel aspi company recognized charges 241 million 48 million 17 million respectively acquisitionrelated costs including cost actions designed improve companys combined competitiveness productivity future profitability acquisitionrelated actions included elimination redundant excess facilities workforce companys combined businesses elimination redundant assets facility closings facility charges amount 14 million primarily comprised lease termination costs net present value minimum lease payments vacated redundant facilities company intends sublease company netted estimated sublease cash receipts lease obligations determine minimum lease payments facilities intends sublease longest lease term facilities identified sublease arrangement extends 2009 sublease arrangements termination active lease obligations remaining redundant facilities scheduled sublease scheduled completed end 2002 addition company assumed liabilities related facility closings totaling 241 million acquisitions picturetel aspi severance charges amount 23 million recorded 2001 severance payments related fringe costs workforce reductions planned performed 2001 2002 remaining planned workforce reductions december 31 2001 expected completed june 2002 severance payments made period time end 2004 addition company assumed liabilities related severance totaling 141 million acquisitions picturetel aspi asset impairments writeoffs exit costs merger fees asset impairments amount 67 million asset writeoffs amount 08 million principally related elimination redundant excess equipment exit costs amount 03 million related payment obligations carry future benefit combined operations scheduled complete march 2002 mergerrelated transaction period expenses years ended december 31 2001 2000 1999 126 million 48 million 17 million respectively principally consisted financial advisory accounting legal consulting fees direct mergerrelated expenses incurred period following table summarizes status companys acquisitionrelated restructuring costs 5 investments december 31 2001 2000 comprise thousands shortterm investments december 31 2001 2000 mature within one year longterm investments excluding equities mature within two years 2001 company recorded net realized gains 391000 disposal investments company used specific identification method determining cost basis resulting realized gain loss transactions 2000 realized gains losses disposal investments included investments december 31 2001 approximately 97 million investments publicly traded equity securities marked market original 95 million investment value 6 inventories consist following thousands 7 fixed assets fixed assets net consist following thousands 8 accrued liabilities accrued liabilities consist following thousands 9 business risks credit concentration company sells limited number products serve communications equipment market substantial majority companys net revenues derived sales viewstation soundstation ipower network systems network access products factor adversely affecting demand supply products could materially adversely affect companys business financial performance currently company subcontracts manufacturing almost video voice network access products one subcontractor asia company believes number alternative contract manufacturers could produce products event reduction interruption supply could take significant period time qualify alternative subcontractor commence manufacturing effect reduction interruption supply results operations would material certain key components used products currently available one source others available limited number sources addition currently process transferring manufacturing ipower 900 series product current contract manufacturers celestica also various products acquired result aspi acquisition transferred celestica transition period products could experience manufacturing shipment delays increased manufacturing costs reseller enduser customer dissatisfaction concentrates product manufacturing celesticas thailand facility increases exposure adverse financial consequences event disruption celesticas manufacturing capabilities reason asian economy gone recent problems yet material impact supply polycom product subcontractor component suppliers used region however economic problems asia persist could create interruption supply could materially adversely affect results operations companys network systems products manufactured israel currently experiencing internal external conflicts include terrorist military action company could experience manufacturing disruption due acts associated conflict could harm business addition technology used network system products developed grants office chief scientist israel israeli law prohibited transfer technology developed pursuant grants person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer technology third parties manufacture products outside israel may adversely affect companys operating results significantly reduce value technology developed grants companys cash equivalents investments maintained limited number international investment management companies commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations companys customers maintains allowance potential credit losses expansion polycoms product offerings may increase companys credit risk customers place larger orders new products assurance companys credit loss experience remain near historic levels december 31 2001 single customer accounted 10 accounts receivable december 31 2000 one customer individually accounted 10 accounts receivable company investments securities private companies classified balance sheet longterm investments addition company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect companys consolidated results operations financial position cash flows 10 commitments contingencies litigation september 3 1997 vtel corporation vtel filed lawsuit state district court travis county texas viavideo communications inc founders formerly employed vtel may 27 1998 following acquisition viavideo vtel amended suit add polycom defendant lawsuit vtel alleged breach contract breach confidential relationship disclosure proprietary information related allegations viavideo founders polycom answered suit denying entirety vtels allegations march 3 2000 vtel voluntarily dismissed allegations polycom viavideo prejudice consideration onetime item first quarter 2000 excess accrual associated expenses company estimated incurred connection lawsuit totaling 18 million released since material expenses incurred november 20 1998 patent infringement claim filed accords us subsidiary accord networks inc united states district court district massachusetts alleging us subsidiary willfully deliberately infringing one ezenias patents complaint later amended allege us subsidiary also willfully deliberately infringing patents june 10 1999 accord added defendant lawsuit june 16 2000 accord us subsidiary entered written settlement agreement court entered order dismissing case lawsuit settlement cost 65 million final payment made december 28 2000 represents onetime charge resulting settlement reported litigation settlement consolidated statement operations june 2000 time company involved various legal proceedings arising normal course business activities addition time third parties assert patent trademark infringement claims company form letters forms communication currently company believe legal proceedings claims likely material adverse effect companys consolidated financial position results operations cash flows standby letters credit company several standby letters credit totaling approximately 186000 issued guarantee certain companys foreign office lease obligations contractual obligations company also maintained time commercial letters credit payments importation certain products amounts exceed 100000 outstanding less 120 days standby letters credit canceled 2001 license agreements march 3 2000 company entered patent licensing agreement vtel corporation vtel provided fullypaid royaltyfree license three patents related various videoconferencing technologies exchange licenses company paid vtel approximately 83 million sublicensed vtel royaltybearing patent videoconferencing technology royalty sublicense payable patent holder polycom amortization license computed using straightline method economic life license five years october 19 2001 company recorded charge 55 million related impairment vtel license management determined technology used picturetel superior obtained polycom vtel license picturetel technology would used polycoms products research development would better protect companys intellectual property charge included acquisitionrelated costs consolidated statement operations company also enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years shown combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2001 2014 future minimum lease payments excluding leases subject cancelation within twelve months follows thousands company currently headquartered approximately 102000 square foot facility milpitas california pursuant lease expires january 2007 facility accommodates corporate administration voice network access research development manufacturing marketing sales customer support february 19 2001 company entered tenyear lease agreement 50000 square foot facility pleasanton california currently construction facility become companys corporate headquarters completed expected second quarter 2002 majority companys video service operations located approximately 321000 square feet andover massachusetts pursuant lease expires september 2014 approximately 55000 square foot austin texas pursuant lease expires december 2004 network systems operations occupy approximately 31000 square feet petach tikva israel 18000 square feet atlanta georgia addition company leases space goleta california network access products engineering manufacturing marketing organizations company leases space vancouver canada voip development operation company leases approximately 44000 square foot facility tracy california used north american latin american distribution center company utilizes space manufacturing contractor thailand companys european distribution contractor united kingdom netherlands provide asian european distribution repair centers respectively included noncancellable operating leases assumed part acquisition picturetel company identified vacated redundant picturetel leased facilities company intends terminate sublease recognized liability assumed purchase combination liability valued estimated net present value lease commitments estimated net present value cost terminating leases net estimated sublease rent 241 million 43 million classified current liability 198 million classified long term liability rent expense years ended december 31 2001 2000 1999 83 million 63 million 30 million respectively grants december 2000 accord repaid outstanding grants office chief scientist israeli ministry industry trade accordingly amount approximately 55 million recorded expense consolidated statement operations 2000 previously accord obligated pay royalties office chief scientist proceeds sales systems resulting three research development projects office chief scientist helped fund grants accord following progressive royalty rates 3 annual system sales first three years system sales accord 4 next three years system sales 5 systems sales thereafter 100 aggregate amount grants received accord time funding received successful development related projects assured december 2000 accord repaid outstanding grants israelunited states binational industrial research development foundation bird accordingly amount approximately 04 million recorded expense consolidated statement operations 2000 accord obligated pay royalties bird proceeds sale leasing marketing commercial exploitation results research development bird helped fund grants accord royalties amount 150 aggregate amount grant paid rate 5 related products sales aggregate amount grant amount grant repaid royalties would payable rate 25 related products sales additional royalties amount 1650 aggregate grant amount paid bird accord obligated pay royalties government israel related marketing expenses government helped fund grants accord amounting approximately 03 million received 1996 1998 royalties payable rate 3 increase export sales accord began receiving marketing grants amount dollarlinked grant received december 31 1999 entire royalty obligation recorded financial statements royalty expenses related mentioned commitments years ended december 31 2001 2000 1999 approximately zero 16 million 09 million respectively 11 credit arrangements company available 25 million revolving line credit bank agreement dated november 15 2001 borrowings line unsecured bear interest banks prime rate 475 december 31 2001 london interbank offered rate libor plus 065 approximately 2525 265 depending term borrowings december 31 2001 borrowings line subject certain financial covenants restrictions liquidity indebtedness financial guarantees business combinations profitability levels related items line credit expires december 3 2003 balances outstanding line credit company compliance applicable financial covenants restrictions periods presented 12 mandatorily redeemable convertible preferred stock june 28 2000 accord converted 3693761 mandatorily redeemable convertible preferred shares common stock 13 stockholders equity public stock offering july 2000 accord completed initial public offering 1762376 shares common stock offering price 3589 per share shares sold 1732665 sold accord net proceeds approximately 549 million 29731 shares sold selling stockholders august 2000 company completed public offering 5608976 shares common stock price 45438 per share shares sold approximately 35 million shares sold company net proceeds approximately 1483 million balance shares sold selling stockholder company used net proceeds sale primarily general corporate purposes including working capital expenditures stock split august 2 2000 company announced board directors approved twoforone split companys common stock split effected stock dividend august 31 2000 payable stockholders record august 15 2000 references share per share amounts periods presented adjusted give effect stock split common stock december 31 2001 2000 zero 69502 shares respectively common stock outstanding subject repurchase shares resulted founder stock viavideo communications inc viavideo employee stock options treasury stock result acquisition picturetel company acquired 363557 shares treasury stock aggregate value 112 million based market value companys common stock date acquisition stock option exchange program may 21 2001 company commenced voluntary stock option exchange program certain eligible employees consultants company program eligible employees consultants given option cancel outstanding stock option previously granted exercise price greater equal 2355 per share exchange new option buy 085 shares companys common stock granted december 26 2001 six months one day june 25 2001 date old options canceled total 11 million stock options canceled result program approximately 827000 stock options granted exchange program result additional compensation charges variable option plan accounting stock option plan 2001 board directors reserved 750000 shares common stock 2001 nonstatutory stock option plan nonstatutory plan issuance nonqualified stock options employees acquired companies foreignbased employees ineligible incentive stock options 1996 board directors reserved 6250000 shares common stock 1996 stock option plan issuance employees directors company 1997 1999 2000 2001 additional 2000000 shares 3000000 shares 3500000 shares 2500000 shares respectively reserved approved stockholders plan supersedes 1991 stock option plan 91 plan 1996 viavideo reserved 1775526 shares common stock 1996 viavideo communications inc stock option plan viavideo plan issuance employees viavideo 1997 additional 1420420 shares reserved approved stockholders viavideo plan assumed polycom january 2 1998 pursuant agreement plan reorganization among polycom venice acquisition corporation viavideo communications inc dated june 11 1997 amended september 2 1997 remaining option shares available grant subsequent cancellations option shares viavideo plan expired expire additional option shares granted viavideo plan subsequent merger 1996 atlas reserved 879736 shares common stock 1996 stock incentive plan atlas plan issuance employees atlas 1997 additional 351894 shares reserved approved stockholders atlas plan assumed polycom december 1 1999 pursuant agreement plan reorganization among polycom periscope acquisition corporation atlas communication engines inc dated november 18 1999 remaining option shares available grant subsequent cancellations option shares atlas plan expired expire additional option shares granted atlas plan subsequent merger 1995 accord reserved 5087 shares common stock 1995 accord networks ltd stock ownership option plan dated march 29 1995 issuance employees accord networks ltd 1995 1996 1997 1999 additional 239739 shares 17209 shares 687419 shares 306500 shares respectively reserved year 2000 accord networks ltd 2000 share option plan accord networks ltd share ownership option plan 2000 accord networks ltd 2000 nonemployee directors option plan created initial reserves 229875 shares 229875 shares 61300 shares respectively accord networks ltd plans assumed polycom february 28 2001 pursuant agreement plan merger reorganization dated december 5 2000 amended remaining option shares available grant subsequent cancellations option shares accord networks ltd plans expired expire additional option shares granted accord networks ltd plans subsequent merger terms plan 91 plan nonstatutory plan viavideo plan atlas plan accord plans circa plan options may granted prices lower fair market value date grant determined board directors options granted 91 plan aspi plan viavideo plan circa plan immediately exercisable expire ten years date grant unvested shares issued upon exercise options generally subject right repurchase company upon termination employment company options granted plan nonstatutory plan acquisition plan atlas plan accord plans circa plan expire ten years date grant generally exercisable upon vesting options granted plan prior december 1998 91 plan normally vest 20 completing one year service company remaining amount equally 48 months fully vested five years options granted viavideo plan normally vest monthly month service company fully vested four years options granted atlas plan normally vest 33 completing one year service company remaining amount equal quarterly installments next eight quarters fully vested three years options granted acquisition plan accord plans circa plan normally vest 25 completing one year service company remaining amount equal quarterly installments next twelve quarters fully vested four years options granted nonstatutory plan vest based conditions set forth plan administrator new options granted plan beginning december 1998 options normally vest 25 completing one year service company remaining amount equally 36 months fully vested four years addition special grant employees option grants become fully vested one year service company made plan atlas plan many option grants vesting schedules different described generally vesting options consistent within plans company connection acquisitions various companies assumed stock option plans acquired company fiscal 2001 total approximately 20 million shares companys common stock reserved issuance assumed plans related options included following table activity plans follows thousands except share per share data december 31 2001 2000 1999 4224324 2725647 2644251 outstanding options exercisable aggregate average exercise price 2132 807 179 respectively options exercisable zero 109083 738638 december 31 2001 2000 1999 respectively unvested shares received exercise would subject repurchase options outstanding currently exercisable exercise price december 31 2001 follows consistent disclosure provisions sfas 123 companys net income basic diluted net income per share would adjusted pro forma amounts indicated thousands except per share amounts impact pro forma net income loss per share net income loss table may indicative effect future years options vest several years company continues grant stock options new current employees fair value option grant estimated date grant using multiple options approach blackscholes model following weighted average assumptions weighted average fair value options granted pursuant plans 1444 2336 958 2001 2000 1999 respectively company also estimated fair value purchase rights issued employee stock purchase plan rights plan also evaluated using blackscholes optionpricing model purchase periods occur twice yearly effectively contains 6month option fair value purchase right estimated blackscholes model following weighted average assumptions weighted average fair value purchase rights granted pursuant employee stock purchase plan 2001 2000 1999 1747 573 278 respectively unearned stockbased compensation connection acquisitions circa aspi company recorded unearned stockbased compensation costs unvested stock options issued employees totaling 15 million recognized vesting period options connection certain stock option grants 1999 company recorded unearned stockbased compensation cost totaling 24 million recognized vesting period related options three years amortization expense associated unearned stock compensation totaled 557000 845000 447000 2001 2000 1999 respectively approximately 343000 498000 unearned stock based compensation reversed 2001 2000 respectively upon cancellation unvested stock option grants resulting termination certain employees warrants connection joint marketing development agreement dated march 28 1997 showstation ip polycom granted 3m warrants purchase 4000000 shares companys common stock exercise price 375 per share warrants due expire march 1999 exercised march 1 1999 warrants valued approximately 40000 date grant using blackscholes model march 1996 1998 accord issued warrants purchase 178906 369402 shares series b preferred stock respectively total consideration 5000 several shareholders exercise price 731 per share accord issued 18130 160776 shares series b preferred stock december 1999 january 2000 respectively upon exercise warrants third quarter 2000 accord issued 294175 shares common stock upon cashless exercise warrant april 28 1999 accord granted warrant bank connection twoyear credit line warrant exercisable period three years purchase 42009 shares common stock exercise price 1191 per share december 2000 bank exercised warrant 30658 shares common stock december 31 2001 company significant warrants outstanding preferred share rights purchase plan july 1998 board directors approved preferred shares rights agreement rights agreement rights agreement intended protect stockholders rights event unsolicited takeover attempt intended prevent takeover company terms favorable fair stockholders interfere merger approved board directors upon becoming exercisable right entitles stockholders buy 11000 share series preferred stock company exercise price 40000 subject adjustment rights exercisable person group acquiring person acquires announces tender exchange offer acquire 20 companys common stock event acquiring person acquires 20 companys common stock triggering event right held acquiring person entitle holder purchase exercise price number shares common stock market value equal two times exercise price addition event following triggering event company acquired merger sells 50 assets right held acquiring person entitle holder purchase exercise price number shares common stock acquiring company market value equal two times exercise price rights redeemable companys option price 0005 per right company may also exchange rights shares common stock certain circumstances rights expire earlier july 15 2008 date redemption exchange 14 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united sates eligible employee may elect contribute polycom 401k plan payroll deductions 20 compensation subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan beginning fiscal year 2000 company matched cash 50 first 3 compensation employees contribute polycom 401k plan maximum 500 per participating employee per year fiscal year 2001 2002 maximum company cash match increased 1000 1500 respectively per participating employee per year company also 401k plan arose acquisition accord 401k plan covers substantially accord employees united states eligible employee may elect contribute accord 401k plan payroll deductions 15 compensation subject current statutory limitations company discretion board directors may make matching contributions accord 401k plan done 2000 connection acquisition accord 401k plan terminated 2001 beginning april 2 2001 eligible formerly accord employees may elect participate polycom 401k plan company also defined contribution profit sharing plan incorporating features section 401k internal revenue code arose acquisition picturetel plan covered substantially picturetel employees connection acquisition picturetel plan terminated 2001 beginning january 1 2002 eligible formerly picturetel employees may elect participate polycom 401k plan companys contributions polycom 401k plan accord 401k plan totaled approximately 433000 183000 fiscal 2001 2000 respectively zero 1999 employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees offering periods maximum 24 months purchase dates approximately every six months february august company reserved 2000000 shares common stock issuance plan shares purchased employees payroll deductions maximum 15 employees compensation purchase prices equal 85 lesser fair market value companys common stock either date employees entrance offering period purchase date participant may purchase 3000 shares 25000 worth common stock one calendar year 2001 2000 1999 170250 223094 274310 shares purchased average per share prices 2274 1090 379 respectively december 31 2001 986944 shares available granted plan benefit plans israeli labor laws agreements company required pay severance pay upon dismissal employee companys israeli subsidiary upon termination employment specified circumstances companys severance pay employees israel based upon length service latest monthly salary one months salary year worked mainly covered purchased managerial insurance policies value policies recorded asset consolidated balance sheets labor agreements insurance policies property employees subject specified limitations net amount severance pay charged income totaled approximately 977000 739000 239000 2001 2000 1999 respectively december 31 2001 2000 severance pay funded included assets approximately 1183000 931000 respectively accrued severance pay included longterm liabilities approximately 2035000 1540000 respectively company also contributing funds behalf israeli employees individual insurance policy provides combination savings plan insurance severance pay benefits insured employee provides payments employee upon retirement death secures substantial portion severance pay employee legally entitled upon termination employment participating employee contributes amount equal 50 employees base salary employer contributes 133 158 employees base salary companys fulltime israeli employees participate benefit package company also provide employees education fund participating employee contributes amount equal 25 employees base salary employer contributes amount equal 75 employees base salary 15 income taxes income tax expense consists following thousands sources income loss provision income taxes follows thousands companys tax provision differs provision computed using statutory tax rates follow thousands tax effects temporary differences give rise deferred tax assets presented thousands december 31 2001 company tax net operating loss carryforwards approximately 91 million tax credit carryforwards approximately 99 million net operating loss carryforward tax credit carryforward begin expire 2007 portion future utilization companys net operating loss credit carryforwards subject certain limitations due change ownership companies acquired company 1998 2001 company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2001 cumulative amount earnings upon us income tax provided approximately 501 million tax benefits 125 million 2001 383 million 2000 associated exercise employee stock plans added stockholders equity company granted beneficial tax status israeli tax authorities income earned israel terms company subject tax two years accumulated net operating loss carryforwards offset taxable income reduced 25 rate applied income eight years following two year exemption reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 failure comply conditions may result cancellation benefits whole part 16 business segment information company markets products united states foreign countries primarily resellers five product lines video communications voice communications network systems network access products services reporting purposes company aggregates five product lines one reporting segment named communications companys net revenues substantially denominated us dollars summarized follows thousands percentage total net revenues video communications voice communications network systems network access products ipowerrelated service follows customer accounted 10 companys net revenues 2001 2000 lucent technologies inc accounted 10 companys net revenues 1999 companys fixed assets net accumulated depreciation located following geographical areas thousands 17 earnings per share eps disclosures accordance disclosure requirements sfas 128 reconciliation numerator denominator basic diluted eps provided follows thousands except per share amounts 2001 options purchase 2998580 shares common stock weighted average basis included computation diluted net loss per share effect would antidilutive 2001 2000 1999 4635424 864887 268522 options respectively weighted average basis excluded computation earnings per share since option exercise price greater average market price common shares period 18 subsequent event unaudited february 2002 company completed followon public offering sold 8050000 shares common stock including overallotment option 1050000 shares exercised underwriters price 3120 per share net proceeds company approximately 238 million underwriting discounts commissions expenses company intends use net proceeds sale primarily general corporate purposes including working capital expenditures well acquisitions complementary businesses technologies polycom inc supplementary financial data unaudited thousands except per share amounts areflects twoforone stock split effective august 31 2000 historical financial information restated reflect acquisitions accounted pooling interests s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands aadditions allowance doubtful accounts provision excess obsolete inventory 30 million 146 million respectively includes amounts acquired picturetel aspi acquisitions see note 3 notes consolidated financial statements s2 index exhibits exhibit description 21 agreement plan merger reorganization dated december 5 2000 among registrant merger sub ltd accord networks ltd incorporated herein reference exhibit 21 form 8k filed registrant securities exchange commission december 12 2000 22 agreement plan merger dated may 24 2001 among registrant pharaoh acquisition corp picturetel corporation incorporated herein reference exhibit 21 registrants registration statement form s4 registration 33363252 filed commission june 18 2001 23 addendum agreement plan merger dated may 24 2001 among registrant pharaoh acquisition corp picturetel corporation incorporated herein reference exhibit 12d4 amendment 6 schedule filed commission october 3 2001 31 amended restated certificate incorporation polycom inc incorporated herein reference exhibit 2 registrants registration statement form 8aa filed commission january 29 2002 32 amended restated bylaws polycom inc incorporated herein reference exhibit 32 registrants annual report form 10k filed commission march 12 2001 41 reference made exhibits 31 32 42 specimen common stock certificate incorporated herein reference exhibit 42 registrants registration statement form s1 registration 33302296 filed commission march 12 1996 s1 43 amended restated investor rights agreement dated may 17 1995 among registrant investors named therein incorporated herein reference exhibit 43 registrants 1996 s1 44 preferred shares rights agreement dated july 15 1998 amended march 2 2001 polycom inc fleet bank na fka bankboston na including certificate designation form rights certificate summary rights attached thereto exhibits b c respectively incorporated herein reference exhibit 1 registrants form 8aa filed commission march 2 2001 101 form indemnification agreement entered registrant directors officers incorporated herein reference exhibit 101 registrants 1996 s1 102 registrants 1996 stock incentive plan amended forms agreements thereunder incorporated herein reference exhibit 103 registrants 1996 s1 exhibit 41 registrants registration statement form s8 filed commission may 31 2001 registration 33361952 103 registrants 1996 employee stock purchase plan forms agreements thereunder incorporated herein reference exhibit 104 registrants 1996 s1 104 viavideo communications inc 1996 stock optionstock issuance plan related agreements incorporated herein reference exhibit 42 registrants registration statement form s8 registration 33345351 105 lease agreement registrant trinet essential facilities xxvi dated december 1 1999 regarding space located 1565 barber lane milpitas california incorporated herein reference exhibit 1018 registrants annual report form 10k filed commission march 29 2000 106 lease agreement registrant wjt llc dated february 19 2001 regarding space located 4750 willow road pleasanton california incorporated herein reference exhibit 1015 registrants annual report form 10k filed commission march 12 2001 107 accord networks ltd 1995 employee share ownership option plan form agreement thereunder incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 108 accord networks ltd share ownership option plan 2000 form agreement thereunder incorporated herein reference exhibit 42 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 109 accord networks ltd 2000 share option plan form agreement thereunder incorporated herein reference exhibit 43 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 1010 accord networks ltd 2000 nonemployee director stock option plan form agreement thereunder incorporated herein reference exhibit 44 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 1011 circa communications ltd stock option plan related agreements incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33359820 filed commission april 30 2001 1012 form change control severance agreement chief executive officer chief financial officer registrant effective march 28 2001 incorporated herein reference exhibit 101 registrants quarterly report form 10q filed commission may 16 2001 1013 form change control severance agreement management registrant chief executive officer chief financial officer effective march 28 2001 incorporated herein reference exhibit 102 registrants quarterly report form 10q filed commission may 16 2001 10141 amendment 1 lease registrant wjt llc dated october 5 2001 regarding space located 4750 willow road pleasanton california 1015 picturetel corporation 1998 acquisition stock option plan form nonstatutory stock option incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33372544 filed commission october 31 2001 1016 polycom inc 2001 nonstatutory stock option plan form agreement thereunder incorporated herein reference exhibit 101 registrants quarterly report form 10q filed commission november 13 2001 1017 atlanta signal processors incorporated 1997 incentive stock plan forms stock option grant exercise agreement employee shareholder agreement incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33376312 filed commission january 4 2002 10181 lease agreement picturetel corporation 100 minuteman limited partnership dated october 10 1995 amended regarding space located 100 minuteman rd andover massachusetts 10191 summary arrangement registrant robert c hagerty 2111 subsidiaries registrant 2311 consent independent accountants 2411 power attorney included page 58 annual report form 10k indicates management contract compensatory plan arrangement 1filed herewith special note regarding forwardlooking statements item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common stock item 6 selected consolidated financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial ownership management item 13 certain relationships related transactions part iv item 14 exhibits financial statement schedules reports form 10k signatures power attorney polycom inc index consolidated financial statements report independent accountants polycom inc consolidated balance sheets thousands except share per share data polycom inc consolidated statements operations thousands except per share data polycom inc consolidated statements stockholders equity thousands except share data polycom inc consolidated statements cash flows thousands polycom inc notes consolidated financial statements polycom inc supplementary financial data unaudited thousands except per share amounts financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands index exhibitsitem 14 controls procedures aevaluation disclosure controls procedures chief executive officer chief financial officer evaluating disclosure controls procedures defined securities exchange act 1934 exchange act rules 13a14c 15d14c date evaluation date within 90 days filing date annual report form 10k concluded evaluation date disclosure controls procedures effective ensure information required disclose reports file submit exchange act recorded processed summarized reported within time periods specified securities exchange commission rules forms bchanges internal controls review internal controls made within context relevant professional auditing standards defining internal controls reportable conditions material weaknesses internal controls processes designed provide reasonable assurance transactions properly authorized assets safeguarded unauthorized improper use transactions properly recorded reported permit preparation condensed consolidated financial statements conformity accounting principles generally accepted united states significant deficiencies referred reportable conditions control issues could significant adverse effect ability properly authorize transactions safeguard assets record process summarize report financial data condensed consolidated financial statements material weakness particularly serious reportable condition internal control reduce relatively low level risk misstatements caused error fraud may occur amounts would material relation condensed consolidated financial statements detected within timely period employees normal course performing assigned functions part internal controls procedures also address less significant control matters auditors identify determine revision improvement make accordance ongoing procedures subsequent evaluation date significant changes internal controls factors could significantly affect internal controls including corrective actions regard significant deficiencies material weaknesses part iv item 15item 14 principal accounting fees services information required item included caption “principal accounting fees services” proxy statement 2004 annual meeting stockholders incorporated item 14 reference part iv item 15item 14 principal accounting fees services information required item included caption “principal accounting fees services” proxy statement 2005 annual meeting stockholders incorporated item 14 reference part iv item 15item 14 principal accounting fees services information required item included caption “principal accounting fees services” proxy statement 2006 annual meeting stockholders incorporated item 14 reference part iv item 15item 14 principal accounting fees services information required item included caption “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2007 proxy statement incorporated item 14 reference part iv item 15item 14 principal accounting fees services information required item included caption “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2008 proxy statement incorporated item 14 reference part iv item 15item 14 principal accounting fees services information required item included caption “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2009 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item included caption “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2010 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item included caption “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2011 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item included caption “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2012 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item included caption “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2014 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item included proposal “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2015 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item included proposal “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2016 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item included caption “ratification appointment independent registered public accounting firmprincipal accounting fees services” 2013 proxy statement incorporated herein reference part iv item 15 item 7 managements discussion analysis financial condition results operations overview polycom incorporated december 1990 develop manufacture market audioconferencing dataconferencing products facilitate meetings distance company engaged principally research development inception september 1992 began volume shipments first audioconferencing product soundstation company began selling soundstation internationally january 1993 company commenced shipments domestically enhanced version product soundstation ex march 1994 commenced international shipments november 1994 september 1996 company introduced first desktop audioconferencing products soundpoint november 1996 company began shipping new premium audioconferencing product soundstation premier december 31 1996 company derived substantial majority net revenues sales soundstation products company began customer shipments first dataconferencing product showstation november 1995 company anticipates sales soundstation product line continue account substantial majority net revenues least year ending december 31 1997 factors adversely affecting demand supply soundstation product line could materially adversely affect companys business financial condition cash flows results operations january 1997 company announced plans divisionalize company along two lines business audioconferencing dataconferencing company named general manager division formally restructured companys research development organization two separate divisions reporting business general manager business unit alignments also made companys sales marketing general administrative organizations inception nine month period ended september 30 1995 company incurred losses operations primarily result investments development products expansion sales marketing manufacturing administrative organizations company achieved profitability fourth quarter 1995 generated small operating income quarter fourth quarter 1996 company intends continue invest significantly research development plans operate operating loss breakeven results third quarter 1997 assurance company achieve operating plans achieve profitable operations subsequent period companys net revenues grown primarily new product introduction increased market acceptance established audioconferencing product line lesser extent expansion companys north american international distribution networks company experienced growth net revenues recent quarters believe historical growth rates net revenues historical gross margin levels historical declines operating expenses percentage net revenues sustainable indicative future operating results example company believes 37 price reduction list price soundstation product line effective december 1996 resellers january 1997 end user customers negatively impacted companys net revenues gross margins fourth quarter 1996 continue negatively impact net revenues gross margins 1997 company expects gross margins continue decline significantly future result several factors including low negative gross margins companys firstgeneration showstation dataconferencing products 37 reduction list price soundstation product line introduction lower margin soundpoint desktop product line continuing competitive price pressure audioconferencing dataconferencing markets although price reductions driven competitive price pressures companys desire expand market products company expects future may reduce prices introduce new products carry lower margins order expand market respond competitive pricing pressures assurance actions company expand market products sufficient meet competitive pricing pressures addition companys limited operating history limited resources among factors make prediction future operating results difficult impossible form 10k contains forwardlooking statements involve risks uncertainties companys actual results may differ materially results discussed forwardlooking statements factors might cause difference include limited discussed factors affecting future operations results operations following table sets forth percentage net revenues consolidated statement operations data periods indicated year ended december 31 1994 1995 1996 net revenues 100 cost net revenues 41 44 48 gross profit 59 56 52 operating expenses sales marketing 35 28 25 research development 37 28 20 general administrative 8 7 6 total operating expenses 80 63 51 operating income loss 21 7 1 interest income net 1 2 litigation settlement income net 1 income expense income loss provision income taxes 20 6 4 provision income taxes net income loss 20 6 4 following table sets forth net revenues line business periods indicated amounts thousands net revenues companys net revenues increased 66 150 million 1994 249 million 1995 increased 49 370 million 1996 net revenues increased period primarily due increased unit sales resulting primarily new product introductions increased market acceptance companys audioconferencing product line lesser extent expansion companys north american international distribution networks offset part decline list price soundstation products company reduced list price soundstation products three separate times effective july 1 1994 january 1 1996 january 1 1997 expects increased competitive pressure lead intensified pricebased competition resulting lower prices could materially adversely affect companys net revenues 1996 company derived substantial majority net revenues sales soundstation product family confertech international inc accounted 14 11 net revenues 1994 1995 respectively 2confermutare inc accounted 11 net revenues 1994 customer reseller accounted 10 companys net revenues periods indicated customer reseller accounted 10 net revenues 1996 international net revenues accounted 23 24 23 total net revenues 1994 1995 1996 respectively see note 13 notes consolidated financial statements business segment information reduction percentage international net revenues 1996 1995 resulted initial sales soundpoint soundstation premier product families introduced first north america company anticipates international sales continue account significant portion total net revenues foreseeable future however international net revenues may fluctuate future company introduces new products since company expects initially introduce products north america also additional time required product homologation regulatory approvals new products international markets extent company unable expand international sales timely costeffective manner companys business financial condition results operations could adversely affected assurance company able maintain increase international market demand companys products date substantial majority companys international sales denominated us currency however company expects future international sales may denominated local currencies net revenues division companys audioconferencing net revenues increased 58 150 million 1994 238 million 1995 increased 35 322 million 1996 companys dataconferencing net revenues increased 336 11 million 1995 48 million 1996 companys first dataconferencing products began shipping november 1995 net revenues prior time gross profit cost net revenues consists primarily manufacturing costs company companys contract manufacturer warranty expense allocation overhead expenses gross margin represented 59 56 52 net revenues 1994 1995 1996 respectively decrease gross margins 1995 1996 principally due shift product mix higher margin soundstation product family lower margin showstation 1996 soundstation premier soundpoint product family introductions audioconferencing gross margin positively impacted cost reductions manufacturing cost soundstation product line partially offset negative impact reduction price companys soundstation product line announced first quarter 1996 price reduction soundstation product line resellers december 1996 gross margins dataconferencing product line negatively impacted manufacturing startup costs associated launch showstation product 1995 mid1996 point manufacture product transferred companys contract manufacturer gross margins dataconferencing product line also negatively impacted lower planned unit volume significant manufacturing variances fourth quarter 1996 company expects gross margins continue decline significantly future result several factors including low negative gross margins companys dataconferencing products manufacturing rampup firstgeneration showstation products 37 reduction list price soundstation product line introduction lower margin soundpoint desktop product line continuing competitive price pressure audioconferencing dataconferencing markets companys historical price reductions driven competitive price pressures companys desire expand market products company expects future may reduce prices introduce new products carry lower margins order expand market respond competitive pricing pressures although assurance actions company expand market products sufficient meet competitive pricing pressures future gross margin may affected price competition changes unit volume product cost warranty expenses gross margin may also impacted mix distribution channels used company mix products sold mix international versus north american revenues company typically realizes higher gross margin direct sales indirect channels higher gross margin international revenues north american revenues sales resellers especially oems increase percentage total revenues companys gross margin adversely impacted gross profit division companys audioconferencing gross margin represented 59 58 61 net revenues 1994 1995 1996 respectively companys dataconferencing gross margin represented 16 6 net revenues 1995 1996 respectively companys first dataconferencing products began shipping november 1995 cost net revenues prior time sales marketing sales marketing expenses consist primarily salaries commissions advertising promotional expenses allocation overhead expenses customer service support costs sales marketing expenses 53 million 71 million 91 million 1994 1995 1996 respectively representing 35 28 25 net revenues respective period increase absolute dollars periods primarily related expansion companys sales marketing organization particularly increase direct sales associated costs increased commission expenses related higher sales volumes launch companys dataconferencing business company expects continue increase sales marketing expenses absolute dollar amounts effort expand north american international markets market new products establish expand distribution channels particular due innovative nature showstation products company incurred significant expenses 1996 develop worldwide sales presence showstation product believes required incur significant additional expenses sales marketing including advertising educate potential customers desirability showstation addition company continuing invest market launch new soundpoint soundstation premier product lines order improve sales processing systems company plans make significant investment implement new sales service information system next two fiscal years research development research development expenses consist primarily compensation costs consulting fees allocation overhead expense supplies depreciation equipment product marketing expenses research development expenses 55 million 69 million 76 million 1994 1995 1996 respectively representing 37 28 20 net revenues respective period increase dollar amount research development expenses periods primarily attributable increased staffing associated support required expand enhance companys dataconferencing audioconferencing product lines december 31 1996 research development costs expensed incurred company believes technological leadership critical success committed continuing high level research development especially development planned next generation showstation product consequence company intends significantly increase absolute amount research development expenses future general administrative general administrative expenses consist compensation costs allocation overhead expense outside legal accounting expenses general administrative expenses 11 million 18 million 21 million 1994 1995 1996 respectively representing 8 7 6 net revenues respective period increase dollar amount period primarily due increased staffing support companys growth 1996 costs related patent litigation company believes general administrative expenses increase absolute dollar amounts future primarily result expansion companys administrative staff costs related public company interest income net interest income consists interest earned companys cash equivalents shortterm investments net interest expense companys bank debt facilities interest income net 175000 189000 784000 1994 1995 1996 respectively representing 1 2 net revenues respective period increase interest income net 1996 prior two years primarily due increase companys cash equivalents shortterm investments resulting companys initial public offering provision income taxes company accounts income taxes accordance financial accounting standards boards statement financial accounting standards 109 accounting income taxes company incurred net loss consequently paid federal state income taxes either 1994 1995 1996 company provided income tax 108000 federal certain foreign alternative minimum taxes december 31 1996 company approximately 64 million federal net operating loss carryforwards 790000 federal tax credit carryforwards future utilization companys net operating loss carryforwards may subject certain limitations upon certain changes ownership company believes initial public offering april 29 1996 triggered change ownership pursuant internal revenue code 1986 amended annual limitation utilization federal net operating loss carryforwards approximately 71 million company established valuation allowance deferred tax assets due uncertainty surrounding realization assets management evaluates quarterly basis recoverability deferred tax assets level valuation allowance time determined likely deferred tax assets realizable valuation allowance appropriately reduced see note 11 notes consolidated financial statements factors affecting future operations companys operating results fluctuated past may fluctuate future result number factors including market acceptance showstation products new product introductions product enhancements company competitors prices companys competitors products mix products sold mix products sold directly resellers fluctuations level international sales cost availability components manufacturing costs level warranty claims changes companys distribution network level royalties third parties changes general economic conditions addition competitive pressure pricing given quarter could adversely affect companys operating results period price pressure extended period could materially adversely affect companys longterm profitability companys reductions list price soundstation products negative impact net revenues gross margin company also expects gross margin continue decline result price reductions several factors including lower gross margin companys dataconferencing products well continuing competitive price pressure audioconferencing market companys ability maintain increase net revenues depend upon ability increase unit sales volumes soundstation premier soundpoint families audioconferencing products dataconferencing line products currently comprised showstation product upon new products product enhancements assurance company able increase unit sales volumes existing products introduce sell new products reduce costs percentage net revenues company typically ships products within short time receipt order usually significant backlog significant backlog fluctuations period result backlog point time good indicator future net revenues net revenues particular quarter cannot predicted degree accuracy accordingly companys expectations short longterm future net revenues based large part estimate future demand firm customer orders addition company past received orders shipped substantial percentage total products sold particular quarter last several weeks quarter cases orders consisted distributor stocking orders company time provided special incentives distributors purchase minimum quantities required agreements company therefore company uncertain even quarter level revenues achieve quarter impact distributor stocking orders gross margins quarter subsequent quarters addition substantial percentage product sales occur end quarter product mix therefore gross margins quarter difficult predict company anticipates pattern sales continue future expense levels based part estimates since company limited ability reduce expenses quickly orders net revenues meet expectations particular period operating results would adversely affected addition seasonal demand may develop companys products future due foregoing factors likely future quarter companys operating results expectations public market analysts investors event price companys common stock would likely materially adversely affected liquidity capital resources december 31 1996 companys principal sources liquidity included cash equivalents 95 million shortterm investments 101 million 40 million revolving bank line credit silicon valley bank 33 million available december 31 1996 expires april 15 1997 company negotiating extension term line credit although assurance company successful extending term line credit line credit modified december 1995 currently provides borrowings lesser 40 million ii sum 80 eligible domestic government accounts receivable 50 eligible foreign accounts receivable minus sum aggregate outstanding face amount letters credit issued line eligible accounts receivable defined receivables outstanding less 90 days borrowings line bear interest banks prime rate plus 10 925 december 31 1996 collateralized substantially companys assets line credit facility contains provisions require maintenance certain financial ratios profitability requirements december 31 1996 company compliance covenants see note 8 notes consolidated financial statements company used cash operating activities totaling 23 million 33 million 23 million years ended 1994 1995 1996 respectively use cash 1994 1995 primarily attributable operating losses increased levels accounts receivable inventories partially offset increase accounts payable accrued liabilities use cash 1996 attributable increased levels accounts receivable inventories partially offset increase accounts payable accrued liabilities increase accounts receivable 1994 1995 primarily due increased revenues addition 1995 1996 increase accounts receivable impacted concentration sales late quarter resulting number factors including companys decision interrupt shipments showstation products sixweek period delays production shipment soundstation products companys transition new contract manufacturer 1995 introduction soundstation premier fourth quarter 1996 inventories increased last three years company built finished goods inventory audioconferencing product lines support increased sales levels raw materials inventory support introduction launch dataconferencing product line transfer soundstation product line manufacturing flextronics first quarter 1996 increase provision excess obsolete inventories 1996 directly related increased inventory levels company used 41000 35 million 91 million net cash investing activities 1994 1995 1996 respectively purchase property equipment 1995 1996 purchase shortterm investments financing activities provided 45 million 174 million net cash 1995 1996 respectively due primarily issuance preferred stock 1995 issuance common stock companys initial public offering 1996 financing activities used 28000 1994 due primarily repayment notes payable capital lease obligations offset part issuance notes payable company material commitments obligations revolving bank line credit facility operating leases company estimates 1997 capital expenditures approximately 45 million see notes 7 8 notes consolidated financial statements company may future require additional funds support working capital requirements purposes may seek raise additional funds public private equity financings sources assurance additional financing available financing obtainable terms favorable company would dilutive companys future liquidity cash requirements depend numerous factors including introduction new products potential product family technology acquisitions item 8item 7 managements discussion analysis financial condition results operations management discussion analysis financial condition results operations sections document contain forwardlooking statements based current expectations estimates projections companys industry managements beliefs assumptions made management words anticipates expects intends plans believes seeks estimates variations words similar expressions intended identify forwardlooking statements guarantees future performance subject certain risks uncertainties assumptions difficult predict therefore actual results may differ materially expressed forecasted forwardlooking statements risks uncertainties including potential flucuations results future growth rates successful launch manufacturing ramp viewstation showstation ip new products market acceptance viewstation showstation ip new products achievement product development deliverables associated second 3m agreement success 3m establishing maintaining channels viewstation showstation ip products profitability dataconferencing videoconferencing product lines dependence new products technological change uncertainties relating integration operations viavideo communications inc effects acquisition existing business partnerships dependence third party distributors risks associated international operations dependence research development competition dependence third party manufacturers dependence intellectual property proprietary rights dependence thirdparty licenses dependence personnel risks detailed time companys sec reports including quarterly reports form 10q quarters ended march 30 1997 june 29 1997 september 28 1997 companys current reports form 8k filed commission august 13 1997 september 9 1997 january 16 1998 unless required law company undertakes obligation update publicly forwardlooking statements whether result new information future events otherwise however investors carefully review risk factors information set forth reports documents company files time commission overview polycom incorporated december 1990 develop manufacture market audioconferencing dataconferencing videoconferencing products facilitate meetings distance polycom engaged principally research development inception september 1992 began volume shipments first audioconferencing product soundstation december 31 1997 polycoms audioconferencing product line consisted principally soundstation ex soundstation premier soundpoint polycom began shipping first dataconferencing product showstation november 1995 october 1997 polycom announced enhancements audio dataconferencing product lines first videoconferencing product viewstation discussed later section january 1998 company acquired outstanding shares viavideo communications inc stock transaction valued 54 million viavideo development stage company dedicated development videoconferencing equipment polycoms viewstation product comes result merger commenced first customer shipments first quarter 1998 polycom markets products domestically internationally network valueadded resellers vars original equipment manufacturers oems retailers also sells audioconferencing products direct sales force december 31 1997 polycom derived substantial majority net revenues sales soundstation products polycom anticipates sales soundstation product line continue account substantial majority net revenues least year ending december 31 1998 factor adversely affecting demand supply soundstation product line could materially adversely affect polycoms business financial condition cash flows results operations inception nine month period ended september 30 1995 company incurred losses operations primarily result investments development products expansion sales marketing manufacturing administrative organizations company achieved profitability fourth quarter 1995 generated small operating income quarter fiscal 1996 company incurred quarterly operating loss quarter 1997 company intends continue invest significantly research development plans operate operating loss breakeven results excluding acquisition expenses first quarter 1998 assurance company achieve operating plans achieve profitable operations subsequent period march 1997 polycom entered joint marketing development agreement first agreement 3m agreement 3m provided 30 million funding polycom certain deliverables related development next generation dataconferencing product also provide shared technology resources development future products december 31 1997 polycom recorded 30 million revenue 10 million first three quarters 1997 based delivery items specified contract amounts recognized revenue approximates amount would recognized using percentage completion methodology additionally polycom granted 3m exclusive privatelabel rights certain distribution channels products developed agreement subject certain minimum volumes 3m received warrants purchase 2000000 shares polycoms common stock exercise price 750 per share warrants expire march 1999 may extended march 2000 depending delivery polycoms first product developed agreement time grant warrants valued using blackscholes model determined value 40000 3m also certain rights first offer stock warrant agreement polycom give 3m right period 45 days effective time purchase additional shares polycom common stock purchase price 750 per share february 1998 3m exercised option purchased approximately one million shares polycom common stock consideration approximately 76 million result purchase 3m owns approximately 35 outstanding polycom common stock june 1997 polycom entered second joint marketing development agreement second agreement 3m agreement 3m expected provide 25 million funding polycom certain deliverables related development videoconferencing products may also provide shared technology resources development future products however order receive funding polycom must meet certain milestones outlined agreement assurance company meet milestones receive funding polycom receive funding 3m material adverse impact profitability company polycom grant 3m exclusive privatelabel rights certain distribution channels products developed agreement december 31 1997 polycom recognized revenue agreement mentioned june 1997 polycom signed agreement polycom would acquire viavideo acquisition viavideo adds videoconferencing product engineering team polycoms audioconferencing dataconferencing product portfolio december 1997 shareholders companies voted approve merger january 2 1998 merger became effective january 2 1998 terms agreement 87 million shares polycom common stock plus additional 11 million shares based option grants viavideo exchanged outstanding shares options viavideo transaction accounted pooling interests qualifies taxfree reorganization october 1997 polycom announced new set data video audioconferencing products add existing line dataconferencing market polycom announced new showstation ip product next generation conference room projector showstation ip targeted available north america first quarter 1998 europe asia pacific countrybycountry basis following several months videoconferencing arena polycom introduced new viewstation product family includes 128kbps version providing enhanced video performance 384kbps512kbps version provides premiumquality fullmotion video 128kbps version began shipping north america first quarter 1998 384kbps512kbps version targeted first customer ship date april 1998 audioconferencing market polycom introduced soundstation premier satellite unique enhanced system works conjunction polycoms soundstation premier conference phone soundstation premier satellite began shipping north america december 1997 assurance products yet commercially available polycoms targeted dates lack availability products materially affect polycoms financial results operations three years ended december 31 1997 following table sets forth percentage net revenues consolidated statement operations data periods indicated following table sets forth net revenues line business periods indicated amounts thousands net revenues total net revenues 1997 466 million increase 96 million 26 compared period 1996 audioconferencing net revenues 1997 86 million 27 compared 1996 increase due introduction new premier soundpoint product lines division partially offset price reductions soundstation product line soundstation unit sales increased period 1996 dataconferencing revenues 58 million 1997 versus 48 million 1996 increase due entirely revenue associated first agreement 3m offset significant showstation unit volume decreases net revenues increased 121 million 49 comparing 1996 1995 audioconferencing net revenues increased 35 322 million 1996 1995 increase primarily due increased unit sales resulting increased market acceptance polycoms audioconferencing product line lesser extent expansion polycoms north american international distribution networks offset part decline list price soundstation products dataconferencing net revenues increased 336 48 million 1996 compared 1995 increase due increased product shipments first dataconferencing products began shipping november 1995 net revenues prior time 1997 1996 1995 polycom derived substantial majority net revenues sales soundstation product family lucent technologies accounted 10 net revenues 1997 confertech accounted 11 net revenues 1995 customer reseller accounted 10 polycoms net revenues periods international net revenues accounted 23 24 total net revenues 1997 1996 1995 respectively see note 13 notes consolidated financial statements business segment information 1997 price reductions offset unit growth internationally 30 million revenue associated first 3m agreement offset product revenue growth companys international business reduction percentage international net revenues 1996 1995 resulted initial sales soundpoint soundstation premier product families introduced first north america polycom anticipates international sales continue account significant portion total net revenues foreseeable future however international net revenues may fluctuate future polycom introduces new products since polycom expects initially introduce products north america also additional time required product homologation regulatory approvals new products international markets additionally recent economic problems asian market could adversely offset companys profitability continues 1998 extent polycom unable expand international sales timely costeffective manner polycoms business financial condition results operations could adversely affected assurance polycom able maintain increase international market demand polycoms products date substantial majority polycoms international sales denominated us currency however polycom expects future international sales may denominated local currencies cost net revenues cost net revenues consists primarily polycoms manufacturing organization contract manufacturers tooling depreciation warranty expense allocation overhead expenses cost net revenues represented 54 net revenue 1997 compared 48 1996 audioconferencing cost net revenues percentage 50 1997 versus 39 1996 increase audioconferencing cost net revenue percentage primarily attributable 37 soundstation price reduction implemented north america january 1997 30 price reduction implemented international regions april 1997 also costs associated transitioning soundstation premier product manufacturing ims thailand introduction lower margin audio product contributed higher cost net revenues percentage dataconferencing cost net revenues 82 1997 compared 106 1996 dataconferencing division decrease cost net revenues percentage primarily due revenue received first agreement 3m low associated costs although polycoms dataconferencing division receive revenue associated deliverables first agreement 3m 1998 dataconferencing cost net revenues expected decrease 1998 due introduction next generation showstation product royalty revenue stream associated first agreement 3m comparing 1996 1995 cost net revenue percentage increased 48 1996 44 1995 audioconferencing cost net revenue percentage decreased 39 1996 42 1995 due cost reductions soundstation product line partially offset negative impact price reduction first quarter 1996 dataconferencing cost net revenues percentage increased 106 1996 84 1995 increase due higher costs associated manufacturing startup showstation product lower planned unit volume generated unfavorable manufacturing cost variances polycom expects overall cost net revenues percentage remain current levels 1998 cost net revenue percentage increases due increased sales lower margin audio products offset cost net revenue percentage decreases due increased royalty streams associated video data products 3m video revenue associated deliverables connected second agreement 3m expected recognized first half 1998 however assurances happen due significant dependence uncertain items royalty revenue stream manufacturing efficiencies subcontractors manufacturing purchased part variances warranty costs related new data video products timing sales within quarter 1998 cost net revenues percentage fluctuate significantly assurances achieving profitability targets due uncertainties polycoms historical price reductions driven polycoms desire expand market products polycom may reduce prices introduce new products carry higher costs order expand market respond competitive pricing pressures assurance actions polycom expand market products sufficient meet competitive pricing pressures future cost net revenue percentage may affected price competition changes unit volume shipments product cost warranty expenses cost net revenues percentage may also impacted mix distribution channels used polycom mix products sold mix international versus north american revenues polycom typically realizes lower cost net revenue percentages direct sales indirect channels sales resellers especially oems increase percentage total revenues polycoms cost net revenues percentage adversely impacted june 1997 polycom began manufacturing soundstation products manufacturing contractor based thailand third quarter 1997 manufacturer also began producing premier product family although transition manufacturing process thailand manufacturer caused unfavorable cost variance initial phase polycom realized lower audioconferencing cost net revenues fourth quarter 1997 primarily soundstation premier product families expects trend continue products although assurances occur additionally july 1997 polycom moved distribution product repair center new location livermore california move expected provide polycom better control distribution repair activities may improve overall warranty service costs although assurances happen sales marketing expenses increase absolute dollars 1997 1996 primarily related expansion polycoms sales marketing organization primarily direct sales force associated costs increased commission expenses related higher sales volumes additionally compliance joint services agreement viavideo polycom incurred billed credit expense charges related marketing work done behalf viavideo 1996 sales marketing expense increase related launch polycoms dataconferencing business polycom expects continue increase sales marketing expenses absolute dollar amounts effort expand north american international markets market new products establish expand distribution channels particular due innovative nature showstation ip viewstation products polycom believes required incur significant additional expenses sales marketing including advertising educate potential customers desirability products due uncertainties concerning service support requirements showstation ip viewstation products polycom may experience higher customer support charges future also compensation benefits new vice president marketing cause increase marketing sales expense future also company likely incur additional expenses related liquidation showstation product latin america due large part merger viavideo sales marketing expenses increase absolute dollars percentage net revenues materially adversely affect profitability polycom research development expenses research development expenses consist primarily compensation costs outside services consulting fees allocation overhead expense supplies depreciation increase dollar amount research development expenses 1997 1996 primarily attributable increased staffing associated support required expand enhance polycoms dataconferencing audioconferencing product lines december 31 1997 research development costs expensed incurred also compliance joint services agreement viavideo polycom incurred billed credit expense charges related development work done behalf viavideo polycom believes technological leadership critical success committed continuing high level research development consequently polycom intends increase research development expenses absolute dollars future due large part merger viavideo research development expenses increase absolute dollars percentage net revenues materially adversely affect profitability polycom general administrative expenses general administrative expenses consist primarily compensation costs allocation overhead expense outside legal accounting expenses increase dollar amount 1997 1996 primarily due increased staffing including hiring president beginning 1997 support polycoms growth 1996 costs related patent litigation polycom believes general administrative expenses increase absolute dollar amounts future primarily result expansion polycoms administrative staff infrastructure additional information technology improvements support larger company due large part merger viavideo addition management staff general administrative expenses increase absolute dollars percentage net revenues materially adversely affect profitability polycom acquisition expenses 1997 polycom incurred expenses totaling 06 million related acquisition viavideo significant portion charges outside legal accounting consulting services assurances polycom incur additional acquisition related charges subsequent quarters associated merger viavideo management successful efforts integrate operations acquired company significant risks associated acquisition viavideo including limited difficulties generating enough videoconferencing revenue offset substantial operating expenses associated product family ii difficulties integration companies iii difficulties maintaining revenue levels product transitions iv difficulties delays achieving product technology integration benefits v increased competition videoconferencing companies acquisition relates company early stage development result polycom believes increases costs net revenues operating expenses associated development integration technologies near term greatly exceed associated increases net revenues adverse impact operating results income expense provision income taxes interest income consists interest earned polycoms cash equivalents shortterm investments interest expense polycoms bank debt facilities interest income net interest expense 10 million 08 million 02 million 1997 1996 1995 respectively increase 1997 due increase polycoms cash equivalents shortterm investments result initial public offering second quarter 1996 addition interest expense recorded 1997 insignificant due reduction debt initial public offering increase interest income net interest expense 1996 1995 primarily due increase polycoms cash equivalents shortterm investments resulting polycoms initial public offering polycom accounts income taxes accordance financial accounting standards boards statement financial accounting standards 109 accounting income taxes 1997 1996 polycom provided income tax 171000 108000 respectively federal certain foreign alternative minimum taxes polycom incurred net loss consequently paid federal state income taxes 1995 1998 beyond polycom targeting realize increasingly profitable results generate significantly higher federal state income tax expense although assurance polycom achieve profitable results december 31 1997 polycom approximately 41 million federal net operating loss carryforwards 14 million federal tax credit carryforwards future utilization polycoms net operating loss carryforwards may subject certain limitations upon certain changes ownership polycom believes initial public offering april 29 1996 triggered change ownership pursuant internal revenue code 1986 amended annual limitation utilization federal net operating loss carryforwards approximately 71 million viavideo acquisition may trigger additional limitation 1998 polycom established valuation allowance deferred tax assets due uncertainty surrounding realization assets management evaluates quarterly basis recoverability deferred tax assets level valuation allowance time determined likely deferred tax assets realizable valuation allowance appropriately reduced see note 11 notes consolidated financial statements factors affecting future operations polycoms net revenues grown primarily increased market acceptance established audioconferencing product line new product introductions expansion polycoms north american international distribution networks polycom experienced growth net revenues recent quarters believe historical growth rates net revenues sustainable indicative future operating results example polycom believes 37 price reduction north american list price soundstation product line effective december 1996 resellers january 1997 end user customers 30 price reduction soundstation products sold internationally effective april 1997 negatively impacted polycoms net revenues profitability 1997 continue negatively impact net revenues profitability throughout 1998 polycom believes profitability could continue negatively affected future result several factors including low negative gross margins polycoms showstation ip dataconferencing products viewstation videoconferencing product inventory value loss related showstation inventory determined units cannot sold least carrying cost reduction list prices soundstation product line introduction lower margin soundpoint desktop product line continuing competitive price pressure audioconferencing dataconferencing markets although price reductions driven polycoms desire expand market products polycom expects future may reduce prices introduce new products carry lower margins order expand market respond competitive pricing pressures assurance actions polycom expand market products sufficient meet competitive pricing pressures addition costs related merger viavideo integration polycom expense growth related activities combined entities costs related introduction new showstation ip viewstation soundstation satellite products could negatively impact future profitability also impacts pending future litigation polycom viavideo including suit filed vtel viavideo mentioned polycoms form 8k filed september 9 1997 suit filed datapoint discussed polycoms form 8k filed january 2 1998 difficult predict time polycoms limited operating history limited resources among factors make prediction future operating results difficult impossible past polycom experienced delays time introduction certain new products enhancements expects delays may occur future instance introduction showstation delayed approximately eighteen months originally anticipated date introduction unforeseen technical challenges difficulties building core technologies approximately nine weeks first quarter 1996 shipments interrupted order correct software technical problems identified initial customers addition soundstation premier first customer shipments delayed original shipment target september 1996 november 1996 showstation ip delayed september 1997 targeted first customer shipment date february 1998 viewstation delayed december 1997 february 1998 due engineering manufacturing startup issues similar delays could material adverse effect polycoms results operations polycoms operating results fluctuated past may fluctuate future result number factors including market acceptance next generation showstation products viewstation new product introductions product enhancements polycom competitors prices polycoms competitors products mix products sold mix products sold directly resellers fluctuations level international sales cost availability components manufacturing costs level cost warranty claims changes polycoms distribution network level royalties third parties changes general economic conditions addition competitive pressure pricing given quarter could adversely affect polycoms operating results period price pressure extended period could materially adversely affect polycoms longterm profitability polycoms ability maintain increase net revenues depend upon ability increase unit sales volumes soundstation premier soundpoint families audioconferencing products dataconferencing line products currently comprised showstation products first videoconferencing product viewstation new products product enhancements assurance polycom able increase unit sales volumes existing products introduce sell new products reduce costs percentage net revenues polycom typically ships products within short time receipt order historically significant backlog however backlog may fluctuate significantly period result backlog point time good indicator future net revenues net revenues particular quarter cannot predicted degree accuracy accordingly polycoms expectations short longterm future net revenues based large part estimate future demand firm customer orders addition polycom past received orders shipped substantial percentage total products sold particular quarter last several weeks quarter cases orders consisted distributor stocking orders polycom time provided special incentives distributors purchase minimum quantities required agreements polycom therefore polycom uncertain throughout quarter level revenues achieve quarter impact distributor stocking orders revenues profitability quarter subsequent quarters addition substantial percentage product sales occur end quarter product mix therefore profitability difficult predict guarantee polycoms contract manufacturers able meet product demand quarter ends polycom anticipates pattern sales may continue future exception company may reduce ultimately eliminate end quarter incentives offered distributors company chooses eliminate reduced stocking incentive programs particularly associated audioconferencing sales quarterly revenue may materially adversely affected expense levels based part estimates since polycom limited ability reduce expenses quickly orders net revenues meet expectations particular period operating results would adversely affected addition seasonal demand may develop polycoms products future due foregoing factors likely future quarter polycoms operating results expectations public market analysts investors event price polycoms common stock would likely materially adversely affected polycom significant inventory monochrome showstation products plans sell latin america next several quarters assurance polycom successful sale products failure successfully sell inventory would material adverse effect polycoms business financial condition results operations markets videoconferencing products characterized changing technology evolving industry standards frequent new product introductions success polycoms new videoconferencing products dependent several factors including proper new product definition product cost timely completion introduction new products differentiation new products polycoms competitors market acceptance products polycom attempting address need develop new products internal development efforts joint developments companies assurance polycom successfully identify new videoconferencing product opportunities develop bring new videoconferencing products market timely manner videoconferencing products technologies developed others render polycoms videoconferencing products technologies obsolete noncompetitive failure polycoms new videoconferencing products development efforts would material adverse effect polycoms business financial condition results operations polycom completed acquisition viavideo communications inc january 2 1998 polycom acquired viavideo expectation acquisition would result operating strategic benefits including operating cost reductions product development marketing sales synergies operations viavideo successfully combined polycom coordinated timely efficient manner polycoms business financial condition results operations would materially adversely effected integration viavideos product offerings operations polycoms product offerings operations coordination viavideos sales marketing efforts polycom require substantial attention management diversion attention management difficulties encountered transition process could material adverse affect polycoms business financial condition results operations difficulties assimilation may increased necessity integrating personnel disparate business backgrounds combining two different corporate cultures addition process combining two organizations could cause interruption loss momentum activities either companies businesses could adverse effect combined operations result acquisition polycoms operating expenses increase absolute dollars expected revenues viavideo products occur later amount less expected higher operating expenses could material adverse affect business financial condition results operations polycom failure achieve anticipated benefits acquisition successfully integrate operations companies could material adverse effect upon business operating results financial condition polycom additionlly assurance polycom incur additional material charges future quarters reflect additional costs associated acquisition could cause customers potential customers polycom viavideo delay cancel orders products result customer concerns uncertainty product evolution integration support viavideos products polycoms products delay cancellation orders could material adverse effect business financial condition results operations polycom picturetel entered agreements whereby picturetel resells polycoms showstation products supplies polycoms soundpoint products producers videoconferencing products polycom agreements picturetel regarding resale supply polycoms videoconferencing products polycom picturetel also competitors teleconferencing market assurance picturetel enter future agreements resell supply new enhanced teleconferencing products development viavideo expected directly competitive picturetel products thus competition picturetel polycom likely increase resulting strain existing relationship companies could material adverse effect business financial condition results operations polycom polycoms operations vulnerable interruption fire earthquake power loss telecommunications failure events beyond polycoms control additionally polycoms operations currently located san francisco bay area susceptible earthquakes polycom carry sufficient business interruption insurance compensate polycom losses may occur losses damages incurred polycom could material adverse effect business financial condition operating results liquidity capital resources three years ended december 31 1997 december 31 1997 polycoms principal sources liquidity included cash equivalents 113 million shortterm investments 52 million additionally october 17 1997 company reestablished 50 million revolving bank line credit silicon valley bank line credit allows additional facility 50 million available upon request company contingent upon payment associated fees line credit facility contains provisions require maintenance certain financial ratios profitability requirements december 31 1997 polycom compliance covenants see note 8 notes consolidated financial statements polycom used cash operating activities totaling 10 million 23 million 33 million years ended 1997 1996 1995 respectively improvement cash operating activities due primarily improved collections accounts receivable larger accounts payable balances offset somewhat lower profitability considering noncash items depreciation 1997 compared 1996 larger increase current assets primarily related receivables polycoms contracted manufacturers comparing 1996 1995 improvement cash operating activities due higher profitability considering noncash items lower increases inventory offset larger increases accounts receivable smaller increases accounts payable total net change cash equivalents 1997 increase 17 million primary sources cash 49 million proceeds sales investments net purchases net proceeds issuance common stock 04 million primary uses cash 1997 purchases property plant equipment 27 million cash used operating activities 10 million use cash operating activities result higher accounts receivable due larger portion revenue realized end year higher inventory levels higher current assets primarily related receivables polycoms contracted manufacturers offset somewhat higher accounts payable positive net income considering noncash expenses depreciation polycom material commitments obligations revolving bank line credit facility sw licensing agreement operating leases see notes 7 8 notes consolidated financial statements polycom may future require additional funds support working capital requirements purposes may seek raise additional funds public private equity financings sources assurance additional financing available financing obtainable terms favorable polycom would dilutive polycoms future liquidity cash requirements depend numerous factors including introduction new products potential product family technology outright acquisitions recent accounting pronouncements june 1997 fasb issued sfas 130 reporting comprehensive income sfas 130 establishes standards reporting display comprehensive income components full set generalpurpose financial statements comprehensive income defined change equity business enterprise period transactions events circumstances nonowner sources impact adopting sfas 130 effective polycom 1998 determined june 1997 fasb issued sfas 131 disclosures segments enterprise related information sfas 131 requires publiclyheld companies report financial information key revenueproducing segments entity information available utilized chief operation decision maker specific information reported individual segments includes profit loss certain revenue expense items total assets reconciliation segment financial information amounts reported financial statements would provided sfas 131 effective polycom 1998 impact adoption determined item 8item 7 managements discussion analysis financial condition results operations management discussion analysis financial condition results operations sections document contain forwardlooking statements based current expectations estimates projections companys industry managements beliefs assumptions made management words anticipates expects intends plans believes seeks estimates targets variations words similar expressions intended identify forwardlooking statements guarantees future performance subject certain risks uncertainties assumptions difficult impossible predict therefore actual results may differ materially expressed forecasted forwardlooking statements risks uncertainties include potential fluctuations results future growth rates successful launch new products manufacturing ramp viewstation showstation ip webstation meetingsite new products market acceptance viewstation showstation ip webstation soundpoint pro meetingsite new products success 3m establishing maintaining channels viewstation product line showstation ip products sales soundpoint product given introduction soundpoint pro ongoing success 3m royalty relationship profitability even positive gross margin dataconferencing product line dependence new products technological change uncertainties relating integration operations viavideo communications inc effects acquisition existing business partnerships dependence third party distributors risks associated international operations dependence research development existing new competition dependence third party manufacturers solesource suppliers dependence intellectual property proprietary rights dependence thirdparty licenses dependence personnel impact legal proceedings involving vtel successful expansion companys infrastructure support recent future anticipated growth timely resolution year 2000 issue company customers suppliers risks detailed time companys sec reports including companys current report forms 8k filed commission january 16 1998 july 22 1998 quarterly report forms 10q filed commission may 19 1998 period ended march 31 1998 august 19 1998 period ended june 30 1998 november 16 1998 period ended september 30 1998 unless required law company undertakes obligation update publicly forwardlooking statements whether result new information future events otherwise however investors carefully review risk factors information set forth reports documents company files time commission overview polycom incorporated december 1990 develop manufacture market conferencing products facilitate meetings distance polycom engaged principally research development inception september 1992 began volume shipments first audioconferencing product soundstation december 31 1998 polycoms audioconferencing product line consisted principally soundstation ex soundstation premier soundstation premier ex soundpoint pro polycom began shipping first dataconferencing product showstation november 1995 march 1998 polycom began shipments next generation showstation ip december 31 1998 polycoms dataconferencing product line consisted principally showstation ip webstation january 2 1998 company completed acquisition viavideo communications inc viavideo development stage company designed developed high quality low cost easytouse group videoconferencing systems utilize advanced video audio compression technologies along internetwebbased features february 1998 polycom began customer shipments viewstation 128 first videoconferencing product december 31 1998 polycoms videoconferencing product line consisted principally viewstation 128 viewstation 512 viewstation v35 viewstation mp september 1998 company began shipping meetingsite product multipoint conferencing unit mcu product provides connectability large multipoint videoconference calls polycom markets products domestically internationally network valueadded resellers vars original equipment manufacturers oems retailers company also sells audioconferencing products direct sales force effective january 1999 direct sales force also began selling dataconferencing product line december 31 1998 polycom derived majority net revenues sales soundstation viewstation products polycom anticipates sales soundstation viewstation product lines continue account significant portion companys net revenues least year ending december 31 1999 factor adversely affecting demand supply products would materially adversely affect polycoms business financial condition cash flows results operations inception nine month period ended september 30 1995 company incurred losses operations primarily result investments development products expansion sales marketing manufacturing administrative organizations company achieved profitability fourth quarter 1995 generated net income fiscal 1996 company incurred quarterly operating loss quarter 1997 result investments next generation dataconferencing product videoconferencing product line sales marketing function company intends continue invest significantly research development sales marketing companys infrastructure 1999 although polycom plans generate operating income 1999 limited history profitability company additionally polycoms profitability dependent market acceptance profitability relatively small amount products assurance company achieve operating plans achieve profitable operations subsequent period march 1997 polycom entered joint marketing development agreement first agreement 3m agreement 3m provided 30 million funding polycom certain deliverables related development showstation ip may also provide shared technology resources development future products polycom recorded 30 million revenue 10 million first three quarters 1997 based delivery items specified contract amounts recognized revenue using percentage completion methodology additionally polycom granted 3m exclusive privatelabel rights distribution rights certain distribution channels products developed agreement subject certain minimum volumes effective january 1999 however 3m longer exclusive distribution rights 3m received warrants purchase 2000000 shares polycoms common stock exercise price 750 per share march 1999 3m exercised warrants purchased 2000000 shares polycoms common stock time grant warrants valued using blackscholes model determined value 40000 3m also granted certain rights first offer stock warrant agreement polycom gave 3m right purchase additional shares polycom common stock purchase price 750 per share february 1998 3m exercised option purchased approximately one million shares polycom common stock consideration approximately 76 million exercise warrants right first offer expired march 12 1999 3m owned approximately 9 outstanding polycom common stock june 1997 company entered second joint marketing development agreement second agreement 3m agreement 3m provided 25 million funding polycom certain deliverables related development videoconferencing products may also provide shared technology resources development future products polycom granted 3m exclusive privatelabel rights distribution rights certain distribution channels products developed agreement subject certain minimum volumes three months ended march 31 1998 three months ended june 30 1998 company received recognized revenue 15 million 10 million respectively agreement using percentage completion methodology july 21 1998 company announced robert c hagerty previously polycoms president coo appointed role president ceo brian l hinman formerly chairman ceo continues chairman board directors results operations three years ended december 31 1998 following table sets forth percentage net revenues consolidated statement operations data periods indicated net revenues total net revenues 1998 1117 million increase 651 million 140 compared 1997 increase due large part revenues videoconferencing products part prior year revenue stream additionally audioconferencing product line sales volume increases primarily north america also contributed revenue growth 1998 company recorded 25 million revenue relating second agreement 3m 1998 3m revenue compares 30 million 1997 revenue associated first agreement 3m total net revenues 1997 466 million increase 96 million 26 compared 1996 increase due unit volume increases soundstation period 1996 introduction new premier soundpoint product lines 1997 revenue 1997 associated first agreement 3m increases partially offset price reductions soundstation product line showstation unit volume decreases 1998 1997 1996 polycom derived substantial majority net revenues sales soundstation viewstation product families one customer accounted 11 10 net revenues 1998 1997 respectively customer reseller accounted 10 polycoms net revenues periods international net revenues accounted 24 23 total net revenues 1998 1997 1996 respectively see note 14 notes consolidated financial statements business segment information 1998 volume increases international regions primarily europe contributed increase percentage international revenue 1997 price reductions 30 million domestic revenue associated first 3m agreement offset unit growth companys international business company anticipates international sales continue account significant portion total net revenues foreseeable future international sales subject certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations longer payment cycles problems collecting accounts receivable potentially adverse tax consequences additionally international net revenues may fluctuate percentage net revenues future company introduces new products since company expects initially introduce products north america also additional time required product homologation regulatory approvals new products international markets also ongoing economic problems asian latin american markets could adversely affect companys profitability economic problems continue company plans expand operations europe middle east africa region 1999 expansion marketing administrative functions could initially divert managements attention sales effort could materially adversely affect revenue growth region extent company unable expand international sales timely costeffective manner companys business financial condition results operations could materially adversely affected assurance company able maintain increase international market demand companys products date substantial majority companys international sales denominated us currency however company expects future international sales may denominated local currencies therefore subject currency fluctuation risks beginning january 1 1999 participating member countries european union agreed adopt european currency unit euro common legal currency date established fixed conversion rates existing sovereign currencies euro establishment euro significant impact polycom since substantial majority companys international sales denominated us currency cost net revenues cost net revenues consists primarily contract manufacturer costs including material direct labor polycoms manufacturing organization tooling depreciation warranty expense allocation overhead expenses cost net revenues represented 49 net revenues 1998 compared 54 1997 improvement cost 1997 attributable favorable product mix royalty revenues associated costs favorable material price improvements favorable manufacturing variances related increased production levels comparing 1997 1996 cost net revenues represented 54 net revenues 1997 versus 48 1996 increase cost net revenues percentage primarily attributable 37 soundstation price reduction implemented north america january 1997 30 soundstation price reduction implemented international regions april 1997 also costs associated transitioning soundstation premier product manufacturing celestica formerly ims thailand introduction lower margin audio product contributed higher 1997 cost net revenues percentage increases offset revenue received first agreement 3m low associated costs forecasting future gross margin percentages difficult polycom expects overall cost net revenues percentage remain current levels 1999 however assurances happen example uncertainties surrounding competition changes technology changes product mix royalty revenue stream manufacturing efficiencies subcontractors manufacturing purchased part variances warranty costs timing sales within quarter 1999 cause cost net revenues percentage fluctuate significantly additionally gross margins associated showstation ip soundpoint pro lower targeted gross margins total product portfolio yet gross margins webstation closer targeted gross margins contribution products 1999 significant impact companys overall gross margins assurances achieving profitability targets due uncertainties polycoms historical price reductions driven polycoms desire expand market products polycom may reduce prices introduce new products carry higher costs order expand market respond competitive pricing pressures assurance actions polycom expand market products sufficient meet competitive pricing pressures future cost net revenue percentage may affected price competition changes unit volume shipments product cost warranty expenses cost net revenues percentage may also impacted mix distribution channels used polycom mix products sold mix international versus north american revenues polycom typically realizes lower cost net revenue percentages direct sales indirect channels sales resellers especially oems increase percentage total revenues polycoms cost net revenues percentage would materially adversely impacted sales marketing expenses increase sales marketing expenses absolute dollars 1998 1997 primarily related increased investment videoconferencing sales effort mentioned previously company began selling viewstation products 1998 consequently little sales marketing expense 1997 associated products additionally increases audioconferencing sales efforts 1998 also contributed overall increase 1997 comparing 1997 1996 sales marketing expense increase related launch polycoms dataconferencing videoconferencing products company expects continue increase sales marketing expenses absolute dollar amounts effort expand north american international markets market new products establish expand distribution channels particular due innovative nature showstation ip webstation viewstation products meetingsite product company believes required incur significant additional expenses sales marketing especially advertising educate potential customers desirability products addition company currently making significant investment european market decentralize marketing sales effort region thereby increasing absolute dollars spent area also launch meetingsite product multipoint conferencing unit mcu product provides connectability large multipoint videoconference calls cause increase companys sales marketing expenses additionally mcu market new polycom significant investments may need made become successful polycom currently expanding service organization provide expanded improved support video data multipoint conferencing products increase companys sales marketing expenses research development expenses research development expenses consist primarily compensation costs consulting fees allocation overhead expense supplies depreciation expense decrease 1998 compared 1997 primarily attributable higher development expenses showstation ip viewstation products 1997 resulted initial launch products early 1998 remainder 1998 development charges products normalized decreases offset somewhat increases related audioconferencing product line increase dollar amount research development expenses 1997 1996 primarily attributable increased staffing associated support required expand enhance polycoms dataconferencing videoconferencing product lines december 31 1998 research development costs expensed incurred company believes technological leadership critical success committed continuing high level research development consequently company intends increase research development expenses absolute dollars future general administrative expenses general administrative expenses consist primarily compensation costs allocation overhead expense outside legal accounting expenses decrease general administrative expenses 1998 compared 1997 due lower legal expenses associated vtel datapoint lawsuits decrease offset increases related increased staffing infrastructure support companys growth additionally third quarter 1998 company reversed contingency reserve associated datapoint litigation resolved favorably quarter increase dollar amount 1997 1996 primarily due increased staffing including hiring president beginning 1997 support polycoms growth company believes general administrative expenses increase absolute dollar amounts future primarily result expansion companys administrative staff costs related supporting larger company additional charges include expenses related new information system infrastructure charges related investments made europe acquisition expenses company incurred expenses totaling 02 million 06 million 1998 1997 respectively related acquisition viavideo significant portion charges outside legal accounting consulting services management anticipate material viavideo acquisition related expenses however assurances expenses related acquisition activity incurred material income expense provision income taxes interest income consists interest earned polycoms cash equivalents shortterm investments interest expense polycoms bank debt facilities interest income net interest expense 09 million 12 million 08 million 1998 1997 1996 respectively fluctuations interest income net due primarily changes average cash balances throughout year polycom accounts income taxes accordance financial accounting standards boards statement financial accounting standards 109 accounting income taxes 1998 1997 1996 polycoms provision income taxes 17 million 02 million 01 million respectively provision income taxes 1997 1996 primarily federal alternative minimum certain foreign taxes december 31 1998 polycom approximately 73 million federal net operating loss carryforwards 04 million federal tax credit carryforwards well deferred tax assets arising timing differences polycom established valuation allowance portion deferred tax assets due uncertainty surrounding realization assets given companys recent return profitability strong competition picturetel largest competitor videoconferencing market lack backlog sales cycle management evaluates quarterly basis recoverability deferred tax assets level valuation allowance accordingly valuation allowance may change based upon companys financial performance market condition time determined likely deferred tax assets realizable valuation allowance appropriately reduced see note 12 notes consolidated financial statements year 2000 many currently installed computer systems software products coded accept two digit entries date code field year 2000 approaches code fields need accept four digit entries distinguish years beginning 19 beginning 20 result less one year computer systems andor software products used many companies may need upgraded comply year 2000 requirements company currently expending resources review internal use software order identify modify systems year 2000 compliant companys products services already reviewed certified year 2000 compliant costs associated effort may incremental company also represent reallocation existing resources addition company initiated project replace current internal business information system effort also address year 2000 issues legacy system internal system implementation effort principally conducted improve operating efficiencies polycom takes seriously potential issues could arise due year 2000 impact internal systems facilities suppliers connection year 2000 initiative company working assure internal systems facilities suppliers year 2000 compliant advance january 1 2000 schedule program percentage tasks complete follows results assessments date 100 polycom product year 2000 compliant inventoried internal systems 42 year 2000 compliant 26 require upgrade 7 require replacement 25 require completion assessment company early phases year 2000 initiative efforts required become year 2000 compliant fully identified therefore company know total costs associated correcting year 2000 problem company believes however unlikely experience material adverse impact financial condition results operations due year 2000 compliance issues costs related year 2000 issue incurred date insignificant less 30000 expensed incurred budget 150000 established software hardware upgrades replacement internal business information system funded separate budget costs associated year 2000 project expensed incurred additionally company expects fund year 2000 project cash generated operations however since assessment process ongoing year 2000 complications fully known potential liability issues clear full potential impact year 2000 company known time mentioned polycom begun efforts business systems replacement project new system make companys business computer systems fully year 2000 compliant scheduled completion end 1999 contingency plan developed make systems scheduled replaced year 2000 compliant decision implement contingency plan would made later middle 1999 completion end 1999 contingency plan would invoked determined material risk exists business systems replacement project would slip beyond end 1999 date significant projects delayed due year 2000 project expected significant project delayed future current year 2000 plan meets compliance objectives significantly change however events occur require company implement year 2000 contingency plan new business system implementation may delayed three six months expected material impact company polycom highly dependent performance services key suppliers companys banking institutions manufacturing partners communications suppliers due general uncertainty year 2000 readiness suppliers services company unable determine time whether risk associated year 2000 readiness companys suppliers consequences year 2000 failures part said suppliers would material adverse affect companys results operations liquidity financial condition unlikely failure correct material year 2000 problem result interruption failure certain normal business activities operations although significant efforts would required year 2000 problem business activities operations could accommodated manual efforts short term company believes completion year 2000 compliance project implementation new business systems scheduled possibility significant interruptions normal operations reduced however companys assumptions estimates incorrect come fruition company achieve key factors associated companys efforts comply year 2000 requirements companys results operations liquidity financial position could materially adversely affected liquidity capital resources three years ended december 31 1998 december 31 1998 polycoms principal sources liquidity included cash equivalents 175 million shortterm investments 55 million additionally company established 50 million revolving bank line credit silicon valley bank line credit allows additional facility 50 million available upon request company contingent upon payment associated fees line credit facility contains provisions require maintenance certain financial ratios profitability requirements december 31 1998 polycom compliance covenants see note 9 notes consolidated financial statements polycom used cash operating activities totaling 05 million 87 million 25 million years ended 1998 1997 1996 respectively improvement cash operating activities 1998 1997 due primarily improvement net income noncash items smaller increase accounts payable accrued liabilities offset somewhat growth receivables inventory comparing 1997 1996 decline cash operating activities due net loss considering noncash items compared net income 1996 offset somewhat increase accounts payable accrued liabilities total net change cash equivalents 1998 increase 51 million primary sources cash 119 million proceeds issuance stock mainly purchase stock worth 76 million 3m primary uses cash 1998 purchases property plant equipment 54 million cash used operating activities 05 million use cash operating activities primarily result higher accounts receivable due larger portion revenue realized end year higher inventory levels offset somewhat positive net income considering noncash expenses depreciation higher accounts payable accrued liabilities companys material commitments consist obligations revolving bank line credit operating leases 300000 standby letter credit issued guarantee certain companys contractual obligations company also maintains time commercial letters credit payments importation certain products amounts exceed 100000 outstanding less 120 days see notes 8 9 notes consolidated financial statements company believes available cash equivalents shortterm investments bank line credit sufficient meet companys operating expenses capital requirements least december 31 1999 however cannot determined degree certainty successful company growing market products substantial growth result company goes beyond current acceptable liquidity levels financial results violate financial covenants bank line credit polycom may require additional funds support working capital requirements purposes acquisitions competitive reasons may seek raise additional funds public private equity financing sources assurance additional financing available financing obtainable terms favorable company would dilutive companys future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology recent accounting pronouncements march 1998 american institute certified public accountants issued statement position sop 981 software internal use provides guidance accounting cost computer software developed obtained internal use sop 981 effective financial statements fiscal years beginning december 15 1998 company expect adoption sop 981 material impact consolidated financial statements june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 company required adopt sfas 133 fiscal 2000 sfas 133 established methods accounting derivative financial instruments hedging activities related instruments well hedging activities company yet determined effect sfas 133 operations financial position company factors affecting future operations polycoms net revenues grown primarily increased market acceptance established soundstation premier initial acceptance viewstation product lines new product introductions expansion polycoms north american international distribution networks polycom experienced growth net revenues recent quarters believe historical growth rates net revenues sustainable indicative future operating results example polycom believes 37 price reduction north american list price soundstation product line effective december 1996 resellers january 1997 enduser customers 30 price reduction soundstation products sold internationally effective april 1997 negatively impacted polycoms net revenues profitability 1997 additionally company lowered price showstation ip 23 effective march 1999 due market acceptance issues product recent growth rates audio video product sales channels endusers significant future growth rates may achieve levels success would material adverse affect polycoms revenue growth profitability polycom believes profitability could continue negatively affected future result several factors including low negative gross margins showstation ip continuing competitive price pressure conferencing equipment market although price reductions driven polycoms desire expand market products polycom expects future may reduce prices introduce new products carry lower margins order expand market respond competitive pricing pressures assurance actions polycom expand market products sufficient meet competitive pricing pressures additionally webstation product materially negatively affects future sales showstation ip companys total revenue could significantly adversely affected could create excess obsolescence issue concerning showstation ip inventory could materially adversely affect companys profitability similarly soundpoint pro product materially negatively affects future sales soundpoint product companys total revenue could significantly adversely affected could create excess obsolescence issue concerning soundpoint inventory could materially adversely affect companys profitability addition costs related merger viavideo integration polycom expense growth related activities combined entities could negatively impact future profitability costs related introduction new showstation ip viewstation soundstation satellite webstation meetingsite soundpoint pro products could also negatively impact future profitability also impacts pending future litigation polycom viavideo including suit filed vtel viavideo mentioned polycoms form 8k filed september 9 1997 beyond already provided companys balance sheet december 31 1998 difficult predict time polycoms limited operating history limited resources among factors make prediction future operating results difficult impossible past polycom experienced delays time introduction certain new products enhancements believes delays may occur future instance introduction showstation delayed approximately eighteen months originally anticipated date introduction unforeseen technical challenges difficulties building core technologies approximately nine weeks first quarter 1996 shipments interrupted order correct software technical problems identified initial customers addition soundstation premier first customer shipments delayed original shipment target september 1996 november 1996 showstation ip delayed original shipment target september 1997 first customer shipment date march 1998 due engineering manufacturing startup issues polycom also experienced delays introducing webstation viewstation mp 1998 original expected release dates similar delays future could material adverse effect polycoms results operations polycoms operating results fluctuated past may fluctuate future result number factors including market acceptance viewstation soundpoint pro webstation showstation ip meetingsite new product introductions product enhancements polycom competitors prices polycoms competitors products mix products sold mix products sold directly resellers fluctuations level international sales cost availability components manufacturing costs level cost warranty claims changes polycoms distribution network level royalties third parties changes general economic conditions addition competitive pressure pricing demand levels given quarter could adversely affect polycoms operating results period price pressure extended period could materially adversely affect polycoms longterm profitability polycoms ability maintain increase net revenues depend upon ability increase unit sales volumes soundstation premier soundpoint families products showstation webstation line products viewstation product line new products product enhancements assurance polycom able increase unit sales volumes existing products introduce sell new products reduce costs percentage net revenues 1998 polycom began marketing selling meetingsite product multipoint conference product manufactured lucent technologies polycom reselling lucents product gross margins business significantly lower rest polycoms product portfolio additionally product new polycom significant investments marketing sales service areas may need made successfully sell product guarantee mcu business ever profitable polycom typically ships products within short time receipt order historically material backlog fluctuates significantly period result backlog point time good indicator future net revenues net revenues particular quarter cannot predicted degree accuracy accordingly polycoms expectations short longterm future net revenues based almost exclusively estimate future demand firm customer orders addition polycom typically receives orders ships substantial percentage total products sold particular quarter last weeks quarter often orders consist distributor stocking orders typically quarter polycom provided special incentives distributors purchase minimum quantities required agreements polycom additionally majority polycoms net revenues sales resellers sell products end users resellers unable sell inventory polycom products given quarter could affect volume polycoms sales resellers future quarters especially true new product channel shipments viewstation 512 viewstation v35 viewstation mp webstation shipments fourth quarter 1998 polycom depends significantly sales resellers many undercapitalized yet carry multiple polycom product lines failure business establish sustain profitability could significantly affect future revenue levels polycom also since substantial portion polycoms orders received shipped within last weeks quarter polycom supplier major customers subject business interruption example natural disaster last weeks quarter would material adverse impact polycoms results operations financial condition result factors polycom uncertain throughout quarter level revenues achieve quarter impact distributor stocking orders revenues profitability quarter subsequent quarters addition substantial percentage product sales occur end quarter product mix therefore profitability difficult impossible predict company depends thirdparty resellers substantial portion revenue certain thirdparty resellers also act resellers competitors company devote greater effort resources marketing competitive products loss certain thirdparty resellers could material adverse effect companys business results operations guarantee polycoms contract manufacturers able meet product demand given quarter ends polycom anticipates pattern sales may continue future exception company may reduce ultimately eliminate endofquarter incentives offered distributors company chooses eliminate reduce stocking incentive programs quarterly revenue may materially adversely affected expense levels based part estimates since polycom limited ability reduce expenses quickly orders net revenues meet expectations particular period operating results would adversely affected addition seasonal demand appears developed polycoms products particularly evident lag demand summer months due foregoing factors likely future quarter quarters polycoms operating results materially expectations public market analysts investors event price polycoms common stock would likely materially adversely affected polycom various oem agreements major telecommunications equipment manufacturers whereby polycom manufactures products work equipment oem partner partnerships create channel conflicts polycom distributors directly compete polycoms oem partner could adversely affect revenue nonoem channels additionally polycom direct sales organization could times compete polycom resellers national account government business many companys distributors also sell equipment competes polycom product lines distributors could devote attention product lines could materially adversely affect companys profitability channel conflicts could arise cause distributors devote resources nonpolycom conferencing equipment thereby materially adversely affecting polycoms financial position results operations company several distribution marketing agreements 3m whereby 3m purchases video data products polycom provides royalty revenue stream polycom 3m unsuccessful videoconferencing dataconferencing equipment business would significantly reduce amount product purchase polycom royalty revenue stream associated could materially adversely affect future profitability polycom experienced significant revenue growth 1998 growth due large part new product introductions videoconferencing product line fact quarter 1998 major new video product introduction significantly contributed revenue growth although new product releases planned 1999 assurance releases happen planned happen additionally guarantee new product introductions 1999 produce revenue growth experienced 1998 1999 polycom make significant investment europe expand business region europe international regions credit terms typically longer united states therefore europe international regions grow percentage polycoms total revenues accounts receivable balances likely increase previous years additionally sales videoconferencing product market typically longer payment periods polycoms traditional experience audioconferencing market therefore polycom sells video products percentage revenue accounts receivable balances increase previous experience increases cause polycoms days sales outstanding dso increase prior years negatively affect future cash flows third quarter 1998 company traded 11 million soundpoint inventory barter trade credits trade credits convertible variety goods services company believes majority used media advertising revenue recorded transaction impact net income december 31 1998 trade credits classified prepaid asset net realizable value approximates original value inventory credits expiration date company subsequently determines cannot utilize trade credits could material adverse impact profitability markets videoconferencing products characterized changing technology evolving industry standards frequent new product introductions success polycoms new viewstation products dependent several factors including proper new product definition product cost timely completion introduction new products differentiation new products polycoms competitors market acceptance products additionally properly addressing complexities associated isdn compatibility reseller training technical sales support well field support also factors may affect companys success market shift communications circuitswitched ip network time may require polycom add new resellers gain new core technological competencies polycom attempting address needs need develop new products internal development efforts joint developments companies assurance polycom successfully identify new videoconferencing product opportunities develop bring new videoconferencing products market timely manner videoconferencing products technologies developed others render polycoms viewstation products technologies obsolete noncompetitive failure polycoms new videoconferencing products development efforts would material adverse effect polycoms business financial condition results operations polycom subcontracts manufacture soundstation premier soundpoint pro viewstation product families celestica inc global thirdparty contract manufacturer polycom uses celesticas thailand facilities disruption supply due recent economic political difficulties thailand asia disruption would material adverse effect polycoms business financial condition result operations addition operating international environment exposes polycom certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could material adverse effect polycoms business financial condition results operations celestica recently merged operations international manufacturing services inc ims company polycom original contracted manufacturing relationship impact merger agreement polycom currently unknown could material adverse impact polycoms business financial condition results operations company operates high technology market subject rapid frequent technology changes technology changes often render existing technologies obsolete obsolescence issues require writedowns inventory value determined existing inventory sold net realizable value situation occurred original showstation product third quarter 1998 polycom wrotedown additional 15 million related loss value associated inventory guarantee situation occur product polycoms inventory polycom completed acquisition viavideo communications inc january 2 1998 polycom acquired viavideo expectation acquisition would result operating strategic benefits including operating cost reductions product development marketing sales synergies although material difficulties date outstanding merger related issues successfully addressed coordinated timely efficient manner polycoms business financial condition results operations would materially adversely effected integration viavideos product offerings operations polycoms product offerings operations coordination video sales marketing efforts polycom require substantial attention management diversion attention management difficulties encountered transition process could material adverse affect polycoms business financial condition results operations difficulties assimilation may increased necessity integrating personnel disparate business backgrounds combining two different corporate cultures addition process combining two organizations could cause interruption loss momentum activities either companies businesses could adverse effect combined operations result acquisition polycoms operating expenses significantly increased absolute dollars future expected revenues viavideo products occur later amount less expected higher operating expenses could material adverse affect business financial condition results operations polycom failure achieve anticipated benefits acquisition successfully integrate operations companies could material adverse effect upon business operating results financial condition polycom additionally assurance polycom incur additional material charges future quarters reflect additional costs associated acquisition polycom currently agreements certain videoconferencing equipment providers whereby equipment suppliers resell polycoms soundpoint pc products along videoconferencing products polycom equipment suppliers competitors conferencing market assurance enter future agreements resell supply companys new enhanced conferencing products certain current polycom video products video products development polycom directly competitive products suppliers thus competition polycom suppliers likely increase resulting strain existing relationship companies occurs could limit potential contribution relationships financial results operations polycom companys overall business grew significantly 1998 level growth persists could cause strains normal business processes infrastructure company polycom manage growth resource additions headcount capital timely efficient manner future growth profitability likely significantly negatively affected assurances resources available company needs capital available fund resource needs polycoms stock price varied greatly volume shares companys common stock traded company expects fluctuations continue due factors announcements new products services technological innovations polycom competitors announcements major restructurings polycom competitors quarterly variations polycoms results operations changes revenue earnings estimates investment community speculation press investment community general conditions conferencing equipment industry changes companys revenue growth rates growth rates polycoms competitors sales large blocks companys stock market may time experience extreme price volume fluctuations many technology companies polycom experienced fluctuations addition polycoms stock price may affected general market conditions domestic international macroeconomic factors unrelated companys performance often fluctuations unrelated operating performance specific companies market price polycoms common stock may experience significant fluctuations future polycoms operations vulnerable interruption fire earthquake power loss telecommunications failure events beyond polycoms control additionally polycoms operations currently located san francisco bay area susceptible earthquakes polycom carry sufficient business interruption insurance compensate polycom losses may occur losses damages incurred polycom could material adverse effect business financial condition operating results item 7aitem 7 managements discussion analysis financial condition results operations management discussion analysis financial condition results operations sections form 10k contain forward looking statements including statements concerning future revenues viewstation soundstation netengine streamstation product families future international sales expectations cost net revenues percentage expected expenses absolute dollars percentage net revenues impact year 2000 issue polycom statements guarantees future performance subject certain risks uncertainties assumptions difficult impossible predict therefore actual results may differ materially expressed forecasted forwardlooking statements risks uncertainties include successful launch new products manufacturing ramp viewstation netengine streamstation meetingsite new products level sales key customers including lucent new spinoff company possible price competition demand viewstation netengine streamstation showstation ip webstation soundpoint pro meetingsite netengine new products potential difficulties associated transitioning new management information system uncertainties relating integration operations atlas communication engines inc retention key staff effects acquisition existing business partnerships dependence third party distributors profitability media server product line success recently announced business relationships jetstream communication inc lucent technologies cisco systems nortel networks risks associated international operations dependence third party manufacturers solesource suppliers recruiting retention key technical management personnel risks detailed report polycoms sec reports polycom undertakes obligation update publicly forwardlooking statements whether result new information future events otherwise furthermore investors carefully review risk factors information set forth reports documents polycom files time commission overview engaged principally research development inception september 1992 began volume shipments first voice communication product soundstation december 31 1999 voice communication product line consisted principally soundstation ex soundstation premier soundstation premier ex soundpoint pro january 1998 completed acquisition viavideo communications inc viavideo development stage company designed developed high quality low cost easytouse group video communication systems february 1998 began customer shipments viewstation product family video communication equipment product line december 31 1999 video communication product line consisted principally viewstation 128 viewstation 512 viewstation v35 viewstation mp viewstation sp streamstation webstation showstation ip meetingsite 5000 december 1999 acquired atlas communication engines inc atlas privatelyheld oem supplier integrated access devices iads emerging supplier digital subscriber line dsl routers atlass line iads dsl routers become network access product line provides voice data rapidlygrowing dsl network december 31 1999 derived majority net revenues sales viewstation soundstation products although iad dsl routers expected become increasingly important revenue contributor anticipate viewstation soundstation product lines continue account significant portion net revenues least year ending december 31 2000 factor adversely affecting demand supply products would harm business financial condition cash flows results operations results operations three years ended december 31 1999 following table sets forth percentage net revenues consolidated statement operations data periods indicated net revenues total net revenues 1999 2001 million increase 832 million 71 compared 1998 increase due large part revenues video communication products product line began shipping february 1998 polycom added various models since time additionally voice communication product line sales volume increases also contributed revenue growth majority growth north america also saw growth europe due increase investment region 1999 total net revenues 1998 1169 million increase 665 million 132 compared 1997 increase due large part revenues video communication products part prior year revenue stream additionally voice communication product line sales volume increases primarily north america also contributed revenue growth 1998 recorded 25 million revenue relating joint development marketing agreement 3m concerning viewstation product line 1998 3m revenue compares 30 million 1997 revenue associated joint development marketing agreement 3m concerning showstation ip 1999 1998 1997 derived substantial majority net revenues sales video communication voice communication products lucent technologies accounted 11 10 net revenues 1999 1998 1997 respectively customer reseller accounted 10 net revenues periods see note 13 notes consolidated financial statements business segment information international net revenues outside north america accounted 31 23 21 total net revenues 1999 1998 1997 respectively see note 13 notes consolidated financial statements 1999 invested greater resources europe 1998 helped drive volumes revenues percentage revenue within europe video revenues main driver increase addition asia also increased percentage net revenue 1998 volume increases international regions primarily europe contributed increase percentage international revenue 1997 anticipate international sales continue account significant portion total net revenues foreseeable future plan continue expansion europe asia 2000 international sales however subject certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations longer payment cycles problems collecting accounts receivable potentially adverse tax consequences additionally international net revenues may fluctuate percentage net revenues future introduce new products since expect initially introduce products north america also additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner business could harmed cannot assure able maintain increase international market demand products additionally date substantial majority international sales denominated us currency however international sales denominated local currencies future transactions would subject currency fluctuation risks beginning january 1 1999 participating member countries european union agreed adopt european currency unit euro common legal currency date established fixed conversion rates existing sovereign currencies euro establishment euro significant impact us date future since substantial majority international sales denominated us currency cost net revenues cost net revenues consists primarily contract manufacturer costs including material direct labor polycoms manufacturing organization tooling depreciation warranty expense allocation overhead expenses cost net revenues percentage net revenues 46 1999 compared 50 1998 55 1997 improvement cost 1998 attributable favorable product mix shipments higher margin video products occurred favorable material price improvements decreases offset writedown showstation ip inventory soundpoint inventory net realizable value reduced revenue received joint development marketing agreement 3m concerning viewstation low associated costs received 09 million revenue agreement 1999 compared 25 million 1998 margin improvement 1998 1997 attributable favorable product mix royalty revenues associated costs favorable material price improvements favorable manufacturing variances related increased production levels forecasting future gross margin percentages difficult expect overall cost net revenues percentage within percentage points current level number risks associated maintaining current gross margin levels example uncertainties surrounding competition changes technology changes product mix manufacturing efficiencies subcontractors manufacturing purchased part variances warranty costs timing sales next quarters cause cost net revenues percentage fluctuate significantly additionally iad dsl equipment products voiceoverip voip products desktop products significantly higher cost net revenue percentage viewstation soundstation product lines iad dsl voip desktop products grow become significant revenue stream negative effect future cost revenue percentages also may reduce prices products future competitive reasons stimulate demand could increase cost net revenues percentage however possible price reductions may offset competitive pressures stimulate demand addition costs variances associated manufacturing ramp new products viewstation 4000 viewstation fx new product could occur would increase cost net revenues percentage gross margins associated showstation ip viewstation sp soundpoint pro lower targeted gross margins total product portfolio yet gross margins webstation closer targeted gross margins contribution products significant impact overall gross margins addition uncertainties listed cost net revenues percentage may increase due change mix distribution channels mix international versus north american revenues realized lower cost net revenue percentages direct sales indirect channels longer sell products direct sales force profit margins negatively impacted sales marketing expenses sales marketing expenses consist primarily salaries commissions advertising promotional expenses product marketing allocation overhead expenses customer service support costs increase sales marketing expenses absolute dollars 1999 1998 primarily related increased advertising promotional expenditures video voice products additionally increase investment worldwide sales effort resulting staff increases also contributed increase 1998 increase sales marketing expenses absolute dollars 1998 1997 primarily related increased investment video communication sales effort mentioned previously began selling viewstation products 1998 consequently little sales marketing expense 1997 associated products additionally increases voice communication sales efforts 1998 also contributed overall increase 1997 expect continue increase sales marketing expenses absolute dollar amounts effort expand north american international markets market new products establish expand distribution channels particular acquisition atlas communication engines inc expands product portfolio dsl access market require significant additional marketing expenditures communicate value new product offerings well significant additional sales expenditures develop new sales organization market addition due innovative nature viewstation streamstation webstation showstation ip products believe incur additional expenses sales marketing especially advertising educate potential customers desirability products competing products addition invest european asian markets thereby increasing absolute dollars spent area also launch streamstation product streams pointtopoint multipoint video communications using viewstation web well voip potential desktop products cause increase sales marketing expenses additionally video streaming market new us significant investments may need made become successful currently expanding service organization provide expanded improved support products increase sales marketing expenses research development expenses research development expenses consist primarily compensation costs consulting fees depreciation allocation overhead expense research development expense increased 1999 1998 due increases network access video voice product lines expense decrease 1998 compared 1997 primarily attributable higher development expenses showstation ip viewstation products 1997 resulted initial launch products early 1998 remainder 1998 development charges products normalized decreases offset somewhat increases related voice communication product line years presented research development costs expensed incurred believe technological leadership critical success committed continuing high level research development also continued investment new product initiatives voip desktop products require significant research development spending consequently intend increase research development expenses absolute dollars percentage net revenues future however due extremely competitive hiring market hightechnology industries may able find hire qualified personnel timely manner fact established development office boston 1999 attempt broaden recruiting top technical talent general administrative expenses general administrative expenses consist primarily compensation costs allocation overhead expense bad debt writeoffs legal expenses accounting expenses increase general administrative expenses 1999 1998 due increased staffing infrastructure costs support polycoms growth including conversion management information system decrease general administrative expenses 1998 compared 1997 due lower legal expenses associated vtel datapoint lawsuits decrease offset increases related increased staffing infrastructure support growth additionally third quarter 1998 reversed contingency reserve associated datapoint litigation resolved favorably quarter believe general administrative expenses increase absolute dollar amounts future primarily result expansion administrative staff costs related supporting larger company additional charges include expenses related new information system new tax deferral strategy infrastructure charges related significant investments made europe asia additionally writeoffs associated bad debt difficult predict material writeoffs could negatively affect profitability quarter realized acquisition costs incurred expenses totaling 17 million 02 million 06 million 1999 1998 1997 respectively 1999 costs related acquisition atlas december 1999 1998 1997 cost incurred related acquisition viavideo significant portion charges acquisitions outside legal accounting financial advisory services anticipate material acquisition related expenses associated either acquisitions however assurances expenses related acquisitions incurred material income expense interest income consists interest earned cash equivalents investments interest expense bank debt facilities interest income net interest expense 18 million 10 million 12 million 1999 1998 1997 respectively fluctuations interest income net due primarily changes average cash investment balances throughout year provision income taxes 1999 1998 1997 provision income taxes 136 million 17 million 02 million respectively provision income taxes 1998 1997 primarily state federal alternative minimum certain foreign taxes increase income taxes 1999 due increased profitability valuation allowance established prior years reversed 1999 due belief deferred tax assets likely realized december 31 1999 approximately 48 million net operating loss carryforwards 03 million tax credit carryforwards well deferred tax assets arising temporary differences see note 12 notes consolidated financial statements year 2000 prior year 2000 many currently installed computer systems software products coded accept two digit entries date code field code fields needed accept four digit entries distinguish years beginning 19 beginning 20 result computer systems andor software products used many companies needed upgraded comply year 2000 requirements anticipation issue expended resources review internal use software order identify modify systems year 2000 compliant addition products services reviewed certified year 2000 compliant also initiated project replace current internal business information system 1999 effort addressed year 2000 issues legacy system internal system implementation effort principally conducted improve operating efficiencies costs associated effort immaterial yet incremental operations also represented reallocation existing resources costs expensed incurred funded cash generated operations experienced material adverse impact financial condition results operations due year 2000 compliance issues addition date significant projects delayed due year 2000 project liquidity capital resources three years ended december 31 1999 december 31 1999 principal sources liquidity included cash equivalents 360 million shortterm investments 248 million longterm investments 151 million additionally established 150 million line credit bank line credit facility contains provisions require maintenance certain financial ratios profitability requirements december 31 1999 compliance covenants see note 9 notes consolidated financial statements generated cash operating activities totaling 386 million 27 million used cash operating activities 86 million years ended 1999 1998 1997 respectively improvement cash operating activities 1999 1998 due primarily improvement net income noncash items increase accounts taxes payable smaller increase inventories offset somewhat growth receivables deferred taxes improvement cash operating activities 1998 1997 due primarily improvement net income noncash items reduction nontrade receivables offset somewhat growth receivables inventory smaller increase accounts payable accrued liabilities total net change cash equivalents 1999 increase 179 million primary sources cash 386 million operating activities 150 million proceeds exercise warrants 3m 56 million issuance stock associated exercise stock options purchases employee stock purchase plan primary uses cash 1999 net purchases investments 345 million purchases property plant equipment 72 million positive cash operating activities primarily result positive net income considering noncash expenses depreciation higher total current liabilities including accounts payable taxes payable offset increase accounts receivable deferred taxes inventory material commitments consist obligations operating leases also maintains time commercial letters credit payments importation certain products amounts exceed 300000 outstanding less 120 days see notes 8 9 notes consolidated financial statements believe available cash equivalents investments bank line credit sufficient meet operating expenses capital requirements least december 31 2000 however cannot determined degree certainty successful growing market products substantial growth result go beyond current acceptable liquidity levels financial results violate financial covenants bank line credit may require desire additional funds support working capital requirements purposes acquisitions competitive reasons may seek raise additional funds public private equity financing sources cannot assure additional financing available financing obtainable terms favorable polycom would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology recent accounting pronouncements june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 133 established methods accounting derivative financial instruments hedging activities related instruments well hedging activities effective fiscal years beginning june 15 2000 amended sfas 137 believe adoption pronouncement material impact financial position results operations december 1999 securities exchange commission issued staff accounting bulletin sab 101 revenue recognition outlines basic criteria must met recognize revenue provide guidance presentation revenue disclosure related revenue recognition policies financial statements filed securities exchange commission effective date pronouncement second quarter fiscal year beginning december 15 1999 believe adopting sab 101 material impact financial position results operations factors affecting future operations investors carefully consider risks described making investment decision risks described ones facing company additional risks presently known us currently believe immaterial may also impair business operations business could harmed risks trading price common stock could decline due risks investors may lose part investment assessing risks investors also refer information contained incorporated reference form 10k report including financial statements related notes channel sales inventory sell significant amount products distributors resellers maintain inventory products sale dealers endusers substantial percentage total products sold particular quarter consist distributor stocking orders typically provide special cost early payment incentives distributors purchase minimum quantities required agreements us resellers unable sell adequate amount inventory determined resellers products given quarter dealers endusers resellers decide decrease inventories would negatively affect volume sales resellers current future quarters also negatively affect total revenues also choose eliminate reduce stocking incentive programs quarterly revenue may lower historical levels capital market expectations revenue estimates based largely sellthrough reporting resellers provide us monthly basis accuracy data good north america questionable outside region extent data sellthrough channel inventory inaccurate either north america outside north america may able make reseller estimates may find previous estimates entirely inaccurate many distributors resellers revenues depend significantly undercapitalized yet carry multiple polycom product lines failure businesses establish sustain profitability obtain financing could significantly affect future revenue levels polycom loss distributors resellers could harm business addition effect spinoff lucent technologies business equipment segment polycom yet known light restructure lucent decides significantly reduce amount orders polycom could harm financial condition channel customer orders typically ship products within short time receipt order historically material backlog result backlog point time good indicator future net revenues net revenues particular quarter cannot predicted degree accuracy additionally orders reseller customers based level demand endusers uncertainty enduser demand means quarter could significantly negatively impacted lower enduser orders could negatively affect orders receive resellers accordingly expectations short longterm future net revenues based almost exclusively estimate future demand firm customer orders expense levels based part estimates since limited ability reduce expenses quickly orders net revenues meet expectations particular period operating results would lower expected addition seasonal demand appears evident lag demand summer months seasonality make predicting revenues levels difficult impossible substantial portion orders received shipped within last weeks quarter therefore polycom suppliers major customers subject business interruption example natural disaster last weeks quarter would negatively affect business cannot assure contract manufacturers able meet product demand given quarter ends uncertainty future revenues results result several factors including reliance channel sales timing orders shipments quarter throughout quarter uncertain level revenues achieve quarter impact distributor stocking orders revenues profitability quarter addition substantial percentage product sales occur end quarter product mix therefore profitability difficult impossible predict due factors likely future quarter operating results materially expectations public market analysts investors event price common stock would likely decrease significantly net revenues grown primarily increased market acceptance viewstation soundstation product lines expansion north american international distribution networks experienced growth net revenues recent quarters believe historical growth rates net revenues sustainable indicative future operating results example lowered price showstation ip 23 effective march 1999 due market acceptance issues product similar price reductions demand issues could occur products could negatively impact net revenues profitability recent growth rates voice video product sales channels endusers significant future growth rates may achieve levels success believe profitability could negatively affected future result several factors including low negative gross margins showstation ip continuing competitive price pressure conferencing equipment market although price reductions driven desire expand market products expect future may reduce prices introduce new products carry lower margins order expand market respond competitive pricing pressures actions may expand market products sufficient meet competitive pricing pressures additionally endusers decide purchase streamstation webstation product instead showstation ip net revenues could significantly adversely affected could create excess obsolescence issue showstation ip inventory could negatively impact profitability similarly soundpoint pro product materially negatively affects future sales soundpoint product polycoms total revenue could lower could create excess obsolescence issue concerning soundpoint inventory could lower profitability example third quarter 1999 recorded charge excess obsolete inventory concerns showstation ip soundpoint product line negatively impacted cost net revenues percentage issue new products rendering existing products obsolete reducing demand existing products exists every one products addition costs related introduction new products netengine viewstation 4000 viewstation fx viewstation sp soundpoint pro webstation streamstation could also negatively impact future profitability operating results fluctuated past may fluctuate future result number factors including market acceptance viewstation soundpoint pro netengine webstation showstation ip meetingsite streamstation new product introductions product enhancements us competitors prices competitions products mix products sold mix products sold directly resellers fluctuations level international sales cost availability components manufacturing costs level cost warranty claims changes distribution network level royalties third parties changes general economic conditions example beginning november 1999 eliminated direct sales force moved direct customers resellers var channel sales channel shift negatively impacted cost net revenues percentage continue negatively impact gross margins year 2000 addition competitive pressure pricing demand levels given quarter could adversely affect operating results period price pressure extended period could materially adversely affect near longterm profitability ability maintain increase net revenues depend upon ability increase unit sales volumes viewstation product line soundstation premier soundpoint families products showstation webstation line products new network access products new products product enhancements cannot assure able increase unit sales volumes existing products introduce sell new products reduce costs percentage net revenues product introductions revenue growth since beginning 1998 due large part new product introductions video communication product line quarter 1998 major new video product introduction significantly contributed revenue growth although continuing introduce new product releases recently announced viewstation 4000 viewstation fx cannot assure new product releases timely made additionally cannot assure new product introductions 2000 produce revenue growth experienced 1998 1999 past experienced delays introduction certain new products enhancements believe delays may occur future instance experienced delays introducing viewstation mp webstation 1998 original expected release dates due unforeseen technology manufacturing ramp issues additionally showstation ip delayed original shipment target september 1997 first customer shipment date march 1998 due engineering manufacturing startup issues similar delays occurred introduction soundstation premier showstation affecting first customer ship dates products similar delays future new product offerings voip desktop netengine product line extensions could material adverse effect results operations atlas integration completed acquisition atlas communication engines inc december 1999 acquired atlas expectation acquisition would result operating strategic benefits including product development marketing sales synergies outstanding merger related issues successfully addressed coordinated timely efficient manner business results operations could harmed integration atlass product offerings operations product offerings operations coordination two companies sales marketing efforts may require substantial attention management diversion attention management difficulties encountered transition process could harm business difficulties assimilation may increased necessity integrating personnel disparate business backgrounds combining two different corporate cultures may result problems employee retention addition process combining two organizations could cause interruption loss momentum activities either companies businesses could adverse effect combined operations result acquisition operating expenses likely increase absolute dollars fact currently recruiting management technical staff added group future expected revenues atlass products occur later amount less expected higher operating expenses could harm business failure achieve anticipated benefits acquisition successfully integrate operations companies could also harm business results operations additionally cannot assure incur additional material charges future quarters reflect additional costs associated acquisition channel conflicts various oem agreements major telecommunications equipment manufacturers lucent technologies whereby manufacture products work equipment oem partner partnerships create channel conflicts polycom distributors directly compete oem partner could adversely affect revenue nonoem channels many distributors also sell equipment compete polycom product lines distributors could devote attention product lines could materially adversely affect profitability channel conflicts could arise cause distributors devote resources nonpolycom conferencing equipment thereby negatively affecting business results operations currently agreements certain video communication equipment providers whereby equipment suppliers resell soundpoint pc products along video communication products polycom equipment suppliers competitors conferencing market assurance enter future agreements resell supply new enhanced conferencing products certain current polycom video products video products development directly competitive products suppliers thus competition us suppliers likely increase resulting strain existing relationship companies occurs could limit potential contribution relationships results operations addition dependent certain agreements critical partners jetstream communications network access arena conflicts may occur evolving market seek relationships partners competitive current relationships occurs could harm business technology training markets voice video communication products network access products characterized rapidly changing technology evolving industry standards frequent new product introductions success new viewstation netengine dependent several factors including proper new product definition product cost timely completion introduction new products differentiation new products competitors market acceptance products additionally properly addressing complexities associated dsl isdn compatibility reseller training technical sales support well field support also factors may affect success market shift communications circuitswitched ip network time may require us add new resellers gain new core technological competencies attempting address needs need develop new products internal development efforts joint developments companies cannot assure successfully identify new voice video network access product opportunities develop bring new voice video network access products market timely manner competing technologies developed others render viewstation soundstation products technologies obsolete noncompetitive failure new voice video network access product development efforts ability service maintain necessary third party interoperability licenses would harm business results operations manufacturing disruptions subcontract manufacture soundstation premier soundpoint pro viewstation product families currently migrating production new network access products celestica inc global thirdparty contract manufacturer use celesticas thailand facilities disruption supply due economic political difficulties thailand asia disruption would harm business results operations also celestica currently sole source provider product lines supply subcontractor experiences interruption operations would experience delay shipping products could negatively affect revenues quarter disruption addition operating international environment exposes us certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations management information system transition transitioning new enterprise resource planning system affects almost every facet business operations conversion expected bring new process efficiencies improve business operations however typically conversions negatively affect companys ability conduct business initially due problems historical data conversion errors learning curve associated new system delays implementation unforeseen technical problems conversion problems arise transition could experience period time delays lack shipping inability support existing customer base delays paying vendors delays collecting customers inability place receive product orders operational problems occur profitability financial position could negatively impacted infrastructure growth recent overall growth likely continue cause strains normal business processes infrastructure manage growth resource additions headcount capital processes timely efficient manner future growth profitability likely significantly negatively affected cannot assure resources available need capital available fund resource needs service support recent growth due large part expansion product lines complex technologies protocols shift well acquisition atlas communication engines network products increased need increased product warranty service capabilities addition increased international competition forced companies conferencing market provide complete service support package maintain inhouse hotline support group subcontracts onsite technician support functions cannot develop train internal support organization maintain relationship outside technical support efficiently transition new service contractor could negatively affect future sales higher technology products like video voip equipment network access products would material negative effect results operations cash flow fluctuations due receivable collections 1999 initiated significant investment europe expand business region europe asia international regions credit terms typically longer united states therefore europe asia international regions grow percentage total net revenues happened 1999 accounts receivable balances likely increase previous years additionally sales video communication product market typically longer payment periods traditional experience voice communication market therefore sell video products percentage net revenues accounts receivable balances increase previous experience increases cause days sales outstanding increase prior years negatively affect future cash flows addition able offset affect influences additional incentives offered resellers end quarter form prepay discounts additional incentives lowered profitability improved days sales outstanding performance potential asset impairment concerns operate high technology market subject rapid frequent technology changes technology changes often render existing technologies obsolete obsolescence issues require writedowns inventory value determined existing inventory sold net realizable value situation occurred third quarter 1999 showstation ip soundpoint products recorded 13 million excess obsolescence charges original showstation product third quarter 1998 wrotedown additional 15 million related loss value associated inventory stock price flucuations stock price varied greatly trading volume common shares expect fluctuations continue due factors announcements new products services technological innovations us competitors announcements major restructurings us competitors quarterly variations results operations changes revenue earnings estimates investment community speculation press investment community general conditions communications industry changes revenue growth rates growth rates competitors sales large blocks stock market likely experience extreme price volume fluctuations time many technology companies polycom experienced fluctuations addition stock price may affected general market conditions domestic international macroeconomic factors unrelated performance often fluctuations unrelated operating performance specific companies business interruption operations vulnerable interruption fire earthquake power loss telecommunications failure events beyond control detailed disaster recovery plan addition carry sufficient business interruption insurance compensate us losses may occur losses damages incurred us could material adverse effect business financial condition operating results item 7aitem 7 managements discussion analysis financial condition results operations read following discussion conjunction consolidated financial statements related notes following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 forwardlooking statements involve risks uncertainties including among things statements regarding anticipated product offerings customer geographic revenue mix gross margins operating costs expenses actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed factors affecting future operations elsewhere form 10k report overview incorporated december 1990 engaged principally research development inception september 1992 began volume shipments first voice communications product soundstation currently voice communications products consist principally soundstation ex soundstation premier soundstation premier ex soundpoint pro january 1998 completed acquisition viavideo development stage company designed developed highquality lowcost easytouse group video communications systems february 1998 began customer shipments viewstation product family video communications equipment product line currently video communications products consist principally viewstation 128 viewstation 512 viewstation v35 viewstation mp viewstation sp viewstation fx vs 4000 viavideo december 1999 acquired atlas communication engines inc privatelyheld oem supplier iads emerging supplier dsl routers addition atlas also sold nondsl custom communications products oem arrangements atlas line iads dsl routers become network access product line provides voice data rapidlygrowing dsl network december 31 2000 derived substantial majority net revenues sales viewstation network access soundstation products anticipate viewstation netengine soundstation products continue account significant portion net revenues least next twelve months factor adversely affecting demand supply products would harm business financial condition cash flows results operations results operations three years ended december 31 2000 following table sets forth percentage net revenues consolidated statement income data periods indicated net revenues net revenues year ended december 31 2000 increased 66 period 1999 increase due primarily increased sales volume video communication products accounted 68 total increase addition sales volume increases network access voice communication products also contributed improvement 1999 increase voice communications revenue accounted 13 total increase network access products accounted 19 total increase also significant increase sales international region 2000 1999 due increased focus expanding foreign markets expansion included adding sales marketing operational administrative resources net revenues year ended december 31 1999 increased 71 period 1998 due primarily sales volume increases video communications products accounted 84 total increase products began shipping february 1998 added various models since time additionally voice communications products sales volume increases also contributed revenue growth accounted remaining 16 total increase although majority revenue growth north america also experienced growth net revenues europe due increase investment region 1999 major contributor expected growth broadband distribution market deployment digital subscriber lines dsl beginning second half 2000 dsl providers experienced delays delivering service caused financial troubles companies dsl providers customers network access products oem providers use resellers service delays slowed expected growth market turn slowed sales network access products conditions persist negatively impact revenues network access products 2000 1999 1998 derived substantial majority net revenues sales video communication voice communication network access products customer accounted 10 net revenues fiscal year ended december 31 2000 however one customer lucent technologies accounted 12 net revenues three months ended december 31 2000 primarily sales network access products addition lucent technologies accounted 11 net revenues 1999 1998 reason lucent technologies reduced purchases products would harm business customer reseller accounted 10 net revenues periods see note 13 notes consolidated financial statements business segment information business subject risks arising domestic global economic conditions recently economic growth unites states slowed point industries delaying reducing technology purchases impact slowdown us difficult predict customers delay ordering products fall short revenue expectations given quarter 2001 entire year conditions would negatively affect business profitability addition weakness enduser market could negatively affect cash flow reseller customers could turn delay paying obligations us would increase credit risk exposure could harm profitability financial condition international net revenues outside north america accounted 33 31 23 total net revenues 2000 1999 1998 respectively see note 13 notes consolidated financial statements fiscal year ended 2000 continued make investments europe asia lesser degree latin america expansion resources main reason increase international percentage total net revenues despite increase net revenue sales network access products sold primarily north america increase video communication products unit sales volume europe asia latin america primary reason increase international percentage total net revenues 2000 1999 increased investment resources europe 1998 helped drive volumes revenues percentage revenue within europe video revenues main driver increase 1999 1998 addition net revenues derived sales products asia also increased percentage net revenue 1999 1998 anticipate international sales continue account significant portion total net revenues foreseeable future plan continue expansion europe asia latin america 2001 international sales however subject certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations longer payment cycles problems collecting accounts receivable potentially adverse tax consequences additionally international net revenues may fluctuate percentage net revenues future introduce new products since expect initially introduce products north america also additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner business could harmed cannot assure able maintain increase international market demand products additionally date substantial majority international sales denominated us currency however international sales denominated local currencies future transactions would subject currency fluctuation risks date establishment european currency unit euro european union common legal currency europe significant impact us since substantial majority international sales denominated us currency however may impact future due recent weakening euro dollar requires customers convert greater number euros dollars settle outstanding debts us cost net revenues cost net revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense allocation overhead expenses cost net revenues percentage total net revenues year ended december 31 2000 45 slight decrease 46 1999 decrease attributable favorable product mix generated increased shipments higher margin video products favorable material price variances offset writedown certain media server inventory including showstation ip net realizable value higher shipment volumes lower margin network access products comparing cost net revenues percentage net revenues 1999 1998 percentage decreased 46 50 improvement cost 1999 1998 attributable favorable product mix shipments higher margin video products occurred favorable material price improvements decreases offset writedown showstation ip inventory soundpoint inventory net realizable value reduced revenue received joint development marketing agreement 3m concerning viewstation low associated costs received 09 million revenue agreement 1999 compared 25 million 1998 forecasting future gross margin percentages difficult expect future overall cost net revenues percentage within percentage points current level number risks associated maintaining current gross margin levels example uncertainties surrounding revenue levels competition changes technology changes product mix manufacturing efficiencies subcontractors manufacturing purchased part variances warranty costs timing sales next quarters cause cost net revenues percentage fluctuate significantly additionally iad dsl equipment products voip products desktop products significantly higher cost net revenue percentage viewstation soundstation products iad dsl voip desktop products grow become significant portion revenue stream negative effect future cost net revenues percentages also may reduce prices products future competitive reasons stimulate demand could increase cost net revenues percentage however cannot assure potential price reductions would offset competitive pressures stimulate demand addition cost variances associated manufacturing ramp new products netengine new product could occur would increase cost net revenues percentage gross margins associated viavideo viewstation sp soundpoint pro lower targeted gross margins product portfolio yet gross margins webstation closer targeted gross margins proportional contribution products product mix significant impact overall gross margins addition uncertainties listed cost net revenues percentage net revenues may increase due change mix distribution channels mix international versus north american revenues sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force advertising promotional expenses product marketing allocation overhead expenses customer service support costs increase sales marketing expenses absolute dollars 2000 1999 primarily related increased advertising promotional expenditures video network access products additionally increase investment worldwide sales effort also contributed increases 1999 increase sales marketing expenses absolute dollars 1999 1998 primarily related increased advertising promotional expenditures video voice products additionally increase investment worldwide sales efforts resulting staff increases also contributed increase 1998 expect continue increase sales marketing expenses absolute dollar amounts effort expand north american international markets market new products establish expand distribution channels particular acquisition atlas expanded product portfolio dsl access market require significant additional marketing expenditures communicate value new product offerings well significant additional sales expenditures develop new sales organization market addition due innovative nature viewstation viavideo upcoming voip products believe incur additional expenses sales marketing especially advertising educate potential customers desirability products competing products also invest international markets increasing absolute dollars spent area currently expanding service organization provide expanded improved support products increase sales marketing expenses research development expenses research development expenses consist primarily compensation costs consulting fees depreciation allocation overhead expenses expense increases video voice network access product development contributed total increase 2000 1999 individually increase video communication product development expenditures accounted 48 total increase network access development expenditures accounted 38 total increase voice communications accounted remaining 14 total increase research development expense increased 1999 1998 due increases network access video voice products years presented research development costs expensed incurred believe technological leadership critical success committed continuing high level research development also continued investment new product initiatives dsl access voip desktop products require significant research development spending consequently intend increase research development expenses absolute dollars percentage net revenues future however due extremely competitive hiring market hightechnology industries may able find hire qualified personnel timely manner general administrative expenses general administrative expenses consist primarily compensation costs allocation overhead expenses bad debt writeoffs legal expenses accounting expenses increase general administrative expenses 2000 1999 due increased staffing infrastructure costs support growth including additional costs upgrade management information system expansions europe asia higher bad debt expense increase general administrative expenses 1999 1998 due increased staffing infrastructure costs support growth including conversion management information system believe general administrative expenses continue increase absolute dollar amounts future primarily result expansion administrative staff costs related supporting larger company additional charges include principally expenses related expansions information system increased tax planning efforts infrastructure charges related significant investments made international regions additionally writeoffs associated bad debt difficult predict material writeoffs could negatively affect profitability quarter made acquisition costs incurred acquisition costs totaling 19 million 2000 17 million 1999 02 million 1998 2000 costs related acquisition accord networks ltd completed february 2001 1999 costs related acquisition atlas completed december 1999 1998 costs incurred related acquisition viavideo significant portion charges acquisitions outside financial advisory legal accounting services expect material acquisition related expenses associated accord networks ltd acquisition 2001 may acquisition expenses related transactions future litigation reserve release september 3 1997 vtel corporation vtel filed lawsuit state district court travis county texas viavideo communications inc subsidiary polycom founders formerly employed vtel may 27 1998 vtel amended suit add polycom defendant lawsuit vtel alleged breach contract breach confidential relationship disclosure proprietary information related allegations viavideo founders polycom answered suit denying entirety vtels allegations march 3 2000 vtel voluntarily dismissed allegations polycom viavideo prejudice consideration onetime item first quarter 2000 excess accrual associated expenses estimated would incur connection lawsuit totaling 18 million released since material expenses incurred see note 8 notes consolidated financial statements interest income net interest income net consists interest earned cash equivalents investments less bank charges resulting use polycoms bank accounts interest expense polycoms credit facilities interest income net interest expense 68 million 2000 18 million 1999 10 million 1998 fluctuations interest income net due primarily changes average cash investment balances throughout year significant relates secondary stock offering raised 1483 million third quarter 2000 investments adjustment throughout year ended december 31 2000 made various investments private companies included investments balance sheet accordance generally accepted accounting principles gaap monitor value investments impairment make appropriate reductions carrying value necessary 2000 determined value investments became impaired reduced carrying amount 59 million provision income taxes provision income taxes 242 million 2000 136 million 1999 17 million 1998 increase income taxes 2000 1999 due increased profitability increase income taxes 1999 1998 also due increased profitability offset reversal deferred tax valuation allowance 1999 due belief deferred tax assets likely realized december 31 2000 approximately 201 million net operating loss carryforwards 83 million tax credit carryforwards well deferred tax assets arising temporary differences see note 12 notes consolidated financial statements liquidity capital resources december 31 2000 principal sources liquidity included cash equivalents 1733 million shortterm investments 325 million longterm investments 424 million additionally 150 million line credit bank 101 million investments related nonmarketable equity securities line credit facility contains provisions require maintenance certain financial ratios profitability requirements december 31 2000 compliance covenants generated cash operating activities totaling 470 million 2000 386 million 1999 27 million 1998 improvement cash operating activities 2000 1999 due primarily improvements net income noncash items increase tax benefits exercise employee stock options employee stock purchase plan transactions improvement offset somewhat higher growth inventories deferred taxes nontrade receivables lower increase current liabilities improvement cash operating activities 1999 1998 due primarily improvement net income noncash items increase accounts taxes payable smaller increase inventories offset somewhat growth receivables deferred taxes total net change cash equivalents year ended 2000 increase 1374 million primary sources cash 1483 million followon stock offering net issuance costs 471 million operating activities 148 million associated exercise stock options purchases employee stock purchase plan primary uses cash period 511 million net purchases investments 134 million purchases property plant equipment 83 million purchases licenses positive cash operating activities primarily result net income considering noncash expenses depreciation amortization provision doubtful accounts tax benefits exercise employee stock options investment loss adjustment higher total current liabilities including accounts payable taxes payable offset increase inventories trade nontrade receivables deferred taxes assets material commitments consist obligations operating leases also maintain time commercial letters credit payments importation certain products amounts exceed 100000 outstanding less 120 days addition bank issued letters credit secure leases offices letters credit total less 100000 secured credit facilities cash deposits banks see notes 8 9 notes consolidated financial statements august 2000 completed followon offering 5608976 shares common stock price 45438 per share shares sold approximately 35 million shares sold us net proceeds approximately 1483 million balance shares sold selling stockholder using net proceeds sale primarily general corporate purposes including working capital expenditures portion proceeds may also used acquire invest complementary businesses products obtain right use complementary technologies pending uses investing net proceeds sale shortterm longterm interest bearing investment grade obligations believe available cash equivalents investments bank line credit sufficient meet operating expenses capital requirements least next eighteen months future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technologies recent developments february 28 2001 announced completion acquisition accord network ltd leading provider nextgeneration richmedia network products enable internet protocol ip network voice video communications customer premise service provider markets terms merger originally announced december 6 2000 exchanged approximately 63 million shares common stock outstanding accord shares assume accord options warrants exercisable approximately 15 million shares polycom common stock exchange assumption occur rate 03065 polycom shares accord share account merger pooling interests recent accounting pronouncements june 1998 financial accounting standards board fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 133 amended sfas 138 established methods accounting derivative financial instruments hedging activities related instruments well hedging activities effective fiscal years beginning june 15 2000 adopted pronouncement january 1 2001 adoption material impact consolidated financial position results operations cash flows december 1999 securities exchange commission issued staff accounting bulletin sab 101 revenue recognition outlines basic criteria must met recognize revenue provide guidance presentation revenue disclosure related revenue recognition policies financial statements filed securities exchange commission effective date pronouncement fourth quarter fiscal year beginning december 15 1999 adoption sab 101 material impact consolidated financial position results operations cash flows factors affecting future operations investors carefully consider risks described making investment decision addition rsks ones facing company additional risks presently aware currently believe immaterial may also impair business operations business could harmed risks trading price common stock could decline due risks investors may lose part investment assessing risks investors also refer information contained incorporated reference annual report form 10k including consolidated financial statements related notes quarterly operating results fluctuate significantly may able maintain historical growth rates quarterly operating results fluctuated significantly past may vary significantly future result number factors include •changes general economic conditions case recently specific economic conditions technology industries •market acceptance new product introductions product enhancements us competitors •our prices competitors products •the timing size orders products •the mix products sold •fluctuations level international sales •the delay rollout dsl technology •the cost availability components •manufacturing costs •the level cost warranty claims •changes distribution network •fluctuations demand products •the impact seasonality •the level royalties third parties although significant revenue growth recent quarters fluctuations quarterly operating results due factors could prevent us sustaining growth rates meeting expectations use past results predict future operating margins results particular quarterly revenues operating results depend upon volume timing customer orders received given quarter percentage order able ship recognize revenue quarter difficult forecast addition majority orders given quarter historically shipped third month quarter trend continues failure delay closing orders last part quarter seriously harm business products experienced seasonal fluctuations affected sequential growth rates products example appears slow summer quarter products european region addition sales video communications products appear decline first quarter year compared fourth quarter prior year fluctuations negatively affect business quarters could cause operating results fall short anticipated results would negative impact stock price result factors believe periodtoperiod comparisons historical results operations good predictor future performance future operating results expectations stock market analysts stock price decline general economic conditions may reduce revenues harm business grown become increasingly subject adverse changes general economic conditions result reductions capital expenditures enduser customers longer sales cycles deferral delay purchase commitments products increased price competition although factors materially impacted us recent years current economic slowdown continues worsens factors could adversely affect business results operations addition also face risk resellers build inventories anticipation growth sales growth occur anticipated resellers reason including slowdown economic growth began fourth quarter 2000 continuing 2001 resellers may substantially decrease amount product ordered subsequent periods would harm business difficulty estimating customer orders could harm operating results typically ship products within short time receive order historically material backlog result backlog point time good indicator future net revenues net revenues particular quarter cannot predicted degree accuracy additionally orders reseller customers based level demand endusers uncertainty enduser demand means quarter could significantly negatively impacted lower enduser orders could turn negatively affect orders receive resellers accordingly expectations short longterm future net revenues based almost exclusively estimate future demand firm reseller orders expense levels based part estimates since majority customer orders received last month quarter limited ability reduce expenses quickly reason orders net revenues meet expectations particular period addition historically experienced lag demand summer months adds level difficulty predicting revenue levels depend distributors resellers sell products subject risks associated inventories products product sellthrough success businesses sell significant amount products distributors resellers maintain inventory products sale dealers endusers substantial percentage total products sold particular quarter consists distributor reseller stocking orders typically provide special cost early payment incentives distributors resellers purchase minimum quantities required agreements us distributors resellers unable sell adequate amount inventory products given quarter dealers endusers distributors resellers decide decrease inventories numerous reasons including reduction economic growth realized fourth quarter 2000 anticipated 2001 would negatively affect volume sales distributors resellers also negatively affect net revenues could harm business also choose eliminate reduce stocking incentive programs quarterly revenues may fail meet expectations lower historical levels revenue estimates based largely enduser sales reports distributors resellers provide us monthly basis date believe data generally accurate north america less reliable outside region extent sales channel inventory data inaccurate either north america outside north america may able make revenue estimates may find previous estimates inaccurate many distributors resellers carry multiple polycom products derive significant revenues undercapitalized failure businesses establish sustain profitability obtain financing could significant negative effect future revenue levels profitability example fiscal year 2000 increased allowance bad debt 16 million specific reseller default situations collection doubtful loss distributors resellers could harm business lucent technologies one larger resellers accounted 12 net revenues three months ended december 31 2000 primarily related lucents purchases network access products period addition lucent accounted 11 net revenues 1999 1998 lucent technologies reduces purchases products due current economic slowdown factor harm business addition lucent technologies spun business equipment division known avaya inc yet know spinoff affect us connection restructuring combined business lucent avaya yields significant reduction amount orders us could harm business late first quarter 2000 began shipping viewstation fx product timing delivery date likely created confusion reseller customer base enduser customer market groups waited see new viewstation product desirable existing products therefore timing new product release likely negative effect 2000 first quarter salesin resellers salesout endusers cannot assure similar situation happen major contributor expected growth broadband distribution market deployment digital subscriber lines dsl beginning second half 2000 dsl providers experienced delays delivering service caused financial troubles companies dsl providers customers network access products oem providers use resellers service delays slowed expected growth market turn slowed sales network access products conditions persist negatively impact revenues network access products may experience delays product introductions products may contain defects could adversely affect market acceptance products reputation seriously harm results operations since beginning 1998 revenue growth due large part new video communications product introductions although continuing introduce new products viavideo viewstation 4000 viewstation fx soundpoint pro 30 products cannot assure new product releases timely made fact viewstation fx viavideo delayed original release dates believe negatively affected net revenues 2000 additionally cannot assure new existing product introductions free defects produce revenue growth experienced 1999 2000 past experienced delays introduction certain new products enhancements believe delays may occur future instance experienced delays introducing viewstation fx 2000 viewstation mp webstation 1998 original expected release dates due unforeseen technology manufacturing ramping issues similar delays occurred introduction showstation ip soundstation premier showstation affecting first customer ship dates products similar delays future new product offerings voip desktop product line extensions could adversely affect market acceptance products reputation seriously harm results operations due dynamic nature network access market sector delays netengine product line extensions would seriously harm business limited supply sources key components products operations could harmed supply interruptions component defects unavailability components key components used products currently available one source others available limited number sources including key integrated circuits optical elements also obtain certain plastic housings metal castings components suppliers located singapore china political economic instability region future import restrictions may cause delays inability obtain supplies supply commitments suppliers generally purchase components purchase order basis either directly contract manufacturers contract manufacturers limited experience purchasing volume supplies various components products components included products microprocessors integrated circuits time subject limited allocations suppliers event contract manufacturers unable obtain sufficient supplies components develop alternative sources needed operating results could seriously harmed particular recently encountered development delays component shortages relating network access products conditions continue business suffer moreover operating results would seriously harmed receipt significant number defective components increase component prices inability obtain lower component prices response competitive price reductions additionally video communications products designed based integrated circuits produced philips video equipment produced sony could longer obtain integrated circuits video equipment suppliers would incur substantial expense take substantial time redesigning products compatible components manufacturers cannot assure would successful obtaining components alternative sources timely costeffective manner additionally sony philips competitors video communications market may adversely affect ability obtain necessary components failure obtain adequate supplies could prevent delay product shipments could harm business also rely introduction schedules key components development launch new products particular network access products delays availability key components could harm business rely thirdparty license agreements termination impairment agreements may cause delays reductions product introductions shipments would harm business licensing agreements various suppliers software incorporated products example license video communications source code radvision telesoft omnitel adtran ebsnet video algorithm protocols real networks ezenia development source code digital equipment philips semiconductor audio algorithms lucent technologies communication software databeam windows software microsoft addition new network access products interoperability agreements jetstream communications tollbridge technologies depend significantly agreements ability secure similar licenses gateway providers thirdparty software licenses may continue available us commercially reasonable terms termination impairment licenses could result delays reductions new product introductions current product shipments equivalent software could developed licensed integrated possible would harm business lower expected market acceptance products price competition would negatively impact business products accepted market profitability could harmed example lowered price showstation ip 23 effective march 1999 due market acceptance issues product similar price reductions demand issues could occur products could negatively impact net revenues profitability end 2000 growth rates voice video product sales channels endusers significant future growth rates products may achieve levels growth profitability could also negatively affected future result continuing competitive price pressure conferencing equipment network access device markets although past price reductions driven desire expand market products expect future may reduce prices introduce new products carry lower margins order expand market respond competitive pricing pressures actions may desired impact international sales accounting increasing portion net revenues risks inherent international sales could harm business international sales accounting increasing portion net revenues anticipate international sales continue account significant portion net revenues foreseeable future international sales subject certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations longer payment cycles problems collecting accounts receivable potentially adverse tax consequences additionally international net revenues may fluctuate percentage net revenues future introduce new products since expect initially introduce new products north america also additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner business could harmed cannot assure able maintain increase international market demand products additionally date substantial majority international sales denominated us currency however international sales denominated local currencies future transactions would subject currency fluctuation risks completion acquisition circa communications ltd contingent upon certain conditions september 2000 signed definitive agreement acquire circa communications ltd circa canadian corporation develops voice internet protocol voip telephony products believe acquisition circa augment voip technology product development product offerings currently anticipate acquisition completed end first quarter 2001 however acquisition subject fulfillment certain conditions circa including general availability certain circas voip products proper legal filing canadian government event circa satisfy conditions required us complete acquisition probable consummate acquisition consummate circa acquisition plans augment voip technology product development product offerings would delayed delay would harm business recent acquisition accord networks could adversely impact business completed acquisition accord networks accord february 28 2001 result completion acquisition face additional risks set forth section entitled risk factors pages 1322 proxy statementprospectus dated january 29 2001 filed securities exchange commission january 24 2001 incorporated reference annual report form 10k risks relate impact merger business risks related operation combined company risks related business accord including operations israel business could suffer result future acquisitions circa communications may make additional acquisitions future example described currently scheduled complete acquisition circa communications end first quarter 2001 failure achieve anticipated benefits future acquisition successfully integrate operations circa could also harm business results operations additionally cannot assure incur material charges future quarters reflect additional costs associated future acquisitions may make conflicts channel partners could hurt sales products various oem agreements major telecommunications equipment manufacturers lucent technologies whereby manufacture products work equipment oem relationships create channel conflicts distributors directly compete oem partner could adversely affect revenue nonoem channels many distributors also sell equipment competes products distributors could devote attention products could harm business channel conflicts could arise cause distributors devote resources nonpolycom communications equipment would negatively affect business results operations currently agreements video communications equipment suppliers equipment suppliers resell soundpoint pc voice products along video communications products compete equipment suppliers voice conferencing market cannot assure enter future agreements resell supply new enhanced communication products current video products video products development directly competitive products suppliers consequence competition us suppliers likely increase resulting strain existing relationship companies strain could limit potential contribution relationships business addition depend several key agreements including agreement jetstream communications network access products market conflicts may occur evolving market seek relationships conflicts could harm business success depends ability assimilate new technologies products properly train resellers use products markets voice video communications products network access products characterized rapidly changing technology evolving industry standards frequent new product introductions success new products depends several factors including proper new product definition product cost timely completion introduction new products differentiation new products competitors market acceptance products additionally properly addressing complexities associated dsl isdn compatibility reseller training technical sales support well field support also factors may affect success market shift communications circuitswitched ipbased technologies time may require us add new resellers gain new core technological competencies attempting address needs need develop new products internal development efforts joint developments companies cannot assure successfully identify new voice video network access product opportunities develop bring new voice video network access products market timely manner cannot assure competing technologies developed others render products technologies obsolete noncompetitive failure new voice video network access product development efforts inability service maintain necessary thirdparty interoperability licenses would harm business results operations manufacturing disruptions capacity constraints would harm business subcontract manufacture soundstation premier soundpoint pro viewstation new network access products celestica thirdparty contract manufacturer use celesticas thailand facilities disruption services due natural disaster economic political difficulties thailand asia reason disruption would harm business results operations also celestica currently sole source manufacturer products subcontractor experiences interruption operations otherwise suffers capacity constraints would experience delay shipping products may able meet demand products either could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes us certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations product obsolescence asset impairment negatively affect results operations operate high technology market subject rapid frequent technology changes technology changes often render existing technologies obsolete obsolescence issues require writedowns inventory value determined existing inventory cannot sold net realizable value situation occurred first quarter 2000 showstation ip recorded additional excess obsolescence charges addition introduction soundpoint pro product materially negative effect future sales soundpoint product net revenues could reduced excess obsolescence issue concerning soundpoint inventory could result could lower profitability potential new products render existing products obsolete reduce demand existing products exists every one products cannot assure future inventory investment license fixed asset writedowns happen future writedowns occur could harm business recent transition new enterprise resource planning system could adversely affect operations last quarter 1999 throughout fiscal year 2000 migrated operations new enterprise resource planning system affects almost every facet business operations typically conversions negatively affect companys ability conduct business due problems historical data conversion errors required personnel training time associated new system delays implementation unforeseen technical problems conversion problems arise transitional phase could experience delays lack shipping inability support existing customer base delays paying vendors delays collecting customers inability place receive product orders operational problems occur profitability financial position could negatively impacted failure adequately service support products could harm results operations recent growth due large part expansion products complex technologies protocols including recently introduced network access products increased need increased product warranty service capabilities cannot develop train internal support organization maintain relationship outside technical support could harm business cash flow could fluctuate due ability collect receivables 1999 2000 initiated significant investments europe asia expand business regions europe asia international regions credit terms typically longer united states therefore europe asia international regions grow percentage net revenues happened 1999 2000 accounts receivable balances likely increase previous years additionally sales network access video communications markets typically longer payment periods traditional experience voice communications market therefore network access video products constitute greater percentage net revenues accounts receivable balances likely increase increases would cause days sales outstanding increase prior years negatively affect future cash flows although able offset effects influences additional incentives offered resellers end quarter form prepaid discounts additional incentives lowered profitability stock price fluctuates result conduct business stock market fluctuations market price common stock experienced significant fluctuations may continue fluctuate significantly market price common stock may significantly affected variety factors including •statements changes opinions ratings earnings estimates made brokerage firms industry analysts relating market business relating us specifically •the announcement new products product enhancements us competitors •technological innovations us competitors •quarterly variations results operations •general market conditions market conditions specific particular industries •international macroeconomic factors addition recently stock market experienced extreme price volume fluctuations substantial effect market prices many high technology companies polycom fluctuations often unrelated operating performance specific companies business interruptions could adversely affect business operations vulnerable interruption fire earthquake power loss telecommunications failure events beyond control detailed disaster recovery plan facilities state california currently subject electrical blackouts consequence shortage available electrical power event blackouts continue increase severity could disrupt operations affected facilities addition carry sufficient business interruption insurance compensate us losses may occur losses damages incurred us could material adverse effect business reseller customer contracts typically shortterm early terminations contracts may harm results operations typically enter longterm contracts reseller customers cannot certain future order levels reseller customers enter longterm contract generally terminable convenience customer event early termination one major customers unlikely able rapidly replace revenue source would harm results operations failure manage growth may harm business grown recent years internal expansion acquisitions continued growth may cause significant strain infrastructure internal systems manage growth effectively must continue improve expand management information systems continue resource additions headcount capital processes timely efficient manner cannot assure resources available need sufficient capital fund resource needs addition success depends significant extent management skills executive officers unable manage growth effectively experience shortfall resources results operations harmed fail successfully compete markets business results operations would significantly harmed video communications market major competitors include picturetel tandberg sony vcon vtel many companies substantial financial resources production marketing engineering capabilities develop manufacture market sell products addition advances telecommunications standards connectivity video processing technology increasing market acceptance video communications established new companies may develop market products competitive video communications products addition video streaming products employ technology microsoft real networks solutions competitive products market voice communications equipment particularly voiceconferencing highly competitive subject rapid technological change regulatory developments emerging industry standards expect competition persist increase future voice communications equipment market segment major competitors include clearone soundgear nec gentner companies offer lower cost fullduplex speakerphones lucent technologies hello direct hello direct one resellers offers competitive product hello direct name oem relationship gentner companies substantial financial resources production marketing engineering capabilities develop manufacture market sell products addition major telephony manufacturers produce handsfree speakerphone units lower cost voice communications products network access products significant competition efficient networks netopia 3com cisco systems cannot assure able compete successfully current future competitors expect competitors continue improve performance current products introduce new products new technologies provide improved performance characteristics new product introductions competitors could cause significant decline sales loss market acceptance existing products future products believe possible effects ongoing competition may reduction prices products competitors products introduction additional lower priced competitive products expect increased competitive pressure may lead intensified pricebased competition resulting lower prices gross margins would significantly harm results operations rely patents trademarks copyrights trade secrets protect proprietary rights may sufficient protect intellectual property rely combination patent copyright trademark trade secret laws confidentiality procedures protect proprietary rights others may independently develop similar proprietary information techniques gain access intellectual property rights disclose technology addition cannot assure patent registered trademark owned us invalidated circumvented challenged us foreign countries rights granted thereunder provide competitive advantages us pending future patent applications issued scope claims sought us furthermore others may develop similar products duplicate products design around patents addition foreign intellectual property laws may protect intellectual property rights litigation may necessary enforce patents intellectual property rights protect trade secrets determine validity scope proprietary rights others defend claims infringement invalidity litigation could result substantial costs diversion resources could harm business face might future face intellectual property infringement claims might costly resolve time received may future receive communications third parties asserting patent intellectual property rights covering products example named along approximately 90 manufacturers distributors electronic semiconductor products served complaint filed lemelson medical education research foundation alleging patent infringement us addition industry characterized uncertain conflicting intellectual property claims vigorous protection pursuit intellectual property rights positions occasion resulted significant often protracted expensive litigation past involved litigation adversely affected operating results cannot assure prevail litigation intellectual property claims made us future prohibited using technologies subject claims required obtain licenses make corresponding royalty payments addition necessary management attention legal costs associated litigation significant adverse effect operating results fail successfully attract retain qualified personnel business harmed future success depend part continued ability hire assimilate retain qualified personnel competition personnel intense may successful attracting retaining personnel loss key employee failure key employee perform current position inability attract retain skilled employees particularly technical management needed could harm business loss services executive officer key technical management personnel could harm business item 7aitem 7 managements discussion analysis financial condition results operations read following discussion conjunction consolidated financial statements related notes following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 forwardlooking statements including among things statements regarding anticipated product offerings customer geographic revenue mix gross margins operating costs expenses involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed factors affecting future operations elsewhere annual report form 10k overview incorporated december 1990 engaged principally research development inception september 1992 began volume shipments first voice communications product soundstation currently voice communications products consist principally soundstation voicestation soundpoint vortex product families january 1998 completed acquisition viavideo communications inc viavideo development stage company designed developed high quality low cost easytouse group video communications systems february 1998 began customer shipments viewstation products currently video communications products consist principally viewstation ipower visual concert viavideo product families december 1999 acquired atlas communication engines inc atlas privately held oem supplier integrated access devices iads emerging supplier digital subscriber line dsl routers provide voice data dsl networks current network access product offerings comprised netengine line iads dsl routers february 2001 acquired accord networks ltd accord leading provider next generation richmedia network products enable internet protocol network voice video communications customer premises service provider markets accords product line become network systems product family consists principally mgc gw pathnavigator weboffice line products provide multipoint video connectivity gateway capability disparate networks see note 3 notes consolidated financial statements october 2001 completed acquisition picturetel corporation picturetel terms transaction exchanged combination 01177 shares polycom common stock 311 cash outstanding share picturetel common stock total approximately 66 million shares common stock net treasury shares approximately 183 million cash exchanged outstanding shares picturetels common stock addition assumed picturetel options warrants following assumption became exercisable approximately 12 million shares common stock acquisition accounted purchase business combination using guidance contained sfas 141 acquisition picturetel enhances video communications product family ipower pcbased architecture product series see note 3 notes consolidated financial statements december 31 2001 derived substantial majority net revenues sales viewstation ipower network systems soundstation products anticipate viewstation ipower mgc gw soundstation products services account substantial majority net revenues least next twelve months see note 16 notes consolidated financial statements factor adversely affecting demand supply products would harm business financial condition cash flows results operations results operations three years ended december 31 2001 following table sets forth percentage net revenues consolidated statement income data periods indicated net revenues net revenues year ended december 31 2001 increased 3 period 2000 increase due increased sales volume network systems products increased 423 million 2000 831 million 2001 ipowerrelated service revenue 77 million resulting acquisition picturetel october 2001 increases offset decreases volume network access voice communications video communications product revenue decreased 45 16 6 respectively year decrease viewstation video communications product sales largely offset ipower video communications product sales fourth quarter 2001 believe lower sales video voice network access products 2001 due principally reduction capital spending united states due downturn economic activity past year resulted channel partners reducing level inventory typically hold regional basis asia europe revenues increased 39 3 respectively 2001 2000 north america latin america revenues decreased slightly 2001 2000 included product revenues voice nonipower video network systems products immaterial amounts related service revenue net revenues year ended december 31 2000 increased 66 period 1999 increase due primarily increased sales volume video communication products accounted 60 total increase addition sales volume increases network access voice communication network systems products also contributed improvement 1999 increase voice communications revenue accounted 12 total increase network access products accounted 16 total increase network systems revenue accounted remaining 12 total increase also significant increase sales international region 2000 1999 due increased focus expanding foreign markets expansion included adding sales marketing operational administrative resources major contributor expected growth broadband market deployment dsl beginning second half 2000 continuing year 2001 many dsl providers experienced delays delivering service caused financial troubles companies dsl providers customers network access products oem providers use resellers service delays slowed expected growth market turn slowed sales network access products conditions persist 2002 negatively impact revenues network access products 2001 2000 1999 derived substantial majority net revenues sales video communication voice communication network systems network access products customer accounted 10 net revenues fiscal years ended december 31 2001 2000 however one customer lucent technologies accounted 11 net revenues three months ended december 31 2000 primarily sales network access products addition lucent technologies accounted 10 net revenues 1999 customer reseller accounted 10 net revenues periods see note 16 notes consolidated financial statements business segment information business subject risks arising domestic global economic conditions 2001 economic recession unites states slowed overall spending point industries delayed reduced technology purchases economic downturn continues 2002 likely continue adversely affect results operations customers delay reduce orders products fall short revenue expectations given quarter 2002 entire year conditions would negatively affect business profitability 2001 impact adverse economic conditions 2002 difficult predict time represents significant uncertainty respect 2002 operating results addition weakness enduser market products could negatively affect cash flow reseller customers could turn delay paying obligations us would increase credit risk exposure could harm profitability financial condition cash flow international net revenues outside canada us accounted 36 32 30 total net revenues 2001 2000 1999 respectively see note 16 notes consolidated financial statements percentage improvement international component revenues 2001 2000 due growth asia europe sales video communications network systems products reductions sales video voice network access products north america fiscal year 2000 made investments europe asia lesser degree latin america expansion resources main reason increase international percentage total net revenues 2001 2000 despite increase net revenue sales network systems products sold primarily north america increase video communication products unit sales volume europe asia latin america primary reason increase international percentage total net revenues 2000 1999 anticipate international sales continue account significant portion total net revenues foreseeable future plan continue expansion europe asia latin america international sales however subject certain inherent risks including economic weakness international markets unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations longer payment cycles problems collecting accounts receivable potentially adverse tax consequences additionally international net revenues may fluctuate percentage net revenues future introduce new products since expect initially introduce products north america also additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner business could harmed cannot assure able maintain increase international market demand products additionally date substantial majority international sales denominated us currency however international sales denominated local currencies future transactions would subject currency fluctuation risks example consequence acquisition picturetel completed october 2001 anticipate sell ipower products related services nonus dollar denominations due lack experience foreign currency hedging transactions may risk incurring foreign currency losses could negatively affect consolidated financial position results operations cash flows date establishment european currency unit euro european union common legal currency europe significant impact us since substantial majority international sales denominated us currency however may impact future due recent weakening euro dollar requires customers convert greater number euros dollars settle outstanding debts us cost net revenues cost net revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments allocation overhead expenses cost net revenues percentage total net revenues fiscal 2001 44 consistent period 2000 overall favorable product mix generated increased shipments higher margin network systems products offset writedown network access inventory net realizable value comparing cost net revenues percentage net revenues 2000 1999 percentage 44 overall favorable product mix generated increased shipments higher margin network systems video products favorable material price variances offset writedown certain media server inventory including showstation ip net realizable value higher shipment volumes lower margin network access products forecasting future gross margin percentages difficult number risks associated maintaining current gross margin levels example uncertainties surrounding revenue levels related production level variances competition changes technology changes product mix manufacturing efficiencies subcontractors manufacturing purchased part variances warranty costs timing sales next quarters cause cost net revenues percentage fluctuate significantly additionally iad dsl equipment products ipower products voip products desktop products significantly higher cost net revenue percentage network systems viewstation soundstation products accordingly full year ipower revenue significant revenue growth iad dsl voip desktop products negative effect cost net revenues percentages also may reduce prices products future competitive reasons stimulate demand could increase cost net revenues percentage risk potential price reductions would offset competitive pressures stimulate demand addition cost variances associated manufacturing ramp new products netengine voip telephony products voicestation 100 new product could occur would increase cost net revenues percentage similarly may incur unfavorable cost variances associated manufacturing ramp associated transition ipower video products picturetel manufacturing facilities subcontractor thailand gross margins associated viavideo viewstation sp ipower video products soundpoint pro lower targeted gross margins product portfolio gross margins network systems products higher closer targeted gross margins thus proportional contribution products product mix significant impact overall gross margins addition uncertainties listed cost net revenues percentage net revenues may increase due change mix distribution channels mix international versus north american revenues 2001 wrote network access products inventory net realizable value significantly lower value inventory adjustment writedown due part delay deployment dsl technology current value network access products inventory based upon expectations performance market network access products future market grow future currently expect could write network access products inventory would negatively affect cost net revenues consolidated financial position results operations cash flows sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force advertising promotional expenses product marketing allocation overhead expenses customer service support costs 6 increase absolute dollars 2001 2000 due primarily increased marketing efforts related network systems products increase investment worldwide sales effort increase sales marketing expenses absolute dollars 2000 1999 primarily related business growth associated increased advertising promotional expenditures video network systems network access products additionally increase investment worldwide sales effort also contributed increases 1999 expect continue increase sales marketing expenses absolute dollar amounts effort expand north american international markets market new products establish expand distribution channels particular acquisitions picturetel accord circa aspi expanded product portfolio new products markets require significant additional marketing expenditures communicate value new product offerings well significant additional sales expenditures develop new sales organization markets addition due innovative nature viavideo viewstation ipower network systems web office path navigator vortex voip products believe incur additional expenses sales marketing especially advertising educate potential customers desirability products competing products also invest international markets increasing absolute dollars spent area currently expanding service organization provide expanded improved support products increase sales marketing expenses research development expenses research development expenses consist primarily compensation costs consulting fees depreciation allocation overhead expenses increases research development expenses occurred product lines except network access products declined slightly 2001 compared 2000 3 increase research development expense percentage net revenues reflects continued investments existing products well new investments ipower products acquired picturetel acquisition individually increase network systems product development expenditures accounted 43 total increase video communication product development expenditures accounted 52 total increase voice communications development expenditures accounted 6 total increase decrease network access product development accounted 1 change increases video voice network systems network access product development contributed total increase fiscal 2000 fiscal 1999 individually increase video communication product development expenditures accounted 37 total increase network access development expenditures accounted 29 total increase network systems development expenditures accounted 23 total increase voice communications product development expenditures accounted remaining 11 total increase years presented research development costs expensed incurred believe technological leadership critical success committed continuing high level research development also continued investment new product initiatives require significant research development spending consequently intend increase research development expenses absolute dollars future general administrative expenses general administrative expenses consist primarily compensation costs allocation overhead expenses bad debt writeoffs legal expenses accounting expenses increase general administrative expenses year ended december 31 2001 period 2000 due higher costs associated increased staffing infrastructure costs offset slightly lower expenditures associated implementation enterprise resource planning system implemented 2000 expense controls initiated 2001 increase general administrative expenses 2000 1999 due increased staffing infrastructure costs support growth including additional costs upgrade management information system expansions europe asia higher bad debt expense believe general administrative expenses continue increase absolute dollar amounts future primarily result expansion administrative staff costs related supporting larger company additional charges principally include expenses related expansion information system infrastructure charges related significant investments made international regions additionally writeoffs associated uncollectable receivables difficult predict material writeoffs could negatively affect profitability quarter made acquisition picturetel october 2001 adds administrative complexity organization result increased general administrative expenses acquisitionrelated costs incurred acquisitionrelated costs totaling 241 million 2001 48 million 2000 17 million 1999 2001 costs associated acquisitions accord circa picturetel aspi 2001 costs made 37 million restructuring charges related facility closings severance costs 67 million asset impairment charges 137 million acquisition costs including outside financial advisory legal accounting consulting services 2000 costs related acquisition accord completed february 2001 1999 costs related acquisition atlas completed december 1999 charges 2000 1999 outside financial advisory legal accounting services expect incur future material expenses relating acquisitions may acquisition expenses related transactions future see note 4 notes consolidated financial statements purchased inprocess research development year ended december 31 2001 incurred charges totaling 526 million inprocess research development research development acquired part acquisitions picturetel circa aspi totaled 493 million 24 million 09 million respective acquisitions inprocess research development expensed upon acquisition technological feasibility established future alternative uses existed see note 3 notes consolidated financial statements amount allocated purchased inprocess research development intangible assets determined management using independent appraisal inprocess research development identified valued analysis data provided us concerning developmental products stage development time resources needed complete applicable expected income generating ability target markets associated risks income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development estimated net cash flows products based upon estimates revenue cost revenue research development costs sales marketing costs income taxes projects discounted rates ranging 30 40 percent relation stage completion technical risks associated achieving technological feasibility efforts develop purchased inprocess research development commercially viable products principally relate completion planning designing prototyping testing activities necessary establish products produced meet design specifications including function features technical performance requirements reasonably possible development technology could fail prohibitive cost inability perform required efforts complete technology factors outside control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance unable produce market product cost effectively following values assigned acquired picturetel inprocess research development project estimated completion percentages expected technology lives estimated time costs complete close picturetel acquisition thousands projects next generation products enable pc based multipoint collaborative audio video conferencing multiple communication standards protocols material changes estimated time cost complete inprocess research development december 31 2001 amortization goodwill purchased intangibles year ended december 31 2001 recorded 60 million amortization goodwill charge related circa acquisition amortization intangibles related picturetel circa aspi acquisitions goodwill intangible assets amortized expense estimated useful lives three years beginning january 1 2002 guidance statement financial accounting standards 142 goodwill intangible assets longer amortize goodwill estimated useful life instead evaluate asset impairment record adjustments necessary amortization purchase intangibles continue estimated useful lives grant repayment fourth quarter 2000 accord incurred charge 59 million relating repayment outstanding grants office chief scientist israel ocs israelus binational industrial research development foundation bird payments ocs bird derived directly commercial success accord products resulting research development funding received organizations litigation settlement november 20 1998 patent infringement claim filed accords us subsidiary accord networks inc united states district court district massachusetts alleging us subsidiary willfully deliberately infringing one ezenias patents complaint later amended allege us subsidiary also willfully deliberately infringing patents june 10 1999 accord added defendant lawsuit june 16 2000 accord us subsidiary entered written settlement agreement court entered order dismissing case lawsuit settlement cost 65 million final payment made december 28 2000 represents onetime charge resulting settlement reported litigation settlement consolidated statement operations june 2000 litigation reserve release september 3 1997 vtel corporation vtel filed lawsuit state district court travis county texas viavideo communications inc founders formerly employed vtel may 27 1998 following acquisition viavideo vtel amended suit add polycom defendant lawsuit vtel alleged breach contract breach confidential relationship disclosure proprietary information related allegations viavideo founders polycom answered suit denying entirety vtels allegations march 3 2000 vtel voluntarily dismissed allegations polycom viavideo prejudice consideration onetime item first quarter 2000 excess accrual associated expenses estimated would incur connection lawsuit totaling 18 million released since material expenses incurred see note 10 notes consolidated financial statements interest income net interest income net consists interest earned cash equivalents investments less bank charges resulting use bank accounts interest expense credit facilities interest income net interest expense 128 million 2001 84 million 2000 16 million 1999 fluctuations interest income net due primarily changes average cash investment balances throughout year significant relates followon common stock offering 2000 accords initial public offering together raised 2032 million third quarter 2000 interest income net likely fluctuate 2002 due movement cash balances caused cash outlay approximately 183 million october 2001 related acquisition picturetel cash increase approximately 238 million related followon public common stock offering completed first quarter 2002 addition interest income net also fluctuate due reduction interest rates throughout 2001 related monetary policy actions taken united states federal reserve board stimulate economic growth united states investments adjustment strategic reasons made various investments private companies included longterm assets consolidated balance sheet monitor value investments impairment make appropriate reductions carrying value necessary 2001 2000 determined value investments became impaired reduced carrying amount 32 million 59 million respectively provision income taxes tax provision income taxes 147 million 2001 242 million 2000 136 million 1999 decrease provision income taxes 2001 2000 attributable decrease us tax increase foreign tax due increase foreign income increase provision income taxes 2000 1999 primarily due increase taxes us foreign income december 31 2001 approximately 91 million net operating loss carryforwards 99 million tax credit carryforwards well deferred tax assets arising temporary differences see note 15 notes consolidated financial statements liquidity capital resources december 31 2001 principal sources liquidity included cash equivalents 1268 million shortterm investments 233 million longterm investments 687 million shortterm longterm investments consisted primarily us government securities state local government securities corporate debt equity securities 97 million invested publicly traded equity securities see note 5 notes consolidated financial statements addition 250 million line credit bank 43 million investments equity securities privatelyheld companies shown longterm assets balance sheet generated cash operating activities totaling 767 million 2001 381 million 2000 381 million 1999 increase cash provided operating activities 2001 2000 due net reduction trade receivables inventories deferred taxes 2001 compared increases items 2000 smaller increase prepaid current assets compared 2000 offset net reduction total liabilities accounts payable taxes payable liabilities lower net income noncash items comparing 2000 activity 1999 improvements net income noncash items increase tax benefits exercise employee stock options employee stock purchase plan transactions offset higher growth inventories deferred taxes nontrade receivables included current assets lower increase current liabilities total net change cash equivalents year ended 2001 decrease 626 million primary uses cash period 1218 million paid purchase acquisitions net cash received acquired companies 415 million purchase convertible notes receivable related picturetel acquisition 128 million purchases property plant equipment 13 million purchase trademarks licenses primary sources cash 767 million operating activities 208 million net maturities sales investments 173 million associated exercise stock options purchases employee stock purchase plan positive cash operating activities primarily result net loss considering noncash expenses depreciation amortization provision doubtful accounts investments adjustment writeoff inprocess research development tax benefits exercise employee stock options lower trade receivables inventories deferred taxes offset net decrease total liabilities including accounts payable taxes payable liabilities increase prepaid expenses current assets positive cash impact due inventory reductions may occur 2002 2001 february 2002 completed followon public offering sold 8050000 shares common stock including overallotment option 1050000 shares exercised underwriters price 3120 per share net proceeds offering approximately 238 million taking account underwriting discounts commissions expenses intend use net proceeds sale primarily general corporate purposes including working capital expenditures well acquisitions complementary businesses technologies issued letters credit bank credit facility totaling 84 million guarantee certain obligations picturetel subsequently returned bank december 2001 material commitments consist obligations operating leases addition open purchase orders contractual obligations approximately 285 million related inventory purchases december 31 2001 also maintain time commercial letters credit payments importation certain products amounts exceed 100000 outstanding less 120 days addition bank issued letters credit secure leases offices letters credit total approximately 186000 secured credit facilities cash deposits banks see notes 10 11 notes consolidated financial statements december 31 2001 following future minimum lease payments due lease obligations excluding leases subject cancellation within twelve months december 31 2001 thousands believe available cash equivalents investments bank line credit proceeds stock offering completed february 2002 sufficient meet operating expenses capital requirements forseeable future however may require desire additional funds support operating expenses capital requirements purposes acquisitions competitive reasons may seek raise additional funds public private equity financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology critical accounting policies managements discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies use reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements revenue recognition product returns recognize hardware product revenue using guidance sec staff accounting bulletin 101 revenue recognition financial statements statement financial accounting standards sfas 48 revenue recognition right return exists recognize software revenue accordance sop 972 software revenue recognition amended sop 989 modification sop 972 software revenue recognition respect certain transactions guidelines defer revenue recognition transactions persuasive evidence arrangement exist title transferred product payment contingent upon performance installation service obligations price fixed determinable payment reasonably assured addition estimate future product returns may occur based upon actual historical return rates reduce revenue estimated future returns historical data use calculate estimates properly reflect future returns estimates could revised addition defer revenue associated longterm customer maintenance contracts value contracts recognized ratably length customer contract customer programs incentives record estimated reductions revenue customer programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline may take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered warranty provide estimated cost hardware product warranties time revenue recognized engage product quality programs processes warranty obligation affected product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revisions estimated warranty liability would required allowance doubtful accounts maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers channel partners deteriorate resulting impairment ability make payments additional allowances may required excess obsolete inventory write excess obsolete inventory equal difference cost inventory estimated market value based upon assumptions future product lifecycles product demand market conditions actual product lifecycles product demand market conditions less favorable projected management additional inventory writedowns may required deferred refundable taxes estimate actual current tax exposure together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance december 31 2001 valuation allowance established deferred tax assets extent establish valuation allowance increase allowance period must include expense allowance within tax provision statement operations significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets fair value assets acquired liabilities assumed purchase combinations purchase combinations carried us require management estimate fair value assets acquired liabilities assumed combinations estimates fair value based business plan entities acquired including planned redundancies restructuring use assets acquired assumptions ultimate resolution obligations assumed future benefit received example picturetel acquisition identified vacated redundant facilities intend terminate sublease actual use assets resolution obligations differ estimates revisions estimated fair values would required change estimate occurs one year acquisition change would recorded statement operations goodwill identifiable intangibles assess impairment goodwill identifiable intangibles whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following •significant underperformance relative expected historical projected future operating results •significant changes manner use acquired assets strategy overall business •significant negative industry economic trends determine carrying value goodwill identified intangibles may recoverable based upon existence one indicators impairment measure impairment based projected discounted cash flow method using discount rate determined management commensurate risk inherent current business model accordance sfas 142 goodwill intangible assets january 1 2002 cease amortize goodwill arising acquisitions completed prior july 1 2001 lieu amortization required perform initial impairment review goodwill 2002 annual impairment review thereafter determine impairment review process goodwill impaired would record impairment charge statement operations nonmarketable securities periodically make strategic investments companies whose stock currently traded major stock exchange cost method accounting used account investments hold nonmaterial ownership percentage quarter assess value investments using information acquired industry trends management companies external sources based information acquired record investment impairment charge believe investment experienced decline value temporary future adverse changes market conditions poor operating results underlying investments could result losses inability recover carrying value investments may reflected investments current carrying value thereby possibly requiring impairment charge future recent accounting pronouncements july 2001 fasb issued sfas 141 business combinations sfas 141 requires purchase method accounting business combinations initiated june 30 2001 eliminates poolingofinterests method adopted pronouncement beginning picturetel corporation acquisition completed october 18 2001 see note 3 notes consolidated financial statements july 2001 fasb issued sfas 142 goodwill intangible assets effective fiscal years beginning december 15 2001 sfas 142 changes accounting goodwill amortization method impairment approach addition standard includes provisions upon adoption reclassification certain existing recognized intangibles goodwill reassessment useful lives existing recognized intangibles reclassification certain intangibles previously reported goodwill testing impairment existing goodwill intangibles existing goodwill intangibles adopt pronouncement january 1 2002 result adoption 63 million goodwill amortized ratably march 2004 cease adopted nonamortization provision goodwill contained within pronouncement new acquisitions beginning picturetel acquisition completed october 18 2001 see note 3 notes consolidated financial statements sfas 142 requires goodwill tested annually impairment using twostep process first step identify potential impairment transition step must measured beginning fiscal year however company six months date adoption complete first step second step goodwill impairment test measures amount impairment loss measured beginning year adoption must completed end fiscal year intangible assets deemed indefinite life tested impairment using onestep process compares fair value carrying amount asset beginning fiscal year pursuant requirements sfas 142 completed first quarter 2002 loss resulting first step impairment test reflected cumulative effect change accounting principle first quarter 2002 yet determined effect impairment tests consolidated financial position results operations cash flows august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets effective fiscal years beginning december 15 2001 sfas 144 supersedes fasb statement 121 accounting impairment disposal longlived assets longlived assets disposed accounting reporting provisions relating disposal segment business accounting principles board opinion 30 currently assessing impact sfas 144 consolidated financial position results operations cash flows september 2001 fasb emerging issues task force eitf issued eitf issue 0109 accounting consideration given vendor customer reseller vendors products codification eitf issues 0025 vendor income statement characterization consideration paid reseller vendors products 0014 accounting certain sales incentives 0022 accounting points certain timeor volumebased sales incentive offers free products services delivered future eitf 0025 codified eitf 0109 established treatment statement operations vendor consideration resellers vendors products eitf 0025 0109 effective interim yearend periods beginning december 15 2001 years ended december 31 2001 2000 85 million 95 million respectively cooperative advertising consideration charged reduction revenue currently assessing impact adoption issue consolidated financial position results operations cash flows factors affecting future operations investors carefully consider risks described making investment decision risks described ones face additional risks presently aware currently believe immaterial may also impair business operations business could harmed risks trading price common stock could decline due risks investors may lose part investment assessing risks investors also refer information contained incorporated reference annual report form 10k including consolidated financial statements related notes quarterly operating results may fluctuate significantly good indicator future performance quarterly operating results fluctuated significantly past may vary significantly future result number factors many control factors include •changes general economic conditions case recently economic downturn specific economic conditions prevailing broadband communications industry technology industries •near longterm impact recent terrorist attacks incidents military response attacks future terrorism responses terrorism •the effects integrating picturetels operations products distribution channels personnel •fluctuations demand products •the levels inventory products channel partners willing maintain •our distribution channels reducing inventory levels •slowing sales resellers customers places pressure resellers minimize inventory levels reduce purchases products •the level mix inventory hold meet future demand •further delays rollout digital subscriber line dsl technology failure rollout occur •market acceptance new product introductions product enhancement us competitors •impact unstable political situation recent hostilities middle east impact israeli operations •the prices products competitors •the timing size orders products •the mix products sell •fluctuations level international sales exposure international currency fluctuations •the cost availability components •manufacturing costs •the level cost warranty claims •changes distribution network •the impact seasonality various product lines geographic regions •the level royalties must pay third parties although experienced sequential quarterly revenue growth 1998 2000 fluctuations quarterly operating results due factors could prevent us sustaining sequential quarterly growth meeting expectations investors use past results predict future operating margins results example experienced sequential quarterly revenue decreases first three quarters fiscal 2001 profitability decreased 2001 2000 result factors believe periodtoperiod comparisons historical results operations good predictor future performance future operating results expectations stock market securities analysts investors stock price decline disproportionate amount sales occur end quarter operating results unpredictable timing customer orders product shipments harm operating results quarterly revenues operating results depend upon volume timing customer orders received given quarter percentage order able ship recognize revenue quarter extremely difficult forecast moreover majority orders given quarter historically shipped last month quarter sometimes last weeks quarter trend likely continue failure delay closing orders last part quarter would materially harm operating results event price common stock would decline difficulty estimating customer orders harm operating results typically ship products within short time receive order historically material backlog therefore backlog good indicator future net revenues result net revenues particular quarter extremely difficult predict additionally orders reseller customers based level demand endusers uncertainty enduser demand means quarter could significantly negatively impacted lower enduser orders could turn negatively affect orders receive resellers accordingly expectations short longterm future net revenues based almost exclusively estimate future demand firm reseller orders expense levels based part estimates receive majority customer orders last month quarter often last weeks quarter limited ability reduce expenses quickly reason orders net revenues meet expectations particular period accordingly significant shortfall demand products relation expectations would immediate adverse impact operating results general economic conditions may reduce revenues harm business grown become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers longer sales cycles deferral delay purchase commitments products increased price competition factors adversely impacted operating results 2001 example experienced sequential revenue decrease first three quarters 2001 profitability decrease 2001 2000 revenues increased fourth quarter 2001 compared third quarter 2001 first quarter 2002 subject similar risks particularly current economic downturn continues addition also face risk resellers built inventories anticipation growth sales growth occur anticipated resellers reason including continuation current economic downturn 2002 resellers may substantially decrease amount product order us subsequent periods product returns may exceed historical predicted levels would harm business sales endusers channel partners 2001 lower expected therefore channel partners reduced inventory levels 2001 may reduce inventory levels future particularly voice video communication products area face risks related dependence distributors resellers sell products subject risks associated distributors resellers product inventories product sellthrough sell significant amount products distributors resellers maintain inventory products sale dealers endusers substantial percentage total products sold particular quarter consist distributor reseller stocking orders typically provide special cost early payment incentives distributors resellers purchase minimum quantities contemplated agreements us distributors resellers unable sell adequate amount inventory products given quarter dealers endusers distributors resellers decide decrease inventories reason current economic downturn began fourth quarter 2000 continuing 2002 volume sales distributors resellers net revenues would negatively affected example current economic downturn negatively affected business operating results 2001 conditions continue future business operating results continue negatively affected moreover choose eliminate reduce stocking incentive programs quarterly revenues may fail meet expectations lower historical levels addition recently implemented reseller distributor certification program distributors resellers may refuse delay acceptance program could cause us lose resellers delay collection accounts receivable either results occur business results operations would harmed revenue estimates based largely enduser sales reports distributors resellers provide us monthly basis date believe data generally accurate north america less reliable outside region extent salesout channel inventory data inaccurate either north america outside north america may able make revenue estimates future periods may find previous estimates inaccurate addition need incorporate new resellers acquired result picturetel acquisition reporting process may take time complete major contributor expected growth broadband distribution market deployment dsl beginning second half 2000 continuing 2001 dsl providers experienced delays delivering service caused financial troubles companies dsl providers customers network access products original equipment manufacturers use resellers service delays slowed expected growth market turn materially decreased sales network access products decreased quarter 2001 conditions persist continue negatively impact revenues network access products subject risks associated success businesses distributors resellers many distributors resellers carry multiple products derive significant revenues undercapitalized failure businesses establish sustain profitability obtain financing could significant negative effect future revenue levels profitability current economic downturn united states regions could cause customers businesses suffer fail would harm business would also harmed large resellers affected current economic downturn example lucent technologies historically one larger resellers accounted 11 net revenues three months ended december 31 2000 primarily related lucents purchases network access products period addition lucent accounted 10 net revenues 1999 1998 2001 amount orders received lucent dropped significantly negative effect revenues profitability lucent continues limit purchases products due current economic downturn factor continue harm business avoid confusion among distributors resellers regarding product offerings need devote significant resources educating training take significant actions regarding product offerings important educate train distributors resellers avoid confusion example late first quarter 2000 began shipping viewstation fx product timing delivery date likely created confusion reseller customer base enduser customer market groups waited see new viewstation product desirable existing products therefore timing new product release likely negative effect 2000 first quarter salesin distributors resellers salesout endusers cannot assure similar situation happen addition acquisition picturetel could create confusion among distributor reseller customers due potential uncertainties concerning picturetels product offerings need devote significant resources educate train distributors resellers combined product offerings initial confusion may lead delays ordering products would negatively affect revenues moreover picturetel sold products directly endusers extent maintain direct sales relationships endusers relationships distributors resellers negatively affected conflicts channel partners could hurt sales products various oem agreements major telecommunications equipment manufacturers cisco systems lucent technologies whereby manufacture products work equipment oem relationships create channel conflicts distributors directly compete oem partners could adversely affect revenue nonoem channels many distributors also sell equipment competes products distributors could devote attention products could harm business example significant amount network systems revenues generated sales tandberg vcon compete us video communications product market due conflict may significantly reduce orders network systems products could harm business channel conflicts could arise cause distributors devote resources nonpolycom communications equipment would negatively affect business results operations current future products directly competitive products channel strategic partners example agreement cisco systems acoustic clarity technology included voip endpoints sold cisco systems intend introduce voip endpoint polycom brand incorporates technology license cisco systems product compete directly voip products sold cisco systems addition network access products directly competitive products produced siemens strategic reseller video communications products consequence conflicts competition partners likely increase potentially resulting strains existing relationships companies strain could limit potential contribution strategic relationships business restrict ability form strategic relationships companies future create additional competitive pressures us could harm business addition depend several key agreements including agreement jetstream communications network access products market conflicts may occur evolving market seek relationships conflicts could harm business channel partner contracts typically shortterm early termination contracts may harm results operations typically enter longterm contracts reseller customers cannot certain future order levels reseller customers enter longterm contract generally terminable convenience customer event early termination one major reseller customers unlikely able rapidly replace revenue source would harm results operations furthermore require resellers carrying picturetel products previously reseller relationship us enter new reseller agreements us agreements likely contain different terms previous agreements picturetel resellers may unwilling enter agreements us loss resellers could harm results operations experience seasonal fluctuations revenue sales products experienced seasonal fluctuations affected sequential growth rates products particularly third first quarters example slowdown third quarter sales products european region addition sales video communications products typically declined first quarter year compared fourth quarter prior year fluctuations negatively affect business quarters could cause operating results fall short anticipated results quarters difficulties integrating acquisitions could adversely impact business acquisition picturetel could adversely impact business completed acquisition picturetel october 2001 picturetel acquisition largest acquisition completed complex process integrating picturetel required continue require significant resources integrating picturetel continue time consuming expensive disruptive business integration process strained financial managerial controls reporting systems procedures resulted diversion management financial resources core business objectives failure achieve anticipated benefits acquisition successfully integrate operations picturetel could harm business results operations cash flows may realize benefits anticipate acquisition following significant challenges •expected synergy benefits acquisition lower costs may realized may realized slowly anticipated particularly regard costs associated reduction headcount facilities •potentially incompatible cultural differences two companies •incorporating picturetels technology products current future product lines •geographic dispersion operations •integrating picturetels technical team engineering organizations •generating market demand expanded product line includes pcbased systems collaborationintensive applications •integrating picturetels products business distribution manufacturing marketing support experience products •some picturetels suppliers distributors customers licensors competitors work competitors result may terminate business relationships us •the difficulty leveraging picturetels combined technologies capabilities across product lines customer bases •our inability retain previous picturetel customers employees incurred expect continue incur significant costs commit significant management time integrating picturetels operations technology development programs products information systems customers personnel costs likely continue substantial include costs •converting integrating upgrading information systems including extremely complex timeconsuming integration data picturetels incompatible enterprise resource planning system •integrating reorganizing operations including combining teams facilities processes various functional areas •identifying duplicative redundant resources facilities developing plans resource consolidation implementing plans •fees expenses professionals consultants involved completing integration process •settling existing picturetel liabilities •costs associated vacating subleasing closing facilities •employee relocation redeployment severance costs •integrating technology products •other transaction costs associated acquisition including financial advisor attorney accountant financial printer fees addition significant costs associated converting integrating picturetels information systems significant risks associated process example migrating picturetel data information system lose data may inaccessible us lengthy integration process addition may need upgrade information systems difficulties integrating past future acquisitions could adversely affect business critical growth efficient effective integration acquired businesses organization result spent continue spend significant resources identifying acquiring businesses addition picturetel acquired following businesses last fiscal year atlanta signal processors incorporated aspi november 2001 circa communications ltd circa april 2001 accord networks ltd accord february 2001 acquisitions involve numerous risks including difficulties integrating operations technologies products acquired companies diversion managements attention business concerns potential loss key employees acquired companies failure achieve anticipated benefits acquisitions successfully integrate operations aspi circa accord could also harm business results operations cash flows may make additional acquisitions future failure achieve anticipated benefits future acquisition could also harm business results operations cash flows additionally cannot assure incur material charges future quarters reflect additional costs associated future acquisitions may make difficulties may encounter managing substantially larger business could adversely affect operating results experienced significant growth business operations last four years ability manage growth future growth affect operating results business grown recent years internal expansion acquisitions continued growth may cause significant strain infrastructure internal systems managerial resources example annual revenues increased 52 million 1997 383 million 2001 last 12 months acquired accord circa picturetel aspi headcount increased 175 employees december 31 1997 526 employees december 31 1999 1269 employees december 31 2001 manage growth effectively must continue improve expand infrastructure including operating administrative systems controls continue managing headcount capital processes efficient manner productivity quality products may adversely affected integrate train new employees quickly effectively coordinate among executive engineering finance marketing sales operations customer support organizations add complexity organization increase operating expenses addition revenues may grow sufficient rate absorb costs associated larger overall headcount integrating picturetel complicate tasks example currently converting integrating picturetels information systems complex timeconsuming process addition acquisition picturetel video communications product development group located multiple locations limited experience coordinating large geographically separated product development group addition future growth may require significant additional resources cannot assure resources available need sufficient capital fund resource needs also assess resources following acquisitions likely determine redundancy certain areas require consolidation resources organizational disruptions associated consolidation process could require management attention financial expenditure unable manage growth effectively experience shortfall resources must take additional restructuring charges results operations harmed officers key personnel worked together short period time recently joined us officers key personnel worked together short period time example three executive officers joined us within past twelve months addition executive officers recently assumed significant new responsibilities may require time transition new roles fail successfully attract retain qualified personnel business harmed future success depend part continued ability hire assimilate retain qualified personnel competition personnel intense may successful attracting retaining personnel loss key employee failure key employee perform current position inability attract retain skilled employees particularly technical management needed could harm business addition many key employees israel responsible development network systems products obligated perform annual military reserve duty may called active duty time emergency conditions loss services executive officer key technical management personnel could harm business fail compete successfully business results operations would significantly harmed face significant competition broadband communications industry subject rapid technological change video communications major competitors include aethra clearone communications formerly gentner nec panasonic philips viseon formerly rsi sony sun microsystems tandberg vcon vtel well various smaller new industry entrants broadband networks imagecom motion media technology rosetel system videra zydacron many companies substantial financial resources production marketing engineering capabilities develop manufacture market sell products addition advances telecommunications standards connectivity video processing technology increasing market acceptance video communications established new companies may develop market products competitive video communications products believe face increasing competition alternative video communications solutions employ new technologies new combinations technologies companies 3com cisco systems compaq dell meetingone microsoft nortel networks realnetworks webex enable webbased networkbased video communications lowcost digital camera systems market voice communications equipment particularly voiceconferencing products highly competitive also subject rapid technological change regulatory developments emerging industry standards expect competition persist increase future area voice communications major competitors include clearone communications nec soundgear companies offer lower cost fullduplex speakerphones lucent technologies hello direct hello direct one resellers offers competitive product hello direct name oem relationship clearone communications companies substantial financial resources production marketing engineering capabilities develop manufacture market sell products addition major telephony manufacturers produce handsfree speakerphone units lower cost voice communications products network access products face significant competition 3com adtran netopia siemens network systems business significant competition avaya cisco systems ezenia radvision network systems revenue heavily dependent purchases video product competitors network systems customers decide reduce purchases due potential competition harm business cannot assure able compete successfully current future competitors expect competitors continue improve performance current products introduce new products new technologies provide improved performance characteristics new product introductions competitors could cause significant decline sales loss market acceptance existing products future products believe possible effects ongoing competition may reduction prices products competitors products introduction additional lower priced competitive products expect increased competitive pressure may lead intensified pricebased competition resulting lower prices gross margins would significantly harm results operations face risks related international operations sales significant operations israel subject risks associated political regulatory environment israel principal research development manufacturing facilities network systems group many groups suppliers located israel political economic military conditions israel directly affect network systems groups operations since establishment state israel 1948 number armed conflicts taken place israel arab neighbors current futurearmed conflicts political instability region may impair ability produce sell network systems products could disrupt research developmental activities state hostility varying degree intensity led security economic problems israel future peace efforts israel arab neighbors remains uncertain recent months marked increase civil unrest hostility israelis palestinians hostility could adverse impact results operations technology used develop current network systems products developed part grants israeli office chief scientist israeli law technology developed pursuant grants office chief scientist cannot transferred person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer certain technology third parties manufacture products outside israel may adversely affect operating results development additional network systems products significantly reduce value technology international sales represent increasing portion net revenue risks inherent international sales could harm business international sales represent increasing portion net revenues anticipate international sales continue account significant portion net revenues foreseeable future international sales subject certain inherent risks including following •unexpected changes regulatory requirements tariffs •difficulties staffing managing foreign operations •longer payment cycles •problems collecting accounts receivable •potentially adverse tax consequences •potential foreign currency exchange rate fluctuations also poor economic conditions overseas adversely impact business europe 2001 conditions expected continue 2002 additionally international net revenues may fluctuate percentage total net revenues future introduce new products fluctuations primarily result practice introducing new products north america first additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner business could harmed cannot assure able maintain increase international market demand products although date substantial majority international sales denominated us currency expect growing number sales denominated nonus currencies near future picturetel traditionally accepted wide variety currencies international sales result expect business significantly vulnerable currency fluctuations could adversely impact results operations moreover result increased exposure currency fluctuations likely begin engaging currency hedging activities however limited experience hedging activities may successful could harm operating results financial condition limited supply sources key components products operations could harmed supply interruptions component defects unavailability components key components used products currently available one source others available limited number sources including key integrated circuits optical elements also obtain certain plastic housings metal castings components suppliers located china southeast asia countries political economic instability region future import restrictions may cause delays inability obtain supplies raw material supply commitments suppliers generally purchase components purchase order basis either directly contract manufacturers contract manufacturers limited experience purchasing volume supplies various components products components included products microprocessors integrated circuits time subject limited allocations suppliers event contract manufacturers unable obtain sufficient supplies components develop alternative sources needed operating results could seriously harmed example 2000 encountered development delays component shortages relating network access products similar conditions occur business would suffer moreover operating results would seriously harmed receipt significant number defective components increase component prices inability obtain lower component prices response competitive price reductions additionally video communications products designed based integrated circuits produced philips semiconductor philips cameras produced sony could longer obtain integrated circuits cameras suppliers would incur substantial expense take substantial time redesigning products compatible components manufacturers cannot assure would successful obtaining components alternative sources timely costeffective manner additionally sony philips compete us video communications industry may adversely affect ability obtain necessary components failure obtain adequate supplies vital components could prevent delay product shipments could harm business also rely introduction schedules key components development launch new products delays availability key components could harm business manufacturing disruption capacity constraints would harm business subcontract manufacture soundstation premier soundpoint pro viewstation viavideo ipower 900 series netengine access products celestica thirdparty contract manufacturer use celesticas thailand facilities disruption services due natural disaster economic political difficulties thailand asia reason disruption would harm business results operations also celesticas thailand facility currently sole source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints would experience delay shipping products subcontract manufacture voip phones unicos malaysia facilities ipower 600 series sharps japan facilities unico sharp experiences interruption operations otherwise suffers capacity constraints would also experience delay shipping respective products result may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes us certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations subcontract manufacturing ipower 600 series product sharp electronics corporation sharp ipower 600 series product also contains sharp technology subsequently decide transfer manufacturing product sharp another manufacturer would reach alternate design solution include sharp technology alternate design could timeconsuming expensive develop could result manufacturing shipment delays increased manufacturing costs reseller enduser customer dissatisfaction addition currently process transferring manufacturing ipower 900 series product various aspi products current contract manufacturers celestica transition period could experience manufacturing shipment delays increased manufacturing costs reseller enduser customer dissatisfaction concentrates product manufacturing celesticas thailand facility increases exposure adverse financial consequences event disruption celesticas manufacturing capabilities reason network systems products manufactured israel currently experiencing internal external conflicts include terrorist military action could experience manufacturing disruption due acts associated conflict could harm business addition certain technology used network systems products developed grants office chief scientist israel israeli law prohibited transfer technology developed pursuant grants person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer technology third parties manufacture products outside israel may adversely affect operating results significantly reduce value technology developed grants face risks associated products product development may experience delays product introductions products may contain defects could adversely affect market acceptance products reputation seriously harm results operations 1998 2001 revenue growth due large part sales new video communications products although intend continue introduce new products visual concert products soundstation ip 3000 voicestation 100 soundpoint ip 400 pathnavigator weboffice products cannot assure new product releases timely made fact viewstation fx viavideo delayed original release dates believe negatively affected net revenues 2000 additionally new existing product introductions may contain defects may produce revenue growth experienced 1999 2000 acquisition picturetel video communications product development group located massachusetts texas since significant experience coordinating large geographically separated product development group may experience product delays future due communications logistics issues similarly acquisition aspi may contribute audio communications product delays audio communications product development group dispersed among california georgia canada past experienced delays introduction certain new products enhancements believe delays may occur future instance experienced delays introducing viewstation mp webstation 1998 original expected release dates due unforeseen technology manufacturing ramping issues similar delays occurred introduction showstation ip soundstation premier showstation affected first customer ship dates products also delays introducing soundstation ip product believe negatively impacted sales revenue first quarter 2001 soundpoint ip product introduction delayed impacted sales third fourth quarters 2001 also past picturetel experienced delays new product introductions including significant delay release ipower product adversely impacted picturetels revenues similar delays future new product offerings could adversely affect market acceptance products reputation seriously harm results operations face risks related deployment broadband communications services adoption rate new technologies success network access product line dependent continued deployment broadband services digital subscriber line dsl service providers beginning second half 2000 market broadband services experienced severe downturn characterized financial troubles many telecommunications service providers delays delivering broadband services downturn negatively impacted sales network access products example three months ended december 31 2001 generated 13 million network access product revenues compared 151 million comparable period 2000 moreover given lack demand network access products product line currently unprofitable generating negative gross margins market broadband services improve network access product line continue perform may restructure dispose product line could result financial charges disruption business invested significant resources developing products dependent adoption rate new technologies example soundstation ip soundpoint ip products dependent roll voiceoverip voip technologies success viavideo product depends increased use desktop video collaboration technologies use new technologies current future products based occur occurs slowly expected may able sell certain products significant volumes business may harmed lower expected market acceptance products price competition price decreases would negatively impact business products accepted market profitability could harmed example lowered price showstation ip 23 effective march 1999 market acceptance issues product similar price reductions demand issues could occur products could negatively impact net revenues profitability could also negatively affected future result continuing competitive price pressures sale video voice conferencing equipment network systems network access products could cause us reduce prices products reduced prices past order expand market products future may reduce prices introduce new products carry lower margins order expand market stimulate demand products cannot assure actions would desired result actions could adverse impact product margins profitability success depends ability assimilate new technologies products properly train resellers use products markets video voice communications products network systems products network access products characterized rapidly changing technology evolving industry standards frequent new product introductions success new products depends several factors including proper new product definition product cost timely completion introduction new products differentiation new products competitors market acceptance products additionally properly addressing complexities associated compatibility issues reseller training technical sales support well field support also factors may affect success market shift communications circuitswitched ipbased technologies time may require us add new resellers gain new core technological competencies attempting address needs need develop new products internal development efforts joint developments companies acquisitions may identify successful new product opportunities develop bring products market timely manner additionally cannot assure competing technologies developed others render products technologies obsolete noncompetitive failure new product development efforts inability service maintain necessary thirdparty interoperability licenses would harm business results operations product obsolescence excess inventory asset impairment negatively affect results operations operate high technology industry subject rapid frequent technology market demand changes often render existing technologies obsolete obsolescence issues require writedowns inventory value determined stated value existing inventory greater fair market value situation occurred 2001 recorded material excess obsolescence charges associated inventory network access products situation also occurred first quarter 2000 showstation ip deployment dsl delayed never materializes current level network access product inventory may deemed excessive may write much inventory could adversely affect profitability also viewstation product ipower products offer certain comparable functionality may compete customers sales one products negative effect sales product could significantly increase inventory levels negatively impacted product potential new products render existing products obsolete cause inventories existing products increase reduce demand existing products exists every one products addition made investments private companies classify longterm assets balance sheet value investments influenced many factors including operating effectiveness companies overall health companies industries strength private equity markets general market conditions past recorded charges earnings associated impairment investments example recorded charges 59 million fiscal 2000 32 million fiscal 2001 associated impairment investments due factors previously determined may future determine value investments impaired caused would cause us write stated value investments cannot assure future inventory investment license fixed asset writedowns happen future writedowns occur could harm business results operations failure adequately service support products could harm results operations recent growth due large part expansion products complex technologies including network access products network systems products ipower products increased need product warranty service capabilities cannot develop train internal support organization maintain relationship outside technical support could harm business insufficient proprietary rights fail protect rights business would materially impaired rely third party license agreements termination impairment agreements may cause delays reductions product introductions shipments would harm business licensing agreements various suppliers software incorporated products example license video communications source code adtran ebsnet omnitel radvision telesoft video algorithm protocols ezenia real networks development source code cisco systems philips semiconductor audio algorithms lucent technologies nortel networks texas instruments communication software databeam windows software microsoft addition interoperability agreements jetstream communications tollbridge technologies network access products depend significantly agreements ability secure similar licenses gateway providers thirdparty software licenses may continue available us commercially reasonable terms termination impairment licenses could result delays reductions new product introductions current product shipments equivalent software could developed licensed integrated possible would harm business results operations rely patents trademarks copyrights trade secrets protect proprietary rights may sufficient protect intellectual property rely combination patent copyright trademark trade secret laws confidentiality procedures protect proprietary rights others may independently develop similar proprietary information techniques gain access intellectual property rights disclose technology addition cannot assure patent registered trademark owned us invalidated circumvented challenged us foreign countries rights granted thereunder provide competitive advantages us pending future patent applications issued scope claims sought us furthermore others may develop similar products duplicate products design around patents addition foreign intellectual property laws may protect intellectual property rights litigation may necessary enforce patents intellectual property rights protect trade secrets determine validity scope proprietary rights others defend claims infringement invalidity litigation could result substantial costs diversion resources could harm business could ultimately unsuccessful protecting intellectual property rights face might future face intellectual property infringement claims might costly resolve time received may future receive communications third parties asserting patent intellectual property rights covering products example named along approximately 90 manufacturers distributors electronic semiconductor products served complaint filed lemelson medical education research foundation alleging patent infringement us suit stayed pending outcome different suit filed lemelson foundation addition industry characterized uncertain conflicting intellectual property claims vigorous protection pursuit intellectual property rights positions occasion resulted significant often protracted expensive litigation past involved litigation adversely affected operating results example november 1998 videoserver inc known ezenia inc filed patent infringement claim accords us subsidiary accord subsequently added defendant september 2000 accord us subsidiary entered settlement agreement ezenia case dismissed accord paid 65 million ezenia cannot assure prevail litigation intellectual property claims made us future prohibited using technologies subject claims required obtain licenses make corresponding royalty payments addition necessary management attention legal costs associated litigation significant adverse effect operating results financial condition business interruptions could adversely affect operations vulnerable interruption fire earthquake power loss telecommunications failure national catastrophe terrorist attacks occurred september 11 2001 events beyond control detailed disaster recovery plan facilities located california recently subject electrical blackouts consequence shortage available electrical power event blackouts continue increase severity could disrupt operations affected facilities addition carry sufficient business interruption insurance compensate us losses may occur losses damages incurred us could material adverse effect business results operations cash flow could fluctuate due ability collect receivables past several quarters initiated significant investments europe asia expand business regions europe asia international regions credit terms typically longer united states therefore europe asia international regions grow percentage net revenues happened 1999 2000 2001 accounts receivable balances likely increase compared previous years additionally sales network access network systems video communications industries typically longer payment periods compared voice communications market therefore network access network systems video products constitute greater percentage net revenues accounts receivable balances likely increase increases would cause days sales outstanding increase compared prior years negatively affect future cash flows although able largely offset effects influences additional incentives offered resellers end quarter form prepaid discounts additional incentives lowered profitability given downturn united states economy many companies opting take advantage incentives instead preserve liquidity addition economic downturn united states may restrict availability capital may delay collections resellers beyond historical experience would harm cash flow days sales outstanding performance also transition picturetels resellers picturetels credit policies credit policies resellers may find policies stringent result may delay confusion implementation credit policies resellers could result delayed collection receivables stringent credit policies could limit ability resellers pay products could result reduced sales products resellers finally resellers may unwilling unable meet credit terms may decide terminate relationship us stock price fluctuates result conduct business stock market fluctuations market price common stock experienced significant fluctuations may continue fluctuate significantly market price common stock may significantly affected variety factors including •statements changes opinions ratings earnings estimates made brokerage firms industry analysts relating market business relating us specifically •the announcement new products product enhancements us competitors •technological innovations us competitors •quarterly variations results operations •general market conditions market conditions specific particular industries •domestic international macroeconomic factors addition stock market recently experienced extreme price volume fluctuations substantial effect market prices many high technology companies like us fluctuations often unrelated operating performance specific companies item 7aitem 7 managements discussion analysis financial condition results operations read following discussion conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed factors affecting future operations document well information found elsewhere annual report form 10k overview incorporated december 1990 engaged principally research development inception september 1992 began volume shipments first voice communications product soundstation second quarter 2001 fourth quarter 2001 completed acquisitions circa communications ltd circa atlanta signal processors incorporated aspi respectively acquisitions added voice communications product line currently consists soundstation voicestation soundpoint vortex voip product families january 1998 completed acquisition viavideo communications inc viavideo development stage company designed developed high quality low cost easytouse group video communications systems february 1998 began customer shipments viewstation products fourth quarter 2001 completed acquisition picturetel corporation adding video communications product line currently consists viewstation ipower visual concert gms viavideo product families december 1999 acquired atlas communication engines inc atlas privately held oem supplier integrated access devices iads emerging supplier digital subscriber line dsl routers provide voice data dsl networks january 2003 sold product line verilink corporation see recent developments network access product offerings comprised netengine line iads dsl routers february 2001 acquired accord networks ltd accord leading provider next generation richmedia network products enable internet protocol network voice video communications customer premises service provider markets accords products initial network systems product offerings second quarter 2002 completed acquisition meetucom inc meetu adding network systems product line currently consists mgc gw voice bridge pathnavigator weboffice product families provide multipoint video connectivity gateway capability disparate networks consolidated financial statements year ended december 31 2002 include effects picturetel circa aspi acquisitions meetu included consolidated financial position results operations cash flows june 20 2002 date acquisition fiscal 2002 derived substantial majority net revenues sales viewstation ipower network systems soundstation products ipowerrelated services anticipate video communications products network systems voice communications products ipowerrelated services account substantial majority net revenues least next twelve months factor adversely affecting demand supply products would harm business financial condition cash flows results operations fiscal 2002 network systems segment contributed profitability percentage net revenues communications segment due principally higher gross margins network systems products network access segment negative gross margins see note 18 notes consolidated financial statements results operations three years ended december 31 2002 following table sets forth percentage net revenues consolidated statements operations data periods indicated net revenues net revenues year ended december 31 2002 increased 22 period 2001 net revenues year ended december 31 2002 communications network systems segments increased 29 4 respectively network access segment decreased 16 period 2001 increase communications due primarily increased sales volume video communications products ipowerrelated services video communications products net revenues increased 2616 million 2002 2050 million 2001 although viewstation product line contributed increase video communications net revenues growth primarily due addition ipower video product line added acquisition picturetel october 2001 due timing acquisition ipower product revenue reflected prior year numbers fourth quarter 2001 although overall 2002 video revenue grew experienced sequential quarterly revenue decreases second third fourth quarters 2002 primarily related declines video communications product revenue viewstation ipower product lines ipowerrelated services net revenues 293 million year ended december 31 2002 compared 59 million reported period 2001 revenue stream also added acquisition picturetel also contributing increase net revenues increase service revenue related network systems products increase sales voice ip installed voice products offset decreases sales volumes circuit switch voice communications products decreases sales network access product line 2002 compared 2001 installed voice products added acquisition aspi fourth quarter 2001 2002 began implement new directtouch strategy concert realignment channel partner strategy part new channel partner strategy channel inventory model changing reduce channel inventories optimal level dropshipment method certain channel partners end user customers third quarter fourth quarter 2002 believe channel partners video voice inventory decreased second third quarter 2002 respectively decrease due part shift channel partner strategy resulting us shipping fewer video voice units channel partners third fourth quarter 2002 decreased channel inventory levels less impact sales ipower units typically carried inventory channel partners regional basis north america europe asia latin america revenues increased 10 40 44 67 respectively year ended december 31 2002 year ended december 31 2001 included product revenues voice nonipower video network systems products immaterial amounts related service revenue net revenues year ended december 31 2001 increased 3 period 2000 net revenues year ended december 31 2001 communications network systems network access segments decreased 6 increased 97 decreased 45 respectively period 2000 increase overall revenue due increased sales volume network systems products increased 423 million 2000 831 million 2001 ipowerrelated service revenue 59 million resulting acquisition picturetel october 2001 increases offset decreases volume network access voice communications video communications product revenue decreased 45 15 5 respectively year decrease viewstation product sales largely offset ipower product sales fourth quarter 2001 believe lower sales video voice network access products 2001over 2000 due principally reduction capital spending united states due downturn economic activity 2001 resulted channel partners reducing level inventory typically hold regional basis asia europe revenues increased 39 3 respectively 2001 2000 north america latin america revenues decreased slightly 2001 2000 included product revenues voice nonipower video network systems products immaterial amounts related service revenue major contributor expected growth broadband market deployment dsl beginning second half 2000 market broadband services experienced severe downturn characterized financial troubles many telecommunications service providers delays delivering broadband services downturn continued 2002 negatively impacted sales network access products dsl providers customers network access products oem providers used channel partners service delays slowed expected growth market turn slowed sales volumes network access products result network access product revenues decreased 15 2002 2001 january 2003 made decision business longer strategic overall product offerings sold verilink corporation certain fixed assets intellectual property rights relating network access product line including line netengine integrated devices total 30 million cash 10 million paid us closing ii 025 million paid us first anniversary closing iii 175 million paid us quarterly based ten percent verilinks revenues related sale netengine products result sale network access product line verilink corporation future revenue associated product line 2002 2001 2000 derived substantial majority net revenues sales video communication voice communication network systems products customer accounted 10 net revenues fiscal years ended december 31 2002 2001 2000 year ended december 31 2002 network systems segment two channel partners represented approximately 20 network systems segment revenues believe unlikely loss one channel partners would material adverse affect net revenues segment believe endusers would likely purchase network systems products different channel partner see note 18 notes consolidated financial statements business segment information business subject risks arising domestic global economic conditions 2001 2002 economic downturn united states slowed overall spending point industries delayed reduced technology purchases economic downturn uncertainty technology spending continues 2003 currently appears likely adverse effect results operations 2003 channel partners delay reduce orders products may fall short revenue expectations 2003 second third quarters 2002 entire year conditions persist business financial performance continue negatively affected 2002 2001 example third quarter 2002 conditions resulted sequentially weaker video communications voice communications network systems network access product revenues second quarter 2002 extent adverse economic conditions 2003 difficult predict time represents significant uncertainty respect 2003 operating results addition weakness enduser market products could negatively affect revenue cash flow channel partners could turn delay orders delay paying obligations us could harm revenues profitability financial condition cash flow believe plans reduce channel inventories optimal level may limit revenue growth may cause decrease revenue near term fourth quarter 2002 addition plan continue implement changes channel partner strategy result smaller number channel partners change mix channel partners shift model direct interaction us direct enduser customers changes may cause additional disruptions channels negatively impact revenue growth near term international net revenues outside us canada accounted 42 36 32 total net revenues 2002 2001 2000 respectively see note 18 notes consolidated financial statements absolute dollar increase international component revenues 2002 2001 primarily driven increased sales volume video communications network systems products europe asia latin america increase network access products europe asia additionally international ipowerrelated services net revenues 111 million 25 2002 2001 respectively revenue stream added acquisition picturetel improvement international revenues 2001 2000 due growth asia sales video communications products growth asia europe sales network systems products reductions sales video voice network access products north america fiscal year 2000 made investments europe asia lesser degree latin america expansion resources main reason increase international percentage total net revenues 2001 2000 despite increase net revenue sales network systems products sold primarily north america anticipate international sales continue account significant portion total net revenues foreseeable future plan continue expansion asia europe international sales however subject certain inherent risks including potential economic weakness international markets political instability adverse economic impact terrorist attacks incidents military response attacks war hostilities changes foreign government regulations telecommunications standards export license requirements tariffs taxes trade barriers fluctuations currency exchange rates difficulty staffing managing foreign operations longer payment cycles difficulty collecting accounts receivable significant adverse changes currency exchange rates happened european market 2000 asian market late 1997 could cause products become relatively expensive customers particular country leading reduction revenue profitability country additionally international net revenues may fluctuate percentage net revenues future introduce new products since expect initially introduce products north america also additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner business could harmed cannot make assurances able maintain increase international market demand products additionally date substantial majority international sales denominated us currency however international sales denominated local currencies future transactions would subject currency fluctuation cost net revenues cost net revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments allocation overhead expenses cost net revenues percentage total net revenues fiscal 2002 44 consistent fiscal 2001 overall margins remained flat result favorable product mix generated increased shipments higher margin video products favorable network access margins due less writedowns inventory 2002 2001 offset higher service revenue lower margins result sale network access product line verilink corporation future cost sales associated product line fiscal 2002 network systems segment percentage net revenues contributed profitability communications segment due principally higher gross margins network systems products network access segment negative gross margins see note 18 notes consolidated financial statements comparing cost net revenues percentage net revenues 2001 2000 percentage 44 overall favorable product mix generated increased shipments higher margin network systems products offset writedown network access inventory net realizable value forecasting future gross margin percentages difficult number risks associated maintaining current gross margin levels example uncertainties surrounding revenue levels related production level variances competition changes technology changes product mix manufacturing efficiencies subcontractors manufacturing purchased part variances warranty costs timing sales next quarters cause cost net revenues percentage fluctuate significantly additionally ipower products voip products desktop products significantly higher cost net revenue percentage network systems viewstation soundstation products accordingly significant revenue growth ipower voip desktop products negative effect cost net revenues percentages also may reduce prices products future competitive reasons result difficult economy stimulate demand could increase cost net revenues percentage risk potential price reductions would offset competitive pressures stimulate demand addition cost variances associated manufacturing ramp new products writeoff initial inventory purchases due product launch delays lack market acceptance new products ipower 9000 series voiceplus bridging solution voip telephony products vtx 1000 viewstation ec viewstation ex mgc 25 new product development could occur would increase cost net revenues percentage quarter addition uncertainties listed cost net revenues percentage net revenues may increase due change mix distribution channels mix international versus north american revenues canada united states sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force advertising promotional expenses product marketing allocation overhead expenses including facilities costs 33 increase absolute dollars 2002 2001 due primarily increase headcount sales force increased product sales driven largely picturetel acquisition fourth quarter 2001 lesser extent focus public sector market result increases salaries commissions headcountrelated expenses travel also contributing absolute dollar increase overall efforts expand marketing efforts including addition chief marketing officer related staffing increased spending promotional materials trade shows outside consultants increase partially offset cost containment measures expense controls implemented second half 2002 due continued economic downturn uncertainty technology spending 6 increase absolute dollars 2001 2000 due primarily increased marketing efforts related network systems products increase investment worldwide sales effort sale network access product line significant impact sales marketing expense expect continue increase sales marketing expenses absolute dollar amounts expand north american international markets market new products expand public sector market acquisitions picturetel accord circa meetu aspi expanded product portfolio new products markets require significant additional marketing expenditures communicate value new product offerings well significant additional sales expenditures develop sales organization market products due innovative nature products viavideo viewstation ipower mgc gw weboffice pathnavigator vortex voip products believe incur additional expenses sales marketing especially advertising expand overall market drive penetration increase adoption rate technology products educate potential endusers desirability products competing products research development expenses research development expenses consist primarily compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs increases research development expenses occurred product lines 2002 2001 except network access products declined 39 2002 2001 declined slightly 2001 compared 2000 2 3 increase research development expense percentage net revenues 2002 2001 respectively reflects continued investments existing products well new investments ipower products acquired picturetel acquisition investments integrating existing acquired products developing new products launched first quarter 2003 increase partially offset cost containment measures expense controls implemented second half 2002 due continued economic downturn uncertainty technology spending 2002 individually video product development expenditures accounted 93 total increase due addition picturetel research development team full year versus part fourth quarter 2001 voice product development expenditures accounted 15 total increase network systems product development expenditures accounted 9 total increase corporate product development expenses accounted 1 change decrease network access product development expenses accounted 18 change 2001 individually increase network systems product development expenditures accounted 43 total increase video product development expenditures accounted 52 total increase voice product development expenditures accounted 6 total increase decrease network access product development accounted 1 change currently devoting significant portion research development expenses toward product lines gained picturetel accord circa aspi meetu acquisitions addition investing research development resources enhance upgrade polycom office suite products provides complete endtoend communications solution products include viewstation ipower gms mgc weboffice pathnavigator soundstation voicestation vortex provide multipoint video voice connectivity gateway capability disparate networks years presented research development costs expensed incurred believe technological leadership critical success committed continuing high level research development develop new technologies combat competitive pressures also continued investment new product initiatives require significant research development spending consequently intend increase research development expenses absolute dollars future result sale network access product line future research development expense associated product line general administrative expenses general administrative expenses consist primarily compensation costs professional service fees allocation overhead expenses including facilities costs bad debt expense increase absolute dollars spending general administrative 2002 2001 primarily result higher costs associated increased infrastructure costs outside services including increased costs associated regulatory requirements increase bad debt expense increase partially offset cost containment measures expense controls implemented second half 2002 due continued economic downturn uncertainty technology spending individually increase infrastructure costs accounted 24 total increase outside services accounted 38 total increase bad debt expense accounted 27 total increase remaining increase related numerous smaller items increase general administrative expenses year ended december 31 2001 period 2000 due higher costs associated increased staffing infrastructure costs offset slightly lower expenditures associated implementation enterprise resource planning system implemented 2000 expense controls initiated 2001 believe general administrative expenses likely continue increase absolute dollar amounts future primarily result expansion administrative staff costs related supporting larger company increased costs associated regulatory requirements continued investments international regions additional expenses principally relate expansion information system infrastructure charges related significant investments made international regions additionally predicting timing bad debt expense associated uncollectible receivables difficult particularly current economic environment material charges due uncollectability receivables could increase general administrative expenses negatively affect profitability quarter recorded sale network access product line impact general administrative expense acquisitionrelated costs recorded charge operations 37 million 2002 241 million 2001 48 million 2000 acquisitionrelated costs 2002 acquisitionrelated charges related primarily acquisition picturetel consisted primarily professional services costs complete integration companies 2001 costs associated acquisitions accord circa picturetel aspi 2001 costs made 37 million restructuring charges related facility closings severance costs 67 million asset impairment charges 137 million acquisition costs including outside financial advisory legal accounting consulting services 2000 costs related acquisition accord completed february 2001 charges include cost actions designed improve combined competitiveness productivity future profitability primarily relate elimination redundant excess facilities workforce combined businesses elimination redundant assets acquire another business future may incur material acquisition expenses related transactions see note 5 notes consolidated financial statements purchased inprocess research development years ended december 31 2002 2001 incurred charges totaling 09 million 526 million respectively inprocess research development research development acquired 2002 part acquisition meetucom inc 2001 part acquisitions picturetel circa aspi comprised 493 million 24 million 09 million respective acquisitions see note 3 notes consolidated financial statements amounts allocated purchased inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects cost approach uses concept replacement cost indicator fair value primary technique utilized valuing inprocess research development acquired meetu transaction cost approach based premise prudent investor would pay asset cost replace asset new one replacement cost based total costs net unrealized income tax deduction benefit spent developing inprocess technology meetus inception date valuation performed income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development 2001 estimated net cash flows products based upon estimates revenue cost revenue research development costs sales marketing costs income taxes projects discounted rates ranging 30 40 percent relation stage completion technical risks associated achieving technological feasibility efforts develop purchased inprocess research development commercially viable products principally relate completion planning designing prototyping testing activities necessary establish products produced meet design specifications including function features technical performance requirements reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance unable produce market product effectively following values assigned acquired picturetel inprocess research development project time acquisition estimated completion percentages expected technology lives estimated time costs complete december 31 2002 thousands 2002 company completed shipped product associated projects b two projects costs complete projects line expectations company terminated one projects continuing develop project c smaller projects remaining projects next generation products enhance pc based voice video conferencing features amortization purchased intangibles year ended december 31 2002 recorded 171 million amortization purchased intangibles acquired picturetel circa aspi meetu acquisitions year ended december 31 2001 recorded 39 million amortization purchased intangibles acquired picturetel circa aspi acquisitions purchased intangible assets amortized expense estimated useful lives three years statement financial accounting standards 142 goodwill intangible assets sfas 142 purchased intangibles longer meeting criteria recorded separately goodwill must reclassified goodwill purchased intangibles deemed indefinite lives must longer amortized first quarter 2002 reclassified approximately 05 million unamortized acquired workforce recorded part purchase price allocation circa acquisition meet criteria recorded separately goodwill resulted permanent reduction amortization expense 58300 per quarter first quarter 2004 also sfas 142 intangible assets indefinite lives longer amortized result determined previously recorded trade name intangible indefinite life consequently trade name intangible longer amortized resulting permanent reduction amortization expense 25000 per quarter april 2011 june 2002 completed transitional purchased intangible impairment test outlined sfas 142 required assessment purchased intangibles impairment january 1 2002 october 2002 completed annual impairment test tests conducted determining comparing fair value reporting units defined sfas 142 reporting units carrying value date based results impairment tests determined purchased intangible assets impaired january 1 2002 amortization goodwill year ended december 31 2001 recorded 21 million amortization goodwill related circa acquisition beginning january 1 2002 sfas 142 longer amortize goodwill related circa acquisition resulted permanent decrease goodwill amortization expense approximately 07 million per quarter first quarter 2004 transition rules sfas 142 business combinations completed july 1 2001 prior january 1 2002 accounted accordance sfas 142 consequently goodwill balances picturetel aspi acquisitions never amortized june 2002 completed transitional goodwill impairment test outlined sfas 142 required assessment goodwill impairment january 1 2002 october 2002 completed annual impairment test tests conducted determining comparing fair value reporting units defined sfas 142 reporting units carrying value date based results impairment tests determined goodwill assets impaired january 1 2002 plan conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill impairment tests restructure costs third fourth quarters 2002 approved restructuring actions response continued global economic downturn improve overall cost structure prioritizing resources strategic areas business reducing operating expenses recorded restructuring charge 17 million 2002 result actions charge consisted severance employee termination benefits related workforce reduction approximately six percent employees worldwide december 31 2002 paid approximately 12 million 17 million charge liability recorded accrued liabilities consolidated balance sheet remaining amount paid fiscal 2003 expect due restructuring actions operating expenses grow much smaller rate otherwise would headcount affected restructuring added back time operations expand connection growth business current economic downturn uncertainty technology spending continues may take additional restructuring actions reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed grant repayment fourth quarter 2000 accord incurred charge 59 million relating repayment outstanding grants office chief scientist israel ocs israelus binational industrial research development foundation bird payments ocs bird derived directly commercial success accord products resulting research development funding received organizations litigation settlement reached favorable settlement former picturetel customer first quarter 2002 dispute involved certain services provided picturetel 2001 amounts owed us providing services amount received approximately 03 million net legal fees incurred litigate settle case november 20 1998 patent infringement claim filed accords us subsidiary accord networks inc united states district court district massachusetts alleging us subsidiary willfully deliberately infringing one ezenias patents complaint later amended allege us subsidiary also willfully deliberately infringing patents june 10 1999 accord added defendant lawsuit june 16 2000 accord us subsidiary entered written settlement agreement court entered order dismissing case lawsuit settlement cost 65 million final payment made december 28 2000 represents onetime charge resulting settlement reported litigation settlement consolidated statement operations june 2000 litigation reserve release september 3 1997 vtel corporation vtel filed lawsuit state district court travis county texas viavideo communications inc founders formerly employed vtel may 27 1998 following acquisition viavideo vtel amended suit add polycom defendant lawsuit vtel alleged breach contract breach confidential relationship disclosure proprietary information related allegations viavideo founders polycom answered suit denying entirety vtels allegations march 3 2000 vtel voluntarily dismissed allegations polycom viavideo prejudice consideration onetime item first quarter 2000 excess accrual associated expenses estimated would incur connection lawsuit totaling 18 million released since material expenses incurred see note 12 notes consolidated financial statements interest income net interest income net consists interest earned cash equivalents investments less bank charges resulting use bank accounts imputed interest expense related present value costs associated closing facilities part picturetel acquisition related integration plan imputed interest expense 2002 2001 18 million 40000 respectively interest income net interest expense 95 million 128 million 84 million 2002 2001 2000 respectively interest income decreased 2002 comparable period prior year due primarily imputed interest expense related facility closings interest rate reductions resulting monetary policy actions taken united states federal reserve board stimulate economic growth united states 2001 2002 partially offsetting negative effects increase average cash investment balances due primarily common stock offering raised 2375 million first quarter 2002 average interest rate return cash equivalents 186 investments 301 2002 compared 307 480 respectively 2001 increases interest income net 2001 2000 due primarily changes average cash investment balances throughout year significant relates common stock offering 2000 accords initial public offering together raised 2032 million third quarter 2000 interest income net could fluctuate 2003 due movement cash balances changes interest rates 2003 related monetary policy actions taken united states federal reserve board stimulate economic growth united states loss strategic investments strategic reasons made various investments public private companies 2002 2001 2000 private company investments carried cost less impairment writedowns recorded assets consolidated balance sheets review investments impairment events changes circumstances indicate impairment may exist make appropriate reductions carrying value necessary private company investments carrying value december 31 2002 carrying value 43 million december 31 2001 investments permanently written total 120 million original cost including 30 million 31 million 59 million 2002 2001 2000 respectively reflected loss strategic investments consolidated statements operations strategic public company investments recorded fair value shortterm investments longterm investments consolidated balance sheets marked market period unrealized gains losses recorded component stockholders equity except warrants purchase publicly traded equity securities marked market statement operations investments sold loss permanently declined value charge operations recorded realized gains losses strategic investments reflected loss strategic investments consolidated statements operations 2002 2001 company recorded loss totaling 44 million 01 million respectively related sale strategic investments equity securities publicly traded companies impairment equity securities publicly traded companies writedown warrants purchase publicly traded equity securities provision income taxes provision income taxes 102 million 147 million 242 million 2002 2001 2000 respectively decrease provision income taxes 2002 2001 attributable decrease nondeductible acquisitionrelated costs increase foreign earnings subject relatively lower tax rates decrease provision income taxes 2001 2000 attributable decrease us tax increase foreign tax due increase foreign income december 31 2002 approximately 610 million net operating loss carryforwards 131 million tax credit carryovers 38 million capital loss carryforwards well deferred tax assets arising temporary differences see note 17 notes consolidated financial statements liquidity capital resources december 31 2002 principal sources liquidity included cash equivalents 1552 million shortterm investments 387 million longterm investments 3191 million shortterm longterm investments consisted primarily us government securities state local government securities corporate debt equity securities 04 million invested equity securities publicly traded companies see note 7 notes consolidated financial statements addition 250 million line credit bank unused december 31 2002 generated cash operating activities totaling 815 million 2002 767 million 2001 381 million 2000 increase cash provided operating activities 2002 2001 due primarily larger decreases trade receivables prior period larger increases taxes payable smaller increase prepaids current assets offset partially smaller reductions inventories increases deferred taxes larger decreases accounts payable accrued liabilities comparable period comparing increase cash operating activities 2001 2000 improvements result net reduction trade receivables inventories deferred taxes 2001 compared increases items 2000 smaller increase prepaid current assets compared 2000 offset net reduction total liabilities accounts payable taxes payable liabilities lower net income noncash items total net change cash equivalents year ended 2002 increase 284 million primary uses cash period 2686 million net purchases investments 129 million purchases property equipment 159 million repurchases common stock primary sources cash 815 million operating activities 2375 million proceeds offering net issuance costs 67 million associated exercise stock options purchases employee stock purchase plan positive cash operating activities primarily result net income considering noncash expenses depreciation amortization provision doubtful accounts loss strategic investments writeoff purchased inprocess research development tax benefits exercise employee stock options lower trade receivables inventories offset net decrease total liabilities including accounts payable taxes payable liabilities increase prepaid expenses current assets deferred taxes positive cash impact due net trade receivables inventory reductions may occur 2003 2002 february 2002 completed public offering sold 8050000 shares common stock including overallotment option 1050000 shares exercised underwriters price 3120 per share net proceeds offering approximately 2375 million taking account underwriting discounts commissions expenses intend use net proceeds sale primarily general corporate purposes including working capital expenditures well acquisitions complementary businesses technologies june 2002 board directors approved plan repurchase 35 million shares common stock december 31 2002 repurchased approximately 1483000 shares cash 159 million fourth quarter 2002 company retired reclassified shares common stock authorized unissued 2003 plan continue repurchase shares open market privately negotiated transactions december 31 2002 open purchase orders related contract manufacturers contractual obligations approximately 211 million primarily related inventory purchases also material commitments consist obligations operating leases event decided cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur commitments obligations reflected consolidated financial statements goods services received time obligated make payments related requested goods services addition bank issued letters credit secure leases offices letters credit total approximately 08 million secured credit facilities cash deposits banks december 31 2002 following future minimum lease payments net sublease income due current lease obligations example company approximately 152000 square foot building fully subleased third party sublease runs concurrent companys lease obligation result company currently showing lease obligation related facility addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases subject cancellation within twelve months december 31 2002 thousands believe available cash equivalents investments bank line credit sufficient meet operating expenses capital requirements foreseeable future however may require desire additional funds support operating expenses capital requirements purposes acquisitions competitive reasons may seek raise additional funds public private equity financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology critical accounting policies managements discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements revenue recognition product returns recognize hardware product revenue using guidance sec staff accounting bulletin 101 revenue recognition financial statements statement financial accounting standards sfas 48 revenue recognition right return exists recognize software revenue accordance aicpa statement position 972 sop 972 software revenue recognition amended sop 989 modification sop 972 software revenue recognition respect certain transactions guidelines defer revenue recognition transactions persuasive evidence arrangement exist title transferred product payment contingent upon performance installation service obligations price fixed determinable payment reasonably assured addition estimate future product returns may occur based upon actual historical return rates reduce revenues estimated future returns historical data use calculate estimates properly reflect future returns estimates could revised addition defer revenue associated longterm customer maintenance contracts value contracts recognized ratably length customer contract channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements tradein credits promotions volumebased incentives market conditions decline may take actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered warranty provide estimated cost hardware product warranties time revenue recognized engage product quality programs processes warranty obligation affected product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers channel partners deteriorate particularly current economic environment resulting impairment ability make payments additional allowances may required case global crossing worldcom 2002 excess obsolete inventory write excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product lifecycles product demand market conditions less favorable projected management additional inventory writedowns may required deferred refundable taxes estimate actual current tax exposure together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statements operations december 31 2002 valuation allowance established deferred tax assets fair value assets acquired liabilities assumed purchase combinations purchase combinations completed require us identify estimate fair value assets acquired including intangible assets goodwill liabilities assumed combinations estimates fair value based business plan entities acquired including planned redundancies restructuring use assets acquired assumptions ultimate resolution obligations assumed future benefit received example picturetel acquisition identified vacated redundant facilities intended sublease negotiate lease termination settlement material acquisitions allocation period defined statement financial accounting standards 38 accounting preacquisition contingencies purchased enterprises completed therefore actual costs exceed estimates charges would recognized consolidated statements operations actual costs less estimates charges would continue recognized adjustment goodwill purchased intangibles assess impairment goodwill identifiable intangibles whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following •significant underperformance relative projected future operating results •significant changes manner use acquired assets strategy overall business •significant negative industry economic trends determine carrying value goodwill identified intangibles may recoverable based upon existence one indicators impairment would typically measure impairment based projected discounted cash flow method using discount rate determined management commensurate risk inherent current business model accordance sfas 142 goodwill intangible assets accounted picturetel aspi meetu acquisitions completed july 1 2001 new guidance january 1 2002 ceased amortize goodwill arising circa acquisition completed prior july 1 2001 required perform transitional impairment review goodwill prior june 30 2002 impairment review least annually thereafter june 2002 completed transitional goodwill purchased intangibles impairment tests outlined sfas 142 required assessment goodwill purchased intangibles impairment january 1 2002 october 2002 completed annual impairment tests conducted determining comparing fair value reporting units defined sfas 142 reporting units carrying value date based results impairment tests determined goodwill assets purchased intangible assets impaired january 1 2002 plan conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill impairment tests nonmarketable securities periodically make strategic investments acquired investments business acquisitions companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate management impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated companys future business plans impairment indicators identified reporting period could result significant write carrying value investment believe investment experienced decline value temporary investments carrying value december 31 2002 permanently written total 120 million original cost 2002 2000 recent accounting pronouncements october 2001 fasb issued sfas 144 sfas 144accounting impairment disposal longlived assets sfas 144 amends existing accounting guidance asset impairment provides single accounting model longlived assets disposed among provisions new rules change criteria classifying asset heldforsale standard also broadens scope businesses disposed qualify reporting discontinued operations changes timing recognizing losses operations adopted sfas 144 effective january 1 2003 expect adoption material effect results consolidated operations financial condition cash flows april 2002 fasb issued sfas 145 sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections among provisions sfas 145 rescinds sfas 4 sfas 4 reporting gains losses extinguishment debt accordingly gains losses extinguishment debt shall reported extraordinary items unless extinguishment qualifies extraordinary item criteria accounting principles board apb opinion 30 reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions gains losses extinguishment debt meet criteria apb 30 reclassified income continuing operations prior periods presented adopted sfas 145 effective january 1 2003 expect adoption material effect results consolidated operations financial condition cash flows june 2002 fasb issued sfas 146 sfas 146 accounting costs associated exit disposal activities sfas 146 provides guidance related accounting costs associated disposal activities covered sfas 144 exit restructuring activities previously covered eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 supercedes eitf issue 943 entirety sfas 146 requires costs related exiting activity restructuring recognized liability incurred sfas 146 applied prospectively exit disposal activities initiated december 31 2002 expect adoption sfas 146 material effect results consolidated operations financial condition cash flows november 2002 fasb issued financial interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including rollforward entitys product warranty liabilities apply recognition provisions fin 45 prospectively guarantees issued december 31 2002 disclosure provisions fin 45 effective financial statements fiscal year 2002 customary industry provided local law us jurisdictions standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time indemnify customers combinations loss expense liability arising various trigger events related sale use products services addition time also provide protection customers claims related undiscovered liabilities additional product liability environmental obligations experience claims made indemnifications rare believe adoption standard material impact results consolidated operations financial condition cash flows november 2002 eitf reached consensus issue 0021 revenue arrangements multiple deliverables eitf issue 0021 provides guidance account arrangements involve delivery performance multiple products services andor rights use assets provisions eitf issue 0021 apply revenue arrangements entered fiscal periods beginning june 15 2003 currently evaluating effect adoption eitf issue 0021 results consolidated operations financial condition cash flows december 2002 fasb issued sfas 148 sfas 148 accounting stockbased compensation transition disclosure sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires disclosures pro forma effect using fair value method accounting stockbased employee compensation displayed prominently tabular format additionally sfas 148 requires disclosure pro forma effect interim financial statements annual disclosure requirements sfas 148 included notes transition disclosure requirements effective fiscal 2003 expect sfas 148 material effect results consolidated operations financial condition cash flows january 2003 fasb issued financial interpretation 46 fin 46 consolidation variable interest entities interpretation arb 51 fin 46 requires certain variable interest entities consolidated primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior february 1 2003 provisions fin 46 must applied first interim annual period beginning june 15 2003 expect fin 46 material effect results consolidated operations financial condition cash flows factors affecting future operations investors carefully consider risks described making investment decision risks described ones face additional risks presently aware currently believe immaterial may also impair business operations business could harmed risks trading price common stock could decline due risks investors may lose part investment assessing risks investors also refer information contained incorporated reference annual report form 10k including consolidated financial statements related notes quarterly operating results may fluctuate significantly good indicator future performance quarterly operating results fluctuated significantly past may vary significantly future result number factors many control factors include •difficult general economic conditions case current economic downturn uncertainty technology industries specific economic conditions prevailing communications industry technology industries •the near longterm impact terrorist attacks incidents military response uncertainty regarding military response attacks outbreak war hostilities •changes channel partner contracts channel partner strategy including change number mix channel partners result smaller number channel partners likely reduce channel partner orders •market acceptance new product introductions including products launched first quarter 2003 product enhancements us competitors •the prices performance products competitors •the timing size orders products •our distribution channels reducing inventory levels •slowing sales channel partners customers places pressure channel partners minimize inventory levels reduce purchases products •the level mix inventory hold meet future demand •the impact unstable political situation israel recent military action israeli government hostilities middle east impact israeli operations •the mix products sell •fluctuations level international sales exposure international currency fluctuations •the cost availability components •manufacturing costs •the level cost warranty claims •the impact disruptions sites primary manufacturing partners thailand israel reason •the impact seasonality various product lines geographic regions •the level royalties must pay third parties •adverse outcomes intellectual property claims experienced sequential quarterly revenue growth 1998 2000 since time experienced fluctuations quarterly operating results due factors could prevent us attaining sustaining sequential quarterly growth meeting expectations investors use past results predict future operating margins results example experienced sequential quarterly revenue decreases second third fourth quarters 2002 primarily related declines video communications product revenue addition incurred significant net loss 2001 due charges related acquisitions completed year result factors believe periodtoperiod comparisons historical results operations good predictor future performance future operating results expectations stock market securities analysts investors stock price likely decline disproportionate amount sales occur end quarter operating results unpredictable timing channel partner orders product shipments harm operating results quarterly revenues operating results depend upon volume timing channel partner orders received given quarter percentage order able ship recognize revenue quarter extremely difficult forecast moreover majority orders given quarter historically shipped last month quarter sometimes last weeks quarter trend likely continue failure delay closing orders last part quarter would materially harm operating results occurred second third quarter 2002 furthermore due trend may unable ship products period receive order would adverse impact operating results events price common stock would decline difficulty estimating channel partner orders harm operating results typically ship products within short time receive order historically material backlog therefore backlog good indicator future net revenues result net revenues particular quarter extremely difficult predict additionally orders channel partners based level demand endusers uncertainty enduser demand means quarter could significantly negatively impacted lower enduser orders could turn negatively affect orders receive channel partners accordingly expectations short longterm future net revenues based almost exclusively estimate future demand firm channel partner orders expense levels based largely estimates receive majority channel partner orders last month quarter often last weeks quarter limited ability reduce expenses quickly reason orders net revenues meet expectations particular period accordingly significant shortfall demand products relation expectations would adverse impact operating results general economic conditions may reduce revenues harm business grown become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition factors adversely impacted operating results 2001 experienced sequential revenue decrease first three quarters also experienced sequential revenue decreases second third fourth quarters 2002 due part factors 2003 subject similar risks particularly current economic downturn uncertainty technology spending continues addition also face risk channel partners inventory levels excess future anticipated sales growth sales growth occur time frame anticipated channel partners reason including continuation current economic downturn uncertainty technology spending throughout 2003 channel partners may substantially decrease amount product order us subsequent periods product returns may exceed historical predicted levels would harm business example channel partners reduced inventory levels 2001 anticipation lower enduser demand also 2002 began implement new directtouch strategy concert realignment channel partner strategy part new channel partner strategy channel inventory model changing reduce channel inventories optimal level drop shipment method certain channel partners end user customers third quarter fourth quarter 2002 believe channel partners video voice inventory decreased second third quarter 2002 respectively decrease due part shift channel partner strategy resulting us shipping fewer video voice units channel partners third fourth quarter 2002 decreased channel inventory levels less impact sales ipower units typically carried inventory channel partners channel partners likely reduce inventory levels 2003 based continuation distribution strategy move reduce channel inventory levels addition softness enduser demand likely current economic environment could cause channel partners reduce inventory levels even face risks related dependence channel partners sell products subject risks associated channel partners product inventories product sellthrough sell significant amount products channel partners maintain inventory products sale dealers endusers often provide special cost early payment incentives channel partners purchase minimum quantities contemplated agreements us channel partners unable sell adequate amount inventory products given quarter dealers endusers channel partners decide decrease inventories reason current economic downturn uncertainty technology industries volume sales channel partners net revenues would negatively affected example economic downturn negatively affected business operating results 2001 2002 conditions continue future business operating results continue negatively affected moreover choose eliminate reduce stocking incentive programs quarterly revenues may fail meet expectations lower historical levels believe plans reduce channel inventories optimal level may limit revenue growth may cause decrease revenue near term addition plan continue implement changes channel partner strategy continue result smaller number channel partners change mix channel partners shift model direct interaction us direct enduser customers changes may continue cause disruptions channels negatively impact revenue growth near term revenue estimates based largely enduser sales reports channel partners provide us monthly basis date believe data accurate extent salesout channel inventory data inaccurate may able make revenue estimates future periods subject risks associated success businesses channel partners many channel partners carry multiple polycom products derive significant revenues undercapitalized failure businesses establish sustain profitability obtain financing could significant negative effect future revenue levels profitability ability collect receivables current economic downturn uncertainty technology spending united states regions could cause channel partners businesses suffer fail would harm business would also harmed large channel partners affected current economic downturn uncertainty technology spending example experienced decline revenues worldcom global crossing due financial troubles drop amount orders received two channel partners negatively affected revenues profitability avoid confusion among channel partners regarding product offerings need devote significant resources educating training take significant actions regarding product offerings important educate train channel partners avoid confusion example began shipping viewstation fx product timing delivery date likely created confusion channel partner customer base enduser customer market groups waited see new viewstation product desirable existing products therefore timing new product release likely negative effect salesin channel partners salesout endusers cannot assure similar situation happen first quarter 2003 launched new products new product launch could cause confusion amongst channel partners educate train take time evaluate new product offerings addition acquired picturetel corporation picturetel october 2001 integrating picturetels product offerings created confusion among channel partners need continue devote significant resources educate train channel partners combined product offerings ongoing confusion may lead delays ordering products would negatively affect revenues conflicts channel partners could hurt sales products various oem agreements major telecommunications equipment manufacturers avaya cisco systems nortel networks whereby manufacture products work equipment oem relationships create conflicts channel partners directly compete oem partners could adversely affect revenues channel partners many channel partners also sell equipment competes products channel partners could devote attention products could harm business example significant amount network systems revenues 2001 generated sales tandberg sony vcon compete us video communications product market believe conflict significantly reduced orders network systems products 2002 impacted sales product line channel conflicts could arise cause channel partners devote resources nonpolycom communications equipment would negatively affect business results operations current future products directly competitive products channel strategic partners example agreement cisco systems ship soundstation ip phones resale cisco systems first quarter 2002 introduced voip endpoint polycom brand incorporates technology license cisco systems product competes directly voip products sold cisco systems consequence conflicts competition partners markets operate likely increase potentially resulting strains existing relationships companies strain could limit potential contribution strategic relationships business restrict ability form strategic relationships companies future create additional competitive pressures us could harm business channel partner contracts typically shortterm early termination contracts may harm results operations typically enter longterm contracts channel partners cannot certain future order levels channel partners enter longterm contract generally terminable convenience channel partner event early termination loss one major channel partners unlikely able rapidly replace revenue source would harm results operations experience seasonal fluctuations revenues sales products experienced seasonal fluctuations affected sequential growth rates products particularly third first quarters example slowdown third quarter 2001 sales products european region addition sales video communications products typically declined first quarter year compared fourth quarter prior year even though revenues sequentially increased first quarter 2002 fourth quarter 2001 seasonal fluctuations could negatively affect business could cause operating results fall short anticipated results quarters difficulties integrating acquisitions could adversely impact business acquisition picturetel could adversely impact business completed acquisition picturetel october 2001 picturetel acquisition largest acquisition completed complex process integrating picturetel required significant resources continue face ongoing business challenges include principally geographic dispersion operations generating market demand expanded product line includes pcbased systems collaborationintensive applications addition incurred significant costs committed significant management time integrating picturetels operations technology development programs products information systems customers personnel although integration picturetel complete continue incur cash outflows additional costs completing integration process •identifying duplicative redundant resources facilities developing plans resource consolidation implementing plans •fees expenses professionals consultants involved dissolving legal entities longer used •settling existing picturetel liabilities •costs associated vacating subleasing closing facilities terminating leases •employee severance costs •upgrading customer service information systems accommodate picturetels larger customer service function significant liability approximately 365 million december 31 2002 related vacant redundant facilities connection acquisition picturetel net estimated sublease income expect generate estimate sublease income based current comparable rates leases respective markets actual sublease income lower estimates reason takes us longer estimated sublease facilities associated cost subleasing terminating lease obligations facilities greater estimated would incur additional charges operations would harm business results operations cash flows example company approximately 152000 square foot building fully subleased third party sublease runs concurrent companys lease obligation tenant unable fulfill reason contractual obligations sublease would incur additional charges operations would harm business addition vacated redundant facilities subleased lease obligations facilities terminated continue pay contractual lease facility operating expense obligations without sublease income offset costs event agree sublease facility terminate lease obligation lease buyout means may incur material cash outflow potentially exceeding recorded liability time transaction would harm operating cash flows extent cash outflows additional costs exceed amount recorded liability related sublease termination lease obligations could incur charge operations would harm business adversely impact results operations difficulties integrating past future acquisitions could adversely affect business spent continue spend significant resources identifying acquiring businesses efficient effective integration acquired businesses organization critical growth addition picturetel acquired following businesses prior fiscal year accord networks ltd accord february 2001 circa communications ltd circa april 2001 atlanta signal processors incorporated aspi november 2001 acquired meetucom inc meetu june 2002 future acquisitions involve numerous risks including difficulties integrating operations technologies products acquired companies diversion managements attention business concerns potential loss key employees acquired companies failure achieve anticipated benefits future acquisitions successfully integrate operations companies acquire could also harm business results operations cash flows additionally cannot assure incur material charges future quarters reflect additional costs associated past acquisitions future acquisitions may make difficulties may encounter managing substantially larger business could adversely affect operating results experienced significant growth business operations due internal expansion business acquisitions last five years appropriately manage growth future growth operating results negatively affected business grown recent years internal expansion business acquisitions continued growth may cause significant strain infrastructure internal systems managerial resources example annual revenues increased 52 million 1997 466 million 2002 past eight fiscal quarters acquired accord circa picturetel aspi meetu headcount increased 175 employees december 31 1997 526 employees december 31 1999 1271 employees december 31 2002 manage growth effectively must continue improve expand infrastructure including operating administrative systems controls continue managing headcount capital processes efficient manner productivity quality products may adversely affected integrate train new employees quickly effectively coordinate among executive engineering finance marketing sales operations customer support organizations add complexity organization increase operating expenses addition revenues may grow sufficient rate absorb costs associated larger overall headcount addition acquisition picturetel video communications product development group located multiple locations limited experience coordinating large geographically separated product development group future growth may require significant additional resources cannot assure resources available need sufficient capital fund potential resource needs also assess resources following acquisitions likely determine redundancy certain areas require consolidation resources organizational disruptions associated consolidation process could require management attention financial expenditures unable manage growth effectively experience shortfall resources must take additional restructuring charges results operations harmed officers key personnel worked together short period time recently joined us officers key personnel worked together short period time example senior vice president worldwide sales senior vice president general manager video communications joined us within past three months addition executive officers recently assumed significant new responsibilities may require time transition new roles fail successfully attract retain qualified personnel business harmed future success depend part continued ability hire assimilate retain qualified personnel competition personnel intense may successful attracting retaining personnel loss key employee failure key employee perform current position inability attract retain skilled employees particularly technical management needed could harm business addition many key employees israel responsible development network systems products obligated perform annual military reserve duty may called active duty time emergency conditions loss services executive officer key technical management personnel could harm business fail compete successfully business results operations would significantly harmed face significant competition communications industry subject rapid technological change video communications major competitors include tandberg number companies including aethra clearone huawei nec panasonic philips sony vcon vtel well various smaller new industry entrants companies substantial financial resources production marketing engineering capabilities develop manufacture market sell products addition advances telecommunications standards connectivity video processing technology increasing market acceptance video communications established new companies may develop market products competitive video communications products believe face increasing competition alternative video communications solutions employ new technologies new combinations technologies companies 3com cisco systems hewlettpackard dell microsoft nortel networks realnetworks webex enable webbased networkbased video collaboration communications market voice communications equipment including voice conferencing desktop equipment highly competitive also subject rapid technological change regulatory developments emerging industry standards expect competition persist increase future area voice communications major competitors include aethra cisco systems clearone communications konftel mitel soundgear companies past offered lower cost fullduplex speakerphones voip desktop space several low cost manufacturers asia europe emerging addition notable pbx ip call manager manufacturers compete standards based ip space including cisco mitel siemens furthermore major telephony manufacturers produce handsfree speakerphone units lower cost voice communications products network systems business significant competition radvision number companies including avaya cisco systems first virtual tandberg cannot assure able compete successfully current future competitors expect competitors continue improve performance current products introduce new products new technologies provide improved performance characteristics new product introductions competitors could cause significant decline sales loss market acceptance existing products future products believe possible effects ongoing competition may reduction prices products competitors products introduction additional lower priced competitive products expect increased competitive pressure may lead intensified pricebased competition resulting lower prices gross margins would significantly harm results operations face risks related international operations sales significant operations israel subject risks associated military political regulatory environment israel middle east region principal research development manufacturing facilities network systems group many groups suppliers located israel additionally acquisition meetu concentrates research development activities network systems product line israel political economic military conditions israel middle east region directly affect network systems groups operations since establishment state israel 1948 number armed conflicts taken place israel geographic neighbors current futurearmed conflicts political instability region may impair ability produce sell network systems products could disrupt research developmental activities state hostility varying degree intensity led security economic problems israel future peace efforts israel geographic neighbors remains uncertain marked increase civil unrest hostility military action israelis palestinians hostility could adverse impact results operations war iraq countries region perceived threat united states government could result additional unrest cause israel attacked would adversely affect results operations harm business technology used develop current network systems products developed part grants israeli office chief scientist israeli law technology developed pursuant grants office chief scientist cannot transferred person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer certain technology third parties manufacture products outside israel may adversely affect operating results development additional network systems products significantly reduce value technology international sales represent increasing portion net revenues risks inherent international sales could harm business international sales represent increasing portion net revenues anticipate international sales continue account significant portion net revenues foreseeable future international sales subject certain inherent risks including following •adverse economic conditions international markets •unexpected changes regulatory requirements tariffs •adverse economic impact terrorist attacks incidents military response attacks outbreak war hostilities •difficulties staffing managing foreign operations •longer payment cycles •problems collecting accounts receivable •potentially adverse tax consequences •potential foreign currency exchange rate fluctuations international net revenues may fluctuate percentage total net revenues future introduce new products fluctuations primarily result practice introducing new products north america first additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner business could harmed cannot assure able maintain increase international market demand products although date substantial majority international sales denominated us currency expect growing number sales could denominated nonus currencies international customers request billing currency result expect business significantly vulnerable currency fluctuations could adversely impact results operations hedge speculative purposes result increased exposure currency fluctuations time engage currency hedging activities solely mitigate temporary currency fluctuation exposure however limited experience hedging activities may successful could harm operating results financial condition addition significant adverse changes currency exchange rates happened european market 2000 asian market late 1997 could cause products become relatively expensive customers particular country leading reduction revenue profitability country limited supply sources key components products operations could harmed supply interruptions component defects unavailability components key components used products currently available one source others available limited number sources including key integrated circuits optical elements also obtain certain plastic housings metal castings components suppliers located china asian countries political economic instability region future import restrictions may cause delays inability obtain supplies suppliers israel war iraq middle eastern countries perceived threat united states government may cause delays inability obtain supplies network systems products raw material supply commitments suppliers generally purchase components purchase order basis either directly contract manufacturers limited experience purchasing supplies various components products components included products microprocessors integrated circuits time subject limited allocations suppliers addition companies limited uncertain financial resources manufacture components event contract manufacturers unable obtain sufficient supplies components develop alternative sources needed companies limited financial resources go business operating results could seriously harmed moreover operating results would seriously harmed receipt significant number defective components increase component prices inability obtain lower component prices response competitive price reductions additionally video communications products designed based integrated circuits produced philips semiconductor philips cameras produced sony could longer obtain integrated circuits cameras suppliers would incur substantial expense take substantial time redesigning products compatible components manufacturers cannot assure would successful obtaining components alternative sources timely costeffective manner additionally sony philips compete us video communications industry may adversely affect ability obtain necessary components failure obtain adequate supplies vital components could prevent delay product shipments could harm business also rely introduction schedules key components development launch new products delays availability key components could harm business manufacturing disruption capacity constraints would harm business subcontract manufacture voice video product lines celestica thirdparty contract manufacturer use celesticas thailand facilities disruption services due natural disaster economic political difficulties thailand asia reason disruption would harm business results operations also celesticas thailand facility currently sole source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints would experience delay shipping products would immediate negative impact revenues result may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes us certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations network systems products manufactured israel currently experiencing internal external conflicts include terrorist acts military action also war iraq middle eastern countries perceived threat united states government could cause us experience manufacturing disruption due acts associated conflicts could harm business addition certain technology used network systems products developed grants office chief scientist israel israeli law prohibited transfer technology developed pursuant grants person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer technology third parties manufacture products outside israel may adversely affect operating results significantly reduce value technology developed grants face risks associated products product development may experience delays product introductions products may contain defects could adversely affect market acceptance products reputation seriously harm results operations 1998 2002 revenue due large part sales new video communications products although intend continue introduce new video voice products visual concert products soundsation vtx 1000 viewstation ec viewstation ex mgc 25 vortex ef2241 pathnavigator weboffice products cannot assure new product releases timely made example viewstation fx viavideo delayed original release dates believe negatively affected net revenues 2000 additionally new existing product introductions may contain defects may produce revenue growth experienced 1998 2002 acquisition picturetel video communications product development group located massachusetts texas since significant experience coordinating large geographically separated product development group may experience product delays future due communications logistics issues similarly acquisition aspi may contribute voice communications product delays voice communications product development group dispersed among california georgia canada past experienced delays introduction certain new products enhancements believe delays may occur future instance experienced delays introducing viewstation mp webstation original expected release dates due unforeseen technology manufacturing ramping issues similar delays occurred introduction showstation ip soundstation premier affected first customer ship dates products also delays introducing soundstation ip product believe negatively impacted sales revenue first quarter 2001 soundpoint ip product introduction delayed believe negatively impacted sales third fourth quarters 2001 similar delays future new product offerings currently development could adversely affect market acceptance products reputation seriously harm results operations face risks related adoption rate new technologies invested significant resources developing products dependent adoption rate new technologies example soundstation ip soundpoint ip products dependent roll voiceoverip voip technologies success viavideo product depends increased use desktop video collaboration technologies success weboffice product dependent increased use acceptance web collaboration technologies concert audio video conferencing use new technologies current future products based occur occurs slowly expected may able sell certain products significant volumes business may harmed lower expected market acceptance products price competition price decreases would negatively impact business market accept products including new products launched first quarter 2003 profitability could harmed profitability could also negatively affected future result continuing competitive price pressures sale video voice conferencing equipment network systems could cause us reduce prices products reduced prices past order expand market products future may reduce prices introduce new products carry lower margins order expand market stimulate demand products cannot assure actions would desired result actions could adverse impact product margins profitability success depends ability assimilate new technologies products properly train channel partners use products markets video voice communications products network systems products characterized rapidly changing technology evolving industry standards frequent new product introductions success new products depends several factors including proper new product definition product cost timely completion introduction new products differentiation new products competitors market acceptance products additionally properly addressing complexities associated compatibility issues channel partner training technical sales support well field support also factors may affect success market shift communications circuitswitched ipbased technologies time may require us add new channel partners gain new core technological competencies attempting address needs need develop new products internal development efforts joint developments companies acquisitions may identify successful new product opportunities develop bring products market timely manner additionally cannot assure competing technologies developed others render products technologies obsolete noncompetitive failure new product development efforts inability service maintain necessary thirdparty interoperability licenses would harm business results operations product obsolescence excess inventory asset impairment negatively affect results operations operate high technology industry subject rapid frequent technology market demand changes often render existing technologies obsolete obsolescence issues require writedowns inventory value determined recorded value existing inventory greater fair market value example situation occurred 2001 first six months 2002 recorded material excess obsolescence charges associated inventory network access products situation also occurred first quarter 2000 showstation ip also viewstation product ipower products offer certain comparable functionality may compete customers addition launched several new products first quarter 2003 sales one products negative effect sales product could significantly increase inventory levels negatively impacted product potential new products render existing products obsolete cause inventories existing products increase reduce demand existing products exists every one products purchased several businesses 2001 2002 included goodwill valued approximately 300 million purchased intangible assets valued approximately 33 million december 31 2002 represents significant portion recorded assets generally accepted accounting principles related goodwill intangibles changed issuance statement financial accounting standards 142 sfas 142 goodwill intangible assets adopted effective january 1 2002 sfas 142 goodwill indefinite lived intangible assets longer amortized must reviewed impairment least annually sooner certain circumstances intangible assets deemed finite useful lives continue amortized useful lives must reviewed impairment events changes circumstances indicate carrying amount assets may recoverable screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore cannot assure charge operations occur result future goodwill impairment tests impairment deemed exist would write recorded value intangible assets fair values could result full writeoff book value writedowns occur could harm business results operations addition made investments private companies classify assets balance sheet value investments influenced many factors including operating effectiveness companies overall health companies industries strength private equity markets general market conditions due factors recorded charges earnings totaling 120 million fiscal 2000 2002 associated impairment investments reflected loss strategic investments statements operations investments fully writtenoff december 31 2002 may make additional investments private companies would subject similar impairment risks may cause us write recorded value investments cannot assure future inventory investment license fixed asset writedowns happen future writedowns occur could harm business results operations failure adequately service support products could harm results operations recent growth due large part expansion products complex technologies including network systems products ipower products increased need product warranty service capabilities cannot develop train internal support organization maintain relationship outside technical support could harm business insufficient proprietary rights fail protect rights business would materially impaired rely thirdparty license agreements termination impairment agreements may cause delays reductions product introductions shipments would harm business licensing agreements various suppliers software incorporated products example license video communications source code adtran ebsnet mitsubishi omnitel radvision telesoft video algorithm protocols ezenia real networks development source code cisco systems philips semiconductor audio algorithms lucent technologies nortel networks texas instruments communication software databeam windows software microsoft thirdparty software licenses may continue available us commercially reasonable terms termination impairment licenses could result delays reductions new product introductions current product shipments equivalent software could developed licensed integrated possible would harm business results operations rely patents trademarks copyrights trade secrets protect proprietary rights may sufficient protect intellectual property rely combination patent copyright trademark trade secret laws confidentiality procedures protect proprietary rights others may independently develop similar proprietary information techniques gain access intellectual property rights disclose technology addition cannot assure patent registered trademark owned us invalidated circumvented challenged us foreign countries rights granted thereunder provide competitive advantages us pending future patent applications issued scope claims sought us furthermore others may develop similar products duplicate products design around patents addition foreign intellectual property laws may protect intellectual property rights litigation may necessary enforce patents intellectual property rights protect trade secrets determine validity scope proprietary rights others defend claims infringement invalidity litigation could result substantial costs diversion resources could harm business could ultimately unsuccessful protecting intellectual property rights face might future face intellectual property infringement claims might costly resolve time received may future receive communications third parties asserting patent intellectual property rights covering products example september 23 2002 suit captioned collaboration properties inc v polycom inc filed united states court northern district california complaint alleges viewstation viavideo ipower weboffice path navigator products infringe 4 us patents owned plaintiff complaint seeks unspecified compensatory exemplary damages past present infringement permanently enjoin us infringing patents future november 14 2002 filed answer asserting among things infringement plaintiffs patents invalid unenforceable believe meritorious defenses counterclaims intend vigorously defend action however litigation involves significant inherent risks uncertainties adverse outcome occur could significantly harm business addition industry characterized uncertain conflicting intellectual property claims vigorous protection pursuit intellectual property rights positions resulted significant protracted expensive litigation past involved litigation adversely affected operating results example november 1998 videoserver inc known ezenia inc filed patent infringement claim accords us subsidiary accord subsequently added defendant september 2000 accord us subsidiary entered settlement agreement ezenia case dismissed accord paid 65 million ezenia cannot assure prevail litigation intellectual property claims made us future prohibited using technologies subject claims required obtain licenses make corresponding royalty payments addition necessary management attention legal costs associated litigation significant adverse effect operating results financial condition business interruptions could adversely affect operations vulnerable interruption fire earthquake power loss telecommunications failure national catastrophe terrorist attacks occurred september 11 2001 attack israel events beyond control fully implemented detailed disaster recovery plan addition carry sufficient business interruption insurance compensate us losses may occur losses damages incurred us could material adverse effect business results operations cash flow could fluctuate due potential difficulty collecting receivables past years initiated significant investments europe asia expand business regions europe asia international regions credit terms typically longer united states therefore europe asia international regions grow percentage net revenues happened 1999 2002 accounts receivable balances likely increase compared previous years additionally sales network systems video communications industries typically longer payment periods compared voice communications market therefore network systems video products constitute greater percentage net revenues accounts receivable balances likely increase increases would cause days sales outstanding increase compared prior years negatively affect future cash flows although able largely offset effects influences additional incentives offered channel partners end quarter form prepaid discounts additional incentives lowered profitability given continued downturn united states economy uncertainty technology spending many companies opting take advantage incentives instead preserve liquidity addition continued economic downturn united states may restrict availability capital may delay collections channel partners beyond historical experience may cause companies file bankruptcy occurred global crossing worldcom either conditions would harm cash flow days sales outstanding performance although recent quarters experience collecting receivables good expect trend continue assurance continue stock price fluctuates result conduct business stock market fluctuations market price common stock experienced significant fluctuations may continue fluctuate significantly market price common stock may significantly affected variety factors including •statements changes opinions ratings earnings estimates made brokerage firms industry analysts relating market business including competitors partners suppliers telecommunications industry leaders relating us specifically occurred recently •the announcement new products product enhancements us competitors •technological innovations us competitors •quarterly variations results operations •general market conditions market conditions specific technology industries •domestic international macroeconomic factors addition stock market continues experience extreme price volume fluctuations substantial effect market prices many high technology companies like us fluctuations often unrelated operating performance specific companies item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “other factors affecting future operations” document well information found elsewhere annual report form 10k overview leading global provider line highquality easytouse communications equipment enables enterprise users effectively conduct video voice data web communications offerings organized along four product lines video communications voice communications network systems services reporting purposes aggregate video communications voice communications one segment named communications report network systems separate segment services allocated amongst communications network systems october 18 2001 acquired outstanding stock picturetel inc supplier video communication products result fluctuations operating results segments fiscal 2002 compared historical 2001 results due generally acquisition picturetel historical results present discussion consolidated operating results using historical results polycom prepared accordance generally accepted accounting principles “gaap” years ended december 31 2003 2002 2001 including picturetel’s results operations october 18 2001 acquisition date january 2003 sold verilink corporation verilink certain fixed assets intellectual property rights relating network access product line including line netengine integrated devices total 30 million cash 10 million paid us closing ii 025 million paid us first anniversary closing january 2004 iii 175 million paid us quarterly based ten percent verilink’s revenues related sale netengine products 2003 verilink paid us 04 million related ten percent verilink’s revenues sale netengine products period consolidated financial statements reflect network access product line discontinued operations accordance sfas 144 results operations network access product line classified discontinued prior periods reclassified including reallocation general overhead charges two remaining reporting segments unless otherwise indicated following discussion relates continuing operations january 5 2004 completed acquisition voyant technologies inc voyant pursuant terms agreement plan merger agreement dated november 21 2003 voyant designs delivers group voice communication solutions part network systems segment see recent developments item 1 information voyant’s results operations included results operations presented acquisition completed subsequent december 31 2003 fiscal 2002 lesser extent first quarter fiscal 2003 performance industry whole impacted negatively global economic downturn uncertainty technology spending economic environment remains challenging technology spending showed signs improvement indications improving economic outlook end fiscal 2003 net revenues 4204 million fiscal 2003 compared 4521 million fiscal 2002 decrease net revenue primarily reflects reduced sales ipower network systems products related services addition fiscal 2003 generated approximately 1008 million cash flow operating activities increased cash equivalents approximately 574 million intend discussion financial condition results operations follows provide information assist understanding financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect financial statements results operations three years ended december 31 2003 following table sets forth percentage net revenues consolidated statements operations data periods indicated net revenues net revenues decreased 7 2003 2002 net revenues communications network systems segments decreased 6 9 respectively 2003 2002 decrease communications due primarily decreased sales ipower video product service revenue related ipower product partially offsetting decreases increased sales volume voice communications products video communications products ipower total video communications net revenues decreased 2416 million 2003 2589 million 2002 viewstation product revenues including revenues newly launched vsx 7000 fourth quarter 2003 increased sequentially quarter 2003 ipower net revenues decreased 2003 2002 however ipower video product revenue increased sequentially quarter 2003 exception fourth quarter net revenues related service revenue associated ipowerrelated product decreased 202 million 2003 compared 293 million reported 2002 ipower service revenue remained flat third quarter fourth quarter 2003 declined revenues first half 2003 voice communications net revenues increased 776 million 2003 746 million 2002 voice communications revenue increased primarily result increases sales installed voice products circuit switched products lesser extent increases voiceoverip products also contributing overall decrease net revenues 2003 2002 decrease network systems segment revenues 810 million 2003 893 million 2002 decrease result reduction sales volume network systems hardware products mix shifts lower end systems lower average selling prices decreases partially offset increases upgrade software services revenue service revenue included product revenues voice nonipower video network systems net revenues year ended december 31 2002 increased 23 period 2001 net revenues year ended december 31 2002 communications network systems segments increased 29 3 respectively increase communications due primarily increased sales volume video communications products ipowerrelated services video communications products net revenues increased 2589 million 2002 2017 million 2001 although viewstation product line contributed increase video communications net revenues growth primarily due addition ipower video product line acquisition picturetel october 2001 due timing acquisition ipower product revenue reflected prior year numbers fourth quarter 2001 although overall 2002 video revenue grew experienced sequential quarterly revenue decreases second third fourth quarters 2002 primarily related declines video communications product revenue viewstation ipower product lines ipowerrelated services net revenues 293 million year ended december 31 2002 compared 59 million reported period 2001 revenue stream also added acquisition picturetel voice communications revenue also increased result increase sales voice ip installed voice products offset decreases sales volumes circuit switch voice communications products installed voice products added acquisition company aspi fourth quarter 2001 network systems segment also contributed increase net revenues increase service revenue related network systems products 2002 compared 2001 communications segment 2002 began implement new directtouch strategy concert realignment channel partner strategy part new channel partner strategy result recent economic downturn channel inventory model changed reduce channel inventories channel partners stock product move channel partners dropshipment method enduser customers opposed partners carry inventory second quarter 2003 believe essentially completed channel inventory reduction program believe aggregate see minor variations upwards downwards channel inventory weeks within product lines regions moving forward third fourth quarters 2002 first half 2003 believe channel partners’ video voice inventory decreased respective prior periods third quarter 2003 channel inventories remained stable voice channel inventories decreased fourth quarter 2003 although see slight increase video channel inventories primarily result advance purchases video inventory related specific enduser opportunities first quarter 2004 asia pacific region decrease channel inventories last half 2002 due largely shift channel partner strategy resulting us shipping fewer video voice units channel partners third fourth quarter 2002 well channel partners lowering inventory levels result lower enduser demand first second quarters 2003 believe sales products channel partners enduser customers exceeded number units shipped channel result increased enduser demand thereby decreasing overall inventory channel partners decreased channel inventory levels less impact sales ipower video units network systems segment products typically carried inventory channel partners fact sales network systems products third fourth quarters 2003 increased 21 sequentially quarter regional basis north america europe latin america revenues decreased 13 12 22 respectively 2003 2002 asia pacific revenues increased 17 period north america revenues decreased result decreased revenues communications segment including decreases voice video communication product revenue service revenue related ipower product line decreased revenues network systems segment europe revenues decreased result decreased revenues communications segment partially offset increased revenues network systems segment decreased revenues communications segment primarily result decreased revenue video communications product service revenues related ipower product line partially offset increased revenue voice communication products latin america revenues decreased result decreased revenues communications segment including decreases voice video communication product revenues partially offset increases service revenues related ipower product decreased revenues communications segment partially offset increased revenues network systems segment asia revenues increased result increased revenues communications segment including increases voice video communication product revenues partially offset decreases service revenue related ipower products increased revenues network systems segment customer accounted 10 total net revenues communications segment revenues 2003 2002 2001 2003 2002 network systems segment two channel partners together represented approximately 21 20 respectively network systems segment revenues believe unlikely loss channel partners would material adverse affect net revenues segment believe endusers would likely purchase products different channel partner business subject risks arising domestic global economic conditions domestic global economic downturn 2001 global economic uncertainty continued downturn technology spending 2002 first half 2003 slowed overall spending point industries delayed reduced technology purchases addition first quarter 2003 noted greater decrease revenue products higher average selling prices network systems products improvement technology spending global economy second half 2003 constraints technology capital spending still exist could adverse impact 2004 channel partners delay reduce orders products may fall short revenue expectations 2004 second third quarters 2002 first quarter 2003 conditions recur 2004 business financial performance would negatively affected first half 2003 second half 2002 example first quarter 2003 conditions resulted sequentially weaker network systems product revenues compared fourth quarter 2002 network systems revenue another small sequential decrease revenue second quarter 2003 although improvement technology spending global economy second half 2003 extent recurrence adverse economic conditions uncertainty technology spending 2004 difficult predict time represents significant uncertainty respect operating results 2004 october 2003 launched new video product offering vsx 7000 believe taken appropriate measures educate train channel partners risk launch low end video product could cause confusion among channel partners endusers thereby causing delay purchases video product determine vsx 7000 desirable product existing video products purchase lower end video product instead higher end video products including viewstation ex fx delays purchases vsx 7000 instead higher end video products could adversely affect revenues gross margins operating results addition weakness enduser market products could negatively affect revenue cash flow channel partners could turn delay orders delay paying obligations us could harm revenues profitability financial condition cash flow addition recently made significant changes sales management sales organization changes may result changes channel partner strategy may result smaller number channel partners change mix channel partners shift model even direct interaction us direct enduser customers changes may cause additional disruptions channels negatively impact revenue growth near term addition acquisition voyant adds level complexity operations may obtain revenue synergies anticipating voyant revenue concentration large customers loss one customers could negatively impact revenues addition majority voyant’s orders received last month quarter typically last weeks quarter thus unpredictability receipt orders could negatively impact future results anticipate international sales continue account significant portion total net revenues foreseeable future plan continue expansion asia europe international sales however subject certain inherent risks including potential economic weakness international markets quarantines restrictions associated recurrence sars similar events political instability adverse economic impact terrorist attacks incidents military response attacks war hostilities changes foreign government regulations telecommunications standards export license requirements tariffs taxes trade barriers fluctuations currency exchange rates difficulty staffing managing foreign operations longer payment cycles difficulty collecting accounts receivable significant adverse changes currency exchange rates happened european market 2000 asian market late 1997 could cause products become relatively expensive customers particular country leading reduction revenue profitability country additionally international net revenues may fluctuate percentage net revenues future introduce new products since expect initially introduce products north america also additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner especially core european markets france germany united kingdom business could harmed cannot make assurances able maintain increase international market demand products additionally date substantial majority international sales denominated us currency however international sales denominated local currencies future transactions would subject currency fluctuation impacts could adversely affect financial results typically ship products within short time receive order therefore backlog good indicator future net revenues net revenues particular quarter difficult predict degree certainty december 31 2003 end quarter 227 million order backlog compared 35 million december 31 2002 principally result new channel strategy establishment product lead times maximize inventory efficiency focus operational efficiencies logistics area believe current level backlog percent net revenues potentially maximized result established product lead times therefore assurance able maintain unlikely grow level backlog future quarters dependent part ability sales force generate orders linearly throughout quarter ability forecast revenue mix plan manufacturing requirements accordingly addition orders channel partners based level demand enduser customers decline uncertainty enduser demand could negatively impact enduser orders turn could negatively affect orders channel partners given quarter result backlog could decline historical levels zero cost net revenues cost net revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments allocation overhead expenses including facilities costs generally network systems segment higher gross margin communications segment service gross margins included segments lower product gross margins overall gross margins increased 2003 compared 2002 result favorable margins communications segment partially offset decreases gross margins network systems segment video voice communications products margins favorably impacted due product mix service revenues gross margins declined result relatively fixed costs lower revenues network systems decrease volume mix shift lower margin systems overall 2002 margins decreased 2001 result less favorable margins communications segment partially offset increases gross margins network systems segment communications segment margins 2002 decreased 2001 voice video communications products primarily result product mix service margins decreased result acquisition picturetel network systems margins increased 2002 2001 result product mix forecasting future gross margin percentages difficult number risks associated maintaining current gross margin levels example uncertainties surrounding revenue levels related production level variances competition changes technology changes product mix manufacturing efficiencies subcontractors manufacturing purchased part variances warranty costs timing sales next quarters cause cost net revenues percentage vary significantly 2003 began including one year service video products lowered product gross margins products result allocating portion product revenue deferred service revenue service gross margins however favorably impacted deferred revenue recorded revenue future products may also one year service included product thereby potentially impacting product gross margins negatively depending pricing model established additionally ipower products voip products desktop products significantly higher cost net revenue percentage network systems viewstation soundstation products accordingly significant revenue growth ipower voip desktop products decline revenue associated network systems viewstation soundstation products negative effect cost net revenues percentages also may reduce prices products future competitive reasons result difficult economy stimulate demand occurred first quarter 2003 certain soundstation products could increase cost net revenues percentage risk potential price reductions would offset competitive pressures stimulate demand addition cost variances associated manufacturing ramp new products writeoff initial inventory purchases due product launch delays lack market acceptance new products vsx 7000 ipower 9000 series voiceplus bridging solution voip telephony products vtx 1000 viewstation ex mgc 25 new product development could occur would increase cost net revenues percentage quarter addition uncertainties listed cost net revenues percentage net revenues may increase due change mix distribution channels mix international versus north american revenues don’t expect voyant acquisition significant impact gross margins 2004 sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force advertising promotional expenses product marketing allocation overhead expenses including facilities costs sales marketing expenses allocated segments increase sales marketing expense percentage net revenues 2003 compared 2002 due decrease revenues period time increased marketing costs increase absolute dollars 2003 2002 due primarily overall expansion marketing efforts including addition chief marketing officer subsequently left us end third quarter related staffing increased allocations facilities infrastructure result increased headcount increase partially offset cost containment measures expense controls implemented second half 2002 first half 2003 due global economic uncertainty continued downturn technology spending 35 increase absolute dollars 2002 2001 due primarily increase headcount sales force increased product sales driven largely picturetel acquisition fourth quarter 2001 lesser extent focus public sector market result increases salaries commissions headcountrelated expenses travel also contributing absolute dollar increase overall efforts expand marketing initiatives including addition chief marketing officer related staffing increased spending promotional materials trade shows outside consultants increase partially offset cost containment measures expense controls implemented second half 2002 due continued economic downturn uncertainty technology spending due innovative nature products effect competing much larger companies much greater resources cisco microsoft believe incur increased expenses especially advertising expand overall market drive market penetration increase adoption rate technology products educate potential endusers desirability products competing products expect continue increase sales marketing expenses absolute dollar amounts expand north american international markets market new products expand public sector also acquisition voyant closed first quarter 2004 increase sales marketing expense research development expenses research development expenses consist primarily compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development expenses remained flat absolute dollar amounts 2003 compared 2002 result cost containment measures expense controls implemented second half 2002 first half 2003 due global economic uncertainty continued downturn technology spending increases research development expenses occurred network systems segment 2003 compared period prior year research development expenses decreased communications segment prior year increase research development expense percentage net revenues 2003 compared 2002 primarily due decrease revenues period time continue make investments improving existing products integrating existing acquired products developing new products many launched 2003 network systems segment development expenditures accounted majority slight increase absolute dollars 2002 increase partially offset decreases communications segment primarily video product development accounted majority offset voice product development expenditure decreases contributed lesser extent currently investing research development resources enhance upgrade polycom office suite products encompasses products segments products include viewstation vsx 7000 viavideo ii ipower gms mgc pcs weboffice pathnavigator soundstation voicestation vortex anticipate expending greater proportion research development expenses towards development software infrastructure products included network systems segment enhance integration interoperability entire product suite periods presented research development costs expensed incurred increases research development expenses occurred product lines 2002 2001 2 point increase research development expense percentage net revenues 2002 reflected continued investments existing products well additional investments ipower products acquired picturetel acquisition investments integrating existing acquired products developing new products launched first quarter 2003 increase partially offset cost containment measures expense controls implemented second half 2002 due continued economic downturn uncertainty technology spending 2002 communications segment principally video product development expenditures accounted majority total increase due addition picturetel research development team full year versus part fourth quarter 2001 voice product development expenditures network systems segment product development expenditures accounted lesser portion increase believe technological leadership critical success committed continuing high level research development develop new technologies combat competitive pressures also continued investment new product initiatives require significant research development spending expect research development expenses absolute dollars increase future especially result additional expenses products resulting acquisition voyant first quarter 2004 voyant reflected network systems segment general administrative expenses general administrative expenses consist primarily compensation costs professional service fees allocation overhead expenses including facilities costs patent litigation costs bad debt expense allocated segments percentage net revenues general administrative expenses increased 1 percentage point 2003 2002 2001 increase percent revenue 2003 comparable prior year primarily due decrease revenues period time increase spending absolute dollars general administrative expenses 2003 prior year primarily result higher costs associated accrued bonuses increased infrastructure costs outside services including increased costs associated new regulatory requirements patent litigation increased insurance costs partially offset decrease bad debt expense recruitingrelocation expense 2003 increases salaries related costs accounted 19 million increase increased infrastructure costs accounted 05 million outside services accounted 20 million increase increases partially offset 27 million decrease bad debt expense 04 million decrease recruitingrelocation expense remaining change related numerous smaller items increase absolute dollars spending general administrative 2002 2001 primarily result higher costs associated increased infrastructure costs outside services including increased costs associated regulatory requirements increase bad debt expense increase infrastructure costs accounted 20 million total increase outside services accounted 32 million total increase bad debt expense accounted 23 million total increase remaining increase related numerous smaller items increase partially offset cost containment measures expense controls implemented second half 2002 due continued economic downturn uncertainty technology spending significant charges due uncollectability receivables costs associated patent litigation could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing bad debt expense associated uncollectible receivables difficult future quarter general administrative expense increases decreases absolute dollars difficult predict due visibility costs timing revenue factors believe general administrative expenses likely continue increase absolute dollar amounts future primarily result expansion administrative staff costs related supporting larger company increased costs associated regulatory requirements continued investments international regions however believe acquisition voyant add significant costs general administrative expense acquisitionrelated costs recorded charges operations 04 million 2003 37 million 2002 241 million 2001 acquisitionrelated costs charges 2003 primarily related professional services costs integrate liquidate international picturetel accord legal entities begin integration acquisition voyant closed january 2004 2002 acquisitionrelated charges related primarily acquisition picturetel consisted primarily professional services costs complete integration us picturetel 2001 costs associated acquisitions accord circa picturetel aspi 2001 costs consisted 37 million restructuring charges related facility closings severance costs 67 million asset impairment charges 137 million acquisition costs including outside financial advisory legal accounting consulting services acquire additional businesses future may incur material acquisition expenses related transactions see note 5 notes consolidated financial statements purchased inprocess research development 2002 2001 incurred charges totaling 09 million 526 million respectively inprocess research development research development acquired 2002 part acquisition meetucom inc 2001 part acquisitions picturetel circa aspi comprised 493 million 24 million 09 million respective acquisitions see note 3 notes consolidated financial statements amounts allocated purchased inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects cost approach uses concept replacement cost indicator fair value primary technique utilized valuing inprocess research development acquired meetu transaction cost approach based premise prudent investor would pay asset cost replace asset new one replacement cost based total costs net unrealized income tax deduction benefit spent developing inprocess technology meetu’s inception date valuation performed income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development 2001 estimated net cash flows products based upon estimates revenue cost revenue research development costs sales marketing costs income taxes projects discounted rates ranging 30 40 percent relation stage completion technical risks associated achieving technological feasibility efforts develop purchased inprocess research development commercially viable products principally relate completion planning designing prototyping testing activities necessary establish products produced meet design specifications including function features technical performance requirements reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance unable produce market product effectively acquire additional businesses future may incur material purchased inprocess research development expenses related transactions following values assigned acquired picturetel inprocess research development project time acquisition estimated completion percentages expected technology lives estimated time costs complete december 31 2003 thousands 2002 completed shipped products associated projects b two projects costs complete projects consistent expectations terminated one projects 2002 2003 terminated project c scaled back scope one projects amortization purchased intangibles 2003 2002 2001 recorded 176 million 171 million 39 million amortization purchased intangibles acquired acquisitions respectively purchased intangible assets amortized expense estimated useful lives three years statement financial accounting standards 142 “goodwill intangible assets” sfas 142 purchased intangibles longer meeting criteria recorded separately goodwill must reclassified goodwill purchased intangibles deemed indefinite lives must longer amortized first quarter 2002 reclassified approximately 05 million unamortized acquired workforce recorded part purchase price allocation circa acquisition meet criteria recorded separately goodwill resulted permanent reduction amortization expense 58300 per quarter first quarter 2004 also sfas 142 intangible assets indefinite lives longer amortized result determined previously recorded trade name intangible indefinite life consequently trade name intangible longer amortized resulting permanent reduction amortization expense 25000 per quarter april 2011 june 2002 completed transitional purchased intangible impairment test outlined sfas 142 required assessment purchased intangibles impairment january 1 2002 october 2002 fourth quarter 2003 completed annual impairment tests assessment purchased intangibles impairment conducted comparing fair value purchased intangible carrying amount date based results impairment tests determined purchased intangible assets impaired january 1 2002 2003 amortization goodwill year ended december 31 2001 recorded 21 million amortization goodwill related circa acquisition beginning january 1 2002 sfas 142 longer amortize goodwill related circa acquisition resulted permanent decrease goodwill amortization expense approximately 07 million per quarter first quarter 2004 transition rules sfas 142 business combinations completed july 1 2001 prior january 1 2002 accounted accordance sfas 142 consequently goodwill balances picturetel aspi meetu acquisitions never amortized june 2002 completed transitional goodwill impairment test outlined sfas 142 required assessment goodwill impairment january 1 2002 october 2002 fourth quarter 2003 completed annual impairment tests conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date based results impairment tests determined goodwill assets impaired january 1 2002 2003 plan conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill impairment tests restructure costs 2002 approved restructuring actions response global economic uncertainty continued downturn technology spending improve overall cost structure prioritizing resources strategic areas business reducing operating expenses recorded restructuring charge 17 million 2002 result actions charge consisted severance employee termination benefits related workforce reduction approximately six percent employees worldwide december 31 2003 paid charge first second quarters 2003 approved additional restructuring actions primarily connection sale network access product line verilink response global economic uncertainty continued downturn technology spending actions meant improve overall cost structure prioritizing resources strategic areas business reducing operating expenses recorded restructuring charge 50 million 2003 result actions charge consisted severance employee termination benefits related workforce reduction approximately 12 percent employees worldwide restructuring charge related network systems communications segments amounted 01 million 07 million respectively balance restructuring charge related operating activities separately managed corporate level allocated segments december 31 2003 paid approximately 49 million 50 million charge remaining amount paid end second quarter 2004 recorded accrued liabilities consolidated balance sheets expect due restructuring actions operating expenses absolute dollars grow much smaller rate otherwise would headcount affected restructuring added back time operations expand connection growth business economic downturn uncertainty technology spending recurs 2004 may take additional restructuring actions reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed litigation settlement first quarter 2002 reached settlement former picturetel customer dispute involved certain services provided picturetel 2001 amounts owed us providing services amount received net legal fees incurred litigate settle case interest income net interest income net consists interest earned cash equivalents investments less bank charges resulting use bank accounts imputed interest expense related present value costs associated closing facilities part picturetel acquisition related integration plan imputed interest expense 23 million 2003 18 million 2002 40000 2001 interest income net interest expense 85 million 2003 95 million 2002 128 million 2001 interest income decreased 2003 2002 due primarily interest rate reductions resulting monetary policy actions taken united states federal reserve board stimulate economic growth united states partially offsetting negative effect increase average cash investment balances primarily due cash generated operations average interest rate returns cash investments 202 2003 compared 260 2002 interest income decreased 2002 2001 due primarily imputed interest expense related facility closings interest rate reductions resulting monetary policy actions taken united states federal reserve board stimulate economic growth united states 2001 2002 partially offsetting negative effects increase average cash investment balances due primarily common stock offering raised 2375 million first quarter 2002 average interest rate return cash equivalents 186 investments 301 2002 compared 307 480 respectively 2001 interest income net could fluctuate 2004 due movement cash balances changes interest rates related monetary policy actions taken united states federal reserve board stimulate economic growth united states loss strategic investments strategic reasons made various investments private companies limited circumstances public companies private company investments carried cost less impairment writedowns recorded “other assets” consolidated balance sheets review investments impairment events changes circumstances indicate impairment may exist make appropriate reductions carrying value necessary december 31 2002 investments carrying value made additional investments 14 million two private companies 2003 carrying value 09 million december 31 2003 aggregate investments permanently written total 125 million original cost including 05 million 2003 30 million 2002 31 million 2001 reflected “loss strategic investments” consolidated statements operations public company investments recorded “shortterm investments” “longterm investments” consolidated balance sheets marked market period unrealized gains losses recorded component stockholders’ equity except warrants purchase publicly traded equity securities marked market statement operations realized gains losses strategic investments public company investments reflected “loss strategic investments” consolidated statements operations recorded losses totaling 02 million 2003 44 million 2002 01 million 2001 related sale strategic investments equity securities publicly traded companies impairment equity securities publicly traded companies writedown warrants purchase publicly traded equity securities provision income taxes provision income taxes including taxes related discontinued operations 89 million 102 million 147 million 2003 2002 2001 respectively decrease provision income taxes 2003 2002 primarily attributable decrease worldwide profit taxes decrease provision income taxes 2002 2001 primarily attributable decrease nondeductible acquisitionrelated costs increase foreign earnings subject relatively lower tax rates december 31 2003 approximately 783 million net operating loss carryforwards 116 million tax credit carryovers 90 million capital loss carryforwards well deferred tax assets arising temporary differences see note 16 notes consolidated financial statements liquidity capital resources december 31 2003 principal sources liquidity included cash equivalents 2126 million shortterm investments 157 million longterm investments 3680 million shortterm longterm investments consisted primarily us government securities state local government securities corporate debt equity securities 01 million invested equity securities publicly traded companies see note 7 notes consolidated financial statements addition 250 million line credit bank unused december 31 2003 however outstanding letters credit totaling approximately 09 million secured line credit generated cash operating activities totaling 1008 million 2003 815 million 2002 767 million 2001 increase cash provided operating activities 2003 2002 due primarily decreases deferred taxes increases accrued liabilities increases accounts payable offsetting positive effects smaller net income smaller noncash expenses larger increases prepaids assets smaller decreases accounts receivable inventories smaller increases taxes payable increase cash provided operating activities 2002 2001 due primarily larger decreases trade receivables larger increases taxes payable smaller increase prepaids current assets offset partially smaller reductions inventories increases deferred taxes larger decreases accounts payable accrued liabilities comparable period total net change cash equivalents year ended 2003 increase 574 million primary uses cash period 285 million net purchases investments 148 million purchases property equipment 69 million repurchase common stock 35 million purchase licensed technology 05 million purchase convertible note receivable primary sources cash 1008 million operating activities 94 million associated exercise stock options purchases employee stock purchase plan 14 million proceeds sale discontinued operations positive cash operating activities primarily result net income adjusted noncash expenses depreciation amortization provision doubtful accounts inventory writedowns excess obsolescence gain sales discontinued operations amortization unearned stockbased compensation loss strategic investments tax benefits exercise employee stock options reductions trade receivables inventories deferred taxes net increases accounts payable taxes payable accrued liabilities offsetting positive effect items net increases prepaid expenses current assets past several quarters days sales outstanding dso metrics improved significantly company reduced dsos 59 days december 31 2002 33 days december 31 2003 assurance current level dso maintained likelihood dso metrics increase revenues increase result fluctuations revenue linearity addition inventory turns december 31 2003 increased significantly inventory turns improved 52 turns december 31 2002 71 turns december 31 2003 positive cash impact due net trade receivables inventory reductions likely recur 2004 2003 2002 january 5 2004 completed acquisition voyant technologies inc voyant see “recent developments” item 1 information paid 1093 million cash voyant shareholders connection acquisition approximately 129 million cash placed escrow held security losses incurred us event certain breaches representations warranties covered merger agreement certain events voyant shareholders may receive additional 35 million consideration twoyear period payable cash option polycom stock based achievement certain financial milestones relating sale voyant products voyant’s results operations included results operations presented acquisition completed subsequent december 31 2003 february 2002 completed public offering sold 8050000 shares common stock including overallotment option 1050000 shares exercised underwriters price 3120 per share net proceeds offering approximately 2375 million taking account underwriting discounts commissions expenses used net proceeds sale primarily general corporate purposes including working capital expenditures well acquisitions complementary businesses technologies june 2002 board directors approved plan repurchase 35 million shares common stock open market privately negotiated transactions december 31 2002 repurchased approximately 1483000 shares open market cash 159 million 2002 retired reclassified shares common stock authorized unissued year ended december 31 2003 repurchased 755000 additional shares open market cash 69 million retired reclassified authorized unissued may continue repurchase shares open market privately negotiated transactions december 31 2003 authorized repurchase additional approximately 13 million shares june 2002 repurchase plan 2004 may continue repurchase shares current board authorization may seek obtain approval board directors additional amount shares repurchase december 31 2003 open purchase orders related contract manufacturers contractual obligations approximately 245 million primarily related inventory purchases also commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur november 2003 entered lease amendment one facilities andover massachusetts previously provided restructuring reserve original term lease ended 2014 amended allow us exit approximately onethird space facility currently unoccupied november 2006 cash payment 50 million exit additional approximately onethird space currently unoccupied november 2007 additional cash payment 50 million allow us option exiting remaining onethird building november 2008 currently occupied amendment also gives landlord right november 2008 require us exit occupied space six months notice either voluntarily required landlord exit occupied space make final 50 million payment landlord would begin amortize remaining leasehold improvements net book value 20 million december 31 2003 six months lease agreement also amended allow landlord sublet unoccupied space earlier november 2006 november 2007 landlord successful releasing us space earlier amendment provides would make related cash payments noted additional cash payments pertaining fifty percent cash savings related us longer pay rent common area maintenance charges portion building purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services addition bank issued letters credit secure leases offices letters credit total approximately 09 million secured credit facilities cash deposits banks december 31 2003 following future minimum lease payments current lease obligations shown net estimated sublease income example approximately 152000 square foot building fully subleased third party sublease runs concurrent lease obligation result currently showing lease obligation related facility sublease terminated tenant defaulted payment would incur additional lease payments would negatively impact operating results overall cash flows addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table also shows contractual obligations december 31 2003 believe available cash equivalents investments bank line credit sufficient meet operating expenses capital requirements foreseeable future however may require desire additional funds support operating expenses capital requirements purposes acquisitions competitive reasons continue availability components product sole source suppliers may seek raise additional funds public private equity financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses offbalance sheet arrangements december 31 2003 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies management’s discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis internal audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements discussion accounting policies revenue recognition product returns recognize hardware product revenue using guidance sec staff accounting bulletin 104 “revenue recognition” statement financial accounting standards sfas 48 “revenue recognition right return exists” eitf issue 0021 “revenue arrangements multiple deliverables” recognize software revenue accordance aicpa statement position 972 sop 972 “software revenue recognition amended sop 989 modification sop 972 software revenue recognition respect certain transactions” guidelines defer revenue recognition transactions persuasive evidence arrangement exist title transferred product payment contingent upon performance installation service obligations price fixed determinable payment reasonably assured addition estimate future product returns may occur based upon actual historical return rates reduce revenues estimated future returns historical data use calculate estimates properly reflect future returns estimates could revised addition defer revenue associated longterm customer maintenance contracts revenue contracts recognized ratably length customer contract channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements tradein credits promotions volumebased incentives market conditions decline may take actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered warranty provide estimated cost hardware software product warranties time revenue recognized warranty obligation affected product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers channel partners deteriorate resulting impairment ability make payments case global crossing worldcom 2002 mcsi 2003 additional allowances may required excess obsolete inventory write excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required deferred refundable taxes estimate actual current tax exposure together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2003 771 million net deferred tax assets order fully utilize deferred tax assets need generate sufficient amounts future us taxable income believe likely generate sufficient future taxable income utilize assets therefore december 31 2003 established valuation allowance assets fair value assets acquired liabilities assumed purchase combinations purchase combinations completed require us identify estimate fair value assets acquired including intangible assets goodwill liabilities assumed combinations estimates fair value based business plan entities acquired including planned redundancies restructuring use assets acquired assumptions ultimate resolution obligations assumed future benefit received example picturetel acquisition identified vacated redundant facilities intended sublease negotiate lease termination settlement material acquisitions allocation period defined statement financial accounting standards 38 “accounting preacquisition contingencies purchased enterprises” completed therefore actual costs exceed estimates charges would recognized consolidated statements operations actual costs less estimates charges would continue recognized adjustment goodwill purchased intangibles assess impairment goodwill identifiable intangibles annually whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following • significant underperformance relative projected future operating results • significant changes manner use acquired assets strategy overall business • significant negative industry economic trends determine carrying value goodwill identified intangibles may recoverable based upon existence one indicators impairment would typically measure impairment based projected discounted cash flow method using discount rate determined us commensurate risk inherent current business model accordance sfas 142 “goodwill intangible assets” accounted picturetel aspi meetu acquisitions completed july 1 2001 new guidance january 1 2002 ceased amortize goodwill arising circa acquisition completed prior july 1 2001 june 2002 completed transitional goodwill purchased intangibles impairment tests outlined sfas 142 required assessment goodwill purchased intangibles impairment january 1 2002 fourth quarter 2003 2002 completed annual impairment tests assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date assessment purchased intangibles impairment conducted comparing fair value purchased intangible carrying amount date based results impairment tests determined goodwill assets purchased intangible assets impaired january 1 2002 2003 2002 plan conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill impairment tests nonmarketable securities periodically make strategic investments acquired investments business acquisitions companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant write carrying value investment believe investment experienced decline value temporary investments carrying value 09 million december 31 2003 permanently written total 125 million original cost recent accounting pronouncements april 2002 fasb issued sfas 145 sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” among provisions sfas 145 rescinds sfas 4 sfas 4 “reporting gains losses extinguishment debt” accordingly gains losses extinguishment debt shall reported extraordinary items unless extinguishment qualifies extraordinary item criteria accounting principles board “apb” opinion 30 “reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions” gains losses extinguishment debt meet criteria apb 30 reclassified income continuing operations prior periods presented adopted sfas 145 effective january 1 2003 adoption effect consolidated results operations financial condition cash flows june 2002 fasb issued sfas 146 sfas 146 “accounting costs associated exit disposal activities” sfas 146 provides guidance related accounting costs associated disposal activities covered sfas 144 exit restructuring activities previously covered eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” sfas 146 supercedes eitf issue 943 entirety sfas 146 requires costs related exiting activity restructuring recognized liability incurred sfas 146 applied exit disposal activities initiated december 31 2002 adoption sfas 146 material effect consolidated results operations financial condition cash flows november 2002 fasb issued financial interpretation 45 “fin 45” “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 requires liability recorded guarantor’s balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including rollforward entity’s product warranty liabilities applied recognition provisions fin 45 guarantees issued january 1 2003 company adopted fin 45 disclosure requirements adoption fin 45 material impact consolidated results operations financial condition cash flows november 2002 eitf reached consensus issue 0021 “revenue arrangements multiple deliverables” eitf issue 0021 provides guidance account arrangements involve delivery performance multiple products services andor rights use assets provisions eitf issue 0021 apply revenue arrangements entered fiscal periods beginning june 15 2003 adoption eitf issue 0021 material effect consolidated results operations financial condition cash flows december 2002 fasb issued sfas 148 sfas 148 “accounting stockbased compensation transition disclosure” sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires disclosures pro forma effect using fair value method accounting stockbased employee compensation displayed prominently tabular format additionally sfas 148 requires disclosure pro forma effect interim financial statements adopted disclosure requirements beginning quarterly report form 10q filed may 18 2003 january 2003 fasb issued financial interpretation 46 “fin 46” “consolidation variable interest entities interpretation arb 51” fin 46 requires certain variable interest entities consolidated primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior february 1 2003 provisions fin 46 originally applied first interim annual period beginning june 15 2003 september 2003 fasb deferred adoption fin 46 variable interest entities acquired prior february 1 2003 end first interim annual period ending december 15 2003 adoption fin 46 effect consolidated results operations financial condition cash flows factors affecting future operations investors carefully consider risks described making investment decision risks described ones face additional risks presently aware currently believe immaterial may also impair business operations business could harmed risks trading price common stock could decline significantly due risks investors may lose part investment assessing risks investors also refer information contained incorporated reference annual report form 10k including consolidated financial statements related notes quarterly operating results may fluctuate significantly good indicator future performance quarterly operating results fluctuated significantly past may vary significantly future result number factors many control factors include • market acceptance transition new product introductions including vsx 7000 new products launched 2003 new products launched future product enhancements us competitors • difficult general economic conditions case recent global economic uncertainty downturn technology spending specific economic conditions prevailing communications industry technology industries • prices performance products competitors • changes channel partner contracts channel partner strategy including changes channel partner contracts north america led change number mix channel partners resulted smaller number channel partners channel partners adding competitors’ products portfolio could lead changes channel partner contracts europe asia latin america could lead change number mix channel partners smaller number channel partners could lead channel upset already experienced north america • recent changes sales management sales organization could result disruptions among channel partners • timing size orders products • distribution channels reducing inventory levels • slowing sales channel partners customers places pressure channel partners minimize inventory levels reduce purchases products • level mix inventory hold meet future demand • near longterm impact military action iraq hostilities • near longterm impact terrorist attacks incidents military response uncertainty regarding military response attacks • impact unstable political situation israel military action israeli government hostilities middle east impact israeli operations • shift sales mix products sell lower margin products • shift revenues upgrade revenues opposed full systems network systems segment could lead lower revenues • fluctuations level international sales exposure international currency fluctuations revenues expenses • cost availability components • manufacturing costs • level cost warranty claims • impact disruptions sites primary manufacturing partners thailand china singapore israel raw material suppliers primary manufacturing partners reason including recurrence sars similar event • impact disruptions operations reason including recurrence sars similar event • impact seasonality various product lines geographic regions • introduction web collaboration solutions compete web collaboration video solutions • adverse outcomes intellectual property claims particularly collaboration properties inc litigation • level royalties must pay third parties experienced sequential quarterly revenue growth 1998 2000 since time experienced fluctuations quarterly operating results due factors could prevent us attaining sustaining sequential quarterly growth meeting expectations regarding operating results investors use past results predict future operating margins results example although experienced sequential quarterly revenue increases second third fourth quarters 2003 primarily related increases video network systems product revenues experienced sequential quarterly revenue decreases first quarter 2003 second third fourth quarters 2002 primarily related declines combined video communications network systems product revenue addition incurred significant net loss 2001 due charges related acquisitions completed year well net loss first quarter 2003 result factors believe periodtoperiod comparisons historical results operations good predictor future performance future operating results expectations stock market securities analysts investors stock price likely decline face risks associated products product development including new product introductions transitions success depends ability assimilate new technologies products properly train channel partners use products markets video voice communications network systems products characterized rapidly changing technology evolving industry standards frequent new product introductions success new products depends several factors including proper new product definition product cost timely completion introduction new products proper positioning new products relation total product portfolio relative pricing differentiation new products competitors market acceptance products additionally properly addressing complexities associated compatibility issues channel partner training technical sales support well field support also factors may affect success market take significant actions regarding product offerings acquire new product offerings important educate train channel partners avoid confusion desirability new product offering compared existing product offerings october 2003 launched new video product offering vsx 7000 believe taken appropriate measures educate train channel partners risk launch low end video product could cause confusion among channel partners endusers thereby causing delay purchases video product determine vsx 7000 desirable product existing video products purchase lower end video product instead higher end video products including viewstation ex fx delays purchases vsx 7000 instead higher end video products could adversely affect revenues gross margins operating results period delay addition 2003 launched new voice video network systems products new product launches new product launch future could also cause confusion amongst channel partners educate train take time evaluate new product offerings shift communications circuitswitched ipbased technologies time may require us add new channel partners enter new markets service provider market gain new core technological competencies attempting address needs including developing service provider strategy need develop new products internal development efforts joint developments companies acquisitions may identify successful new product opportunities develop bring products market timely manner successful developing service provider strategy additionally cannot assure competing technologies developed others render products technologies obsolete noncompetitive introduce new products obsolete existing products product transition cycles may go smoothly causing increased risk inventory obsolescence relationship issues channel partners failure new product development efforts inability service maintain necessary thirdparty interoperability licenses inability properly manage product transition inability enter new markets service provider market would harm business results operations may experience delays product introductions products may contain defects could adversely affect market acceptance products reputation seriously harm results operations intend continue introduce new products vsx 7000 visual concert products via video ii soundsation vtx 1000 viewstation ex mgc 25 vortex ef2241 pathnavigator pcs weboffice products however cannot assure new product releases timely made example viewstation fx viavideo delayed original release dates believe negatively affected net revenues 2000 vsx 7000 also delayed original release date video communications product development group located massachusetts texas voice communications product development group dispersed among california georgia canada network systems product development group dispersed among colorado georgia israel therefore may experience product delays future due communications logistics issues involved coordinating large geographically separated product development group past experienced delays introduction certain new products enhancements believe delays may occur future instance experienced delays introducing vsx 7000 viewstation mp webstation original expected release dates due unforeseen technology andor manufacturing ramping issues similar delays occurred introduction showstation ip soundstation premier affected first customer ship dates products also delays introducing soundstation ip product believe negatively impacted sales revenue first quarter 2001 soundpoint ip product introduction delayed believe negatively impacted sales third fourth quarters 2001 similar delays future new product offerings currently development could adversely affect market acceptance products reputation seriously harm results operations face risks related adoption rate new technologies invested significant resources developing products dependent adoption rate new technologies example soundstation ip soundpoint ip products dependent roll voiceoverip voip technologies addition voip products traditionally sold service providers strategy surrounding selling voip products developing service provider network initiated guarantee successful developing strategy establishing successful service provider network success viavideo ii product depends increased use desktop video collaboration technologies success weboffice product dependent increased use acceptance web collaboration technologies concert audio video conferencing success products also dependent quickly sip deployed new technology standard quickly adopt integrate new standard existing future products use new technologies current future products based occur development suitable sales channels occur occurs slowly expected may able sell certain products significant volumes business may harmed lower expected market acceptance products price competition price decreases would negatively impact business market accept products including new products launched 2003 profitability could harmed profitability could also negatively affected future result continuing competitive price pressures sale video voice conferencing equipment network systems could cause us reduce prices products discontinue one product intent simplifying product offering enhancing sales similar product reduced prices past order expand market products future may reduce prices introduce new products carry lower margins order expand market stimulate demand products discontinue existing products hope stimulating growth similar product cannot assure actions would desired result actions could adverse impact product margins profitability product obsolescence excess inventory asset impairment negatively affect results operations operate high technology industry subject rapid frequent technology market demand changes often render existing developing technologies obsolete addition introduction new products related actions discontinue existing products cause existing inventory become obsolete obsolescence issues require writedowns inventory value determined recorded value existing inventory greater fair market value example situation occurred third quarter 2003 wrote inventories product development result delay product introduction also viewstation product ipower products offer certain comparable functionality may compete customers addition launched several new products 2003 sales one products negative effect sales another products could significantly increase inventory levels negatively impacted product potential new products render existing products obsolete cause inventories existing products increase cause us discontinue product reduce demand existing products exists every one products purchased several businesses 2001 2002 included goodwill valued approximately 290 million purchased intangible assets valued approximately 15 million december 31 2003 represents significant portion recorded assets generally accepted accounting principles related goodwill intangibles changed issuance statement financial accounting standards 142 sfas 142 “goodwill intangible assets” adopted effective january 1 2002 sfas 142 goodwill indefinite lived intangible assets longer amortized must reviewed impairment least annually sooner certain circumstances intangible assets deemed finite useful lives continue amortized useful lives must reviewed impairment events changes circumstances indicate carrying amount assets may recoverable screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore cannot assure charge operations occur result future goodwill impairment tests impairment deemed exist would write recorded value intangible assets fair values could result full writeoff book value writedowns occur could harm business results operations addition made investments private companies classify “other assets” balance sheets value investments influenced many factors including operating effectiveness companies overall health companies’ industries strength private equity markets general market conditions due factors recorded charges earnings totaling 125 million fiscal 2000 2003 associated impairment investments reflected “loss strategic investments” statements operations december 31 2003 investments private companies valued 09 million may make additional investments private companies would subject similar impairment risks impairment risks may cause us write recorded value investments cannot assure future inventory investment license fixed asset writedowns happen future writedowns occur could harm business results operations failure adequately service support products could harm results operations recent growth due large part expansion products complex technologies including network systems products new video product offerings software products increased need product warranty service capabilities cannot develop train internal support organization maintain relationship outside technical support provider could harm business addition including service support recent launch vsx 7000 product view service offering service offerings key success factor business currently reorganizing service organization among things fully integrate service businesses recent acquisitions part effort also implementing new customer relationship management system expect provide better information us provide improved customer support manage difficult reorganization properly could alienate customers channel partners could harm business results operations general economic conditions may reduce revenues harm business grown become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition factors adversely impacted operating results 2001 experienced sequential revenue decrease first two quarters also experienced sequential revenue decreases second third fourth quarters 2002 first quarter 2003 due part factors improvement technology spending global economy constraints technology capital spending still exist could adverse impact 2004 addition first quarter 2003 noted greater decrease revenue products higher average selling prices network systems products believe resulted adverse economic conditions implemented restructuring actions 2002 first second quarters 2003 reduce overall cost structure result actions recorded restructuring charges 17 million 2002 50 million 2003 charges consisted severance employee termination benefits related workforce reductions achieve anticipated cost reductions business could harmed addition restructuring actions may sufficient additional actions may need taken future addition also face risk channel partners inventory levels excess future anticipated sales growth sales growth occur time frame anticipated channel partners reason including recurrence 2004 recent global economic uncertainty downturn technology spending channel partners may substantially decrease amount product order us subsequent periods product returns may exceed historical predicted levels would harm business example channel partners reduced inventory levels 2001 anticipation lower enduser demand also 2002 2003 began implement new directtouch strategy concert realignment channel partner strategy enables us direct interaction enduser customers strategy shift includes channel certifications certain network systems video products believe yield higher level enduser customer satisfaction part new channel partner strategy result recent economic downturn channel inventory model changed reduce channel inventories channel partners stock product move channel partners drop shipment method enduser customers opposed partners carry inventory second quarter 2003 believe essentially completed channel inventory reduction program believe aggregate see minor variations upwards downwards channel inventory weeks within product lines regions moving forward third fourth quarters 2002 first half 2003 believe channel partners’ video voice inventory decreased respective prior periods third quarter 2003 channel inventories remained stable voice channel inventories decreased fourth quarter 2003 although see slight increase video channel inventories primarily result advance purchases video inventory related specific enduser opportunities first quarter 2004 asia pacific region decrease channel inventories last half 2002 due largely shift channel partner strategy resulting us shipping fewer video voice units channel partners third fourth quarter 2002 channel partners lowering inventory levels result lower enduser demand first second quarters 2003 believe sales products channel partners enduser customers exceeded number units shipped channel result increased enduser demand thereby decreasing overall inventory channel partners decreased channel inventory levels less impact sales ipower video units products network systems segment typically carried inventory channel partners fact sales network systems products third fourth quarters 2003 increased 21 sequentially quarter fail compete successfully business results operations would significantly harmed face significant competition communications industry subject rapid technological change video communications major competitors include tandberg number companies including aethra clearone communications huawei nec panasonic philips sony vcon vtel well various smaller new industry entrants companies substantial financial resources production marketing engineering capabilities develop manufacture market sell products addition advances telecommunications standards connectivity video processing technology increasing market acceptance video communications established new companies may develop market products competitive video communications products may partner companies substantial financial resources production marketing engineering capabilities develop manufacture market sell products example cisco systems recently announced strategic relationship tandberg major competitor video communications market believe face increasing competition alternative video communications solutions employ new technologies new combinations technologies companies cisco systems 3com hewlettpackard dell microsoft nortel networks realnetworks webex enable webbased networkbased video collaboration communications market voice communications equipment including voice conferencing desktop equipment highly competitive also subject rapid technological change regulatory developments emerging industry standards expect competition persist increase future area voice communications major competitors include aethra clearone communications konftel mitel soundgear companies offer lower cost fullduplex speakerphones voip desktop space several low cost manufacturers asia europe emerging addition notable pbx ip call manager manufacturers compete standards based ip space including avaya cisco mitel siemens furthermore major telephony manufacturers produce handsfree speakerphone units lower cost voice communications products network systems business significant competition radvision number companies including avaya cisco systems first virtual huawei tandberg addition possible see increased competition product lines extent one competitors join together either mutual agreement acquisitions form new partnerships compete us competitors standalone basis combined basis could substantial financial resources production marketing engineering capabilities develop manufacture market sell products cannot assure able compete successfully current future competitors expect competitors continue improve performance current products introduce new products new technologies provide improved performance characteristics new product introductions competitors could cause significant decline sales loss market acceptance existing products future products believe possible effects ongoing competition may reduction prices products competitors’ products introduction additional lower priced competitive products introduction new products product platforms render existing products technologies obsolete expect increased competitive pressure may lead intensified pricebased competition resulting lower prices gross margins would significantly harm results operations disproportionate amount sales occur end quarter operating results unpredictable timing channel partner orders product shipments harm operating results quarterly revenues operating results depend upon volume timing channel partner orders received given quarter percentage order able ship recognize revenue quarter extremely difficult forecast moreover majority orders given quarter historically shipped last month quarter sometimes last weeks quarter 2003 end third fourth quarters significant amount order backlog historical experience principally result new channel strategy establishment product lead times maximize inventory efficiency focus operational officiencies logistics area believe current level backlog percent current quarters net revenues potentially maximized result established product lead times therefore assurance able maintain unlikely grow level backlog future quarters dependent part ability sales force generate orders linearly throughout quarter ability forecast revenue mix plan manufacturing accordingly addition orders channel partners based level demand enduser customers decline uncertainty enduser demand could significantly negatively impact enduser orders could turn negatively affect orders channel partners given quarter result backlog could decline historical levels even zero return historical linearity levels failure delay closing orders last part quarter would materially harm operating results occurred first quarter 2003 second third quarters 2002 furthermore may unable ship products period receive order due factors would adverse impact operating results events price common stock would decline difficulty estimating channel partner orders harm operating results establishment product lead times maximize inventory efficiency focus operations efficiency logistics area net revenues particular quarter extremely difficult predict degree certainty typically ship products within short time receive order therefore backlog good indicator future net revenues 2003 end third fourth quarters significant amount order backlog historical experience principally result new channel strategy establishment product lead times maximize inventory efficiency focus operational officiencies logistics area assurance able maintain unlikely grow level backlog future quarters dependent part ability sales force generate orders linearly throughout quarter ability forecast revenue mix plan manufacturing accordingly addition orders channel partners based level demand enduser customers decline uncertainty enduser demand could negatively impact enduser orders could turn significantly negatively affect orders channel partners given quarter accordingly expectations short longterm future net revenues based almost exclusively estimate future demand firm channel partner orders expense levels based largely estimates historically received majority channel partner orders last month quarter often last weeks quarter limited ability reduce expenses quickly reason orders net revenues meet expectations particular period accordingly significant shortfall demand products relation expectations would adverse impact operating results face risks related dependence channel partners sell products subject risks associated channel partners’ product inventories product sellthrough sell significant amount products channel partners maintain inventory products sale dealers endusers channel partners unable sell adequate amount inventory products given quarter dealers endusers channel partners decide decrease inventories reason recurrence recent global economic uncertainty downturn technology spending volume sales channel partners net revenues would negatively affected example economic downturn negatively affected business operating results 2001 global economic uncertainty downturn technology spending negatively affected business operating results 2002 first quarter 2003 improvement technology spending global economy constraints technology capital spending still exist conditions recur future business operating results continue negatively affected addition channel partners decide purchase inventory due product availability reasons required satisfy enduser demand enduser demand keep pace additional inventory purchases channel inventory could grow particular quarter could adversely affect product revenues subsequent quarter moreover choose eliminate reduce special cost stocking incentive programs quarterly revenues may fail meet expectations lower historical levels addition result changes sales management sales organization implemented changes partner strategy north america plan continue implement changes internationally channel partner strategy contracts may continue result smaller number channel partners change mix channel partners shift model even direct interaction us direct enduser customers addition channel strategy could continue upset channel partners extent could add competitive products portfolios shift emphasis selling competitors products changes may continue cause disruptions channels negatively impact revenue growth near term revenue estimates based largely enduser sales reports channel partners provide us monthly basis date believe data generally accurate extent salesout channel inventory data inaccurate may able make revenue estimates future periods subject risks associated success businesses channel partners many channel partners carry multiple polycom products derive significant revenues undercapitalized failure businesses establish sustain profitability obtain financing could significant negative effect future revenue levels profitability ability collect receivables improvement technology spending global economy constraints technology capital spending still exist could cause channel partners’ businesses suffer fail would harm business harmed could harmed large channel partners continue affected recurrence global economic uncertainty downturn technology spending example experienced decline revenues worldcom global crossing mcsi due financial troubles drop amount orders received three channel partners negatively affected revenues profitability past avoid confusion among channel partners regarding product offerings need devote significant resources educating training take significant actions regarding product offerings acquire new product offerings important educate train channel partners avoid confusion desirability new product offering relation existing product offerings october 2003 launched new video product offering vsx 7000 believe taken appropriate measures educate train channel partners risk launch low end video product could cause confusion among channel partners endusers thereby causing delay purchases video product viewstation ex fx determine vsx 7000 desirable product existing video products delays purchases could adversely affect net revenues gross margins operating results period delay addition 2003 launched new voice video network systems products new product launches new product launch future could cause confusion amongst channel partners educate train take time evaluate new product offerings integrating picturetel’s product offerings created confusion among channel partners need continue devote significant resources educate train channel partners combined product offerings channel confusion could also occur adequately train educate channel product families especially cases simplify product offerings discontinuing one product order stimulate growth similar product ongoing confusion may lead delays ordering products would negatively affect revenues conflicts channel partners could hurt sales products various oem agreements major telecommunications equipment manufacturers avaya cisco systems nortel networks whereby manufacture products work equipment oem relationships create conflicts channel partners directly compete oem partners could create conflicts among oem partners compete could adversely affect revenues channel partners oem partners conflicts among oem partners could also make partnering oem partners increasingly difficult many channel partners also sell equipment competes products channel partners could devote attention products could harm business example significant amount network systems revenues 2001 generated sales tandberg sony vcon compete us video communications product market believe conflict significantly reduced orders network systems products 2002 2003 impacted sales product line channel conflicts could arise cause channel partners devote resources nonpolycom communications equipment would negatively affect business results operations current future products directly competitive products channel strategic partners example agreement cisco systems ship soundstation ip conference phones resale cisco systems addition cisco sells network systems product direct competition network systems offerings announced partnership tandberg one major competitors video communications business consequence conflicts potential channel strategic partners significantly reduce orders products design technology products addition competition partners markets operate likely increase potentially resulting strains existing relationships companies strain could limit potential contribution strategic relationships business restrict ability form strategic relationships companies future create additional competitive pressures us including downward pressure average selling prices would result decrease revenues gross margins could harm business channel partner contracts typically shortterm early termination contracts may harm results operations typically enter longterm contracts channel partners cannot certain future order levels channel partners enter longterm contract generally terminable convenience channel partner event early termination loss one major channel partners believe enduser customer would likely purchase another one channel partners occur unable rapidly replace revenue source loss would harm results operations experience seasonal fluctuations revenues sales products experienced seasonal fluctuations affected sequential growth rates products particularly third first quarters example generally slowdown sales products european region third quarter year sales government entities typically slow fourth quarter greater extent first quarter addition sales video communications products typically declined first quarter year compared fourth quarter prior year seasonal fluctuations could negatively affect business could cause operating results fall short anticipated results quarters first quarter 2003 difficulties may encounter managing substantially larger business could adversely affect operating results officers key personnel worked together short period time recently joined us officers key personnel worked together short period time addition executive officers recently assumed significant new responsibilities example first quarter 2003 hired new senior vice president general manager video communications new senior vice president worldwide sales reorganized sales force video communications division sales force reorganization resulted hiring significant amount new senior sales management including new focus government sales movement senior sales management new roles responsibilities including promotion one individual role general manager asia pacific new management changes could disrupt sales turn could result reduced sales confusion channel partners delayed introduction new upgraded products failure successfully integrate new senior management could divert management’s attention ongoing business concerns fail successfully attract retain qualified personnel business harmed future success depend part continued ability hire assimilate retain qualified personnel competition personnel intense may successful attracting retaining personnel especially light recent additions senior management reorganizations restructurings loss key employee failure key employee perform current position inability attract retain skilled employees particularly technical management needed could harm business addition add complex software product offerings become increasingly important retain attract individuals skilled managing developing complex software product offerings many key employees israel responsible development network systems products obligated perform annual military reserve duty may called active duty time emergency conditions loss services executive officer key technical management personnel could harm business experienced significant growth business operations due internal expansion business acquisitions last five years appropriately manage growth future growth operating results negatively affected business grown recent years internal expansion business acquisitions continued growth may cause significant strain infrastructure internal systems managerial resources example annual revenues increased 52 million 1997 420 million 2003 past twelve fiscal quarters acquired accord circa picturetel aspi meetu headcount increased 175 employees december 31 1997 526 employees december 31 1999 1183 employees december 31 2003 manage growth effectively must continue improve expand infrastructure including information technology financial operating administrative systems controls continue managing headcount capital processes efficient manner productivity quality products may adversely affected integrate train new employees quickly effectively coordinate among executive engineering finance marketing sales operations customer support organizations add complexity organization increase operating expenses addition information technology systems may grow sufficient rate keep processing information demands place much larger company efforts continue expand information technology systems inability could harm business revenues may grow sufficient rate absorb costs associated larger overall headcount future growth may require significant additional resources cannot assure resources available need sufficient capital fund potential resource needs also assess resources following acquisitions likely determine redundancy certain areas require consolidation resources organizational disruptions associated consolidation process could require management attention financial expenditures unable manage growth effectively experience shortfall resources must take additional restructuring charges results operations harmed difficulties integrating acquisitions could adversely impact business difficulties integrating past future acquisitions could adversely affect business completed acquisition picturetel october 2001 voyant january 2004 complex process integrating voyant required continue require significant resources continue time consuming expensive disruptive business integration resulted diversion management financial resources core business objectives failure achieve anticipated benefits acquisition successfully integrate operations voyant could harm business results operations cash flows may realize benefits anticipate acquisition following significant challenges • potentially incompatible cultural differences two companies • revenue concentration large service provider customers • majority orders received last month quarter typically last weeks quarter unpredictability receipt orders • incorporating voyant’s technology products current future product lines • geographic dispersion operations • generating marketing demand expanded product line • integrating voyant’s products business limited experience service provider market • difficulty leveraging voyant’s combined technologies capabilities across product lines customer bases • inability retain previous voyant customers employees picturetel acquisition largest acquisition completed complex process integrating picturetel required significant resources continue face ongoing business challenges include principally geographic dispersion operations generating market demand expanded product line includes pcbased systems collaborationintensive applications addition incurred significant costs committed significant management time integrating picturetel’s operations technology development programs products information systems customers personnel although integration picturetel complete continue incur cash outflows additional costs completing integration process • fees expenses professionals consultants involved dissolving legal entities longer used • costs associated vacating subleasing closing facilities terminating leases • employee severance costs including reorganization service business • upgrading customer service information systems accommodate picturetel’s larger customer service function spent continue spend significant resources identifying acquiring businesses efficient effective integration acquired businesses organization critical growth addition voyant picturetel acquired following businesses prior fiscal years accord networks ltd accord february 2001 circa communications ltd circa april 2001 atlanta signal processors incorporated aspi november 2001 meetucom inc meetu june 2002 future acquisitions involve numerous risks including difficulties integrating operations technologies products acquired companies diversion management’s attention business concerns potential loss key employees acquired companies failure achieve anticipated benefits future acquisitions successfully integrate operations companies acquire could also harm business results operations cash flows additionally cannot assure incur material charges future quarters reflect additional costs associated past acquisitions future acquisitions may make failure implement restructuring plan related picturetel facilities could adversely impact business significant liability approximately 257 million december 31 2003 related vacant redundant facilities connection acquisition picturetel net estimated sublease income expect generate estimate sublease income based current comparable rates leases respective markets actual sublease income lower estimates reason takes us longer estimated sublease facilities associated cost subleasing terminating lease obligations facilities greater estimated would incur additional charges operations would harm business results operations cash flows example approximately 152000 square foot building fully subleased third party length lease obligation tenant unable fulfill reason contractual obligations sublease would incur additional charges operations would harm business addition vacated redundant facilities subleased lease obligations facilities terminated continue pay contractual lease facility operating expense obligations without sublease income offset costs event agree sublease facility terminate lease obligation lease buyout means may incur material cash outflow potentially exceeding recorded liability time transaction would harm operating cash flows extent cash outflows additional costs exceed amount recorded liability related sublease termination lease obligations could incur charge operations would harm business adversely impact results operations november 2003 entered lease amendment one facilities previously provided restructuring reserve original term lease ended 2014 amended allow us exit approximately onethird space facility currently unoccupied november 2006 cash payment 50 million exit additional approximately onethird space facility currently unoccupied november 2007 additional cash payment 50 million allow us option exiting remaining onethird facility currently occupied november 2008 amendment also gives landlord right november 2008 require us exit occupied space six months notice either voluntarily required landlord exit occupied space make final 50 million payment landlord would begin amortize remaining leasehold improvements net book value 20 million december 31 2003 six months landlord terminate lease occupied space would six months plan relocate operations relocation could disrupt operations harm operating results lease agreement also amended allow landlord sublet unoccupied space earlier november 2006 november 2007 landlord successful releasing us space earlier amendment provides would make related cash payments noted regards currently unoccupied space additional cash payments pertaining fifty percent cash savings related us longer pay rent common area maintenance charges portion building extent landlord exercise rights amendment incur significant cash outflows face risks related international operations sales significant operations israel subject risks associated military political regulatory environment israel middle east region principal research development manufacturing facilities network systems group many group’s suppliers located israel political economic military conditions israel middle east region directly affect network systems group’s operations number armed conflicts taken place israel geographic neighbors current futurearmed conflicts political instability region may impair ability produce sell network systems products could disrupt research developmental activities instability could adverse impact results operations military action iraq countries region perceived threat united states government could result additional unrest cause israel attacked would adversely affect results operations harm business technology used develop current network systems products developed part grants israeli office chief scientist israeli law technology developed pursuant grants office chief scientist cannot transferred person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer certain technology third parties manufacture products outside israel may adversely affect operating results development additional network systems products significantly reduce value technology process developing implementing disaster recovery plan could provide manufacturing performed outside israel limited basis today extended basis event disaster implementation disaster recovery plan could subject us additional payments office chief scientist could adversely affect operating results international sales expenses represent increasing portion net revenues operating expenses risks inherent international operations could harm business international sales expenses represent increasing portion net revenues operating expenses anticipate international sales continue account significant portion net revenues foreseeable future international operating expenses continue increase international sales expenses subject certain inherent risks including following • adverse economic conditions international markets • near longterm impact military action iraq hostilities • recurrence sars similar event • unexpected changes regulatory requirements tariffs • adverse economic impact terrorist attacks incidents military response attacks • difficulties staffing managing foreign operations • longer payment cycles • problems collecting accounts receivable • potentially adverse tax consequences • potential foreign currency exchange rate fluctuations international net revenues may fluctuate percentage total net revenues future introduce new products fluctuations primarily result practice introducing new products north america first additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner especially core european markets france germany united kingdom business could harmed cannot assure able maintain increase international market demand products although date substantial majority international sales denominated us currency expect growing number sales could denominated nonus currencies international customers request billing currency international operating expenses denominated foreign currency result expect business significantly vulnerable currency fluctuations could adversely impact results operations addition competitors invoice foreign currency today could disadvantage us 2003 operating costs internationally increased result weakness us dollar currency fluctuations recorded income expense consolidated statement operations hedge speculative purposes result increased exposure currency fluctuations time engage currency hedging activities solely mitigate temporary currency fluctuation exposure however limited experience hedging activities may successful could harm operating results financial condition addition significant adverse changes currency exchange rates happened european market 2000 asian market late 1997 could cause products become relatively expensive customers particular country leading reduction revenue profitability country discounts may temporarily permanently affected limited supply sources key components products operations could harmed supply interruptions component defects unavailability components key components used products currently available one source others available limited number sources including key integrated circuits optical elements also obtain certain plastic housings metal castings components suppliers located china certain southeast asia countries political economic instability region future quarantines restrictions associated recurrence sars infectious diseases future import restrictions may cause delays inability obtain supplies suppliers israel military action iraq war middle eastern countries perceived threat united states government may cause delays inability obtain supplies network systems products raw material supply commitments suppliers generally purchase components purchase order basis either directly contract manufacturers limited experience purchasing supplies various components products components included products microprocessors integrated circuits time subject limited allocations suppliers addition companies limited uncertain financial resources manufacture components event contract manufacturers unable obtain sufficient supplies components develop alternative sources needed companies limited financial resources go business operating results could seriously harmed moreover operating results would seriously harmed receipt significant number defective components increase component prices inability obtain lower component prices response competitive price reductions additionally video communications products designed based integrated circuits produced philips semiconductor philips equator technologies cameras produced sony could longer obtain integrated circuits cameras suppliers would incur substantial expense take substantial time redesigning products compatible components manufacturers cannot assure would successful obtaining components alternative sources timely costeffective manner additionally sony philips compete us video communications industry may adversely affect ability obtain necessary components failure obtain adequate supplies vital components could prevent delay product shipments could harm business also rely introduction schedules key components development launch new products delays availability key components could harm business addition business failure financial instability supplier components could adversely affect cash flows expend funds manner ensure supply components manufacturing disruption capacity constraints would harm business subcontract manufacture voice video product lines celestica thirdparty contract manufacturer use celestica’s facilities thailand china singapore disruption services due natural disaster quarantines restrictions associated recurrence sars similar events economic political difficulties countries asia reason disruption would harm business results operations also celestica’s facilities currently primary source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints would experience delay shipping products would immediate negative impact revenues result may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes us certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations network systems products manufactured israel currently experiencing internal external conflicts include terrorist acts military action also military action iraq war middle eastern countries perceived threat united states government could cause us experience manufacturing disruption due acts associated conflicts could harm business addition certain technology used network systems products developed grants office chief scientist israel israeli law prohibited transfer technology developed pursuant grants person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer technology third parties manufacture products outside israel may adversely affect operating results significantly reduce value technology developed grants process developing implementing disaster recovery plan could call manufacturing performed outside israel limited basis extended basis event disaster today performing final test assembly limited basis atlanta georgia implementation disaster recovery plan could subject us additional payments office chief scientist could adversely affect operating results insufficient proprietary rights fail protect rights business would materially impaired rely thirdparty license agreements termination impairment agreements may cause delays reductions product introductions shipments would harm business licensing agreements various suppliers software incorporated products example license video communications source code adtran ebsnet mitsubishi omnitel radvision telesoft video algorithm protocols ezenia real networks development source code avaya cisco systems hughes software systems ltd philips semiconductor audio algorithms lucent technologies nortel networks texas instruments communication software databeam windows software microsoft thirdparty software licenses may continue available us commercially reasonable terms termination impairment licenses could result delays reductions new product introductions current product shipments equivalent software could developed licensed integrated possible would harm business results operations rely patents trademarks copyrights trade secrets protect proprietary rights may sufficient protect intellectual property rely combination patent copyright trademark trade secret laws confidentiality procedures protect proprietary rights others may independently develop similar proprietary information techniques gain access intellectual property rights disclose technology addition cannot assure patent registered trademark owned us invalidated circumvented challenged us foreign countries rights granted thereunder provide competitive advantages us pending future patent applications issued scope claims sought us furthermore others may develop similar products duplicate products design around patents addition foreign intellectual property laws may protect intellectual property rights litigation may necessary enforce patents intellectual property rights protect trade secrets determine validity scope proprietary rights others defend claims infringement invalidity litigation could result substantial costs diversion resources could harm business could ultimately unsuccessful protecting intellectual property rights face might future face intellectual property infringement claims might costly resolve time received may future receive communications third parties asserting patent intellectual property rights covering products example september 23 2002 suit captioned collaboration properties inc v polycom inc filed united states court northern district california complaint alleges viewstation viavideo ipower weboffice path navigator products infringe 4 us patents owned plaintiff complaint seeks unspecified compensatory exemplary damages past present infringement permanently enjoin us infringing patents future november 14 2002 filed answer asserting among things infringement plaintiff’s patents invalid unenforceable believe meritorious defenses counterclaims intend vigorously defend action however litigation involves significant inherent risks uncertainties adverse outcome occur could significantly harm business costs associated defending litigation patent litigation future unpredictable expensive could cause general administrative expenses increase given quarter could adversely affect operating results cash flow quarter addition industry characterized uncertain conflicting intellectual property claims vigorous protection pursuit intellectual property rights positions resulted significant protracted expensive litigation past involved litigation adversely affected operating results example november 1998 videoserver inc known ezenia inc filed patent infringement claim accord’s us subsidiary accord subsequently added defendant september 2000 accord us subsidiary entered settlement agreement ezenia case dismissed accord paid 65 million ezenia cannot assure prevail litigation intellectual property claims made us future prohibited using technologies subject claims required obtain licenses make corresponding royalty payments addition necessary management attention legal costs associated litigation significant adverse effect operating results financial condition business interruptions could adversely affect operations vulnerable interruption fire earthquake typhoon power loss telecommunications failure quarantines restrictions associated recurrence sars similar events national catastrophe terrorist attacks occurred september 11 2001 war ongoing iraqi disturbances attack israel events beyond control fully implemented detailed disaster recovery plan addition carry sufficient business interruption insurance compensate us losses may occur losses damages incurred us could material adverse effect business results operations cash flow could fluctuate due potential difficulty collecting receivables past years initiated significant investments europe asia expand business regions europe asia international regions credit terms typically longer united states therefore europe asia international regions grow percentage net revenues happened 1999 2003 accounts receivable balances likely increase compared previous years although time able largely offset effects influences additional incentives offered channel partners end quarter form prepaid discounts additional incentives lowered profitability addition recurrence economic uncertainty downturn technology spending united states may restrict availability capital may delay collections channel partners beyond historical experience may cause companies file bankruptcy occurred global crossing worldcom mcsi either conditions would harm cash flow days sales outstanding performance although recent quarters experience collecting receivables good expect trend continue assurance continue past several quarters days sales outstanding dso metrics improved record levels assurance current level dso maintained likelihood dso metrics go revenues increase result fluctuations revenue linearity result fluctuations revenue linearity result extending credit terms customers previously cash terms result future acquisitions factors stock price fluctuates result conduct business stock market fluctuations market price common stock experienced significant fluctuations may continue fluctuate significantly market price common stock may significantly affected variety factors including • statements changes opinions ratings earnings estimates made brokerage firms industry analysts relating market business including competitors partners suppliers telecommunications industry leaders relating us specifically occurred recently • announcement new products product enhancements us competitors • technological innovations us competitors • quarterly variations results operations • general market conditions market conditions specific technology industries • domestic international macroeconomic factors • factors including factors discussed management’s discussion analysis financial condition results operations factors affecting future operations addition stock market continues experience extreme price volume fluctuations substantial effect market prices many high technology companies like us fluctuations often unrelated operating performance specific companies item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “other factors may affect future operations” document well information found elsewhere annual report form 10k overview leading global provider line highquality easytouse communications equipment enables enterprise users effectively conduct video voice data web communications offerings organized along four product lines video communications voice communications network systems services reporting purposes aggregate video communications voice communications one segment named communications report network systems services separate segments january 2003 sold verilink corporation verilink certain fixed assets intellectual property rights relating network access product line including line netengine integrated devices consolidated financial statements reflect network access product line discontinued operations accordance sfas 144 results operations network access product line sold verilink classified discontinued prior periods reclassified including reallocation general overhead charges three remaining reporting segments unless otherwise indicated following discussion relates continuing operations see note 2 notes consolidated financial statements information discontinued operations january 5 2004 completed acquisition voyant technologies inc voyant pursuant terms agreement plan merger agreement dated november 21 2003 voyant designs delivers group voice communication solutions part network systems services segments consolidated financial results year ended december 31 2004 include voyant acquisition included consolidated financial position results operations cash flows january 5 2004 date acquisition fiscal 2002 lesser extent first quarter fiscal 2003 performance industry whole impacted negatively global economic downturn uncertainty technology spending economic environment remains challenging technology spending showed signs improvement indications improving economic outlook end fiscal 2003 throughout 2004 revenues 5403 million 2004 compared 4204 million 2003 increase revenues primarily reflects increased network system revenues increased sales volumes video voice communications products lesser extent increases service revenues network systems services revenues increases reflect results voyant included 2004 voyant product service revenues represented slightly 6 total revenues 2004 revenues voyant 2003 voyant acquisition completed january 2004 addition 2004 generated approximately 796 million cash flow operating activities net 275 million paid due litigation settlement however total cash equivalents decreased approximately 580 million primarily result net cash outlay 950 million purchase voyant 525 million purchases common stock 193 million purchases property equipment 53 million purchases investments net sales maturities substantially offset cash generated operating activities 796 million 338 million proceeds employee director stock option exercises employee purchases polycom stock connection stock purchase plan discussion results operations consolidated level followed detailed discussion results operations segment discussion segment operating results presented three years ended december 31 2004 including voyant’s results operations january 5 2004 intend discussion financial condition results operations follows provide information assist understanding financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect financial statements results operations three years ended december 31 2004 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues total revenues 2004 5403 million increase 1198 million 29 2003 increase due increased network system revenues increased sales volumes video voice communications products lesser extent increases service revenues video communications revenues increased 2669 million 2004 2376 million 2003 12 increase primarily due increase sales viewstationvsx product line partially offset decreases ipower desktop video products voice communications revenues increased 1077 million 2004 764 million 2003 41 increase primarily result increases sales circuit switched products voiceoverip products lesser extent increases installed voice products revenues network systems products 2004 increased 62 2003 674 million 1089 million due primarily sales audio network systems result voyant acquisition increases video network system revenues services revenues increased 567 million 2004 390 million 2003 primarily due increased network system services result voyant acquisition partially offset decreases videorelated services voyant product service revenues represented slightly 6 total revenues 2004 revenues voyant 2003 voyant acquisition completed january 2004 total revenues 2003 4204 million decrease 317 million 7 2002 revenues communications network system services segments decreased 4 14 respectively 2003 2002 decrease communications due primarily decreased sales ipower video product partially offsetting decreases increased sales volume voice communications products video communications products ipower video communications revenues decreased 2376 million 2003 2555 million 2002 primarily due decrease sales ipower video products partially offset increase volumes viewstationvsx product line desktop video products voice communications revenues increased 764 million 2003 728 million 2002 primarily result increases sales volumes installed voice circuit switched products lesser extent increases voiceoverip products revenues network systems products decreased 674 million 2003 786 million 2002 primarily result reduction sales volume network systems hardware products mix shifts lower end systems lower average selling prices decreases partially offset increases video system upgrades software revenue services revenues decreased 390 million 2003 453 million 2002 due primarily decreases ipowerrelated services partially offset increases video network systems maintenance services international sales revenues outside canada us accounted 42 46 42 total revenues 2004 2003 2002 respectively regional basis north america europe asia pacific latin america revenues increased 36 29 10 28 respectively 2004 2003 north america revenues increased result increased revenues communications segment including increases voice video communication product revenues increased revenues network systems services segments portion due voyant acquisition increased revenues communications segment primarily result increases voice communications product revenues lesser extent increases video communication product revenues europe revenues increased result increased revenues communications network systems services segments increased revenues communications segment primarily result increases video communications product revenues lesser extent increases voice communication product revenues asia pacific revenues increased result increased revenues communications segment lesser extent increases network systems services segments increased revenues communications segment primarily result increases voice communications product revenues lesser extent increases video product revenues latin america revenues increased result increased revenues communications network systems services segments increased revenues communications segment primarily result increases video communications product revenues lesser extent increases voice communication product revenues anticipate international sales continue account significant portion total revenues foreseeable future plan continue expansion asia pacific europe international sales however subject certain inherent risks including potential economic weakness international markets political instability adverse economic impact terrorist attacks incidents military response attacks war hostilities changes foreign government regulations telecommunications standards export license requirements tariffs taxes trade barriers fluctuations currency exchange rates difficulty staffing managing foreign operations longer payment cycles difficulty collecting accounts receivable significant adverse changes currency exchange rates happened european market 2000 asian market late 1997 could cause products become relatively expensive customers particular country leading reduction revenue profitability country additionally international revenues may fluctuate percentage total revenues future introduce new products since expect initially introduce products north america also additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner especially core european markets france germany united kingdom business could harmed example revenues asia decreased sequentially third quarter 2004 compared second quarter 2004 revenues europe asia decreased sequentially second quarter 2004 compared first quarter 2004 cannot make assurances able maintain increase international market demand products additionally date substantial majority international sales denominated us currency however may move international sales denominated local currencies future result transactions would subject currency fluctuation impacts could adversely affect financial results customer accounted 10 total net revenues communications services segment revenues 2004 2003 2002 one customer accounted 10 network systems segment revenues 2004 2003 2002 network systems segment two channel partners together represented approximately 21 20 respectively network systems segment revenues believe unlikely loss channel partners would material adverse affect net revenues segment believe endusers would likely purchase products different channel partner 2005 made change coop marketing program provide channel partners generally result coop funds treated marketing expense rather revenue reduction previously change affect partners utilize claim credit eligible marketing activities intended better leverage collective marketing efforts result change revenues gross profit marketing expenses increase 2005 amount coop marketing dollars would previously reduction revenues change effect net income cash flows 2004 recorded approximately 102 million coop marketing programs reduction revenues coop marketing program changes effect 2004 revenues gross profit marketing expenses would increased approximately amount business grown become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition factors adversely impacted operating results 2001 2002 2003 improvement technology spending global economy constraints technology capital spending still exist could adverse impact 2005 addition fourth quarter 2004 experienced sequential decrease absolute dollars revenues us government entities first quarter 2003 noted greater decrease revenue products higher average selling prices network systems products recurrence events 2005 could similar effect addition also face risk channel partners inventory levels excess future anticipated sales occur time frame anticipated channel partners reason including recurrence 2005 global economic uncertainty downturn technology spending channel partners may substantially decrease amount product order us subsequent periods product returns may exceed historical predicted levels would harm business 2004 launched several new video voice product offerings believe taken appropriate measures educate train channel partners risk launch new products could cause confusion among channel partners endusers thereby causing delay purchases product determine new products desirable products existing products delays purchases new products could adversely affect revenues gross margins operating results intend continue introduce new products vsx product family v500 soundstation 2 soundstation 2w pvx products addition weakness enduser market products could negatively affect revenue cash flow channel partners could turn delay orders delay paying obligations us could harm revenues profitability financial condition cash flow result changes sales management sales organization implemented changes partner strategy north america plan continue implement changes internationally channel partner strategy contracts may continue result smaller number channel partners change mix channel partners shift model even direct interaction us enduser customers changes may cause additional disruptions channels negatively impact revenue growth near term addition acquisition voyant added additional level complexity operations result direct sales strategy service provider customers traditionally fulfilled product orders channel partner strategy result less experience selling end user customers including service provider customers may obtain revenue synergies anticipating voyant revenue concentration large customers loss one customers could negatively impact revenues also recently integrated voyant sales team worldwide sales organization made changes sales management may cause disruptions business negatively impact revenues near term addition majority voyant’s orders received last month quarter typically last weeks quarter thus unpredictability receipt orders could negatively impact future results typically ship products within short time receive order therefore backlog good indicator future revenues particular quarter difficult predict degree certainty december 31 2004 201 million order backlog compared 227 million december 31 2003 include backlog open product orders expect ship services expect bill record revenue following quarter billed unrecorded service revenue included deferred revenue second third quarters 2004 end quarter significant amount order backlog historical experience principally result new channel strategy establishment product lead times maximize inventory efficiency acquisition voyant first quarter 2004 focus operational efficiencies logistics area believe current level backlog could continue fluctuate therefore assurance able achieve backlog levels first three quarters 2004 believe unlikely grow levels backlog future quarters dependent part ability forecast revenue mix plan manufacturing accordingly increased deferred revenue associated vsx products ongoing service deferrals service revenues increase percent total revenue addition orders channel partners based level demand enduser customers decline uncertainty enduser demand could negatively impact enduser orders turn could negatively affect orders channel partners given quarter result backlog could decline historical levels zero cost revenues cost product revenues cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments allocation overhead expenses including facilities costs generally network systems products higher gross margin communication products overall product gross margins increased 2004 compared 2003 result favorable margins communications network systems segments video voice margins favorably impacted due increased volumes improved product mix network system margins favorably impacted increase video system volumes video system upgrades partially offset mix shift lower margin systems lower gross margins voyant products fourth quarter 2004 gross margins positively impacted 06 percentage points result one time recovery vendor amounts related warranty issue recovery impact overall 2004 gross margins overall product gross margins increased 2003 compared 2002 result favorable margins communications segment partially offset decreases gross margins network systems segment video voice communications products margins favorably impacted due product mix network systems decrease volume mix shift lower margin systems cost service revenues cost service revenues consists primarily material direct labor depreciation allocation overhead expenses including facilities costs generally services lower gross margin product gross margins overall service gross margins increased 2004 compared 2003 result revenues increasing faster pace related service costs higher margins network systems audio services result voyant acquisition service gross margins also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve months following shipment service revenue gross margins declined 2003 compared 2002 primarily result relatively fixed costs lower revenues forecasting future gross margin percentages difficult number risks associated maintaining current gross margin levels example uncertainties surrounding revenue levels related production level variances competition changes technology changes product mix litigation outcomes potential resulting royalties third parties manufacturing efficiencies subcontractors manufacturing purchased part variances warranty costs timing sales next quarters cause cost revenues percentage vary significantly addition improvement economy may experience higher prices commodity components included products cost increases memory devices used many products experienced 2004 late 2003 began including one year service video products lowered gross margins products result allocating portion product revenue deferred service revenue however service gross margins favorably impacted deferred revenue recorded revenue addition future products may also one year service included product thereby potentially impacting product gross margins negatively depending pricing model establish products additionally ipower products voip products desktop products significantly higher costs revenues network systems viewstation vsx soundstation products accordingly significant revenue growth ipower voip desktop products decline revenue associated network systems viewstation soundstation products negative effect gross margins also may reduce prices products future competitive reasons result difficult economy stimulate demand occurred first quarter 2003 certain soundstation products could increase cost revenues percentage risk potential price reductions would offset competitive pressures stimulate demand addition cost variances associated manufacturing ramp new products writeoff initial inventory purchases due product launch delays lack market acceptance new products vsx product family v500 soundstation 2 soundstation 2w pvx products new product development could occur would increase cost revenues percentage quarter addition uncertainties listed cost revenues percentage revenues may increase due change mix distribution channels mix international versus north american revenues additionally 2005 made change coop marketing program provide channel partners generally result coop funds treated marketing expense rather revenue reduction previously change affect partners utilize claim credit eligible marketing activities intended better leverage collective marketing efforts result change revenues gross profit marketing expenses increase 2005 amount coop marketing dollars would previously reduction revenues change effect net income cash flows 2004 recorded approximately 102 million coop marketing programs reduction revenues coop marketing program changes effect 2004 revenues gross profit marketing expenses would increased approximately amount sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force advertising promotional expenses product marketing allocation overhead expenses including facilities costs sales marketing expenses except direct marketing expenses allocated segments decrease sales marketing expense percentage revenues 2004 compared 2003 due increase revenues year ago period increase absolute dollars 2004 2003 due primarily increased sales commissions result improved sales performance quota lesser extent due increase sales marketing headcount voyant acquisition january 2004 additionally marketing expenses higher due increased product launch trade show activity 2004 increase sales marketing expense percentage revenues 2003 compared 2002 due decrease revenues period time increased marketing costs increase absolute dollars 2003 2002 due primarily overall expansion marketing efforts including addition chief marketing officer subsequently left us end third quarter 2003 related staffing increased allocations facilities infrastructure result increased headcount increase partially offset cost containment measures expense controls implemented second half 2002 first half 2003 due global economic uncertainty continued downturn technology spending due innovative nature products effect competing much larger companies much greater resources cisco microsoft believe incur increased expenses especially advertising expand overall market drive market penetration increase adoption rate technology products educate potential endusers desirability products competing products expect continue increase sales marketing expenses absolute dollar amounts expand north american international markets increase sales coverage existing markets market new products expand public sector additionally 2005 made change coop marketing program provide channel partners generally result coop funds treated marketing expense rather revenue reduction previously change affect partners utilize claim credit eligible marketing activities intended better leverage collective marketing efforts result change revenues gross profit marketing expenses increase 2005 amount coop marketing dollars would previously reduction revenues change effect net income cash flows 2004 recorded approximately 102 million coop marketing programs reduction revenues coop marketing program changes effect 2004 revenues gross profit marketing expenses would increased approximately amount research development expenses research development expenses expensed incurred consist primarily compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development expenses percentage revenues 2004 decreased slightly compared 2003 primarily due increasing revenues increase absolute research development expense dollars 921 million 2004 compared 726 million 2003 increase 27 primarily due increased headcount headcountrelated expenses development spending partially result voyant acquisition january 2004 increases research development expenses occurred network systems segment lesser extent also communications segment 2004 compared 2003 research development expenses remained flat absolute dollar amounts 2003 compared 2002 result cost containment measures expense controls implemented second half 2002 first half 2003 due global economic uncertainty continued downturn technology spending increase research development expense percentage revenues 2003 compared 2002 primarily due decrease revenues period time continued make investments improving existing products integrating existing acquired products developing new products 2003 network systems segment development expenditures accounted slight increase absolute dollars 2002 increase partially offset decreases communications segment primarily video product development accounted majority offset voice product development expenditures remained relatively flat currently investing research development resources enhance upgrade products comprise unified collaboration communications solutions encompasses products communications network systems segments anticipate expending greater proportion research development expenses toward development software infrastructure products included network systems segment enhance integration interoperability entire product suite believe technological leadership critical success committed continuing high level research development develop new technologies combat competitive pressures also continued investment new product initiatives require significant research development spending expect research development expenses absolute dollars increase future general administrative expenses general administrative expenses consist primarily compensation costs professional service fees allocation overhead expenses including facilities costs patent litigation costs including legal costs related collaboration properties inc cpi litigation bad debt expense general administrative expenses allocated segments percentage revenues general administrative expenses decreased 1 percentage point 2004 compared 2003 due increase revenues prior year increase spending absolute dollars general administrative expenses 2004 compared 2003 primarily result increased legal fees associated litigation especially cpi litigation annual salary increases accrued bonuses increased infrastructure costs outside services including increased audit fees associated sarbanesoxley compliance partially offset decrease bad debt expense result improvements accounts receivable aging 2004 increase salary related costs accounted 21 million increase legal fees accounted 16 million increase outside services accounted 22 million increase infrastructure costs accounted 04 million increase increases partially offset decreases 07 million bad debt expense remaining changes related numerous smaller items acquisition voyant add significantly general administrative expense percentage revenues general administrative expenses increased 1 percentage point 2003 2002 increase percent revenue 2003 comparable prior year primarily due decrease revenues period time increase spending absolute dollars general administrative expenses 2003 prior year primarily result higher costs associated accrued bonuses increased infrastructure costs outside services including increased costs associated new regulatory requirements patent litigation increased insurance costs partially offset decrease bad debt expense recruitingrelocation expense 2003 increases salaries related costs accounted 19 million increase increased infrastructure costs accounted 05 million outside services accounted 20 million increase increases partially offset 27 million decrease bad debt expense 04 million decrease recruitingrelocation expense remaining change related numerous smaller items significant charges due costs associated litigation uncollectability receivables would increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing bad debt expense associated uncollectible receivables difficult future quarter general administrative expense increases decreases absolute dollars difficult predict due visibility costs timing revenue factors believe general administrative expenses likely continue increase absolute dollar amounts future primarily result expansion administrative staff costs related supporting larger company increased costs associated regulatory requirements continued investments international regions acquisitionrelated costs recorded charges operations 14 million 2004 04 million 2003 37 million 2002 acquisitionrelated costs charges primarily include outside financial advisory accounting legal consulting fees direct mergerrelated expenses charges 2004 primarily related professional services costs integrate voyant acquisition january 2004 lesser extent additional professional service fees related ongoing liquidation international picturetel legal entities charges 2003 primarily related professional services costs integrate liquidate international picturetel accord legal entities begin integration acquisition voyant closed january 2004 2002 acquisitionrelated charges related primarily acquisition picturetel consisted primarily professional services costs complete integration us picturetel acquire additional businesses future may incur material acquisition expenses related transactions purchased inprocess research development 2004 2003 2002 incurred charges totaling 46 million zero 09 million respectively inprocess research development research development acquired 2004 part voyant acquisition 2002 part acquisition meetucom inc see note 3 notes consolidated financial statements amounts allocated purchased inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development voyant estimated net free cash flows generated inprocess research development projects discounted rates ranging 35 40 percent relation stage completion technical risks associated achieving technology feasibility reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance unable produce market product cost effectively cost approach uses concept replacement cost indicator fair value primary technique utilized valuing inprocess research development acquired meetu acquisition cost approach based premise prudent investor would pay asset cost replace asset new one replacement cost based total costs net unrealized income tax benefit spent developing inprocess technology meetu’s inception date valuation performed cost approach selected meetu valuation inprocess research development stage company time acquisition significant revenue stream amortization purchased intangibles 2004 2003 2002 recorded 205 million 176 million 171 million respectively amortization purchased intangibles acquired acquisitions purchased intangible assets amortized expense estimated useful lives range several months eight years increase absolute dollars 2004 compared 2003 primarily related voyant acquisition resulting 322 million recorded purchased intangibles accounted 67 million 205 million expensed 2004 partially offsetting increase related voyant picturetel intangibles became fully amortized fourth quarter 2004 statement financial accounting standards 142 “goodwill intangible assets” sfas 142 purchased intangibles longer meeting criteria recorded separately goodwill must reclassified goodwill purchased intangibles deemed indefinite lives must longer amortized first quarter 2002 reclassified approximately 05 million unamortized acquired workforce recorded part purchase price allocation circa acquisition meet criteria recorded separately goodwill resulted permanent reduction amortization expense 58300 per quarter first quarter 2004 also sfas 142 intangible assets indefinite lives longer amortized result determined previously recorded trade name intangible indefinite life consequently trade name intangible longer amortized resulting permanent reduction amortization expense 25000 per quarter april 2011 june 2002 completed transitional purchased intangible impairment test outlined sfas 142 required assessment purchased intangibles impairment january 1 2002 october 2002 fourth quarters 2003 2004 completed annual impairment test assessment purchased intangibles impairment conducted comparing fair value purchased intangible carrying amount date based results impairment tests determined purchased intangible assets impaired january 1 2002 2003 2004 restructure costs 2004 management approved restructuring plan network systems segment resulting actions intended improve overall cost structure network systems segment focusing resources strategic areas business streamlining certain engineering efforts reducing operating expenses accordance sfas 146 “accounting costs associated exit disposal activities” company recorded charge approximately 14 million year ended december 31 2004 charge consists primarily severance employee termination benefits related workforce reductions comprise less 3 percent company’s employees worldwide final payments related charge completed first quarter 2005 2003 approved restructuring actions primarily connection sale network access product line verilink response global economic uncertainty continued downturn technology spending actions meant improve overall cost structure prioritizing resources strategic areas business reducing operating expenses recorded restructuring charge 50 million 2003 result actions charge consisted severance employee termination benefits related workforce reduction approximately 12 percent employees worldwide restructuring charge related communications services network systems segments amounted 08 million 03 million 01 million respectively balance restructuring charge related operating activities separately managed corporate level allocated segments december 31 2004 paid 50 million charge 2002 approved restructuring actions response global economic uncertainty continued downturn technology spending improve overall cost structure prioritizing resources strategic areas business reducing operating expenses recorded restructuring charge 17 million 2002 result actions charge consisted severance employee termination benefits related workforce reduction approximately six percent employees worldwide december 31 2003 paid charge economic downturn uncertainty technology spending recurs 2005 may take additional restructuring actions reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed see note 6 notes consolidated financial statements litigation reserves payments fourth quarter 2004 entered settlement agreement avistar communications inc “avistar” collaboration properties inc whollyowned subsidiary avistar “cpi” settle patent infringement litigation matter us terms settlement agreement paid avistar onetime amount 275 million cpi agreed dismiss claims litigation prejudice addition settlement agreement avistar cpi entered patent crosslicense agreement whereby nonexclusive fully paidup worldwide patent licenses respective patent portfolios party subsidiaries granted us subsidiaries avistar subsidiaries including cpi avistar subsidiaries us subsidiaries incurred onetime charge 208 million 2004 recorded 67 million prepaid license expect amortize prepaid license third quarter 2013 expiration date patentsinsuit first quarter 2002 reached settlement former picturetel customer dispute involved certain services provided picturetel 2001 amounts owed us providing services received 03 million net legal fees incurred litigate settle case interest income net interest income net consists interest earned cash equivalents investments less bank charges resulting use bank accounts imputed interest expense related present value costs associated closing facilities part picturetel acquisition related integration plan imputed interest expense 16 million 2004 23 million 2003 18 million 2002 interest income net interest expense 73 million 2004 85 million 2003 95 million 2002 interest income decreased 2004 2003 due primarily decreases average cash investment balances primarily due cash outlays acquisition voyant purchases common stock litigation settlement fourth quarter 2004 lesser extent lower average interest rates result monetary policy actions taken united states federal reserve board stimulate economic growth united states average interest rate returns cash investments 178 2004 compared 202 2003 interest income decreased 2003 2002 due primarily interest rate reductions resulting monetary policy actions taken united states federal reserve board stimulate economic growth united states partially offsetting negative effect increase average cash investment balances primarily due cash generated operations average interest rate returns cash investments 202 2003 compared 260 2002 interest income net could fluctuate 2005 due movement cash balances changes interest rates related monetary policy actions taken united states federal reserve board loss strategic investments strategic reasons made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value review investments impairment events changes circumstances indicate impairment may exist make appropriate reductions carrying value necessary evaluate number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2004 2003 investments carrying value 74 million 09 million respectively 2004 2003 made additional investments two private companies totaling 65 million 14 million respectively aggregate investments permanently written total 125 million original cost including 05 million 2003 30 million 2002 reflected “loss strategic investments” consolidated statements operations amounts permanently written 2004 investments recorded “other assets” condensed consolidated balance sheets also included longterm investments nontransferable warrants purchase common stock publicly traded company view warrants part strategic investments warrants readily available fair market value exercised would represent less 1 outstanding common stock public company adjust carrying value warrants fair value period using black scholes option pricing model gains losses warrants recorded consolidated statements operations “loss strategic investments” 2004 2003 2002 recorded losses totaling 01 million 01 million 04 million respectively related warrants provision income taxes overall effective tax rates 2004 2003 2002 295 280 275 respectively resulted provision income taxes including taxes related discontinued operations 148 million 89 million 102 million 2004 2003 2002 respectively increase effective rate 2004 versus 2003 primarily result onetime charge purchased inprocess research development deductible tax purposes increase effective rate 2003 versus 2002 primarily result decrease foreign earnings subject relatively lower tax rates december 31 2004 approximately 819 million net operating loss carryforwards 127 million tax credit carryovers 83 million capital loss carryforwards well deferred tax assets arising temporary differences see note 16 notes consolidated financial statements october 22 2004 american jobs creation act “act” signed law act includes deduction 85 certain foreign earnings repatriated defined act may elect apply provision qualifying earnings repatriations 2005 started evaluation effects repatriation provision however expect able complete evaluation congress department treasury provides additional clarifying language key elements provision expect complete evaluation effects repatriation provision within reasonable period time following publication additional clarifying language time make changes current intention indefinitely reinvest accumulated earnings foreign subsidiaries range possible amounts unremitted earnings considering repatriation provision zero 120 million related potential range income tax zero 13 million segment information description products services well annual financial data segment found business section form 10k note 17 condensed consolidated financial statements adjusted segment financial data 2003 2002 reflect breakout services separate segment effective january 1 2004 future changes organizational structure business may result changes reportable segments disclosed results discussions include results segments years ended december 31 2004 2003 2002 segment contribution margin includes segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing general administrative costs legal accounting acquisitionrelated costs amortization purchased intangible assets purchased inprocess research development costs restructuring costs litigation reserves payments interest income net loss strategic investments expense net provision income taxes communications revenues communications segment 2004 increased 19 2003 due primarily increased sales volumes video voice communications products video communications revenues accounted 9 percentage points overall increase increased 2669 million 2004 2376 million 2003 primarily due increase sales volumes viewstationvsx product line partially offset decrease sales ipower desktop video products voice communications revenues accounted 10 percentage points overall increase increased 1077 million 2004 764 million 2003 primarily result increases sales volumes voiceoverip products circuit switched products lesser extent increases installed voice products revenues communications segment 2003 decreased 4 2002 due primarily decreased sales volumes ipower video communications products partially offset increases sales volumes voice communications products video communications products ipower video communications revenues accounted 5 percentage points overall decrease decreased 2376 million 2003 2555 million 2002 primarily due decrease sales ipower video products partially offset increase volumes viewstationvsx product line desktop video products voice communications revenues whose increase offset 1 percentage point overall decrease increased 764 million 2003 728 million 2002 primarily result increases sales volumes installed voice circuit switched products lesser extent increases voiceoverip products international revenues outside canada us accounted 45 46 43 total communications segment revenues 2004 2003 2002 respectively one customer accounted 10 total revenues communications segment 2004 2003 2002 contribution margin percentage communication segment revenues 2004 increased 48 compared 44 2003 increase contribution margin 2004 compared 2003 primarily due higher gross margins video voice communication products decreases engineering spending video communications partially offset increases direct marketing engineering spending voice communications gross margins improved 2004 compared 2003 due increased revenues improved product mix contribution margin percent communication segment revenues 2003 increased 44 compared 38 2002 increase contribution margin 2003 compared 2002 primarily due higher gross margins video voice communication products decreases engineering direct marketing spending video communications engineering direct marketing spending voice communications remained relatively flat 2003 2002 gross margins improved 2003 compared 2002 due improved product mix direct marketing engineering spending communications segment fluctuate quarter depending upon timing product launches marketing programs network systems revenues network systems segment 2004 increased 62 2003 1089 million due primarily sales audio network systems result voyant acquisition increase video network system revenues lesser extent increases video network system upgrades increases partially offset shift product mix toward products lower average selling prices revenues network systems segment 2003 decreased 14 2002 674 million result reduction sales volume network systems hardware products mix shifts lower end systems lower average selling prices decreases partially offset increases video system upgrades software revenue international revenues outside canada us accounted 38 48 43 total network systems revenues 2004 2003 2002 respectively decrease international network systems revenues percentage network systems revenues 2004 compared 2003 due primarily concentration audio network system revenues attributable voyant acquisition north america 2004 one customer accounted 10 network systems segment product revenues 2003 2002 network systems segment two channel partners together represented approximately 21 20 respectively network systems segment product revenues believe unlikely loss one channel partner would material adverse affect consolidated revenues believe endusers would likely purchase network systems products different channel partner 2004 began selling audio network services product line resulting voyant acquisition direct end users revenues segment end users subject variability segment revenues reseller customers loss one audio network system customers network systems segment could material negative impact network systems segment consolidated revenues increase contribution margin percentage network systems segment revenues 2004 compared 2003 due primarily increased revenues gross margins partially offset increased engineering expenses associated audio network systems headcount development spending result voyant acquisition gross margins network systems higher 2004 versus 2003 primarily due increase video network system upgrades partially offset decreases gross margins result increase volume mix shift lower margin systems lower gross margins audio network system products decrease contribution margin percentage network systems segment revenues 2003 compared 2002 due primarily lower gross margins lesser extent increased engineering marketing expenses gross margins network systems lower 2003 versus 2002 primarily due decrease volume mix shift lower margin systems services revenues services segment 2004 increased 45 2003 567 million due primarily increase audio network systems services result voyant acquisition lesser extent increases video network systems maintenance services increases partially offset decreases ipowerrelated services revenues services segment 2003 decreased 14 2002 390 million due primarily decreases ipowerrelated services partially offset increases video network systems maintenance services international revenues outside canada us accounted 30 35 34 total service revenues 2004 2003 2002 respectively decrease international services revenues percentage services revenues 2004 compared 2003 due primarily concentration audio network systems service revenues attributable voyant acquisition north america one customer accounted 10 total revenues services segment 2004 2003 2002 overall service gross margins increased 2004 compared 2003 result revenue increasing faster pace related service costs higher margins network systems audio services result voyant acquisition service gross margins 2004 also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve month period following shipment increase contribution margin due primarily increased gross margins offsetting increases operating expenses overall service gross margins decreased 2003 compared 2002 result decreased ipower service revenues offsetting decreases operating expenses liquidity capital resources december 31 2004 principal sources liquidity included cash equivalents 963 million shortterm investments 1180 million longterm investments 3209 million shortterm longterm investments consist primarily us government securities state local government securities corporate debt securities see note 7 notes consolidated financial statements addition 250 million line credit bank unused december 31 2004 however outstanding letters credit totaling approximately 45 million 44 million secured line credit generated cash operating activities totaling 796 million net 275 million litigation settlement 2004 1008 million 2003 815 million 2002 decrease cash provided operating activities 2004 2003 due primarily increases accounts receivable smaller decreases inventories deferred taxes smaller increases taxes payable accrued liabilities partially offset increased net income noncash expenses smaller increases prepaids assets larger increases accounts payable increase cash provided operating activities 2003 2002 due primarily decreases deferred taxes increases accrued liabilities increases accounts payable offsetting positive effects smaller net income smaller noncash expenses larger increases prepaids assets smaller decreases accounts receivable inventories smaller increases taxes payable total net change cash equivalents year ended 2004 decrease 580 million primary uses cash period 950 million acquisition voyant 525 million purchases common stock 193 million purchases property equipment 53 million purchases investments net sales maturities primary sources cash 796 million operating activities 338 million associated exercise stock options purchases employee stock purchase plan 08 million proceeds sale discontinued operations positive cash operating activities primarily result net income adjusted noncash expenses depreciation amortization provision doubtful accounts inventory writedowns excess obsolescence gain sale discontinued operations amortization unearned stockbased compensation loss strategic investments purchase inprocess research development tax benefits exercise employee stock options reductions inventories deferred taxes net increases accounts payable taxes payable accrued liabilities offsetting positive effect items net increases trade receivables prepaid expenses current assets past several quarters days sales outstanding dso metrics improved significantly dsos increased 33 days december 31 2003 39 days december 31 2004 expect dso metrics increase 2005 primarily result decrease coop reserves result change accounting coop funds whereby resulting liability longer recorded reserve receivables rather accrued liabilities prospectively increase dso result coop change effect net income cash flows expect dso metrics also increase 2005 due lesser extent revenue increases result fluctuations revenue linearity result longer payment terms service providers government entities inventory turns improved 71 turns december 31 2003 77 turns december 31 2004 assurance current level inventory turns maintained likelihood inventory turns fluctuate continue shorten lead times reduce air freight costs january 5 2004 completed acquisition voyant paid 1092 million cash voyant shareholders connection acquisition approximately 129 million cash placed escrow held security losses incurred us event certain breaches representations warranties covered merger agreement certain events second quarter 2004 company received 01 million escrow account related certain working capital adjustments reducing purchase consideration 1255 million 1254 million third quarter 2004 authorized release approximately 14 million escrow fund voyant shareholders certain prior sales tax liabilities resolved voyant shareholders may receive additional 15 million consideration twoyear period payable cash option polycom stock based achievement certain financial milestones relating sale voyant products voyant’s results operations included results operations beginning january 5 2004 june 2002 august 2004 board directors approved plans purchase 35 million shares 10 million shares respectively company’s common stock open market december 31 2004 company purchased approximately 50 million shares open market cash 754 million shares common stock retired reclassified authorized unissued years ended december 31 2004 2003 2002 company purchased 28 million 08 million 15 million shares common stock open market cash 525 million 69 million 159 million respectively company may continue purchase shares open market december 31 2004 company purchased approved shares june 2002 repurchase plan authorized purchase additional 85 million shares august 2004 repurchase plan august 2006 2005 intend continue purchase shares current board authorization may seek obtain approval board directors purchase additional number shares december 31 2004 open purchase orders related contract manufacturers contractual obligations approximately 259 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur november 2003 entered lease amendment one facilities previously provided restructuring reserve original term lease ended 2014 amended allow us exit facility various stages 2008 exchange certain cash payments june 2004 entered termination agreement related payment agreement facility terminated lease unoccupied space december 28 2004 agreement resulted overall reduction obligations acceleration termination payments previously scheduled 2008 addition december 31 2004 outstanding letter credit amount 31 million secured line credit security remaining termination payment 31 million paid january 2005 purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition bank issued letters credit secure leases offices letters credit total approximately 45 million secured credit facilities cash deposits banks table set forth shows december 31 2004 future minimum lease payments net estimated sublease income 19 million june 2007 due current lease obligations example lease approximately 152000 square foot building fully subleased third party term concurrent term lease obligation result currently showing lease obligation related facility sublease terminated tenant defaulted payment would incur additional lease payments would negatively impact operating results overall cash flows addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2004 follows thousands believe available cash equivalents investments bank line credit sufficient meet operating expenses capital requirements foreseeable future however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2004 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates management’s discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis internal audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements discussion accounting policies revenue recognition product returns recognize revenue including freight charges accordance sec staff accounting bulletin 104 “revenue recognition” statement financial accounting standards sfas 48 “revenue recognition right return exists” eitf issue 0021 “revenue arrangements multiple deliverables” aicpa statement position 972 sop 972 “software revenue recognition amended sop 989 modification sop 972 software revenue recognition respect certain transactions” guidelines recognize revenue transactions persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable payment reasonably assured accrue sales returns coop advertising allowances reduction revenues upon shipment based upon contractual obligations historical experience effective first quarter 2005 made changes coop advertising program affect channel partners utilize claim credit eligible marketing activities result coop funds generally treated marketing expense rather revenue reduction accordance eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” additionally recognize extended service revenue hardware software products service performed channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements tradein credits promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts maintain allowances doubtful accounts estimated losses resulting inability customers make required payments consider following factors determining collection payment reasonably assured customer creditworthiness past transaction history customer current economic industry trends changes customer payment terms previous experience customer typically obtain reports various credit organizations ensure customer history paying creditors may also request financial information including financial statements documents eg bank statements ensure customer means making payment factors indicate collection reasonably assured revenue deferred collection becomes reasonably assured generally upon receipt cash financial condition customers deteriorate adversely affecting ability make payments case global crossing worldcom 2002 mcsi 2003 additional allowances would required excess obsolete inventory record write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis deferred refundable taxes estimate actual current tax exposure together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2004 699 million net deferred tax assets order fully utilize deferred tax assets need generate sufficient amounts future us taxable income believe based upon financial projections likely generate sufficient future taxable income utilize assets therefore december 31 2004 established valuation allowance assets fair value assets acquired liabilities assumed purchase combinations purchase combinations completed require us identify estimate fair value assets acquired including intangible assets goodwill liabilities assumed combinations estimates fair value based business plan entities acquired including planned redundancies restructuring use assets acquired assumptions ultimate resolution obligations assumed future benefit received example picturetel acquisition identified vacated redundant facilities intended sublease negotiate lease termination settlement material acquisitions allocation period defined statement financial accounting standards 38 “accounting preacquisition contingencies purchased enterprises” completed therefore actual costs exceed estimates charges would recognized consolidated statements operations actual costs less estimates charges would continue recognized adjustment goodwill purchased intangibles assess impairment goodwill identifiable intangibles annually whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following • significant underperformance relative projected future operating results • significant changes manner use acquired assets strategy overall business • significant negative industry economic trends determine carrying value goodwill identified intangibles may recoverable based upon existence one indicators impairment would typically measure impairment based projected discounted cash flow method using discount rate determined us commensurate risk inherent current business model accordance sfas 142 “goodwill intangible assets” accounted picturetel aspi meetu acquisitions completed july 1 2001 new guidance january 1 2002 ceased amortize goodwill arising circa acquisition completed prior july 1 2001 june 2002 completed transitional goodwill purchased intangibles impairment tests outlined sfas 142 required assessment goodwill purchased intangibles impairment january 1 2002 fourth quarter 2004 2003 2002 completed annual impairment tests assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date assessment purchased intangibles impairment conducted comparing fair value purchased intangible carrying amount date based results impairment tests determined goodwill assets purchased intangible assets impaired january 1 2002 2004 2003 2002 plan conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests nonmarketable securities periodically make strategic investments companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant write carrying value investment believe investment experienced decline value temporary investments carrying value 74 million december 31 2004 permanently written total 125 million original cost including 05 million 2003 30 million 2002 reflected “loss strategic investments” consolidated statements operations amounts permanently written 2004 recent accounting pronouncements march 2004 fasb issued eitf 0301 “the meaning otherthantemporary impairment application certain investments” provides new guidance assessing impairment losses debt equity investments new impairment model applies investments accounted cost equity method investments accounted fas 115 “accounting certain investments debt equity securities” eitf 0301 also includes new disclosure requirements cost method investments unrealized loss position september 2004 fasb delayed accounting provisions eitf 0301 however disclosure requirements remain effective applicable disclosures included consolidated financial statements related notes thereto evaluate effect adopting eitf 0301 november 2004 fasb issued fasb statement 151 “inventory costsan amendment arb 43” “fas 151” result efforts converge us accounting standards inventories international accounting standards fas 151 requires idle facility expenses freight handling costs wasted material spoilage costs recognized currentperiod charges also requires allocation fixed production overheads costs conversion based normal capacity production facilities fas 151 effective inventory costs incurred fiscal years beginning june 15 2005 anticipate implementation standard significant impact consolidated results operations financial condition cash flows december 2004 fasb issued sfas 123 revised 2004 “sharebased payment” “sfas 123r” sfas 123r addresses forms sharebased payment “sbp” awards including shares issued certain employee stock purchase plans stock options restricted stock appreciation rights sfas 123r require company expense sbp awards compensation cost sbp transactions measured fair value fasb originally stated preference lattice model believed lattice model fully captures unique characteristics employee stock options estimate fair value compared blackscholes model company currently uses footnote disclosure fasb decided remove explicit preference lattice model require particular valuation methodology sfas 123r requires us adopt new accounting provisions beginning third quarter 2005 although company process evaluating impact applying various provisions sfas 123r expect statement material impact consolidated results operations december 2004 fasb issued sfas 153 “exchanges nonmonetary assets amendment apb 29” requires nonmonetary exchanges recorded fair value assets exchanged certain exceptions standard requires exchanges productive assets accounted fair value rather carryover basis provisions sfas 153 effective fiscal years beginning june 15 2005 adopt standard 2006 determined impact statement consolidated financial position results operations december 2004 fasb issued fasb staff position fsp regarding “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 “ajca” fsp 1092 fsp 1092 allows us time beyond fourth quarter 2004 period enactment evaluate effect ajca plan reinvestment repatriation foreign earnings purposes applying sfas 109 “accounting income taxes” see discussion potential impact company note 16 condensed consolidated financial statements factors may affect future operations investors carefully consider risks described making investment decision risks described ones face additional risks presently aware currently believe immaterial may also impair business operations business could harmed risks trading price common stock could decline significantly due risks investors may lose part investment assessing risks investors also refer information contained incorporated reference annual report form 10k including consolidated financial statements related notes quarterly operating results may fluctuate significantly good indicator future performance quarterly operating results fluctuated significantly past may vary significantly future result number factors many control factors include • fluctuations demand products services part due changing global economic environment also result increased competition due new competitors entering market development new partnerships recently announced tandberg cisco relationship • prices performance products existing potential new competitors change rapidly due technological innovations • changes channel partner programs coop program may favorably received partners could result channel partners adding competitors’ products portfolio delaying advertising sales products shifting emphasis selling competitors’ products would negatively impact revenue growth near term • changes channel partner contracts europe asia pacific latin america could result change number mix channel partners smaller number channel partners channel upset already experienced north america • changes sales management sales organization including addition sales headcount achieve increased sales coverage could result disruptions among channel partners andor increased investments sales organization without resulting revenue increases • difficult general economic conditions north america regions world case global economic uncertainty downturn technology spending 2002 2003 specific economic conditions prevailing communications industry technology industries • unpredictable fluctuations general administrative costs associated complying requirements section 404 sarbanesoxley act 2002 evaluating internal control financial reporting associated litigation matters may become involved time • adoption new accounting pronouncement sfas 123r “sharebased payments” require us record compensation expense shares issued stock plans beginning third quarter 2005 material impact results operations • market acceptance transition new product introductions including vsx product family v500 soundstation2 soundstation 2w pvx software new products launched 2004 new products launched future product enhancements us existing potential new competitors • shift sales mix products sell lower margin products • slowing sales channel partners customers places pressure channel partners minimize inventory levels reduce purchases products • timing size mix orders products • distribution channels reducing inventory levels • level mix inventory hold meet future demand • changes channel partner contracts channel partner strategy including changes channel partner contracts north america could result reduction number channel partners channel partners adding competitors’ products portfolio • impact unstable political situation israel military action israeli government hostilities middle east impact israeli operations • shift revenues upgrade revenues opposed full systems revenues network systems segment could lead lower revenues • ability customers channel partners suppliers obtain financing fund capital expenditures • fluctuations level international sales exposure international currency fluctuations revenues expenses • cost availability components recent cost increases memory devices used many products • manufacturing costs • level cost warranty claims • impact disruptions operations sites primary manufacturing partners thailand china singapore israel raw material suppliers primary manufacturing partners reason including fire earthquake natural disasters quarantines power loss telecommunications failures events beyond control • future changes existing financial accounting standards practices taxation rules practices • near longterm impact military action iraq hostilities • near longterm impact terrorist attacks incidents military response uncertainty regarding military response attacks • level royalties must pay third parties • impact seasonality various product lines geographic regions • adverse outcomes intellectual property matters • introduction web collaboration solutions compete web collaboration video solutions experienced sequential quarterly revenue growth 1998 2000 since time experienced fluctuations quarterly operating results due factors could prevent us attaining sustaining sequential quarterly growth meeting expectations regarding operating results investors use past results predict future operating margins results example although experienced sequential quarterly revenue increases second third fourth quarters 2003 throughout 2004 experienced sequential quarterly revenue decreases first quarter 2003 second third fourth quarters 2002 primarily related declines combined video communications network systems product revenue addition incurred significant net loss 2001 due charges related acquisitions completed year well net loss first quarter 2003 result factors believe periodtoperiod comparisons historical results operations good predictor future performance future operating results expectations stock market securities analysts investors stock price likely decline face risks associated products product development including new product introductions transitions success depends ability assimilate new technologies products properly train channel partners use products markets video voice communications network systems products characterized rapidly changing technology evolving industry standards frequent new product introductions success new products depends several factors including proper new product definition product cost timely completion introduction new products proper positioning new products relation total product portfolio relative pricing differentiation new products competitors market acceptance products additionally properly addressing complexities associated compatibility issues channel partner training technical sales support well field support also factors may affect success market take significant actions regarding product offerings acquire new product offerings important educate train channel partners avoid confusion desirability new product offering compared existing product offerings since october 2003 launched several new product offerings vsx product family v500 soundstation2 soundstation 2w pvx software believe taken appropriate measures educate train channel partners risk new products could cause confusion among channel partners endusers thereby causing delay purchases product determine products desirable products legacy products delays purchases could adversely affect revenues gross margins operating results period delay new product launches new product launch future could also cause confusion amongst channel partners educate train take time evaluate new product offerings shift communications circuitswitched ipbased technologies time may require us add new channel partners enter new markets service provider market entered acquisition voyant january 2004 gain new core technological competencies attempting address needs including developing service provider strategy need develop new products internal development efforts joint developments companies acquisitions may identify successful new product opportunities develop bring products market timely manner successful developing service provider strategy additionally cannot assure competing technologies developed others render products technologies obsolete noncompetitive introduce new products render existing products obsolete product transition cycles may go smoothly causing increased risk inventory obsolescence relationship issues end user customers channel partners failure new product development efforts inability service maintain necessary thirdparty interoperability licenses inability properly manage product transition inability enter new markets service provider market would harm business results operations may experience delays product introductions products may contain defects could adversely affect market acceptance products reputation seriously harm results operations intend continue introduce new products vsx product family v500 soundstation2 soundstation 2w pvx software products however cannot assure new product releases timely made example viewstation fx via video delayed original release dates believe negatively affected revenues 2000 vsx 7000 also delayed original release date video communications product development group located massachusetts texas voice communications product development group dispersed among california georgia canada network systems product development group dispersed among colorado georgia israel therefore may experience product delays future due logistics issues involved coordinating large geographically diverse product development group past experienced delays introduction certain new products enhancements believe delays may occur future instance experienced delays introducing vsx 7000 viewstation mp webstation original expected release dates due unforeseen technology andor manufacturing ramping issues similar delays occurred introduction soundstation 2w showstation ip soundstation premier affected first customer ship dates products also delays introducing soundstation ip product believe negatively impacted sales revenue first quarter 2001 soundpoint ip product introduction delayed believe negatively impacted sales third fourth quarters 2001 similar delays future new product offerings currently development could adversely affect market acceptance products reputation seriously harm results operations face risks related adoption rate new technologies invested significant resources developing products dependent adoption rate new technologies example soundstation ip soundpoint ip products dependent roll voiceoverip voip technologies addition voip products traditionally sold service providers strategy surrounding selling voip products developing service provider network initiated guarantee successful developing strategy establishing successful service provider network success viavideo ii vsx 3000 pvx software application products depend increased use desktop video collaboration technologies success weboffice product dependent increased use acceptance web collaboration technologies concert audio video conferencing success products also dependent quickly session initiation protocol sip firewall nat traversal call management integration technologies deployed new technologies quickly adopt integrate new technologies existing future products use new technologies current future products based occur development suitable sales channels occur occurs slowly expected may able sell certain products significant volumes business may harmed lower expected market acceptance products price competition price decreases would negatively impact business market accept products including soundstation2 soundstation 2w vsx product family v500 pvx software launched 2003 2004 profitability could harmed profitability could also negatively affected future result continuing competitive price pressures sale video voice conferencing equipment network systems could cause us reduce prices products discontinue one product intent simplifying product offering enhancing sales similar product reduced prices past order expand market products future may reduce prices introduce new products carry lower margins order expand market stimulate demand products discontinue existing products hope stimulating growth similar product cannot assure actions would desired result actions could adverse impact product margins profitability product obsolescence excess inventory asset impairment negatively affect results operations operate high technology industry subject rapid frequent technology market demand changes often render existing developing technologies obsolete addition introduction new products related actions discontinue existing products cause existing inventory become obsolete obsolescence issues require writedowns inventory value determined recorded value existing inventory greater fair market value example situation occurred third quarter 2003 wrote inventories product development result delay product introduction also pace change technology development release new products increased expected continue increase sales one products negative effect sales another products could significantly increase inventory levels negatively impacted product products potential exists new products render existing products obsolete cause inventories existing products increase cause us discontinue product reduce demand existing products addition acquisition voyant january 2004 purchased several businesses 2001 2002 together include goodwill valued approximately 3526 million purchased intangible assets valued approximately 269 million december 31 2004 represents significant portion recorded assets generally accepted accounting principles related goodwill intangibles changed issuance statement financial accounting standards 142 sfas 142 “goodwill intangible assets” adopted effective january 1 2002 sfas 142 goodwill indefinite lived intangible assets longer amortized must reviewed impairment least annually sooner certain circumstances intangible assets deemed finite useful lives continue amortized useful lives must reviewed impairment events changes circumstances indicate carrying amount assets may recoverable screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore cannot assure charge operations occur result future goodwill intangible asset impairment tests impairment deemed exist would write recorded value intangible assets fair values could result full writeoff book value writedowns occur could harm business results operations addition made investments private companies classify “other assets” balance sheets value investments influenced many factors including operating effectiveness companies overall health companies’ industries strength private equity markets general market conditions due factors recorded charges earnings totaling 125 million including 05 million fiscal 2003 30 million fiscal 2002 associated impairment investments reflected “loss strategic investments” statements operations december 31 2004 investments private companies valued 74 million may make additional investments private companies would subject similar impairment risks impairment risks may cause us write recorded value investments cannot assure future inventory investment license fixed asset writedowns happen future writedowns occur could harm business results operations failure adequately service support products could harm results operations recent growth due large part expansion products complex technologies including network systems products new video product offerings software products increased need product warranty service capabilities cannot develop train internal support organization maintain relationship outside technical support provider could harm business addition including one year maintenance support purchase vsx product family v500 products view service offering service offerings key success factor business currently reorganizing service organization among things fully integrate service businesses recent acquisitions part effort also implementing new customer relationship management system expect provide better information us provide improved customer support manage difficult reorganization properly could alienate customers channel partners could harm business results operations general economic conditions may reduce revenues harm business grown become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition factors adversely impacted operating results 2001 2002 2003 improvement technology spending global economy constraints technology capital spending still exist could adverse impact 2005 example fourth quarter 2004 experienced sequential decrease absolute dollars revenues us government entities first quarter 2003 noted greater decrease revenue products higher average selling prices network systems products believe resulted adverse economic conditions recurrence events could similar effect addition also face risk channel partners inventory levels excess future anticipated sales occur time frame anticipated channel partners reason including recurrence 2005 global economic uncertainty downturn technology spending channel partners may substantially decrease amount product order us subsequent periods product returns may exceed historical predicted levels would harm business fail compete successfully business results operations would significantly harmed face significant competition communications industry subject rapid technological change video communications major competitors include tandberg number companies including aethra avistar dlink huawei leadtek nec panasonic sony vcon vtel zte well various smaller new industry entrants companies substantial financial resources production marketing engineering capabilities develop manufacture market sell products addition advances telecommunications standards connectivity video processing technology increasing market acceptance video communications established new companies may develop market products competitive video communications products may partner companies substantial financial resources production marketing engineering capabilities develop manufacture market sell products example tandberg major competitor video communications recently announced strategic relationship cisco systems whereby tandberg provide cisco systems technology cobranded sold cisco systems since second quarter 2003 experienced greater losses group video conferencing sales competitors including competition experiencing lower price points competitors china expect continue face stiff competition tandberg may continue gain market share us due part strategic relationship cisco latest product offerings addition believe face increasing competition alternative video communications solutions employ new technologies new combinations technologies companies cisco systems 3com hewlettpackard dell microsoft nortel networks realnetworks webex enable webbased networkbased video collaboration communications market voice communications equipment including voice conferencing desktop equipment highly competitive also subject rapid technological change regulatory developments emerging industry standards expect competition persist increase future area voice communications major competitors include aethra clearone communications konftel mitel companies offer lower cost fullduplex speakerphones also several low cost manufacturers asia europe emerging voip desktop products competitive addition notable pbx ip call manager manufacturers compete standards based ip products including avaya cisco systems mitel siemens furthermore major telephony manufacturers produce handsfree speakerphone units lower cost voice communications products video network systems business significant direct competition radvision number companies including cisco systems first virtual huawei tandberg audio network systems business significant competition companies spectel recently acquired avaya compunetix latitude services business see competition potentially coming number companies including cisco systems nortel believe vendors look products potential service revenue streams addition trying provide one service solution customers today third party maintenance companies big threat service base industry continues grow may become concern time addition possible see increased competition product lines extent one competitors join together either mutual agreement acquisitions form new partnerships compete us competitors standalone basis combined basis could substantial financial resources production marketing engineering capabilities develop manufacture market sell products principal competitive factors markets presently compete may compete future include • ability provide sell broad range products services responsive changing technology changing customer requirements • product performance • price • ability introduce new products including products priceperformance advantages • ability reduce production costs • ability provide valueadded features • ability successfully integrate products operate products existing customer platforms • market presence • ability provide financing competition face north american market intense particular noted softening north american sales fourth quarter 2004 whether fourth quarter softening due stiffer competition region due factors difficult predict reduction federal spending economic slowdown trend continues financial results may adversely impacted addition competition face certain international markets different face north america continually changing instance noted increased pricing pressures china india parts asia unable compete effectively regions terms price technology product offerings marketing strategies overall financial results may suffer cannot assure able compete successfully current future competitors expect competitors continue improve performance current products introduce new products new technologies provide improved performance characteristics new product introductions competitors could cause significant decline sales loss market acceptance existing products future products believe possible effects ongoing competition may reduction prices products competitors’ products introduction additional lower priced competitive products introduction new products product platforms render existing products technologies obsolete expect increased competitive pressure may lead intensified pricebased competition resulting lower prices gross margins would significantly harm results operations operating results hard predict disproportionate amount sales occur end quarter timing channel partner orders product shipments harm operating results quarterly revenues operating results depend upon volume timing channel partner orders received given quarter percentage order able ship recognize revenue quarter extremely difficult forecast moreover prior second half 2003 majority orders given quarter shipped last month quarter sometimes last weeks quarter throughout 2003 second quarter 2004 amount order backlog steadily increased principally result new channel strategy establishment product lead times maximize inventory efficiency acquisition voyant focus operational efficiencies logistics area fourth quarter 2004 backlog decreased significantly due part decrease current quarter bookings percentage revenue shorter lead times increase deferred revenue carve outs associated increase shipments vsx product family include first year maintenance support believe current level backlog continue fluctuate unlikely grow backlog levels second third quarters 2004 future quarters due many factors ability sales force generate orders linearly throughout quarter ability forecast revenue mix plan manufacturing accordingly increased deferred revenue associated vsx products ongoing service deferrals service revenues increase percent total revenue addition orders channel partners based level demand enduser customers decline uncertainty enduser demand could significantly negatively impact enduser orders could turn negatively affect orders channel partners given quarter result backlog could decline future quarters even zero return historical linearity levels failure delay closing orders last part quarter would materially harm operating results occurred first quarter 2003 second third quarters 2002 furthermore may unable ship products period receive order due factors would adverse impact operating results events price common stock would decline difficulty estimating channel partner orders harm operating results establishment product lead times maximize inventory efficiency focus operations efficiency logistics area revenues particular quarter extremely difficult predict degree certainty typically ship products within short time receive order therefore backlog good indicator future revenues second third quarters 2004 end quarter significant amount order backlog historical experience principally result new channel strategy establishment product lead times maximize inventory efficiency acquisition voyant first quarter 2004 focus operational efficiencies logistics area believe current level backlog continue fluctuate unlikely grow backlog levels second third quarters 2004 future quarters dependent part ability forecast revenue mix plan manufacturing accordingly increased deferred revenue associated vsx products ongoing service deferrals service revenues increase percent total revenue addition orders channel partners based level demand enduser customers decline uncertainty enduser demand could negatively impact enduser orders could turn significantly negatively affect orders channel partners given quarter accordingly expectations short longterm future revenues based almost exclusively estimate future demand firm channel partner orders expense levels based largely estimates addition majority voyant’s orders received last month quarter typically last weeks quarter thus unpredictability receipt orders could negatively impact future results historically received majority channel partner orders last month quarter often last weeks quarter event order linearity declines levels experienced 2002 first half 2003 majority sales occurred last month quarter reason orders revenues meet expectations particular period limited ability reduce expenses quickly accordingly significant shortfall demand products relation expectations would adverse impact operating results face risks related dependence channel partners sell products avoid confusion among channel partners regarding product offerings need devote significant resources educating training take significant actions regarding product offerings acquire new product offerings important educate train channel partners avoid confusion desirability new product offering relation existing product offerings since october 2003 launched several new video voice products including vsx product family v500 soundstation2 soundstation 2w pvx software believe taken appropriate measures educate train channel partners risk launch new products could cause confusion among channel partners endusers thereby causing delay purchases video voice products determine new products desirable products legacy products delays purchases could adversely affect revenues gross margins operating results period delay new product launches new product launch future could cause confusion amongst channel partners educate train take time evaluate new product offerings integrating acquired product offerings created confusion among channel partners past may continue future need continue devote significant resources educate train channel partners product offerings channel confusion could also occur adequately train educate channel product families especially cases simplify product offerings discontinuing one product order stimulate growth similar product ongoing confusion may lead delays ordering products would negatively affect revenues conflicts channel partners could hurt sales products various oem agreements major telecommunications equipment manufacturers avaya cisco systems nortel networks whereby manufacture products work equipment oem relationships create conflicts channel partners directly compete oem partners could create conflicts among oem partners compete could adversely affect revenues channel partners oem partners conflicts among oem partners could also make continued partnering oem partners increasingly difficult many channel partners also sell equipment competes products channel partners could devote attention products could harm business example significant amount network systems revenues 2001 generated sales tandberg sony vcon compete us video communications product market believe conflict significantly reduced orders network systems products 2002 2003 impacted sales product line channel conflicts could arise cause channel partners devote resources nonpolycom communications equipment would negatively affect business results operations current future products directly competitive products channel strategic partners example agreement cisco systems ship soundstation ip conference phones resale cisco systems addition cisco sells network systems product direct competition network systems offerings recently announced extended partnership tandberg one major competitors video communications business whereby tandberg provide cisco systems technology cobranded sold cisco systems consequence conflicts potential channel strategic partners significantly reduce orders products design technology products addition competition partners markets operate likely increase potentially resulting strains existing relationships companies strain could limit potential contribution strategic relationships business restrict ability form strategic relationships companies future create additional competitive pressures us including downward pressure average selling prices would result decrease revenues gross margins could harm business subject risks associated channel partners’ product inventories product sellthrough sell significant amount products channel partners maintain inventory products sale dealers endusers channel partners unable sell adequate amount inventory products given quarter dealers endusers channel partners decide decrease inventories reason recurrence global economic uncertainty downturn technology spending volume sales channel partners revenues would negatively affected example economic downturn negatively affected business operating results 2001 global economic uncertainty downturn technology spending negatively affected business operating results 2002 first quarter 2003 improvement technology spending global economy constraints technology capital spending still exist conditions recur future business operating results continue negatively affected example fourth quarter 2004 experienced sequential decrease absolute dollars revenues us government entities addition channel partners decide purchase inventory due product availability reasons required satisfy enduser demand enduser demand keep pace additional inventory purchases channel inventory could grow particular quarter could adversely affect product revenues subsequent quarter moreover choose eliminate reduce special cost stocking incentive programs quarterly revenues may fail meet expectations lower historical levels addition result changes sales management sales organization implemented changes partner strategy north america plan continue implement changes internationally channel partner strategy contracts may continue result smaller number channel partners change mix channel partners shift model even direct interaction us direct enduser customers strategy shift includes channel certifications certain network systems video products believe yield higher level enduser customer satisfaction part new channel partner strategy result global economic downturn channel inventory model changed reduce channel inventories channel partners stock product move channel partners drop shipment method enduser customers opposed partners carry inventory second quarter 2003 believe essentially completed channel inventory reduction program believe aggregate see minor variations upwards downwards channel inventory weeks within product lines regions moving forward channel strategy could continue upset channel partners extent could add competitive products portfolios shift emphasis selling competitors products changes may continue cause disruptions channels negatively impact revenue growth near term revenue estimates associated products stocked channel partners based largely enduser sales reports channel partners provide us monthly basis date believe data generally accurate extent salesout channel inventory data inaccurate received timely may able make revenue estimates future periods changes channel partner programs may favorably received result channel partner relationships results operations may adversely impacted channel partners eligible participate various incentive programs depending upon contractual arrangements us part arrangements right make changes programs launch new programs business conditions warrant example recently announced changes coop marketing programs affect partners utilize claim credit eligible marketing activities believe change allow us better focus leverage collective marketing efforts change could cause disruptions channels negatively impact revenue growth near term changes could upset channel partners extent could add competitive products portfolios delay advertising sales products shift emphasis selling competitors products appropriately handled assurance channel partners receptive change receive positive benefits anticipating making program changes subject risks associated success businesses channel partners many channel partners carry multiple polycom products derive significant revenues undercapitalized failure businesses establish sustain profitability obtain financing could significant negative effect future revenue levels profitability ability collect receivables improvement technology spending global economy constraints technology capital spending still exist could cause channel partners’ businesses suffer fail would harm business harmed could harmed large channel partners continue affected recurrence global economic uncertainty downturn technology spending example 2003 experienced decline revenues worldcom global crossing mcsi due financial troubles drop amount orders received three channel partners negatively affected revenues profitability channel partner contracts typically shortterm early termination contracts may harm results operations typically enter longterm contracts channel partners cannot certain future order levels channel partners enter longterm contract generally terminable convenience channel partner event early termination loss one major channel partners believe enduser customer would likely purchase another one channel partners occur unable rapidly replace revenue source loss would harm results operations experience seasonal fluctuations revenues sales products experienced seasonal fluctuations affected sequential growth rates products particularly third first quarters example generally slowdown sales products european region third quarter year sales government entities typically slow fourth quarter greater extent first quarter addition sales video communications products typically declined first quarter year compared fourth quarter prior year seasonal fluctuations could negatively affect business could cause operating results fall short anticipated results quarters first quarter 2003 difficulties may encounter managing substantially larger business could adversely affect operating results fail successfully attract retain qualified personnel business harmed future success depend part continued ability hire assimilate retain qualified personnel competition personnel intense may successful attracting retaining personnel especially light recent additions senior management reorganizations restructurings addition provisions sarbanesoxley act 2002 related rules sec nasdaq impose heightened personal liability key management personnel threat liability could make difficult identify hire retain highlyskilled management personnel loss key employee failure key employee perform current position inability attract retain skilled employees particularly technical management needed could harm business addition add complex software product offerings become increasingly important retain attract individuals skilled managing developing complex software product offerings many key employees israel responsible development network systems products obligated perform annual military reserve duty may called active duty time emergency conditions loss services executive officer key technical management personnel could harm business experienced significant growth business operations due internal expansion business acquisitions last five years appropriately manage growth future growth operating results negatively affected business grown recent years internal expansion business acquisitions continued growth may cause significant strain infrastructure internal systems managerial resources example annual revenues increased 344 million 2000 540 million 2004 time acquired accord circa picturetel aspi meetu voyant headcount increased 362 employees december 31 1999 1437 employees december 31 2004 manage growth effectively must continue improve expand infrastructure including information technology financial operating administrative systems controls continue managing headcount capital processes efficient manner productivity quality products may adversely affected integrate train new employees quickly effectively coordinate among executive engineering finance marketing sales operations customer support organizations add complexity organization increase operating expenses addition information technology systems may grow sufficient rate keep processing information demands place much larger company efforts continue expand information technology systems inability could harm business revenues may grow sufficient rate absorb costs associated larger overall headcount future growth may require significant additional resources given increase business operations complexity scale may insufficient management capabilities internal bandwidth manage growth business effectively cannot assure resources available need sufficient capital fund potential resource needs also assess resources following acquisitions likely determine redundancy certain areas require consolidation resources organizational disruptions associated consolidation process could require management attention financial expenditures unable manage growth effectively experience shortfall resources must take additional restructuring charges results operations harmed difficulties integrating acquisitions could adversely impact business difficulties integrating past future acquisitions could adversely affect business completed acquisition voyant january 2004 process integrating voyant operations required continue require significant resources continue time consuming expensive disruptive business failure achieve anticipated benefits acquisition successfully integrate operations voyant could harm business results operations cash flows may realize benefits anticipate acquisition following significant challenges • potentially incompatible cultural differences two companies • revenue concentration large service provider customers • majority orders received last month quarter typically last weeks quarter unpredictability receipt orders • incorporating voyant’s technology products current future product lines • geographic dispersion operations • generating marketing demand expanded product line • integrating voyant’s products business limited experience service provider market • difficulty leveraging voyant’s combined technologies capabilities across product lines customer bases • inability retain previous voyant customers employees addition revenues related acquisition experienced sequential quarterly decrease 37 fourth quarter 2004 although management taken steps address performance product line including integrating voyant sales team worldwide sales organization making changes sales management may unsuccessful efforts results operations may negatively impacted picturetel acquisition completed october 2001 largest acquisition completed complex process integrating picturetel required significant resources continue face ongoing business challenges include principally geographic dispersion operations generating market demand expanded product line includes pcbased systems collaborationintensive applications although integration picturetel complete continue incur cash outflows additional costs related acquisition primarily related fees expenses professionals consultants involved dissolving legal entities longer used spent continue spend significant resources identifying acquiring businesses efficient effective integration acquired businesses organization critical growth future acquisitions involve numerous risks including difficulties integrating operations technologies products acquired companies diversion management’s attention business concerns potential loss key employees acquired companies failure achieve anticipated benefits future acquisitions successfully integrate operations companies acquire could also harm business results operations cash flows additionally cannot assure incur material charges future quarters reflect additional costs associated past acquisitions future acquisitions may make failure implement restructuring plan related picturetel facilities could adversely impact business significant liability approximately 91 million december 31 2004 related vacant redundant facilities connection acquisition picturetel net estimated sublease income expect generate estimate sublease income based current comparable rates leases respective markets actual sublease income lower estimates reason takes us longer estimated sublease facilities associated cost subleasing terminating lease obligations facilities greater estimated would incur additional charges operations would harm business results operations cash flows example approximately 152000 square foot building fully subleased third party length lease obligation tenant unable fulfill reason contractual obligations sublease would incur additional charges operations would harm business addition vacated redundant facilities subleased lease obligations facilities terminated continue pay contractual lease facility operating expense obligations without sublease income offset costs event agree sublease facility terminate lease obligation lease buyout means may incur material cash outflow potentially exceeding recorded liability time transaction would harm operating cash flows extent cash outflows additional costs exceed amount recorded liability related sublease termination lease obligations could incur charge operations would harm business adversely impact results operations face risks related international operations sales significant operations israel subject risks associated military political regulatory environment israel middle east region principal research development manufacturing facilities network systems group many group’s suppliers located israel political economic military conditions israel middle east region directly affect network systems group’s operations number armed conflicts taken place israel geographic neighbors current futurearmed conflicts political instability region may impair ability produce sell network systems products could disrupt research developmental activities instability could adverse impact results operations military action iraq countries region perceived threat united states government could result additional unrest cause israel attacked would adversely affect results operations harm business technology used develop current network systems products developed part grants israeli office chief scientist israeli law technology developed pursuant grants office chief scientist cannot transferred person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer certain technology third parties manufacture products outside israel may adversely affect operating results development additional network systems products significantly reduce value technology process developing implementing disaster recovery plan could provide manufacturing performed outside israel limited basis today extended basis event disaster implementation disaster recovery plan could subject us additional payments office chief scientist could adversely affect operating results international sales expenses represent increasing portion revenues operating expenses risks inherent international operations could harm business international sales expenses represent increasing portion revenues operating expenses anticipate international sales continue account significant portion revenues foreseeable future international operating expenses continue increase international sales expenses subject certain inherent risks including following • adverse economic conditions international markets • near longterm impact military action iraq hostilities • disruptions business due natural disasters quarantines events beyond control • unexpected changes regulatory requirements tariffs • adverse economic impact terrorist attacks incidents military response attacks • difficulties staffing managing foreign operations • longer payment cycles • problems collecting accounts receivable • potentially adverse tax consequences • potential foreign currency exchange rate fluctuations international revenues may fluctuate percentage total revenues future introduce new products fluctuations primarily result practice introducing new products north america first additional time required product homologation regulatory approvals new products international markets extent unable expand international sales timely costeffective manner especially core european markets france germany united kingdom business could harmed cannot assure able maintain increase international market demand products although date substantial majority international sales denominated us currency expect growing number sales could denominated nonus currencies international customers request billing currency international operating expenses denominated foreign currency result expect business significantly vulnerable currency fluctuations could adversely impact results operations addition competitors currently invoice foreign currency could disadvantage us 2003 2004 operating costs internationally increased result weakness us dollar currency fluctuations recorded income expense consolidated statement operations hedge speculative purposes result increased exposure currency fluctuations time engage currency hedging activities solely mitigate temporary currency fluctuation exposure however limited experience hedging activities may successful could harm operating results financial condition addition significant adverse changes currency exchange rates happened european market 2000 asian market late 1997 could cause products become relatively expensive customers particular country leading reduction revenue profitability country discounts may temporarily permanently affected limited supply sources key components products operations could harmed supply interruptions component defects unavailability components key components used products currently available one source others available limited number sources including key integrated circuits optical elements also obtain certain plastic housings metal castings components suppliers located china certain southeast asia countries political economic instability region future quarantines restrictions associated infectious diseases future import restrictions may cause delays inability obtain supplies suppliers israel military action iraq war middle eastern countries perceived threat united states government may cause delays inability obtain supplies network systems products raw material supply commitments suppliers generally purchase components purchase order basis either directly contract manufacturers components included products microprocessors integrated circuits time subject limited allocations suppliers addition companies limited uncertain financial resources manufacture components event contract manufacturers unable obtain sufficient supplies components develop alternative sources needed companies limited financial resources go business operating results could seriously harmed moreover operating results would seriously harmed receipt significant number defective components increase component prices recent increases memory devices inability obtain lower component prices response competitive price reductions additionally video communications products designed based integrated circuits produced philips semiconductor philips equator technologies cameras produced sony could longer obtain integrated circuits cameras suppliers would incur substantial expense take substantial time redesigning products compatible components manufacturers cannot assure would successful obtaining components alternative sources timely costeffective manner additionally sony philips compete us video communications industry may adversely affect ability obtain necessary components failure obtain adequate supplies vital components could prevent delay product shipments could harm business also rely introduction schedules key components development launch new products delays availability key components could harm business addition business failure financial instability supplier components could adversely affect cash flows expend funds manner ensure supply components manufacturing disruption capacity constraints would harm business subcontract manufacture voice video product lines celestica thirdparty contract manufacturer use celestica’s facilities thailand china singapore disruption services due natural disaster quarantines restrictions associated infectious diseases similar events economic political difficulties countries asia reason disruption would harm business results operations also celestica’s facilities currently primary source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints would experience delay shipping products would immediate negative impact revenues result may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes us certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations network systems products manufactured israel currently experiencing internal external conflicts include terrorist acts military action also political conflict israel military action iraq war middle eastern countries perceived threat united states government could cause us experience manufacturing disruption due acts associated conflicts could harm business addition certain technology used network systems products developed grants office chief scientist israel israeli law prohibited transfer technology developed pursuant grants person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer technology third parties manufacture products outside israel may adversely affect operating results significantly reduce value technology developed grants process developing implementing disaster recovery plan could call manufacturing performed outside israel limited basis extended basis event disaster today performing final test assembly limited basis atlanta georgia implementation disaster recovery plan could subject us additional payments office chief scientist could adversely affect operating results insufficient proprietary rights fail protect rights business would materially impaired rely thirdparty license agreements termination impairment agreements may cause delays reductions product introductions shipments would harm business licensing agreements various suppliers software incorporated products example license video communications source code adtran ebsnet mitsubishi omnitel radvision telesoft video algorithm protocols ezenia real networks development source code avaya cisco systems hughes software systems ltd philips semiconductor audio algorithms lucent technologies nortel networks texas instruments communication software databeam windows software microsoft thirdparty software licenses may continue available us commercially reasonable terms termination impairment licenses could result delays reductions new product introductions current product shipments equivalent software could developed licensed integrated possible would harm business results operations rely patents trademarks copyrights trade secrets protect proprietary rights may sufficient protect intellectual property rely combination patent copyright trademark trade secret laws confidentiality procedures protect proprietary rights others may independently develop similar proprietary information techniques gain access intellectual property rights disclose technology addition cannot assure patent registered trademark owned us invalidated circumvented challenged us foreign countries rights granted thereunder provide competitive advantages us pending future patent applications issued scope claims sought us furthermore others may develop similar products duplicate products design around patents addition foreign intellectual property laws may protect intellectual property rights litigation may necessary enforce patents intellectual property rights protect trade secrets determine validity scope proprietary rights others defend claims infringement invalidity litigation could result substantial costs diversion resources could harm business could ultimately unsuccessful protecting intellectual property rights face might future face intellectual property infringement claims litigation claims might costly resolve resolved adversely may harm operating results financial condition party lawsuits patentrelated otherwise normal course business litigation expensive lengthy disruptive normal business operations results complex litigation matters difficult predict uncertainty associated substantial unresolved lawsuits could harm business financial condition reputation negative developments respect pending lawsuits could cause stock price decline unfavorable resolution particular lawsuit could adverse possibly material effect business results operations moreover specifically time involved claims legal proceedings assert patent infringement claims intellectual property rights covering products expect number significance matters increase business expands particular expect face increasing number patent copyright claims number products competitors industry grows functionality video voice data web conferencing products overlap claims proceedings us whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require us enter royalty licensing agreements royalty licensing agreements required may available terms favorable us unfavorable outcome claim proceeding could material adverse impact financial position results operations period unfavorable outcome occurs potentially future periods settlement announced us may expose us claims us third parties seeking monetary damages even unsuccessful would divert management attention business cause us incur costs possibly material defend matters example november 2004 settled outstanding patent infringement litigation avistar communications inc “avistar” collaboration properties inc whollyowned subsidiary avistar connection settlement paid 275 million believe currently adequate internal control financial reporting required evaluate internal control financial reporting section 404 sarbanesoxley act 2002 adverse results evaluation could result loss investor confidence financial reports adverse effect stock price pursuant section 404 sarbanesoxley act 2002 section 404 beginning annual report form 10k fiscal year ended december 31 2004 required furnish report management internal control financial reporting report contains among matters assessment effectiveness internal control financial reporting end fiscal year including statement whether internal control financial reporting effective assessment must include disclosure material weaknesses internal control financial reporting identified management report must also contain statement auditors issued attestation report management’s assessment internal controls committee sponsoring organizations treadway commission coso provides framework companies assess improve internal control systems auditing standard 2 provides professional standards related performance guidance auditors attest report management’s assessment effectiveness internal control financial reporting section 404 management’s assessment internal controls financial reporting requires management make subjective judgments particularly section 404 auditing standard 2 newly effective judgments areas may open interpretation therefore report uniquely difficult prepare able assert management certifications filed annual report form 10k internal control financial reporting effective december 31 2004 must continue monitor assess internal control financial reporting management identifies one material weaknesses internal control financial reporting unable assert internal control effective unable assert internal control financial reporting effective given reporting period auditors unable attest management’s report fairly stated unable express opinion effectiveness internal controls could lose investor confidence accuracy completeness financial reports would adverse effect stock price unable predict accurately costs associated evaluating internal control financial reporting section 404 sarbanesoxley act 2002 may continue unable future unable accurately predict costs including costs internal assessments external auditor assessments associated complying requirements section 404 sarbanesoxley act 2002 evaluating internal control financial reporting costs compliance significantly larger originally anticipated 2004 costs compliance future periods may continue unpredictable could adverse effect financial results changes existing financial accounting standards practices taxation rules practices may adversely affect results operations changes existing accounting taxation rules practices new accounting pronouncements taxation rules varying interpretations current accounting pronouncements taxation practice could significant adverse effect results operations manner conduct business changes could potentially affect reporting transactions completed changes effective example currently required record stockbased compensation charges earnings connection stock options grants employees however financial accounting standards board fasb issued fasb 123r “stockbased payments” require us record stockbased compensation charges earnings employee stock option grants commencing third quarter 2005 charges negatively impact earnings may fail implement necessary changes business strategy successfully timely manner management continually reviewing refining business strategy direction company time may engage third party consultants assist us evaluation business strategy certain aspects business strategy management fails appropriately recognize changes business strategy warranted fails effectively adjust company’s direction warranted fails implement certain recommendations made third party consultants successfully timely manner relating strategic direction results operations may adversely impacted possibly materially business interruptions could adversely affect operations vulnerable interruption fire earthquake typhoon natural disaster power loss telecommunications failure quarantines national catastrophe terrorist activities war ongoing iraqi disturbances attack israel events beyond control fully implemented detailed disaster recovery plan addition carry sufficient business interruption insurance compensate us losses may occur losses damages incurred us could material adverse effect business results operations cash flow could fluctuate due potential difficulty collecting receivables managing inventories past years initiated significant investments europe asia expand business regions europe asia international regions credit terms typically longer united states therefore europe asia international regions grow percentage revenues happened 1999 2004 accounts receivable balances likely increase compared previous years although time able largely offset effects influences additional incentives offered channel partners end quarter form prepaid discounts additional incentives lowered profitability addition recurrence economic uncertainty downturn technology spending united states may restrict availability capital may delay collections channel partners beyond historical experience may cause companies file bankruptcy occurred global crossing worldcom mcsi either conditions would harm cash flow days sales outstanding performance although recent quarters experience collecting receivables good expect trend continue assurance continue 2004 days sales outstanding dso metrics ranged 32 first quarter 2004 39 days fourth quarter 2004 expect dso metrics increase result change coop marketing programs result extending payment terms beyond 30 days remain competitive recently north america certain service provider public sector customers additionally dso metrics continue fluctuate likelihood increase revenues increase result fluctuations revenue linearity result future acquisitions factors addition manage business focus shorter shipment lead times certain products implement freight cost reduction programs inventory levels may increase resulting decreased inventory turns could negatively impact cash flow stock price fluctuates result conduct business stock market fluctuations market price common stock experienced significant fluctuations may continue fluctuate significantly market price common stock may significantly affected variety factors including • statements changes opinions ratings earnings estimates made brokerage firms industry analysts relating market business including competitors partners suppliers telecommunications industry leaders relating us specifically occurred recently • announcement new products product enhancements us competitors • technological innovations us competitors • quarterly variations results operations • general market conditions market conditions specific technology industries • domestic international macroeconomic factors • factors including factors discussed management’s discussion analysis financial condition results operations factors may affect future operations addition stock market continues experience extreme price volume fluctuations substantial effect market prices many high technology companies like us fluctuations often unrelated operating performance specific companies item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview leading global provider line highquality easytouse communications equipment enables enterprise users effectively conduct video voice data web communications offerings organized along four product lines video communications voice communications network systems services reporting purposes aggregate video communications voice communications one segment named communications report network systems services separate segments products unified polycom accelerated communications architecture framework common technology principles objectives intelligent standardsbased communications architecture designed facilitate interoperability among systems multivendor ecosystem leverage common features across variety products streamline management processes polycom accelerated communications architecture serves enabling platform unified collaborative communication corporate vision unified communications environment employees customers partners communicate dispersed workplace shift circuitswitched telephony networks internet protocol ip based networks significant driver polycom’s collaborative communications markets business 2005 instance voice ip voip products grew faster product line company addition half group video products essentially desktop video products shipped connect ip environments rather legacy isdn networks strategically polycom investing much research development sales marketing efforts delivering superior ipbased collaborative communications solution using polycom proprietary technology evolving standardsbased ip communications environment january 2003 sold verilink corporation verilink certain fixed assets intellectual property rights relating network access product line including line netengine integrated devices consolidated financial statements reflect network access product line discontinued operations accordance sfas 144 results operations network access product line sold verilink classified discontinued prior periods reclassified including reallocation general overhead charges three remaining reporting segments unless otherwise indicated following discussion relates continuing operations see note 2 notes consolidated financial statements information discontinued operations january 5 2004 completed acquisition voyant technologies inc voyant pursuant terms agreement plan merger dated november 21 2003 voyant designs delivers group voice communication solutions part network systems services segments voyant included consolidated financial position results operations cash flows january 5 2004 date acquisition august 25 2005 completed acquisition dstmedia technology co ltd dstmedia privately held video solutions company headquartered beijing china dstmedia designs delivers video network systems solutions well lower cost video ip solutions included communications network systems segments dstmedia included consolidated financial position results operations cash flows august 25 2005 date acquisition consolidated revenues 5807 million 2005 compared 5403 million 2004 increase revenues primarily reflects increased sales volumes voice video communications products lesser extent increases service revenues increases partially offset decreased revenues network systems products 2005 generated approximately 1174 million cash flow operating activities impact investing financing activities resulted 929 million net increase total cash equivalents communications segment includes videoconferencing collaboration products voice communications products accounted 72 revenues 2005 network systems segment includes mgc readivoice series media servers readimanager network management product pathnavigator call processing server network management scheduling software accounted 16 revenues 2005 services segment includes wide range professional service support offerings resellers directly enduser customers accounted 12 revenues 2005 competition face markets intense competition face certain international markets different face north america currently based principally price noted additional competitors increased pricing pressures china india parts asia contributing flat revenues seen asia first second quarters 2005 decreased revenues third quarter 2005 compared respective year ago periods although improved sequential performance asia fourth quarter 2005 revenues lower comparable year ago period still see increased competition region particularly china unable compete effectively regions terms price technology product offerings marketing strategies overall financial results may suffer sales products experienced seasonal fluctuations affected sequential growth rates products particularly third first quarters generally slowdown sales european region third quarter year sales government entities typically slow fourth quarter greater extent first quarter addition sales video communications products typically declined first quarter year compared fourth quarter prior year seasonal fluctuations could negatively affect business could cause operating results fall short anticipated results quarters first quarter 2005 discussion results operations consolidated level followed detailed discussion results operations segment discussion segment operating results presented three years ended december 31 2005 including voyant’s results operations january 5 2004 dstmedia’s results operations august 25 2005 results operations three years ended december 31 2005 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues total revenues 2005 5807 million increase 404 million 7 2004 increase due increased sales volumes voice video communications products lesser extent increases service revenues increases partially offset decrease network systems revenues video communications product revenues increased 2785 million 2005 2669 million 2004 4 increase primarily due increase sales group video products partially offset decreases desktop video products voice communications product revenues increased 1388 million 2005 1077 million 2004 29 increase primarily result increases sales voiceoverip products lesser extent increases sales circuit switched products installed voice products revenues network systems products 2005 decreased 14 2004 1089 million 942 million due primarily decreased video network system revenues network system revenues impacted decrease video network system volumes well lower average selling prices particularly low end products primarily result increased competition services revenues increased 692 million 2005 567 million 2004 primarily due increased videorelated services video network system services lesser extent increases audio network system services total revenues 2004 5403 million increase 1198 million 29 2003 increase due increased network system revenues included revenues voyant acquisition 2004 increased sales volumes video voice communications products lesser extent increases service revenues video communications product revenues increased 2669 million 2004 2376 million 2003 12 increase primarily due increase sales group video products partially offset decreases desktop video products voice communications revenues increased 1077 million 2004 764 million 2003 41 increase primarily result increases sales circuit switched products voiceoverip products lesser extent increases installed voice products revenues network systems products 2004 increased 62 2003 674 million 1089 million due primarily sales audio network systems result voyant acquisition increases video network system revenues services revenues increased 567 million 2004 390 million 2003 primarily due increased network system services result voyant acquisition partially offset decreases videorelated services international sales revenues outside canada us accounted 41 42 46 total revenues 2005 2004 2003 respectively regional basis north america europe asia pacific latin america accounted 59 21 18 2 respectively total 2005 revenues north america europe latin america revenues increased 9 11 29 respectively 2005 2004 asia pacific revenues decreased 4 north america revenues increased result increase voice video communication product revenues lesser extent increased service revenues increases partially offset decreases network systems revenues europe revenues increased result increase video voice communication product revenues lesser extent increased service revenues increases partially offset decreases network systems revenues latin america revenues increased result increased video voice communication product revenues lesser extent increases network systems services revenues asia pacific revenues decreased primarily result decreased video communication product revenues network systems product revenues decreases partially offset increases voice communication product revenues increased service revenues regional basis north america europe asia pacific latin america accounted 58 20 2 respectively total 2004 revenues north america europe asia pacific latin america revenues increased 36 29 10 28 respectively 2004 2003 north america revenues increased result increased network systems voice communication product revenues lesser extent increased video communication product services revenues increases network systems services due part voyant acquisition europe revenues increased result increased revenues video voice communication products network systems services revenues asia pacific revenues increased result increased network systems voice communication product revenues lesser extent increases video communication product revenues services latin america revenues increased primarily result increased video communication revenues lesser extent due increases voice communication product revenues network systems services revenues one customer accounted 10 total net revenues services segment revenues 2005 2004 2003 2005 one channel partner accounted 11 communications segment revenues one customer accounted 10 communications segment revenues 2004 2003 one customer accounted 10 network systems segment revenues 2005 2004 2003 network systems segment two channel partners together represented approximately 21 network systems segment revenues believe unlikely loss channel partners would long term material adverse affect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period 2004 began selling audio network systems product line obtained voyant acquisition direct end users revenues network systems segment end users subject variability revenues reseller customers loss one audio network system customers could material impact network systems segment consolidated revenues 2005 made changes coop marketing program provide channel partners generally resulted coop funds treated marketing expense rather revenue reduction previously change affected partners utilize claim credit eligible marketing activities intended better leverage collective marketing efforts result change revenues gross profit marketing expenses increased 2005 amount coop marketing dollars would previously reduction revenues change effect net income cash flows 2004 2003 recorded approximately 102 million 90 million respectively coop marketing programs reduction revenues coop marketing program changes effect years revenues gross profit marketing expenses would increased approximately amount typically ship products within short time receive order therefore backlog good indicator future revenues december 31 2005 381 million order backlog compared 201 million december 31 2004 include backlog open product orders expect ship services expect bill record revenue following quarter billed unrecorded service revenue included deferred revenue ended 2005 significant amount order backlog historical experience primarily result level timing orders received customer delivery dates requested outside quarter believe current level backlog continue fluctuate dependent part ability forecast revenue mix plan manufacturing accordingly deferred revenue associated vsx products ongoing service deferrals service revenues increase percent total revenue addition orders channel partners based level demand enduser customers decline uncertainty enduser demand could negatively impact enduser orders turn could negatively affect orders channel partners given quarter result backlog could decline current levels cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments allocation overhead expenses including facilities costs generally network systems segment products higher gross margin communications segment products overall product gross margins decreased 2 percentage point 2005 compared 2004 primarily result decreased margins network systems segment network system margins impacted decrease video network system volumes well lower average selling prices particularly low end products primarily result increased competition gross margins communications segment essentially flat year additionally 2005 made change coop marketing program provide channel partners resulted coop funds treated marketing expense rather revenue reduction previously result change revenues gross profit marketing expenses increased 2005 amount coop marketing dollars would previously reduction revenues change effect net income cash flows 2004 2003 recorded approximately 102 million 90 million respectively coop marketing programs reduction revenues coop marketing program changes effect years revenues gross profit marketing expenses would increased approximately amount overall product gross margins increased 3 percentage points 2004 compared 2003 result favorable margins communications network systems segments video voice communications product margins favorably impacted due increased volumes improved product mix network system margins favorably impacted increase video system volumes video system upgrades partially offset mix shift lower margin systems lower gross margins audio network products cost service revenues service gross margins cost service revenues consists primarily material direct labor depreciation allocation overhead expenses including facilities costs generally services lower gross margin product gross margins overall service gross margins increased 2005 compared 2004 result revenues increasing faster pace related service costs higher margins audio network systems services service gross margins also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve months following shipment overall service gross margins increased 2004 compared 2003 result revenues increasing faster pace related service costs higher margins audio network systems services result voyant acquisition service gross margins also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve months following shipment forecasting future gross margin percentages difficult number risks associated maintaining current gross margin levels uncertainties surrounding revenue levels related production level variances competition changes technology changes product mix litigation outcomes potential resulting royalties third parties manufacturing efficiencies subcontractors manufacturing purchased part variances warranty recall costs timing sales next quarters cause cost revenues percentage vary significantly addition improvement economy may experience higher prices commodity components included products cost increases memory devices used many products experienced 2004 late 2003 began including one year service video products lowered gross margins products result allocating portion product revenue deferred service revenue however service gross margins favorably impacted deferred revenue recorded revenue addition future products may also one year service included product thereby potentially impacting product gross margins negatively depending pricing model establish products addition cost variances associated manufacturing ramp new products writeoff initial inventory purchases due product launch delays lack market acceptance new products could occur would increase cost revenues percentage revenues addition uncertainties listed cost revenues percentage revenues may increase due change mix distribution channels mix international versus north american revenues cost revenues also increase 2006 result increased compensation charges due recording stock compensation expense beginning first quarter 2006 well annual merit increases incentive accruals sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force advertising promotional expenses product marketing allocation overhead expenses including facilities costs additionally january 2005 made change coop marketing program provide channel partners resulted coop marketing funds generally treated marketing expense rather revenue reduction previously sales marketing expenses except direct marketing expenses allocated segments increase sales marketing expense percentage revenues 2005 compared 2004 primarily due change coop marketing program provide channel partners resulted coop funds treated marketing expense rather revenue reduction prior years 2004 recorded approximately 102 million coop marketing programs reduction revenues coop marketing program changes effect 2004 marketing expenses would increased approximately amount excluding effect coop marketing change sales marketing expense percentage revenue increased 1 2005 compared 2004 increase absolute dollars 2005 compared 2004 due primarily increase sales headcount due overall expansion sales effort increased trade show marketing event activities change coop marketing program discussed partially offset reduced spending outside marketing services due consolidating services fewer vendors decrease sales marketing expense percentage revenues 2004 compared 2003 due increase revenues year ago period increase absolute dollars 2004 2003 due primarily increased sales commissions result improved sales performance quota lesser extent due increase sales marketing headcount voyant acquisition january 2004 additionally marketing expenses higher due increased product launch trade show activity 2004 believe incur increased expenses especially advertising expand overall market drive market penetration increase adoption rate technology products educate potential endusers desirability products competing products expect continue increase sales marketing expenses absolute dollar amounts expand north american international markets increase sales coverage existing markets market new products expand public sector addition sales marketing expenses increase 2006 result increased compensation charges due recording stock compensation expense beginning first quarter 2006 well annual merit increases incentive accruals research development expenses research development expenses expensed incurred consist primarily compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development expenses percentage revenues 2005 decreased slightly compared 2004 primarily due increasing revenues research development expenses decreased absolute dollars 1 921 million 2004 915 million 2005 decrease absolute research development expense dollars primarily due decreased headcountrelated expenses development spending network systems segment partially offset increases research development expenses communications segment 2005 compared 2004 research development expenses percentage revenues 2004 decreased slightly compared 2003 primarily due increasing revenues increase absolute research development expense dollars 921 million 2004 compared 726 million 2003 increase 27 primarily due increased headcount headcountrelated expenses development spending partially result voyant acquisition january 2004 increases research development expenses occurred network systems segment also lesser extent communications segment 2004 compared 2003 currently investing research development resources enhance upgrade products comprise unified collaboration communications solutions encompasses products services segments anticipate committing greater proportion research development expenses toward development software infrastructure products included network systems segment enhance integration interoperability entire product suite believe technological leadership critical success committed continuing high level research development develop new technologies combat competitive pressures also continued investment new product initiatives require significant research development spending expect research development expenses absolute dollars increase future addition research development expenses increase 2006 result increased compensation charges due recording stock compensation expense beginning first quarter 2006 well annual merit increases incentive accruals general administrative expenses general administrative expenses consist primarily compensation costs professional service fees allocation overhead expenses including facilities costs patent litigation costs bad debt expense general administrative expenses allocated segments percentage revenues general administrative expenses decreased 1 percentage point 2005 compared 2004 due decrease absolute dollars well increase revenues prior year decrease spending absolute dollars general administrative expenses 2005 compared 2004 primarily result decreased legal fees associated litigation partially offset increased infrastructure costs 2005 decrease legal fees accounted 31 million decrease partially offset increases infrastructure costs 13 million remaining changes related numerous smaller items percentage revenues general administrative expenses decreased 1 percentage point 2004 compared 2003 due increase revenues prior year increase spending absolute dollars general administrative expenses 2004 compared 2003 primarily result increased legal fees associated litigation especially cpi litigation annual salary increases accrued bonuses increased infrastructure costs outside services including increased audit fees associated sarbanesoxley compliance partially offset decrease bad debt expense result improvements accounts receivable aging 2004 increase salary related costs accounted 21 million increase legal fees accounted 16 million increase outside services accounted 22 million increase infrastructure costs accounted 04 million increase increases partially offset decreases 07 million bad debt expense remaining changes related numerous smaller items acquisition voyant add significantly general administrative expense significant charges due costs associated litigation including ongoing litigation codian uncollectability receivables would increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing bad debt expense associated uncollectible receivables difficult future general administrative expense increases decreases absolute dollars difficult predict due visibility costs including legal costs associated defending claims us well legal costs associated asserting enforcing intellectual property portfolio factors believe general administrative expenses likely continue increase absolute dollar amounts future primarily result expansion administrative staff costs related supporting larger company increased costs associated regulatory requirements continued investments international regions addition general administrative expenses increase 2006 result increased compensation charges due recording stock compensation expense beginning first quarter 2006 well annual merit increases incentive accruals acquisitionrelated costs recorded charges operations 04 million 2005 14 million 2004 04 million 2003 acquisitionrelated costs charges primarily include outside financial advisory accounting legal consulting fees direct mergerrelated expenses charges 2005 primarily related professional services costs integrate dstmedia acquired august 2005 charges 2004 primarily related professional services costs integrate voyant acquisition january 2004 lesser extent additional professional service fees related ongoing liquidation international picturetel legal entities charges 2003 primarily related professional services costs integrate liquidate international picturetel accord legal entities begin integration acquisition voyant closed january 2004 acquire additional businesses future may incur material acquisition expenses related transactions purchased inprocess research development 2005 2004 incurred charges totaling 03 million 46 million respectively purchased inprocess research development incur charges 2003 research development acquired 2005 part dstmedia acquisition 2004 part voyant acquisition primarily related development projects readivoice series innovox 4000 media servers completed commenced shipping 2005 see note 3 notes consolidated financial statements amounts allocated purchased inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development dstmedia voyant estimated net free cash flows generated inprocess research development projects discounted rates ranging 22 dstmedia 35 40 voyant relation stage completion technical risks associated achieving technology feasibility december 31 2005 significant process research development projects completed amortization impairment purchased intangibles 2005 2004 2003 recorded 88 million 205 million 176 million respectively amortization impairment purchased intangibles acquired acquisitions purchased intangible assets amortized expense estimated useful lives range several months eight years 2005 19 million 88 million expense related impairment certain intangibles acquired voyant acquisition impairment charges 2004 2003 decrease absolute dollars 2005 compared 2004 primarily due purchased intangibles related picturetel circa apsi acquisitions becoming fully amortized december 31 2004 increase absolute dollars 2004 compared 2003 primarily related voyant acquisition resulting 322 million recorded purchased intangibles accounted 67 million 205 million expensed 2004 partially offsetting increase related voyant picturetel intangibles became fully amortized fourth quarter 2004 fourth quarters 2005 2004 completed annual impairment test purchased intangibles assessment purchased intangibles impairment conducted comparing fair value purchased intangible carrying amount date based results 2005 impairment test determined certain purchased intangible assets acquired part voyant acquisition impaired december 31 2005 recorded impairment charge approximately 19 million assets written result decline projected future cash flows oci product line due announced discontinuance fourth quarter 2005 results permanent reduction future amortization expense approximately 115000 first two quarters 2006 265000 third fourth quarters 2006 250000 per quarter 2007 25000 per year 2008 2011 intangible assets impaired december 31 2004 plan conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner december 31 2005 carrying value purchased intangibles 203 million restructure costs 2005 approved restructuring plan eliminating relocating certain positions throughout company focused sales general administrative functions resulting actions intended streamline focus efforts properly align cost structure projected revenue streams accordance sfas 146 “accounting costs associated exit disposal activities” sfas 146 recorded charge approximately 07 million year ended december 31 2005 charge consisted severance employee termination benefits related workforce reductions comprised less 1 percent company’s employees worldwide obligations related charges paid released december 31 2005 charge partially offset release remaining reserve recorded 2004 related restructuring network systems segment discussed resulting net restructuring charges year 06 million 2004 approved restructuring plan network systems segment resulting actions intended improve overall cost structure network systems segment focusing resources strategic areas business streamlining certain engineering efforts reducing operating expenses accordance sfas 146 company recorded charge approximately 14 million year ended december 31 2004 charge consisted primarily severance employee termination benefits related workforce reductions comprised less 3 percent company’s employees worldwide payments related actions made 2003 approved restructuring actions primarily connection sale network access product line verilink response global economic uncertainty continued downturn technology spending actions meant improve overall cost structure prioritizing resources strategic areas business reducing operating expenses recorded restructuring charge 50 million 2003 result actions charge consisted severance employee termination benefits related workforce reduction approximately 12 percent employees worldwide restructuring charge related communications services network systems segments amounted 08 million 03 million 01 million respectively balance restructuring charge related operating activities separately managed corporate level allocated segments payments related actions made future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed see note 6 notes consolidated financial statements litigation reserves payments 2005 released less 01 million remaining reserves related distributor claim tentative settlement employment claim recorded second half 2004 recorded 210 million litigation reserves payments 208 million related settlement patent infringement litigation matter whereby entered settlement agreement avistar communications inc “avistar” collaboration properties inc whollyowned subsidiary avistar “cpi” terms settlement agreement paid avistar onetime amount 275 million cpi agreed dismiss claims litigation prejudice addition settlement agreement avistar cpi entered patent crosslicense agreement whereby nonexclusive fully paidup worldwide patent licenses respective patent portfolios party subsidiaries granted us subsidiaries avistar subsidiaries including cpi avistar subsidiaries us subsidiaries incurred onetime charge 208 million 2004 recorded 67 million prepaid license expect amortize prepaid license third quarter 2013 expiration date patentsinsuit interest income net interest income net consists interest earned cash equivalents investments less bank charges resulting use bank accounts imputed interest expense related present value costs associated closing facilities part picturetel acquisition related integration plan imputed interest expense 05 million 2005 16 million 2004 23 million 2003 interest income net interest expense 128 million 2005 73 million 2004 85 million 2003 interest income increased 2005 2004 due primarily higher average interest rates lesser extent increases average cash investment balances average interest rate returns cash investments 280 2005 compared 178 2004 interest income decreased 2004 2003 due primarily decreases average cash investment balances primarily due cash outlays acquisition voyant purchases common stock litigation settlement fourth quarter 2004 lesser extent lower average interest rates result monetary policy actions taken united states federal reserve board stimulate economic growth united states average interest rate returns cash investments 178 2004 compared 202 2003 interest income net could fluctuate 2006 due movement cash balances changes interest rates related monetary policy actions taken united states federal reserve board cash balance may decrease depending upon stock purchase activity factors gain loss strategic investments strategic reasons made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value review investments impairment events changes circumstances indicate impairment may exist make appropriate reductions carrying value necessary evaluate number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2005 2004 investments carrying value 59 million 74 million respectively recorded “other assets” consolidated balance sheets 2005 2004 made additional investments two private companies totaling 05 million 65 million respectively 2005 2003 investments permanently written 16 million 05 million respectively original cost reflected “gain loss strategic investments” consolidated statements operations amounts permanently written 2004 2005 privately held company held investment carrying value 04 million sold resulting gain 45 million recorded consolidated statements operations “gain loss strategic investments” provision income taxes overall effective tax rates 2005 2004 2003 358 295 280 respectively resulted provision income taxes including taxes related discontinued operations 349 million 148 million 89 million 2005 2004 2003 respectively increase effective rate 2005 versus 2004 related primarily tax expense associated repatriation foreign subsidiary earnings provisions american jobs creation act 2004 discussed partially offset decrease purchased inprocess research development deductible tax purposes increase effective rate 2004 versus 2003 primarily result onetime charge purchased inprocess research development deductible tax purposes december 31 2005 approximately 248 million net operating loss carryforwards 133 million tax credit carryovers 54 million capital loss carryforwards well deferred tax assets arising temporary differences see note 16 notes consolidated financial statements october 22 2004 american jobs creation act “act” signed law act created temporary incentive us corporations repatriate accumulated income earned abroad providing dividends received deduction 85 certain dividends defined act fourth quarter 2005 distributed 1375 million cash foreign subsidiary provided associated income tax expense 75 million future effective tax rates could adversely affected earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates changes valuation deferred tax assets liabilities changes tax laws regulations accounting principles interpretations thereof current lapse us research development tax credit segment information description products services well annual financial data segment found business section form 10k note 17 notes consolidated financial statements results discussions include results segments years ended december 31 2005 2004 2003 segment contribution margin includes segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing general administrative costs legal accounting costs acquisitionrelated costs amortization impairment purchased intangible assets purchased inprocess research development costs restructuring costs litigation reserves payments interest income net gain loss strategic investments expense net provision income taxes communications revenues communications segment 2005 increased 11 2004 due primarily increased sales volumes voice video communications products video communications product revenues accounted 3 percentage points overall increase grew 2669 million 2004 2785 million 2005 increasing 116 million 4 2004 increase video communications product revenues due primarily increased sales volumes group video systems consisted primarily vsx product family voice communications product revenues accounted 8 percentage points overall increase grew 1077 million 2004 1388 million 2005 increasing 311 million 29 2004 increase voice communications product revenues 2005 compared 2004 due primarily increased sales volumes voiceoverip products circuit switched products lesser extent increases installed voice products revenues communications segment 2004 increased 19 2003 due primarily increased sales volumes video voice communications products video communications product revenues accounted 9 percentage points overall increase grew 2376 million 2003 2669 million 2004 increasing 293 million 12 2003 increase video communications product revenues due primarily increase sales volumes group video systems primarily vsx viewstation product families partially offset decrease sales ipower desktop video products voice communications product revenues accounted 10 percentage points overall increase grew 764 million 2003 1077 million 2004 increasing 313 million 41 2004 increase voice communications product revenues 2004 compared 2003 primarily result increases sales volumes voiceoverip products circuit switched products lesser extent increases installed voice products international revenues outside canada us accounted 44 45 46 total communications segment revenues 2005 2004 2003 respectively 2005 one channel partner accounted 11 total revenues communications segment one customer accounted 10 total revenues communications segment 2004 2003 contribution margin percentage communications segment revenues 48 2005 2004 contribution margins remained consistent gross margins essentially flat 2005 compared 2004 video voice communications products engineering direct marketing expenses decreased less 1 percentage point percent revenue although increasing absolute dollars 2005 compared 2004 contribution margin percentage communications segment revenues 2004 increased 48 compared 44 2003 increase contribution margin 2004 compared 2003 primarily due higher gross margins video voice communication products decreases engineering spending partially offset increases direct marketing spending gross margins improved 2004 compared 2003 due increased revenues improved product mix direct marketing engineering spending communications segment fluctuate depending upon timing product launches marketing programs network systems revenues network systems segment 2005 decreased 14 2004 942 million due primarily decreased sales volumes video network systems lower revenues system upgrades addition average selling prices video network systems declined slightly year basis particularly low end products primarily result increased competition revenues audio networking systems software essentially flat year revenues network systems segment 2004 increased 62 2003 1089 million due primarily sales audio network systems result voyant acquisition increase video network system revenues lesser extent increases video network system upgrade revenues increases partially offset shift product mix toward products lower average selling prices international revenues outside canada us accounted 38 48 total network systems revenues 2005 2004 2003 respectively decrease international network systems revenues percentage network systems revenues 2004 compared 2003 due primarily concentration audio network system revenues attributable voyant acquisition north america 2005 2004 one customer accounted 10 network systems segment product revenues 2003 network systems segment two channel partners together represented approximately 21 network systems segment product revenues believe unlikely loss one channel partner would long term material adverse affect consolidated revenues believe endusers would likely purchase network systems products different channel partner however loss one channel partners could material adverse impact transition period 2004 began selling audio network systems product line resulting voyant acquisition directly end users revenues segment end users subject variability segment revenues reseller customers loss one audio network system customers network systems segment could material negative impact network systems segment consolidated revenues decrease contribution margin percentage network systems segment revenues 2005 compared 2004 due primarily lower gross margins lesser extent increased engineering expenses percentage revenues partially offset lower direct marketing expenses gross margins network systems lower 2005 versus 2004 primarily due decrease video network system volumes well lower average selling prices particularly low end products primarily result increased competition increase contribution margin percentage network systems segment revenues 2004 compared 2003 due primarily increased revenues gross margins partially offset increased engineering expenses associated audio network systems headcount development spending result voyant acquisition gross margins network systems higher 2004 versus 2003 primarily due increase video network system upgrades partially offset decreases gross margins result increase volume mix shift lower margin systems lower gross margins audio network system products services revenues services segment 2005 increased 22 2004 692 million due primarily increase video maintenance services result amortization deferred revenue associated first year service vsx product line increased video network systems services lesser extent increases audio network systems maintenance services increases partially offset decreases ipowerrelated services revenues services segment 2004 increased 45 2003 567 million due primarily increase audio network systems services result voyant acquisition lesser extent increases video network systems maintenance services increases partially offset decreases ipowerrelated services international revenues outside canada us accounted 31 30 35 total service revenues 2005 2004 2003 respectively international revenues increased slightly 2005 compared 2004 primarily result increased service revenues associated video communications network systems products decrease international services revenues percentage services revenues 2004 compared 2003 due primarily concentration audio network systems service revenues attributable voyant acquisition north america one customer accounted 10 total revenues services segment 2005 2004 2003 overall increase services segment contribution margin 2005 versus 2004 due primarily increased gross margins offsetting increases operating expenses service gross margins increased 2005 compared 2004 result revenue increasing faster pace related service costs higher margins network systems audio services service gross margins 2005 also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve month period following shipment impact due increased volumes products 2005 compared 2004 overall increase services segment contribution margin 2004 versus 2003 due primarily increased gross margins offsetting increases operating expenses service gross margins increased 2004 compared 2003 result revenue increasing faster pace related service costs higher margins network systems audio services result voyant acquisition service gross margins 2004 also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve month period following shipment impact due increased volumes products 2004 compared 2003 2004 represented first full year services included liquidity capital resources december 31 2005 principal sources liquidity included cash equivalents 1893 million shortterm investments 882 million longterm investments 1829 million substantially shortterm longterm investments comprised us government securities state local government securities corporate debt securities see note 7 notes consolidated financial statements addition 250 million line credit bank unused december 31 2005 however outstanding letters credit totaling approximately 13 million 12 million secured line credit generated cash operating activities totaling 1174 million 2005 796 million net 275 million litigation settlement 2004 1008 million 2003 increase cash provided operating activities 2005 2004 due primarily increased net income noncash expenses larger decreases deferred taxes larger increases taxes payable accrued liabilities smaller increases accounts receivable decreases prepaids current assets partially offset smaller increases accounts payable increases inventories decrease cash provided operating activities 2004 2003 due primarily increases accounts receivable smaller decreases inventories deferred taxes smaller increases taxes payable accrued liabilities partially offset increased net income noncash expenses smaller increases prepaids current assets larger increases accounts payable total net change cash equivalents year ended 2005 increase 929 million primary uses cash period 1840 million purchases common stock 168 million purchases property equipment 86 million acquisition dstmedia primary sources cash 1729 million proceeds sales maturities investments net purchases 1174 million operating activities 115 million associated exercise stock options purchases employee stock purchase plan 06 million proceeds sale discontinued operations positive cash operating activities primarily result net income adjusted noncash expenses depreciation amortization provision doubtful accounts inventory writedowns excess obsolescence gain sale discontinued operations amortization unearned stockbased compensation loss strategic investments purchase inprocess research development tax benefits exercise employee stock options reductions deferred taxes prepaid expenses current assets net increases accounts payable taxes payable accrued liabilities offsetting positive effect items net increases trade receivables inventories days sales outstanding dso metric 40 days december 31 2005 compared 39 days december 31 2004 increase dso due primarily increase trade receivables resulting coop marketing reserves recorded accrued liabilities instead trade receivables 2005 longer payment terms service providers government entities 30 45 60 days respectively increase dso result coop marketing change effect net income cash flows expect dso remain higher levels compared 2004 could also increase result fluctuations revenue linearity increases receivables service providers government entities inventory turns decreased 77 turns december 31 2004 53 turns december 31 2005 reduction turns primarily reflects increased inventory levels support shortened lead times increased product mix believe inventory turns continue fluctuate depending ability reduce lead times well changes product mix greater mix ocean freight versus air freight reduce freight costs additionally payments make income taxes may increase 2006 available net operating losses depleted part dstmedia acquisition dstmedia shareholders may receive additional 200 million consideration 2008 payable cash based achievement certain financial milestones relating operating results dstmedia’s results operations included results operations since august 25 2005 time board directors approved plans purchase shares common stock open market years ended december 31 2005 2004 2003 purchased approximately 114 million 28 million 08 million shares respectively common stock open market cash 1840 million 525 million 69 million respectively december 31 2005 authorized purchase additional 1194 million 2005 share repurchase plan december 31 2005 open purchase orders related contract manufacturers contractual obligations approximately 591 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition bank issued letters credit secure leases offices letters credit total approximately 13 million secured credit facilities cash deposits banks table set forth shows december 31 2005 future minimum lease payments net estimated sublease income 15 million june 2007 due current lease obligations example lease approximately 152000 square foot building fully subleased third party term concurrent term lease obligation result currently showing lease obligation related facility sublease terminated tenant defaulted payment would incur additional lease payments would negatively impact operating results overall cash flows addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2005 follows thousands believe available cash equivalents investments bank line credit sufficient meet operating expenses capital requirements foreseeable future however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive offbalance sheet arrangements december 31 2005 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements discussion accounting policies revenue recognition product returns recognize revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally recognize extended service revenue hardware software products service performed generally one five years video communications network systems products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts accordingly account revenue products accordance statement position 972 “software revenue recognition” related interpretations use residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement defer revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements defer revenue sufficient evidence exists elements delivered accrue sales returns allowances reduction revenues upon shipment based upon contractual obligations historical experience channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered coop marketing funds accounted accordance eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” guidelines accrue coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition company’s customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances writtenoff management determined likelihood collection probable excess obsolete inventory record write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis deferred refundable taxes estimate actual current tax exposure together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2005 485 million net deferred tax assets order fully utilize deferred tax assets need generate sufficient amounts future us taxable income believe based upon financial projections likely generate sufficient future taxable income utilize assets therefore december 31 2005 established valuation allowance assets fair value assets acquired liabilities assumed purchase combinations purchase combinations completed require us identify estimate fair value assets acquired including intangible assets goodwill liabilities assumed combinations estimates fair value based business plan entities acquired including planned redundancies restructuring use assets acquired assumptions ultimate resolution obligations assumed future benefit received example picturetel acquisition identified vacated redundant facilities intended sublease intended negotiate lease termination settlement allocation period material acquisitions defined statement financial accounting standards 38 “accounting preacquisition contingencies purchased enterprises” completed therefore actual costs payment certain earnouts exceed estimates charges would recognized consolidated statements operations actual costs less estimates charges would continue recognized adjustment goodwill purchased intangibles assess impairment goodwill identifiable intangibles annually whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following • significant underperformance relative projected future operating results • significant changes manner use acquired assets strategy overall business • significant negative industry economic trends determine carrying value goodwill identified intangibles may recoverable based upon existence one indicators impairment would typically measure impairment based projected discounted cash flow method using discount rate determined us commensurate risk inherent current business model fourth quarters 2005 2004 completed annual goodwill purchased intangibles impairment tests assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date based results impairment tests determined goodwill assets impaired december 31 2005 2004 assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment existed future cash flows discounted compared carrying amounts purchased intangibles determine amount impairment based results 2005 impairment test determined certain purchased intangible assets acquired part voyant acquisition impaired december 31 2005 recorded impairment charge approximately 19 million intangible assets impaired december 31 2004 plan conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests nonmarketable securities periodically make strategic investments companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant write carrying value investment believe investment experienced decline value temporary investments carrying value 59 million december 31 2005 permanently written 16 million 2005 05 million 2003 reflected “loss strategic investments” consolidated statements operations amounts permanently written 2004 derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated accounting hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements november 2004 fasb issued fasb statement 151 “inventory costsan amendment arb 43” “sfas 151” result efforts converge us accounting standards inventories international accounting standards sfas 151 requires abnormal amounts idle facility expenses freight handling costs wasted material spoilage costs recognized currentperiod charges regardless whether meet criterion “so abnormal” stated arb 43 also requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 anticipate implementation standard significant impact consolidated results operations financial condition cash flows december 2004 fasb issued sfas 123 revised 2004 “sharebased payment” “sfas 123r” requires measurement recognition compensation expense stockbased compensation payments supersedes current accounting principles board opinion 25 “accounting stock issued employees” “apb 25” sfas 123r effective annual periods beginning june 15 2005 addresses forms sharebased payment “sbp” awards including shares issued certain employee stock purchase plans stock options restricted stock appreciation rights march 2005 securities exchange commission issued staff accounting bulletin 107 “sab 107” relating adoption sfas 123r adopted sfas 123r first quarter fiscal 2006 continue evaluate impact sfas 123r operating results financial condition pro forma information note 1 consolidated financial statements presents estimated compensation charges statement financial accounting standards 123 “accounting stockbased compensation” result provisions sfas 123r sab 107 expect compensation charges sfas 123r reduce net income approximately 15 20 million fiscal 2006 however assessment estimated compensation charges affected stock price well assumptions regarding number complex subjective variables related tax impact variables include limited volatility stock price employee stock option exercise behaviors recognize compensation cost stockbased awards issued december 31 2005 straightline basis requisite service period entire award june 2005 fasb issued fsp fas 1431 accounting electronic equipment waste obligations “fsp 1431” fsp 1431 provides guidance accounting obligations associated directive 200296ec “directive” waste electrical electronic equipment adopted european union fas 1431 required applied later first reporting period ending june 6 2005 date directive’s adoption law applicable eu member countries company significant operations directive distinguishes “new” “historical” waste new waste relates products put market august 13 2005 fsp 1431 directs commercial users apply provisions fasb statement 143 accounting asset retirement obligations related fasb interpretation 47 accounting conditional asset retirement obligations measurement recognition liability asset retirement obligation associated historical waste management requirements directive additionally fsp 1431 provides guidance accounting producers financing obligations historical waste held private households adopted fas 1431 first quarter fiscal 2006 concluded significant liability incurred december 31 2005 continuing analyze impact directive fsp 1431 financial position results operations additional eu member countries adopt directive separate requirements fsp 1431 believe internal cost compliance directive liability associated new waste obligations according directive borne solely producers new equipment significant year ended december 31 2005 could significant future november 2005 fasb issued fsp fas 1151 fas 1241 “the meaning otherthantemporary impairment application certain investments” “fsp 1151 1241” clarifies investment considered impaired whether impairment temporary measurement impairment loss also includes accounting considerations subsequent recognition otherthantemporary impairment requires certain disclosures unrealized losses recognized otherthantemporary impairments fsp 1151 1241 effective reporting periods beginning december 15 2005 december 31 2005 none unrealized investment losses recognized otherthantemporary impairments availableforsale securities believe fsp fas 1151 fas 1241 material effect consolidated financial position results operations cash flow item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview leading global provider line highquality easytouse communications equipment enables enterprise users effectively conduct video voice data web communications offerings organized along four product lines video communications voice communications network systems services reporting purposes consider separate segments products unified polycom accelerated communications architecture framework common technology principles objectives intelligent standardsbased communications architecture designed facilitate interoperability among systems multivendor ecosystem leverage common features across variety products streamline management processes polycom accelerated communications architecture serves enabling platform unified collaborative communication corporate vision unified communications environment employees customers partners communicate dispersed workplace shift circuitswitched telephony networks internet protocol ip based networks significant driver polycom’s collaborative communications markets business 2006 instance voice ip voip products grew faster product line company addition half group video products essentially desktop video products shipped connect ip environments 2006 rather legacy isdn networks strategically polycom investing much research development sales marketing efforts delivering superior ipbased collaborative communications solution using polycom proprietary technology evolving standardsbased ip communications environment revenues 6824 million 2006 compared 5807 million 2005 increase revenues primarily reflects increased sales volumes voice video communications products lesser extent increases service revenues increases partially offset decreased revenues network systems products 2006 generated approximately 1477 million cash flow operating activities impact investing financing activities described detail “liquidity capital resources” resulted 1271 million net increase total cash equivalents video communications voice communications network systems services segment accounted 48 28 12 respectively revenues 2006 see note 17 notes consolidated financial statements information segments including summary segment revenues segment contribution margin segment inventory revenue geography january 5 2007 completed acquisition destiny conferencing corporation destiny pursuant terms agreement plan reorganization agreement dated january 5 2007 destiny designs manufactures immersive telepresence solutions destiny’s telepresence solution already incorporates videoconferencing products basis rpx™ telepresence offering result acquisition several patents core telepresence rapidlyemerging market driven need dispersed people communicate room destiny reported part video communications services segments destiny’s results operations included results operations presented acquisition completed subsequent december 31 2006 additionally february 7 2007 announced entered definitive agreement acquire spectralink corporation spectralink designs manufactures sells onpremises wireless telephone systems customers worldwide complement existing telephone systems providing mobile communications building campus environment spectralink wireless telephone systems increase efficiency employees enabling remain telephone contact moving throughout workplace believe spectralink acquisition position us independent provider fixed mobile solutions seamlessly encompass voice video data collaboration solutions desktop meeting room mobile individual spectralink become part voice communications services segments result acquisition anticipated close first second quarter 2007 expect incur significant acquisition costs period transaction closes well ongoing integration costs work integrate two businesses competition face markets intense competition face certain international markets different face north america currently based principally price noted additional competitors increased pricing pressures china india parts asia contributed decreased revenues asia 2005 compared 2004 although improved year performance asia 2006 still see increased competition region particularly china unable compete effectively regions terms price technology product offerings marketing strategies overall financial results may suffer sales products experienced seasonal fluctuations affected sequential growth rates products particularly third first quarters generally slowdown sales european region third quarter year sales government entities typically slow fourth quarter greater extent first quarter addition sales video conferencing products typically declined first quarter year compared fourth quarter prior year seasonal fluctuations could negatively affect business could cause operating results fall short anticipated results quarters first quarter 2005 january 1 2006 adopted sfas 123r requires measurement recognition compensation expense sharebased payment awards made employees directors based upon estimated fair values result adopting sfas 123r income taxes net income year ended december 31 2006 233 million 163 million lower respectively impact basic diluted earnings per share year ended december 31 2006 reduction 018 per share following table summarizes stockbased compensation expense recorded sfas 123r year ended december 31 2006 allocation within consolidated statements operations thousands stockbased compensation expense recognized years ended december 31 2005 2004 except related acquisitions less 01 million 02 million respectively adopted sfas 123r modified prospective basis requires application accounting standard january 1 2006 accordance modified prospective basis consolidated financial statements prior periods restated reflect include impact sfas 123r prior adoption sfas 123r provided disclosures required sfas 123 “accounting stockbased compensation” amended sfas 148 “accounting stockbased compensationtransition disclosures” consistent disclosure provisions sfas 148 net income basic diluted net income per share years ended december 31 2005 2004 would adjusted pro forma amounts indicated thousands except per share amounts january 2003 sold certain fixed assets intellectual property rights relating network access product line consolidated financial statements reflect network access product line discontinued operations accordance statement financial accounting standards 144 sfas 144 results operations network access product line classified discontinued prior periods reclassified including reallocation general overhead charges four remaining reporting segments see note 2 notes consolidated financial statements information discontinued operations unless otherwise indicated following discussion relates continuing operations discussion results operations consolidated level followed detailed discussion results operations segment discussion segment operating results presented three years ended december 31 2006 including voyant’s results operations january 5 2004 dstmedia’s results operations august 25 2005 results operations three years ended december 31 2006 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues total revenues 2006 6824 million increase 1017 million 18 2005 increase due increased sales volumes voice video communications products lesser extent increases service revenues increases partially offset decrease network systems revenues video communications product revenues increased 3275 million 2006 2785 million 2005 18 increase primarily due increase sales volumes average selling prices group video products voice communications product revenues increased 1880 million 2006 1388 million 2005 35 increase primarily result increased sales volumes voiceoverip products circuit switched products lesser extent increases sales volumes installed voice products revenues network systems products 2006 decreased 10 2005 942 million 852 million due primarily decreased video audio network systems revenues partially offset increases revenues network systems software products network system revenues impacted decrease video network system average selling prices due part increased competition services revenues increased 817 million 2006 692 million 2005 primarily due increased videorelated services video network system services total revenues 2005 5807 million increase 404 million 7 2004 increase due increased sales volumes voice video communications products lesser extent increases service revenues increases partially offset decrease network systems revenues video communications product revenues increased 2785 million 2005 2669 million 2004 4 increase primarily due increase sales group video products partially offset decreases desktop video products voice communications product revenues increased 1388 million 2005 1077 million 2004 29 increase primarily result increases sales voiceoverip products lesser extent increases sales circuit switched products installed voice products revenues network systems products 2005 decreased 14 2004 1089 million 942 million due primarily decreased video network system revenues network system revenues impacted decrease video network system volumes well lower average selling prices particularly low end products primarily result increased competition services revenues increased 692 million 2005 567 million 2004 primarily due increased videorelated services video network system services lesser extent increases audio network system services international sales revenues outside canada us accounted 43 41 42 total revenues 2006 2005 2004 respectively regional basis north america europe asia pacific latin america accounted 57 22 18 3 respectively total 2006 revenues north america europe asia pacific latin america revenues increased 14 25 19 34 respectively 2006 2005 north america revenues increased result increase video voice communication product revenues lesser extent increased services revenues increases partially offset decreases network systems revenues europe asia pacific revenues increased result increase voice video communication product revenues lesser extent increased services network systems product revenues latin america revenues increased result increased video voice communication product revenues lesser extent increases services revenues network systems product revenues latin america essentially flat 2006 compared 2005 regional basis north america europe asia pacific latin america accounted 59 21 18 2 respectively total 2005 revenues north america europe latin america revenues increased 9 11 29 respectively 2005 2004 asia pacific revenues decreased 4 north america revenues increased result increase voice video communication product revenues lesser extent increased service revenues increases partially offset decreases network systems revenues europe revenues increased result increase video voice communication product revenues lesser extent increased service revenues increases partially offset decreases network systems revenues latin america revenues increased result increased video voice communication product revenues lesser extent increases network systems services revenues asia pacific revenues decreased primarily result decreased video communication product revenues network systems product revenues decreases partially offset increases voice communication product revenues increased service revenues one channel partner accounted 10 total net revenues 12 video communications segment revenues 2006 one customer accounted 10 total net revenues 2005 2004 2005 one channel partner accounted 11 video communications voice communications segment revenues one customer accounted 10 voice communications segment revenues 2006 video communications segment revenues 2004 one customer accounted 10 voice communications segment revenues 2004 one customer accounted 10 network systems services segment revenues 2006 2005 2004 believe unlikely loss channel partners would long term material adverse effect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period 2004 began selling audio network systems product line obtained voyant acquisition direct end users revenues network systems segment end users subject variability revenues reseller customers loss one audio network system customers could material adverse impact network systems segment consolidated revenues 2005 made changes coop marketing program provide channel partners generally resulted coop funds treated marketing expense rather revenue reduction previously change affected partners utilize claim credit eligible marketing activities intended better leverage collective marketing efforts result change revenues gross profit marketing expenses increased 2005 amount coop marketing dollars would previously reduction revenues change effect net income cash flows 2004 recorded approximately 102 million coop marketing programs reduction revenues coop marketing program changes effect years revenues gross profit marketing expenses would increased approximately amount typically ship products within short time receive order therefore backlog good indicator future revenues december 31 2006 404 million order backlog compared 381 million december 31 2005 include backlog open product orders expect ship services expect bill record revenue following quarter billed unrecorded service revenue included deferred revenue believe current level backlog continue fluctuate primarily result level timing orders received customer delivery dates requested outside quarter level backlog given time also dependent part ability forecast revenue mix plan manufacturing accordingly ongoing service deferrals service revenues increase percent total revenue addition orders channel partners based part level demand enduser customers decline uncertainty enduser demand could negatively impact enduser orders turn could negatively affect orders channel partners given quarter result backlog could decline current levels cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments stockbased compensation costs allocation overhead expenses including facilities costs cost product revenues product gross margins included 15 million charge stockbased compensation year ended december 31 2006 comparable 2005 2004 periods include charges stockbased compensation generally network systems segment products higher gross margin products video voice communications segments overall product gross margins decreased 1 percentage point 2006 compared 2005 result decreased margins voice communications network systems segments partially offset increased margins video communications decrease voice communications due shift product mix toward lower margin voiceoverip desktop products well increased expenses related stockbased compensation additional reserves excess obsolete inventories increase video communications gross margins due increased average selling prices due product mix fact first year service longer bundled product price partially offset increased expenses related stockbased compensation additional reserves excess obsolete inventories effective july 1 2006 began separately charge initial year service video conferencing products rather charging one combined price product service result longer required defer portion product revenues cover first year service gross margins network systems segment lower 2006 relative 2005 due decreased margins video network systems network systems software result decreased average selling prices higher expenses related stockbased compensation partially offset increased margins audio network systems result higher mix software content products network system margins impacted lower average selling prices video network systems primarily result increased competition gross margins video communications segment increased 2006 compared 2005 primarily result higher average selling prices group video products gross margins voice communications segment lower 2006 compared 2005 primarily result increased voiceoverip product revenues generally lower gross margin circuit switched installed voice products overall product gross margins decreased 2 percentage points 2005 compared 2004 primarily result decreased margins network systems segment network system margins impacted decrease video network system volumes well lower average selling prices particularly low end products primarily result increased competition gross margins video voice communications segments essentially flat year additionally 2005 made change coop marketing program provide channel partners resulted coop funds treated marketing expense rather revenue reduction previously result change revenues gross profit marketing expenses increased 2005 amount coop marketing dollars would previously reduction revenues change effect net income cash flows 2004 recorded approximately 102 million coop marketing programs reduction revenues coop marketing program changes effect years revenues gross profit marketing expenses would increased approximately amount cost service revenues service gross margins cost service revenues consists primarily material direct labor including stockbased compensation costs depreciation allocation overhead expenses including facilities costs generally services lower gross margin product gross margins cost service revenues service gross margins included 17 million charge stockbased compensation year ended december 31 2006 comparable 2005 2004 periods include charges stockbased compensation overall service gross margins increased 2006 2005 result revenues increasing faster pace related service costs well shift mix services revenues toward higher margin video maintenance revenues service gross margins also favorably impacted amortization deferred revenue associated first year service vsx™ products included product price june 30 2006 amortized twelve month period following shipment factors offset partially increased expenses related stockbased compensation overall service gross margins increased 2005 compared 2004 result revenues increasing faster pace related service costs higher margins audio network systems services service gross margins also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve months following shipment forecasting future gross margin percentages products services difficult number risks associated maintaining current gross margin levels uncertainties surrounding revenue levels related production level variances competition changes technology changes product mix variability stockbased compensation costs litigation outcomes potential resulting royalties third parties manufacturing efficiencies subcontractors manufacturing purchase price variances warranty recall costs incurred first quarter 2006 voluntary battery recall used soundstation 2w product excess obsolete reserves reserve recorded third quarter 2006 related qsx™ viewstation® products timing sales next quarters cause cost revenues percentage vary significantly may also experience higher prices commodity components included products cost increases memory devices used many products 2006 incurred cost increases components required compliance restrictions hazardous substances rohs rules europe late 2003 began including one year service video products lowered gross margins products result allocating portion product revenue deferred service revenue however service gross margins favorably impacted deferred revenue recorded revenue effective july 1 2006 began separately charge initial year service video conferencing products rather charging one combined price product service actions may desired result increasing revenues improving service renewal rates accordingly could adverse impact gross margins profitability addition cost variances associated manufacturing ramp new products writeoff initial inventory purchases due product launch delays lack market acceptance new products could occur would increase cost revenues percentage revenues addition uncertainties listed cost revenues percentage revenues may increase due change mix distribution channels mix international versus north american revenues cost revenues increase 2007 absolute dollars result increased compensation charges due recording stockbased compensation expense well annual merit increases stockbased compensation costs associated stock options determined use optionpricing model affected stock price well assumptions regarding number highly complex subjective variables changes underlying factors assumptions may result significant variability stockbased compensation costs record makes amounts difficult accurately predict sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force stockbased compensation costs advertising promotional expenses product marketing expenses allocation overhead expenses including facilities costs sales marketing expenses except direct marketing expenses allocated segments sales marketing expenses included 68 million charge stockbased compensation year ended december 31 2006 comparable 2005 2004 periods include charges stockbased compensation sales marketing expense percentage revenue flat 2006 compared 2005 increase absolute dollars 2006 2005 due primarily increase sales commissions coop marketing charges result increased revenues increases sales marketing headcount due expansion sales marketing efforts well increased compensation charges due annual merit increases incentive accruals stockbased compensation expense increase sales marketing expense percentage revenues 2005 compared 2004 primarily due change coop marketing program provide channel partners resulted coop funds treated marketing expense rather revenue reduction prior years 2004 recorded approximately 102 million coop marketing programs reduction revenues coop marketing program changes effect 2004 marketing expenses would increased approximately amount excluding effect coop marketing change sales marketing expense percentage revenue increased 1 2005 compared 2004 increase absolute dollars 2005 compared 2004 due primarily increase sales headcount due overall expansion sales effort increased trade show marketing event activities change coop marketing program discussed partially offset reduced spending outside marketing services due consolidating services fewer vendors expect continue increase sales marketing expenses absolute dollar amounts increase spending percentage revenues 2007 continue increase sales coverage expand marketing efforts across markets hiring additional sales personnel increased spending marketing programs also expect incur increased expenses especially advertising expenses market new products increase adoption rate technology products educate potential endusers desirability products competing products especially launch new products result increased competition high end video conferencing market also expect sales marketing expenses increase absolute dollars 2007 2006 levels result anticipated acquisition spectralink 2007 lesser extent recent acquisition destiny addition sales marketing expenses also increase 2007 2006 levels result increased compensation charges due recording stockbased compensation expense well annual merit increases incentive accruals stockbased compensation costs associated stock options determined use optionpricing model affected stock price well assumptions regarding number highly complex subjective variables changes underlying factors assumptions may result significant variability stockbased compensation costs record makes amounts difficult accurately predict research development expenses research development expenses expensed incurred consist primarily compensation costs including stockbased compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development expenses included 73 million charge stockbased compensation year ended december 31 2006 comparable 2005 2004 periods include charges stockbased compensation research development expenses percentage revenue increased 2006 compared 2005 primarily due spending increasing 25 2006 2005 compared revenues increasing 18 2006 2005 increase absolute dollars 2006 compared 2005 due planned headcount increases program development expenses support increased investment new product initiatives high definition video voice products next generation network systems products well increased compensation charges related annual merit increases incentive accruals stockbased compensation expense research development expenses increased 2006 compared 2005 video communications voice communications network systems segments research development expenses percentage revenues 2005 decreased slightly compared 2004 primarily due increasing revenues research development expenses decreased absolute dollars 1 921 million 2004 915 million 2005 decrease absolute research development expense dollars primarily due decreased headcountrelated expenses development spending network systems segment partially offset increases research development expenses voice communications segments 2005 compared 2004 currently investing research development resources enhance upgrade products comprise unified collaboration communications solutions encompass products services segments including additional network systems products address high end video conferencing market additional voiceoverip products addition investing research development resources across segments support strategic partnerships anticipate committing greater proportion research development expenses toward development software infrastructure products included network systems segment enhance integration interoperability entire product suite believe technological leadership critical success committed continuing high level research development develop new technologies products combat competitive pressures also continued investment new product initiatives require significant research development spending expect research development expenses absolute dollars increase future also expect research development expenses increase absolute dollars 2007 2006 levels result anticipated acquisition spectralink 2007 lesser extent recent acquisition destiny addition research development expenses continue increase 2007 2006 levels result increased compensation charges due recording stockbased compensation expense well annual merit increases incentive accruals stockbased compensation costs associated stock options determined use optionpricing model affected stock price well assumptions regarding number highly complex subjective variables changes underlying factors assumptions may result significant variability stockbased compensation costs record makes amounts difficult accurately predict general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs professional service fees allocation overhead expenses including facilities costs patent litigation costs bad debt expense general administrative expenses allocated segments general administrative expenses included 60 million charge stockbased compensation year ended december 31 2006 comparable 2005 2004 periods include charges stockbased compensation percentage revenues general administrative expenses increased 1 percentage point 2006 compared 2005 due increase stockbased compensation versus year ago period increase spending absolute dollars general administrative 2006 2005 primarily due increased compensation charges related annual merit increases increased incentive accruals stockbased compensation expense well legal projectrelated outside services costs partially offset decreased infrastructure costs 2006 increase compensation charges including stock compensation costs accounted 104 million increase legal outside services accounted 12 million increase partially offset decreases infrastructure costs 23 million remaining changes related numerous smaller items percentage revenues general administrative expenses decreased 1 percentage point 2005 compared 2004 due decrease absolute dollars well increase revenues prior year decrease spending absolute dollars general administrative expenses 2005 compared 2004 primarily result decreased legal fees associated litigation partially offset increased infrastructure costs 2005 decrease legal fees accounted 31 million decrease partially offset increases infrastructure costs 13 million remaining changes related numerous smaller items significant charges due costs associated litigation including ongoing litigation codian uncollectibility receivables would increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing bad debt expense associated uncollectible receivables difficult future general administrative expense increases decreases absolute dollars difficult predict due visibility costs including legal costs associated defending claims us well legal costs associated asserting enforcing intellectual property portfolio factors general administrative expenses may also increase result fee arrangement outside legal counsel representing us litigation codian pursuant may owe additional legal fees favorable outcome litigation ultimately achieved fees would recorded period favorable litigation outcome occurs believe general administrative expenses also likely continue increase absolute dollar amounts future primarily result expansion administrative staff costs related supporting larger company increased costs associated regulatory requirements continued investments international regions also expect general administrative expenses increase absolute dollars 2007 2006 levels result anticipated acquisition spectralink 2007 lesser extent recent acquisition destiny addition general administrative expenses continue increase 2007 2006 levels result increased compensation charges due recording stockbased compensation expense well annual merit increases incentive accruals stockbased compensation costs associated stock options determined use optionpricing model affected stock price well assumptions regarding number highly complex subjective variables changes underlying factors assumptions may result significant variability stockbased compensation costs record makes amounts difficult accurately predict acquisitionrelated costs recorded charges operations 02 million 2006 04 million 2005 14 million 2004 acquisitionrelated costs charges primarily include outside financial advisory accounting legal consulting fees direct mergerrelated expenses charges 2006 2005 primarily related professional services costs integrate dstmedia acquired august 2005 charges 2004 primarily related professional services costs integrate voyant acquisition january 2004 lesser extent additional professional service fees related ongoing liquidation international picturetel legal entities acquire additional businesses future may incur material acquisition expenses related transactions expect acquisitionrelated costs increase significantly absolute dollars 2007 2006 levels result anticipated acquisition spectralink 2007 lesser extent due recent acquisition destiny purchased inprocess research development 2005 2004 incurred charges totaling 03 million 46 million respectively purchased inprocess research development acquired part acquisitions dstmedia voyant respectively incur charges 2006 research development acquired 2004 part voyant acquisition primarily related development projects readivoice series innovox 4000 media servers completed commenced shipping 2005 see note 3 notes consolidated financial statements amounts allocated purchased inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development dstmedia voyant estimated net free cash flows generated inprocess research development projects discounted rates ranging 22 dstmedia 35 40 voyant relation stage completion technical risks associated achieving technology feasibility december 31 2006 significant process research development projects completed expect expense purchased inprocess research development costs 2007 result anticipated acquisition spectralink 2007 lesser extent recent acquisition destiny amounts could significant depending upon results valuing inprocess research development acquired part acquisitions amortization impairment purchased intangibles 2006 2005 2004 recorded 75 million 88 million 205 million respectively amortization impairment purchased intangibles acquired acquisitions purchased intangible assets amortized expense estimated useful lives range several months eight years 2006 2005 14 million 19 million respectively total expense related impairment certain intangibles acquired voyant acquisition impairment charges 2004 decrease absolute dollars 2006 compared 2005 primarily due purchased intangibles related meetu acquisition becoming fully amortized 2005 impairment certain intangibles voyant acquisition end 2005 reduced 2006 amortization decreases partially offset addition purchased intangibles related dstmedia acquisition august 2005 decrease absolute dollars 2005 compared 2004 primarily due purchased intangibles related picturetel circa apsi acquisitions becoming fully amortized december 31 2004 evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment based results 2006 2005 impairment assessments determined certain purchased intangible assets acquired part voyant acquisition impaired respective year end periods recorded impairment charges approximately 14 million 19 million 2006 2005 respectively 2006 assets written result decline projected future cash flows future products utilize technology acquired acquisition 2006 impairment result permanent reduction future amortization expense approximately 02 million per quarter 2008 2005 assets written result decline projected future cash flows oci product line due announced discontinuance fourth quarter 2005 december 31 2006 carrying value purchased intangibles 129 million expect purchased intangibles related amortization increase 2007 result anticipated acquisition spectralink lesser extent recent destiny acquisition amounts could significant depending upon results valuing intangibles acquired part acquisitions restructure costs third quarter 2006 management approved restructuring plan eliminating relocating certain positions throughout company order consolidate certain functions one location well relocate asia pacific headquarters hong kong singapore accordance sfas 146 “accounting costs associated exit disposal activities” company recorded charge approximately 19 million 2006 related workforce reductions relocations events communicated impacted employees incurred period charge comprised severance employee termination benefits related workforce reductions impacts less 3 percent company’s employees worldwide costs related relocations incurred december 31 2006 december 31 2006 approximately 08 million charge remains paid expected paid march 31 2007 employees terminate first quarter 2007 accordance fas 146 exceed minimum retention period generally 60 days well remaining costs associated employee relocation facilities closures moving related expenses recognized company ceases use facility incurred remaining charge approximately 03 million recognized first quarter 2007 total charge 22 million first quarter 2006 management approved restructuring plan eliminating certain positions throughout company focused sales general administrative functions resulting actions intended streamline focus company’s efforts properly align cost structure projected revenue streams accordance sfas 146 company recorded charge approximately 06 million 2006 related workforce reductions communicated impacted employees period total charge 06 million consisted severance employee termination benefits related workforce reductions comprised less 1 percent company’s employees worldwide payments related actions made december 31 2006 2005 approved restructuring plan eliminating relocating certain positions throughout company focused sales general administrative functions resulting actions intended streamline focus efforts properly align cost structure projected revenue streams accordance sfas 146 recorded charge approximately 07 million year ended december 31 2005 charge consisted severance employee termination benefits related workforce reductions comprised less 1 percent company’s employees worldwide obligations related charges paid released december 31 2005 charge partially offset release remaining reserve recorded 2004 related restructuring network systems segment discussed resulting net restructuring charges year 06 million 2004 approved restructuring plan network systems segment resulting actions intended improve overall cost structure network systems segment focusing resources strategic areas business streamlining certain engineering efforts reducing operating expenses accordance sfas 146 company recorded charge approximately 14 million year ended december 31 2004 charge consisted primarily severance employee termination benefits related workforce reductions comprised less 3 percent company’s employees worldwide payments related actions made future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed see note 6 notes consolidated financial statements litigation reserves payments 2006 litigation reserves payments releases prior reserves 2005 released less 01 million remaining reserves related distributor claim tentative settlement employment claim recorded second half 2004 recorded 210 million litigation reserves payments 208 million related settlement patent infringement litigation matter whereby entered settlement agreement avistar communications inc “avistar” collaboration properties inc whollyowned subsidiary avistar “cpi” terms settlement agreement paid avistar onetime amount 275 million cpi agreed dismiss claims litigation prejudice addition settlement agreement avistar cpi entered patent crosslicense agreement whereby nonexclusive fully paidup worldwide patent licenses respective patent portfolios party subsidiaries granted us subsidiaries avistar subsidiaries including cpi avistar subsidiaries us subsidiaries incurred onetime charge 208 million 2004 recorded 67 million prepaid license expect amortize prepaid license third quarter 2013 expiration date patents license interest income net interest income net consists primarily interest earned cash equivalents investments less bank charges resulting use bank accounts interest income net interest expense 212 million 2006 128 million 2005 73 million 2004 interest income increased 2006 2005 primarily due higher average investment returns partially offset lower average cash investment balances due stock repurchase activity 2006 average interest rate returns cash investments 461 2006 compared 280 2005 interest income increased 2005 2004 due primarily higher average interest rates lesser extent increases average cash investment balances average interest rate returns cash investments 280 2005 compared 178 2004 interest income net could fluctuate 2007 due movement cash balances changes market interest rates expect cash balance decrease result recent acquisition destiny anticipated acquisition spectralink 2007 cash balance could decrease depending upon cash used acquisitions stock repurchase activity factors gain loss strategic investments strategic reasons made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value review investments impairment events changes circumstances indicate impairment may exist make appropriate reductions carrying value necessary evaluate number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2006 2005 investments carrying value 89 million 59 million respectively recorded “other assets” consolidated balance sheets 2006 2005 made additional investments two private companies totaling 30 million 05 million respectively 2005 investments permanently written 16 million original cost reflected “gain loss strategic investments” consolidated statements operations amounts permanently written 2004 2005 privately held company held investment carrying value 04 million sold resulting gains 45 million 2005 gain 02 million 2006 final escrow settled amounts recorded consolidated statements operations “gain loss strategic investments” provision income taxes overall effective tax rates 2006 2005 2004 300 358 295 respectively resulted provision income taxes including taxes related discontinued operations 308 million 349 million 148 million 2006 2005 2004 respectively decrease effective rate 2006 versus 2005 due primarily onetime tax impact 75 million distribution made 2005 american jobs creation act reduced exposures foreign cash taxes result agreements outstanding assessments increase effective rate 2005 versus 2004 related primarily tax expense associated repatriation foreign subsidiary earnings provisions american jobs creation act 2004 discussed partially offset decrease purchased inprocess research development deductible tax purposes december 2006 resolved certain tax uncertainties foreign tax jurisdictions allowed us release previously accrued taxes totaling 18 million december 31 2006 approximately 86 million tax credit carryovers 22 million capital loss carryforwards well deferred tax assets arising temporary differences see note 16 notes consolidated financial statements october 22 2004 american jobs creation act “act” signed law act created temporary incentive us corporations repatriate accumulated income earned abroad providing dividends received deduction 85 certain dividends defined act fourth quarter 2005 distributed 1375 million cash foreign subsidiary provided associated income tax expense 75 million future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income non taxdeductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies believe future effective tax rate may volatile result factors july 2006 financial accounting standards board fasb issued fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” fin 48 prescribes recognition threshold measurement process recording financial statements uncertain tax positions taken expected taken tax return additionally fin 48 provides guidance derecognition classification accounting interim periods disclosure requirements uncertain tax positions fin 48 effective fiscal years beginning december 15 2006 first quarter 2007 process determining effect adoption fin 48 financial statements segment information description products services well annual financial data segment found business section form 10k note 17 notes consolidated financial statements results discussions include results segments years ended december 31 2006 2005 2004 segment contribution margin includes segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing stockbased compensation costs general administrative costs legal accounting costs acquisitionrelated costs amortization impairment purchased intangible assets purchased inprocess research development costs restructuring costs litigation reserves payments interest income net gain loss strategic investments expense net video communications revenues video communications segment 2006 increased 18 2005 due primarily increased sales volumes higher average selling prices group video systems consisted primarily vsx product family revenues video communications segment 2005 increased 4 2004 due primarily increased sales volumes group video systems consisted primarily vsx product family international revenues outside canada us accounted 50 51 52 video communications segment revenues 2006 2005 2004 respectively 2006 2005 one channel partner accounted 12 11 respectively total revenues video communications segment one customer accounted 10 total revenues video communications segment 2004 contribution margin percentage video communications segment revenues 51 2006 compared 49 2005 contribution margins increased result higher gross margins 2006 compared 2005 result higher average selling prices group video products engineering direct marketing expenses remained flat percent revenues although increasing absolute dollars 2006 compared 2005 contribution margin percentage video communications segment revenues 49 2005 2004 contribution margins remained consistent gross margins essentially flat 2005 compared 2004 video communications products engineering direct marketing expenses decreased less 1 percentage point percent revenues although increasing absolute dollars 2005 compared 2004 direct marketing engineering spending video communications segment fluctuate depending upon timing new product launches marketing programs voice communications revenues voice communications segment 2006 increased 35 2005 1880 million due primarily increased sales volumes voiceoverip products circuit switched products lesser extent increases installed voice products revenues voice communications segment 2005 increased 29 2004 1388 million due primarily increased sales volumes voiceoverip products circuit switched products lesser extent increases installed voice products international revenues outside canada us accounted 35 29 30 total voice communications segment revenues 2006 2005 2004 respectively increase international revenues 2006 compared 2005 2004 reflects increased adoption voip countries outside us one customer accounted 10 total revenues voice communications segment 2006 2005 2004 one channel partner accounted 11 10 total revenues respectively voice communications segment contribution margin percentage voice communications segment revenues 44 2006 compared 47 2005 contribution margins decreased primarily result lower gross margins 2006 compared 2005 result increased voiceoverip product revenues generally lower gross margin circuit switched installed voice products engineering direct marketing expenses also increased approximately 1 percentage point percent revenues absolute dollars 2006 compared 2005 contribution margin percentage voice communications segment revenues 47 2005 compared 46 2004 contribution margins remained fairly consistent gross margins essentially flat 2005 compared 2004 voice communications products engineering direct marketing expenses decreased less 1 percentage point percent revenues although increasing absolute dollars 2005 compared 2004 direct marketing engineering spending voice communications segment fluctuate depending upon timing new product launches marketing programs network systems revenues network systems segment 2006 decreased 10 2005 852 million due primarily decreased video audio network systems revenues partially offset increases revenues network systems software products video network system revenues decreased primarily due lower revenues system upgrades lower average selling prices video network systems due part increased competition sales volumes video network systems increased 2006 compared 2005 however growth offset lower average selling prices decline audio network systems revenues due lower sales volume 2006 2005 primarily due timing new product introductions customer capacity requirements revenues network systems segment 2005 decreased 14 2004 942 million due primarily decreased sales volumes video network systems lower revenues system upgrades addition average selling prices video network systems declined slightly year basis particularly low end products primarily result increased competition revenues audio networking systems software essentially flat year international revenues outside canada us accounted 46 38 total network systems revenues 2006 2005 2004 respectively increase international network systems revenues percentage network systems revenues 2006 compared 2005 due primarily decreases north america audio network system revenues year basis international sales increased europe asia 2006 2005 remained relatively flat latin america 2006 2005 2004 one customer accounted 10 network systems segment product revenues believe unlikely loss one channel partner would long term material adverse effect consolidated revenues believe endusers would likely purchase network systems products different channel partner however loss one channel partners could material adverse impact transition period sell audio network systems directly end users revenues segment end users subject variability segment revenues reseller customers loss one audio network system customers network systems segment could material negative impact network systems segment consolidated revenues decrease contribution margin percentage network systems segment revenues 2006 compared 2005 due primarily lower gross margins lesser extent increased engineering expenses absolute dollars percentage revenues due lower revenues direct marketing expenses essentially flat 2006 compared 2005 gross margins network systems lower 2006 versus 2005 primarily due lower average selling prices video network systems decreased audio network system revenues typically higher gross margin due software content decrease contribution margin percentage network systems segment revenues 2005 compared 2004 due primarily lower gross margins lesser extent increased engineering expenses percentage revenues partially offset lower direct marketing expenses gross margins network systems lower 2005 versus 2004 primarily due decrease video network system volumes well lower average selling prices particularly low end products primarily result increased competition services revenues services segment 2006 increased 18 2005 817 million due primarily increase video maintenance services result amortization deferred revenue associated first year service vsx product line increased video network systems services increases partially offset decreases ipowerrelated services lesser extent decreases audio network systems maintenance services revenues services segment 2005 increased 22 2004 692 million due primarily increase video maintenance services result amortization deferred revenue associated first year service vsx product line increased video network systems services lesser extent increases audio network systems maintenance services increases partially offset decreases ipowerrelated services international revenues outside canada us accounted 34 31 30 total service revenues 2006 2005 2004 respectively international revenues increased 2006 compared 2005 primarily result increased service revenues associated video communications network systems products europe asia pacific lesser extent latin america international revenues increased slightly 2005 compared 2004 primarily result increased service revenues europe asia pacific lesser extent latin america associated video communications network systems products one customer accounted 10 total revenues services segment 2006 2005 2004 overall increase services segment contribution percentage service segment revenues 2006 versus 2005 due primarily increased gross margins offsetting increases operating expenses service gross margins increased 2006 compared 2005 result revenue increasing faster pace related service costs service gross margins 2006 also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve month period following shipment impact due increased volumes products 2006 compared 2005 effective july 1 2006 began separately charge initial year service video conferencing products rather charging one combined price product service actions may desired result accordingly could adverse impact product margins profitability overall increase services segment contribution percentage services segment revenues 2005 versus 2004 due primarily increased gross margins offsetting increases operating expenses service gross margins increased 2005 compared 2004 result revenue increasing faster pace related service costs higher margins network systems audio services service gross margins 2005 also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve month period following shipment impact due increased volumes products 2005 compared 2004 liquidity capital resources december 31 2006 principal sources liquidity included cash equivalents 3164 million shortterm investments 1573 million longterm investments 1021 million substantially shortterm longterm investments comprised us government securities state local government securities corporate debt securities see note 7 notes consolidated financial statements addition 250 million line credit bank unused december 31 2006 however outstanding letters credit totaling approximately 15 million 13 million secured line credit generated cash operating activities totaling 1477 million 2006 1174 million 2005 796 million net 275 million litigation settlement 2004 increase cash provided operating activities 2006 2005 due primarily increased net income noncash expenses larger increases accounts payable taxes payable accrued liabilities smaller increase inventories offsetting positive effects larger increase accounts receivable smaller decrease deferred taxes increase prepaid expenses current assets increase cash provided operating activities 2005 2004 due primarily increased net income noncash expenses larger decreases deferred taxes larger increases taxes payable accrued liabilities smaller increases accounts receivable decreases prepaid expenses current assets partially offset smaller increases accounts payable increases inventories total net change cash equivalents year ended 2006 increase 1271 million primary sources cash 1477 million operating activities 873 million associated exercise stock options purchases employee stock purchase plan 102 million excess tax benefit stock based compensation 91 million proceeds sales maturities investments net purchases primary uses cash period 1036 million purchases common stock 235 million purchases property equipment positive cash operating activities primarily result net income adjusted noncash expenses items depreciation amortization provision doubtful accounts inventory writedowns excess obsolescence noncash stock based compensation excess tax benefit stock based compensation gain sale discontinued operations amortization unearned stockbased compensation gain strategic investments purchase inprocess research development tax benefits exercise employee stock options reductions deferred taxes net increases accounts payable taxes payable accrued liabilities offsetting positive effect items net increases trade receivables inventories prepaid expenses assets days sales outstanding dso metric 39 days december 31 2006 compared 40 days december 31 2005 decrease dso due primarily improvement revenue linearity last month quarter expect dso continue fluctuate likelihood increase result fluctuations revenue linearity increase international receivables typically longer payment terms increases receivables service providers government entities longer payment terms 45 60 days respectively compared normal 30 day terms inventory turns increased 53 turns december 31 2005 60 turns december 31 2006 increase turns primarily reflects increase revenue levels outpacing increase inventories believe inventory turns continue fluctuate depending ability reduce lead times well changes product mix greater mix ocean freight versus air freight reduce freight costs additionally payments make income taxes may increase 2007 available net operating losses depleted third quarter 2006 entered foreign currency forwardexchange contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record balance sheet reporting period fair value forwardexchange contracts record fair value adjustments results operations gains losses associated currency rate changes contracts recorded income expense offsetting transaction gains losses related assets liabilities additionally commencing third quarter 2006 started hedging program using forwardexchange contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated israeli shekels reporting period record fair value unrealized forward contracts balance sheet related unrealized gains losses component accumulated comprehensive income separate element stockholders’ equity realized gains losses associated effective portion forwardexchange contracts recorded within revenue operating expense depending upon underlying exposure hedged ineffective portion hedging instrument would recorded income expense january 5 2007 completed acquisition destiny paid 476 million cash destiny shareholders debtholders connection acquisition approximately 52 million cash placed escrow held security losses incurred us event certain breaches representations warranties covered reorganization agreement certain events destiny shareholders may receive additional 10 million consideration twoyear period based achievement certain financial milestones february 7 2007 entered definitive agreement acquire spectralink corporation spectralink terms agreement commenced cash tender offer purchase outstanding shares spectralink 1175 per share represents enterprise value approximately 220 million net existing cash debt acquisition expected close first second quarter calendar year 2007 upon closing acquisition also expect incur related transaction costs approximately 80 million 100 million part dstmedia acquisition dstmedia shareholders may receive additional 200 million consideration 2008 payable cash based achievement certain financial milestones relating operating results dstmedia september 2006 paid 02 million additional consideration dstmedia shareholders additional consideration one year following closing acquisition dstmedia’s results operations included results operations since august 25 2005 time board directors approved plans purchase shares common stock open market years ended december 31 2006 2005 2004 purchased approximately 48 million 114 million 28 million shares respectively common stock open market cash 1036 million 1840 million 525 million respectively december 31 2006 authorized purchase additional 157 million 2005 share repurchase plan december 31 2006 open purchase orders related contract manufacturers contractual obligations approximately 820 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition bank issued letters credit secure leases offices letters credit total approximately 15 million secured credit facilities cash deposits banks table set forth shows december 31 2006 future minimum lease payments net estimated sublease income 05 million june 2007 due current lease obligations addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2006 follows thousands believe available cash equivalents investments bank line credit sufficient meet operating expenses capital requirements foreseeable future however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2006 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements discussion accounting policies revenue recognition product returns recognize revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally recognize extended service revenue hardware software products service performed generally one five years video communications network systems products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts accordingly account revenue products accordance statement position 972 “software revenue recognition” related interpretations use residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement defer revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements defer revenue sufficient evidence exists elements delivered accrue sales returns allowances reduction revenues upon shipment based upon contractual obligations historical experience channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered coop marketing funds accounted accordance eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” guidelines accrue coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition company’s customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances writtenoff management determined likelihood collection probable excess obsolete inventory record write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis deferred refundable taxes estimate actual current tax exposure together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2006 392 million net deferred tax assets order fully utilize deferred tax assets need generate sufficient amounts future us taxable income believe based upon financial projections likely generate sufficient future taxable income utilize assets therefore december 31 2006 established valuation allowance assets stockbased compensation measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values accordance sfas 123r sfas 123r requires us estimate fair value sharebased payment awards date grant using optionpricing model determination fair value sharebased payment awards date grant using black scholes optionpricing model affected stock price well assumptions regarding number highly complex subjective variables include limited expected stock price volatility term awards actual projected employee stock option exercise behaviors value portion award ultimately expected vest recognized expense requisite service period consolidated statements operations prior adoption sfas 123r accounted employee equity awards employee stock purchases using intrinsic value method accordance apb 25 allowed statement financial accounting standards 123 “accounting stockbased compensation” “sfas 123” intrinsic value method stockbased compensation expense recognized consolidated statements operations related acquisitions exercise price stock options granted employees directors equaled fair market value underlying stock date grant fair value assets acquired liabilities assumed purchase combinations purchase combinations completed require us identify estimate fair value assets acquired including intangible assets goodwill liabilities assumed combinations estimates fair value based business plan entities acquired including planned redundancies restructuring use assets acquired assumptions ultimate resolution obligations assumed future benefit received example picturetel acquisition identified vacated redundant facilities intended sublease intended negotiate lease termination settlement allocation period material acquisitions defined statement financial accounting standards 38 “accounting preacquisition contingencies purchased enterprises” completed therefore actual costs payment certain earnouts exceed estimates charges would recognized consolidated statements operations actual costs less estimates charges would continue recognized adjustment goodwill purchased intangibles assess impairment goodwill indefinite lived intangibles least annually unless impairment indicators exist sooner assess impairment whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following • significant underperformance relative projected future operating results • significant changes manner use acquired assets strategy overall business • significant negative industry economic trends determine carrying value goodwill indefinite lived intangibles may recoverable based upon existence one indicators impairment would typically measure impairment based projected discounted cash flow method using discount rate determined us commensurate risk inherent current business model fourth quarters 2006 2005 2004 completed annual goodwill impairment tests assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date based results impairment tests determined goodwill assets impaired december 31 2006 2005 2004 assess purchased intangibles impairment ongoing basis assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment based events fourth quarters 2006 2005 performed assessment purchased intangibles determined certain purchased intangible assets acquired part voyant acquisition impaired december 31 2006 2005 recorded impairment charges approximately 14 million 19 million respectively intangible assets impaired december 31 2004 screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests nonmarketable securities periodically make strategic investments companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant write carrying value investment believe investment experienced decline value temporary investments carrying value 89 million december 31 2006 permanently written 16 million 2005 reflected “gain loss strategic investments” consolidated statements operations amounts permanently written 2006 2004 derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately nondesignated derivative instruments require special hedge accounting fas 133 gain loss recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements july 2006 fasb issued fasb interpretation 48 fin 48 “accounting uncertainty income taxes” prescribes recognition threshold measurement process recording financial statements uncertain tax positions taken expected taken tax return additionally fin 48 provides guidance derecognition classification accounting interim periods disclosure requirements uncertain tax positions accounting provisions fin 48 effective first quarter 2007 fiscal year process determining effect adoption fin 48 financial statements september 2006 fasb issued statement financial accounting standards 157 sfas 157 “fair value measurements” clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions standard fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective first quarter 2008 fiscal year early adoption permitted yet determined impact implementation sfas 157 financial statements september 2006 staff sec issued staff accounting bulletin sab 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 provides guidance consideration effects prior year misstatements quantifying current year misstatements purpose determining whether current year’s financial statements materially misstated sab 108 effective fiscal years ending november 15 2006 adoption sab 108 impact consolidated financial position results operations cash flows item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview leading global provider highquality easytouse communications solutions enable enterprise public sector customers effectively collaborate distance time zones organizational boundaries solutions built architectures enable unified voice video content communications offerings organized three segments video solutions voice communications services shift circuitswitched telephony networks internet protocol ip based networks continues significant driver polycom’s collaborative communications markets business high definition hd voice video content another key driver polycom significant improvement quality enabling telepresence communications models approximate inperson communications strategically polycom investing research development sales marketing efforts delivering superior ipbased hd collaborative communications solution using polycom proprietary technology evolving standardsbased ip communications environment goal deliver bestofbreed hd collaborative communications solutions integrate enterprise call management system instant message environment january 5 2007 completed acquisition destiny conferencing corporation destiny designed manufactured immersive telepresence solutions polycom incorporated destiny’s products rpx telepresence offering prior acquisition terms oem distribution agreement companies addition products became foundation recently announced tpx telepresence offering result acquisition several patents core telepresence rapidlyemerging market driven need dispersed people communicate room destiny’s results operations included results operations part video solutions services segments january 5 2007 date acquisition march 26 2007 completed acquisition spectralink corporation spectralink designs manufactures sells onpremises wireless telephone products customers worldwide complement existing telephone systems providing mobile communications building campus environment spectralink wireless telephone products increase efficiency employees enabling remain telephone contact moving throughout workplace believe spectralink acquisition position us independent provider fixed mobile solutions seamlessly encompass voice video data collaboration solutions desktop meeting room mobile individual spectralink’s results operations included results operations part voice communications services segments march 26 2007 date acquisition see notes 2 3 4 notes consolidated financial statements information acquisitions related costs charges revenues 9299 million 2007 compared 6824 million 2006 revenues wireless voice products acquired spectralink acquisition accounted approximately 1135 million year increase remaining increase revenues primarily reflects increased sales volumes video voice communications products lesser extent increases service revenues network systems product revenues essentially flat 2007 compared 2006 gross margins operating margins decreased 2007 2006 primarily result acquisitionrelated charges related spectralink destiny acquisitions amortization purchased intangibles increased stockbased compensation decreased margins voice communications products due shift product mix towards lower margin voip wireless products effects partially offset increased margins services revenues 2007 generated approximately 1495 million cash flow operating activities impact investing financing activities described detail “liquidity capital resources” resulted 368 million net decrease total cash equivalents video solutions voice communications services segments accounted 53 34 13 respectively revenues 2007 see note 14 notes consolidated financial statements information segments including summary segment revenues segment contribution margin segment inventory revenue geography discussion results operations consolidated level followed discussion results operations segment three years ended december 31 2007 results operations three years ended december 31 2007 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues total revenues 2007 9299 million increase 2475 million 36 2006 revenues wireless voice products acquired spectralink acquisition accounted approximately 1135 million year increase remaining increase revenues primarily reflects increased sales volumes video voice communications products lesser extent increase service revenues network systems product revenues essentially flat video solutions segment revenues include revenues sales video communications network systems product lines revenue video communications products increased 4083 million 2007 3275 million 2006 25 increase primarily due increase sales volumes average selling prices group video products consisted primarily vsx hdx product families revenues network systems products 2007 850 million essentially flat compared 2006 revenues 852 million due primarily increases revenues video network systems software product sales substantially offset decreases voice network system revenues network system product revenues impacted decrease video network system average selling prices due part increased competition voice communications product revenues increased primarily result revenues wireless voice products acquired spectralink acquisition well increases sales volumes voiceoverip circuit switched products services revenues increased primarily due increases voicerelated services result acquired spectralink product lines well increased videorelated services video network system services total revenues 2006 6824 million increase 1017 million 18 2005 increase due increased sales volumes voice video communications products lesser extent increases service revenues increases partially offset decrease network systems revenues video solutions segment revenues include revenues sales video communications network systems product lines video communications product revenues increased 3275 million 2006 2784 million 2005 18 increase primarily due increase sales volumes average selling prices group video products consisted primarily vsx product family revenues network systems products 2006 decreased 10 2005 942 million 852 million due primarily decreased video voice network systems revenues partially offset increases revenues network systems software products network system revenues impacted decrease video network system average selling prices due part increased competition voice communications segment revenues increased primarily result increased sales volumes voiceoverip products circuit switched products lesser extent increases sales volumes installed voice products services revenues increased primarily due increased videorelated services video network system services international sales defined revenues outside canada us accounted 44 43 41 total revenues 2007 2006 2005 respectively regional basis north america europe asia pacific latin america accounted 56 24 17 3 respectively total 2007 revenues north america europe asia pacific latin america revenues increased 35 44 31 40 respectively 2007 2006 excluding spectralink revenues north america europe increased 13 24 respectively 2007 2006 asia pacific latin america significantly impacted spectralink revenues 2007 revenues north america europe asia pacific latin america increased 2007 2006 primarily result increase video voice communication product revenues lesser extent increased services network systems revenues regional basis north america europe asia pacific latin america accounted 57 22 18 3 respectively total 2006 revenues north america europe asia pacific latin america revenues increased 14 25 19 34 respectively 2006 2005 north america revenues increased result increase video voice communication product revenues lesser extent increased services revenues increases partially offset decreases network systems revenues europe asia pacific revenues increased result increase voice video communication product revenues lesser extent increased services network systems product revenues latin america revenues increased result increased video voice communication product revenues lesser extent increases services revenues network systems product revenues latin america essentially flat 2006 compared 2005 2007 one customer accounted 10 total net revenues video solutions voice communications services segment revenues 2006 one channel partner accounted 10 total net revenues video solutions segment revenues one customer accounted 10 voice communications services segment revenues 2006 2005 one customer accounted 10 total net revenues video solutions services segment revenues however one channel partner accounted 11 voice communications segment revenues believe unlikely loss channel partners would long term material adverse effect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period also sell voice network systems directly endusers revenues video solutions segment endusers subject variability revenues reseller customers typically ship products within short time receive order therefore backlog good indicator future revenues december 31 2007 577 million order backlog compared 404 million december 31 2006 include backlog open product orders expect ship services expect bill record revenue following quarter billed unrecorded service revenue included deferred revenue believe current level backlog continue fluctuate primarily result level timing orders received customer delivery dates requested outside quarter level backlog given time also dependent part ability forecast revenue mix plan manufacturing accordingly ongoing service deferrals service revenues increase percent total revenue addition orders channel partners based part level demand enduser customers decline uncertainty enduser demand could negatively impact enduser orders turn could negatively affect orders channel partners given quarter result backlog could decline current levels cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments amortization impairment certain intangible assets stockbased compensation costs allocation overhead expenses including facilities costs cost product revenues product gross margins included charges stockbased compensation 27 million 15 million years ended december 31 2007 2006 respectively comparable 2005 period include charges stockbased compensation generally video solutions segment products higher gross margin products voice communications segment overall product gross margins decreased 4 percentage points 2007 compared 2006 due part amortization core existing technology purchased intangibles result recent acquisitions increased stockbased compensation costs addition cost product revenues increased result writeup inventory fair value time acquisitions increased costs allocated segments accounted approximately 2 percentage points decrease gross margin 2007 excluding unallocated costs gross margins decreased video solutions voice communications segments 2007 versus comparable 2006 period fluctuation segments’ gross margin primarily due changes product mix voiceoverip handset products wireless products acquired spectralink lower gross margin consolidated gross margin voice communications products resulted lower gross margins 2007 depending upon product mix could result lower voice communications gross margins future gross margins wireless products also negatively impacted changes distribution model whereby transitioned certain direct customers resellers purchase distributors may continue decrease gross margins video solutions segment primarily due decreased margins video network systems result decreased average selling prices substantially offset higher gross margins group video systems overall product gross margins decreased 1 percentage point 2006 compared 2005 result decreased margins voice communications segment partially offset increased margins video solutions decrease voice communications due shift product mix toward lower margin voiceoverip desktop products well increased expenses related stockbased compensation additional reserves excess obsolete inventories increase video solutions gross margins due increased average selling prices due product mix fact first year service longer bundled product price partially offset increased expenses related stockbased compensation additional reserves excess obsolete inventories effective july 1 2006 began separately charge initial year service video conferencing products rather charging one combined price product service result longer required defer portion product revenues cover first year service increase partially offset lower gross margins video network systems network systems software result decreased average selling prices higher expenses related stockbased compensation partially offset increased margins voice network systems due higher software content products results higher gross margins cost service revenues service gross margins cost service revenues consists primarily material direct labor including stockbased compensation costs depreciation allocation overhead expenses including facilities costs generally services lower gross margin product gross margins cost service revenues service gross margins included charges stockbased compensation 34 million 17 million years ended december 31 2007 2006 respectively comparable 2005 period include charges stockbased compensation overall service gross margins increased 2007 2006 result revenues increasing faster pace related service costs well shift mix services revenues toward higher margin video maintenance revenues offset partially increased expenses related stockbased compensation overall service gross margins increased 2006 2005 result revenues increasing faster pace related service costs well shift mix services revenues toward higher margin video maintenance revenues service gross margins also favorably impacted amortization deferred revenue associated first year service vsx products included product price june 30 2006 amortized twelve month period following shipment factors offset partially increased expenses related stockbased compensation general comments forecasting future gross margin percentages difficult number risks related ability maintain current gross margin levels uncertainties surrounding revenue levels related production level variances competition changes technology changes product mix variability stockbased compensation costs potential resulting royalties third parties manufacturing efficiencies subcontractors manufacturing purchased part variances warranty recall costs timing sales next quarters cause cost revenues percentage vary significantly addition may experience higher prices commodity components included products cost increases memory devices used many products cost increases components required compliance restrictions hazardous substances rohs rules europe addition cost variances associated manufacturing ramp new products writeoff initial inventory purchases due product launch delays lack market acceptance new products could occur would increase cost revenues percentage revenues new products typically lower gross margins period time introduction we’ve recently launched number new products new products becoming increasing percentage revenues example hd video products generate higher gross profit dollars nonhd video products due higher average selling prices may result lower overall gross margin percentage extended period time introduction depending upon mix products sold period addition uncertainties listed cost revenues percentage revenues may increase due change mix distribution channels mix international versus north american revenues cost revenues also increase 2008 2007 levels result increased compensation charges due additional headcount annual merit increases incentive accruals sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force stockbased compensation costs advertising promotional expenses product marketing expenses allocation overhead expenses including facilities costs sales marketing expenses except direct marketing expenses allocated segments sales marketing expenses included charges stockbased compensation 127 million 68 million years ended december 31 2007 2006 respectively comparable 2005 period include charges stockbased compensation sales marketing expense percentage revenue increased 1 percentage point 2007 compared 2006 increase sales marketing expense absolute dollars percentage revenues 2007 2006 due primarily increase sales commissions coop marketing charges result increased revenues increases sales marketing headcount due acquisition spectralink expansion sales marketing efforts well increased compensation charges due incentive compensation costs stockbased compensation expense sales marketing expense percentage revenue flat 2006 compared 2005 increase absolute dollars 2006 2005 due primarily increase sales commissions coop marketing charges result increased revenues increases sales marketing headcount due expansion sales marketing efforts well increased compensation charges due annual merit increases incentive accruals stockbased compensation expense expect continue increase sales marketing expenses absolute dollar amounts percentage revenue continue increase sales coverage across markets including emerging markets key vertical markets hiring additional sales personnel additional marketing programs order capitalize demand high definition products sell market additional product offerings anticipate result strategic partnerships increase revenues wlan products acquired spectralink acquisition marketing expenses also fluctuate depending upon timing extent marketing programs market new products also depending upon timing trade shows sales marketing expenses may also fluctuate due increased international expenses impact changes foreign currency exchange rates addition sales marketing expenses increase 2008 2007 levels result increased compensation charges due annual merit increases incentive accruals lesser extent increases stockbased compensation expense research development expenses research development expenses expensed incurred consist primarily compensation costs including stockbased compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development expenses included charges stockbased compensation 125 million 73 million years ended december 31 2007 2006 respectively comparable 2005 period include charges stockbased compensation research development expenses percentage revenue decreased 2007 compared 2006 primarily due spending increasing 22 2007 2006 compared revenues increasing 36 2007 2006 increase absolute dollars 2007 compared 2006 due planned increases program development expenses support increased investment new product initiatives high definition video voice products enhancements network systems products well increased compensation charges related increased headcount due acquisition spectralink incentive accruals stockbased compensation expense research development expenses increased 2007 compared 2006 video solutions voice communications segments research development expenses percentage revenue increased 2006 compared 2005 primarily due spending increasing 25 2006 2005 compared revenues increasing 18 2006 2005 increase absolute dollars 2006 compared 2005 due planned headcount increases program development expenses support increased investment new product initiatives high definition video voice products next generation network systems products well increased compensation charges related annual merit increases incentive accruals stockbased compensation expense research development expenses increased 2006 compared 2005 video solutions voice communications segments currently investing research development resources enhance upgrade products comprise unified collaboration communications solutions encompass products services three segments including enhancements existing network systems products address high definition video conferencing market additional voiceoverip products also plan make incremental investments research development wlan broaden enterprise wide application spectralink products addition investing research development resources across segments support strategic partnerships recent formation video solutions division anticipate committing greater proportion research development expenses toward enhancing integration interoperability entire video solutions product suite believe technological leadership critical future success committed continuing significant level research development develop new technologies products combat competitive pressures also continued investment new product initiatives require significant research development spending expect research development expenses increase absolute dollars 2008 2007 decrease percentage revenues addition research development expenses increase 2008 2007 levels result increased compensation charges due annual merit increases incentive accruals lesser extent increases stockbased compensation expense general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs professional service fees allocation overhead expenses including facilities costs litigation costs bad debt expense general administrative expenses allocated segments general administrative expenses included charges stockbased compensation 105 million 60 million years ended december 31 2007 2006 respectively comparable 2005 period include charges stockbased compensation percentage revenues general administrative expenses remained flat 2007 compared 2006 increase spending absolute dollars general administrative 2007 2006 primarily due increased compensation charges related increased headcount spectralink acquisition increased incentive accruals stockbased compensation expense well increased legal projectrelated outside services costs 2007 increase compensation charges including stock compensation costs accounted 89 million increase legal outside services accounted 37 million increase increases infrastructure costs accounted 06 million increase remaining changes related numerous smaller items percentage revenues general administrative expenses increased 1 percentage point 2006 compared 2005 due increase stockbased compensation versus year ago period increase spending absolute dollars general administrative 2006 2005 primarily due increased compensation charges related annual merit increases increased incentive accruals stockbased compensation expense well legal projectrelated outside services costs partially offset decreased infrastructure costs 2006 increase compensation charges including stock compensation costs accounted 104 million increase legal outside services accounted 12 million increase partially offset decreases infrastructure costs 23 million remaining changes related numerous smaller items significant future charges due costs associated litigation uncollectibility receivables could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing litigation bad debt expense associated uncollectible receivables difficult future general administrative expense increases decreases absolute dollars difficult predict due lack visibility certain costs including legal costs associated defending claims us well legal costs associated asserting enforcing intellectual property portfolio factors general administrative expenses increase first quarter 2008 result fee arrangement outside legal counsel represented us litigation codian pursuant owe additional legal fees based upon favorable outcome achieved first quarter 2008 believe general administrative expenses also likely continue increase absolute dollar amounts future primarily result expansion administrative staff investments enhancements financial operating systems costs related supporting larger company increased costs associated regulatory requirements continued investments international regions addition general administrative expenses increase 2008 2007 levels result increased compensation charges due annual merit increases incentive accruals lesser extent increases stockbased compensation expense acquisition related integration costs recorded charges operations 43 million 2007 02 million 2006 04 million 2005 acquisitionrelated integration costs charges primarily include outside financial advisory accounting legal consulting fees costs directly related integrating acquired companies 2007 charges primarily related professional services costs integrate spectralink acquired march 2007 lesser extent destiny acquired january 2007 charges 2006 2005 primarily related professional services costs integrate dstmedia acquired august 2005 expect continue incur additional costs related integration spectralink 2008 acquire additional businesses future may incur material acquisition expenses related transactions purchased inprocess research development 2007 2005 recorded charges totaling 94 million 03 million inprocess research development acquired part acquisitions spectralink dstmedia respectively charges 2006 research development acquired part spectralink acquisition related primarily projects associated enhancements upgrades functionality performance link netlink dect products amount allocated purchased inprocess research development determined management considering among factors established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects acquisition date income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development spectralink dstmedia estimated net free cash flows generated inprocess research development projects discounted rates ranging 15 16 spectralink 22 dstmedia relation stage completion technical risks associated achieving technology feasibility key assumptions used valuing spectralink inprocess research development primarily consisted expected completion date inprocess projects ranged stages completion 36 92 expected completed next 10 12 months estimated costs complete projects approximately 14 million revenue expense projections discount rates based risks associated development lifecycle inprocess technology acquired december 31 2007 significant process research development projects completed amortization impairment purchased intangibles 2007 2006 2005 recorded 115 million 75 million 88 million respectively amortization impairment purchased intangibles acquired acquisitions addition amounts recorded operating expenses 2007 recorded amortization totaling 109 million related certain technology intangibles cost product revenues purchased intangible assets amortized expense estimated useful lives range two eight years 2007 2006 2005 36 million 14 million 19 million respectively total operating expense related impairment certain intangibles acquired voyant acquisition increase absolute dollars 2007 compared 2006 primarily due purchased intangibles spectralink destiny acquisitions early 2007 partially offset decreases related certain purchased intangibles related voyant acquisition becoming fully amortized december 31 2006 decrease absolute dollars 2006 compared 2005 primarily due purchased intangibles related meetu acquisition becoming fully amortized 2005 impairment certain intangibles voyant acquisition end 2005 reduced 2006 amortization decreases partially offset addition purchased intangibles related dstmedia acquisition august 2005 evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment based results 2007 2006 2005 impairment assessments determined certain purchased intangible assets acquired part voyant acquisition impaired respective year end periods recorded impairment charges approximately 36 million 14 million 19 million 2007 2006 2005 respectively 2007 2006 assets written result decline projected future cash flows future products utilize technology acquired acquisition 2005 assets written result decline projected future cash flows oci product line due announced discontinuance fourth quarter 2005 december 31 2007 carrying value purchased intangibles 864 million restructure costs 2007 2006 2005 recorded 04 million 24 million 06 million respectively related restructuring actions resulted elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus efforts properly align cost structure projected revenue streams 2007 actions primarily related reorganization video network systems divisions one combined business unit video solutions group elimination certain executive positions 2006 actions included relocation asia pacific headquarters hong kong singapore well elimination certain sales administrative functions actions affected less three percent global workforce 2005 actions included reductions relocation certain positions throughout company primarily sales administrative functions affected less one percent global workforce see note 6 notes consolidated financial statements information restructure costs subsequent december 31 2007 severance packages executives impacted 2007 restructuring actions renegotiated employment terminated january 9 2008 revised total charges expected incurred related actions 18 million paid prior march 31 2008 total charges remaining 16 million expensed quarter ending march 31 2008 future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed interest income net interest income net consists primarily interest earned cash equivalents investments less bank charges resulting use bank accounts interest income net interest expense 186 million 2007 212 million 2006 128 million 2005 interest income decreased 2007 2006 primarily due lower average cash investment balances result net cash paid acquisitions spectralink destiny first quarter 2007 well due stock repurchase activity 2007 partially offset higher average investment returns average interest rate returns cash investments 514 2007 compared 461 2006 interest income increased 2006 2005 primarily due higher average investment returns partially offset lower average cash investment balances due stock repurchase activity 2006 average interest rate returns cash investments 461 2006 compared 280 2005 interest income net likely fluctuate 2008 due movement cash balances changes market interest rates cash balance could decrease depending upon cash used future acquisitions stock repurchase activity factors gainloss strategic investments strategic reasons made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value review investments impairment events changes circumstances indicate impairment may exist make appropriate reductions carrying value necessary evaluate number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2007 2006 investments carrying value 17 million 89 million respectively recorded “other assets” consolidated balance sheets 2007 2006 made additional investments two private companies totaling 02 million 30 million respectively 2007 2005 investments permanently written 74 million 16 million respectively original cost reflected “gain loss strategic investments” consolidated statements operations writedown 74 million second quarter 2007 based upon evaluation investee’s financial position including cash usage status investee’s business prospects june 30 2007 rights privileges associated investment based evaluation intent june 30 2007 participate round additional funding investee process time determined based upon preferences including liquidation preferences would held senior securities write carrying value zero necessary 2005 privately held company held investment carrying value 04 million sold resulting gain 45 million 2005 gain 02 million 2006 final escrow settled amounts recorded consolidated statements operations “gain loss strategic investments” provision income taxes overall effective tax rates 2007 2006 2005 283 300 358 respectively resulted provision income taxes including taxes related discontinued operations 248 million 308 million 349 million 2007 2006 2005 respectively decrease effective rate 2007 versus 2006 due relative increase foreign earnings subject lower tax rates combined settlement certain audits foreign tax authorities substantially offset nondeductibility inprocess research development acquired spectralink acquisition decrease effective rate 2006 versus 2005 due primarily onetime tax impact 75 million distribution made 2005 american jobs creation act combined resolution certain tax uncertainties foreign tax jurisdictions allowed us release previously accrued taxes december 31 2007 approximately 118 million tax net operating loss carryforwards 170 million tax credit carryovers well deferred tax assets arising temporary differences see note 13 notes consolidated financial statements october 22 2004 american jobs creation act “act” signed law act created temporary incentive us corporations repatriate accumulated income earned abroad providing dividends received deduction 85 certain dividends defined act fourth quarter 2005 distributed 1375 million cash foreign subsidiary provided associated income tax expense 75 million january 1 2007 adopted fasb interpretation 48 accounting uncertainty income taxes fin 48 fin 48 impact uncertain income tax position income tax expense must recognized largest amount likely sustained uncertain income tax position recognized less 50 likelihood sustained result decreased reserves uncertain tax positions 126 million 34 million decrease relation interest penalties various tax reserves accounted cumulative adjustment beginning balance retained earnings 92 million decrease related preacquisition tax reserves accounted adjustment goodwill adoption date january 1 2007 615 million unrecognized tax benefits 266 million would affect income tax expense recognized remaining balance unrecognized tax benefits 349 million would adjustment goodwill stockholders’ equity addition recognized certain net operating loss carryovers picturetel recognized previously resulted establishment deferred tax asset 404 million corresponding reduction goodwill see note 13 notes consolidated financial statements future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income non taxdeductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies believe future effective tax rate may volatile result factors segment information description products services well annual financial data segment found business section form 10k note 14 notes consolidated financial statements results discussions include results segments years ended december 31 2007 2006 2005 segment contribution margin includes segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing stockbased compensation costs general administrative costs legal accounting costs acquisitionrelated integration costs amortization impairment purchased intangible assets purchase accounting adjustments made inventory purchased inprocess research development costs restructuring costs interest income net expense net video solutions revenues video solutions segment increased 806 million 20 2006 4933 million 2007 revenue video communications products increased 4083 million 2007 3275 million 2006 25 increase primarily due increase sales volumes average selling prices group video products consisted primarily vsx hdx product families revenues network systems products 2007 850 million essentially flat compared 2006 revenues 852 million due primarily increases revenues video network systems software product sales substantially offset decreases voice network system revenues network system product revenues impacted decrease video network system average selling prices due part increased competition revenues video solutions segment increased 401 million 11 2005 4127 million 2006 video solutions segment revenues include revenues sales video communications network systems product lines video communications product revenues increased 3275 million 2006 2784 million 2005 18 increase primarily due increase sales volumes average selling prices group video products consisted primarily vsx product family revenues network systems products 2006 decreased 10 2005 942 million 852 million due primarily decreased video voice network systems revenues partially offset increases revenues network systems software products network system revenues impacted decrease video network system average selling prices due part increased competition international revenues defined revenues outside canada us accounted 52 49 42 video solutions segment revenues 2007 2006 2005 respectively 2007 2005 one customer accounted 10 total net revenues video solutions segment 2006 one channel partner accounted 10 total net revenues video solutions segment believe unlikely loss one channel partner would long term material adverse effect consolidated revenues believe endusers would likely purchase network systems products different channel partner however loss one channel partners could material adverse impact transition period contribution margin percentage video solutions segment revenues 46 2007 compared 45 2006 contribution margins increased primarily result engineering expenses decreasing percent revenues although increasing absolute dollars offset slightly lower gross margins 2007 compared 2006 video network systems product lines due part new products typically lower gross margins period time introduction we’ve recently launched number new products new products becoming increasing percentage revenues example hd video products generate higher gross profit dollars nonhd video products due higher average selling prices may result lower overall gross margin percentage extended period time introduction depending upon mix products sold period direct marketing expenses increased absolute dollars slightly percent revenues contribution margin percentage video solutions segment revenues 45 2006 2005 contribution margins remained consistent result slightly higher gross margins 2006 compared 2005 result higher average selling prices group video products offset partially lower gross margins network system products due lower average selling prices engineering direct marketing expenses decreased percent revenues absolute dollars 2006 compared 2005 direct marketing engineering spending video solutions segment fluctuate depending upon timing new product launches marketing programs voice communications revenues voice communications segment 2007 increased 67 2006 3132 million due primarily revenues spectralink wireless voice products acquired first quarter 2007 well increased sales volumes voiceoverip products circuit switched products revenues products acquired spectralink acquisition accounted 1135 million increase 2006 excluding spectralink revenues voice communications segment revenues 2007 increased 19 2006 revenues voice communications segment 2006 increased 35 2005 1880 million due primarily increased sales volumes voiceoverip products circuit switched products lesser extent increases installed voice products international revenues defined revenues outside canada us accounted 36 35 29 total voice communications segment revenues 2007 2006 2005 respectively 2007 2006 one customer accounted 10 total net revenues voice communications segment revenues 2005 one channel partner accounted 11 voice communications segment revenues contribution margin percentage voice communications segment revenues 42 2007 compared 44 2006 decrease contribution margin primarily due lower gross margins due higher mix voiceoverip handset wireless product revenues generally lower gross margin circuit switched installed voice products increased engineering expenses increased percent revenues well absolute dollars 2007 compared 2006 due primarily spectralink acquisition end first quarter 2007 wireless products acquired spectralink lower gross margin consolidated gross margin voice communications products depending upon mix could result lower voice communications gross margins future gross margins wireless products also negatively impacted changes distribution model whereby transitioned certain direct customers resellers purchase distributors may continue direct marketing spending increased absolute dollars 2007 decreasing percentage revenues year contribution margin percentage voice communications segment revenues 44 2006 compared 47 2005 contribution margins decreased primarily result lower gross margins 2006 compared 2005 result increased voiceoverip handset product revenues generally lower gross margin circuit switched installed voice products engineering direct marketing expenses also increased approximately 1 percentage point percent revenues absolute dollars 2006 compared 2005 direct marketing engineering spending voice communications segment fluctuate depending upon timing new product launches marketing programs services revenues services segment 2007 increased 51 2006 1234 million due primarily increased revenues spectralink acquisition first quarter 2007 well increases video solutions related services including video endpoints video network systems increases partially offset decreases voice network systems maintenance services revenues services related products acquired spectralink acquisition accounted 235 million increase year ago period revenues services segment 2006 increased 18 2005 817 million due primarily increase video maintenance services result amortization deferred revenue associated first year service vsx product line increased video network systems services increases partially offset decreases ipowerrelated video services lesser extent decreases voice network systems maintenance services international revenues defined revenues outside canada us accounted 30 34 31 total service revenues 2007 2006 2005 respectively international revenues decreased 2007 compared 2006 primarily result increased service revenues associated voice communications products acquired spectralink acquisition concentrated north america one customer accounted 10 total revenues services segment 2007 2006 2005 overall increase services segment contribution margin percentage service segment revenues 2007 versus 2006 due primarily increased gross margins offsetting increases operating expenses service gross margins increased 2007 compared 2006 result revenue increasing faster pace related service costs overall increase services segment contribution margin percentage service segment revenues 2006 versus 2005 due primarily increased gross margins offsetting increases operating expenses service gross margins increased 2006 compared 2005 result revenue increasing faster pace related service costs service gross margins 2006 also favorably impacted amortization deferred revenue associated first year service vsx v500 products included product price amortized twelve month period following shipment impact due increased volumes products 2006 compared 2005 effective july 1 2006 began separately charge initial year service video conferencing products rather charging one combined price product service liquidity capital resources december 31 2007 principal sources liquidity included cash equivalents 2796 million shortterm investments 627 million longterm investments 323 million substantially shortterm longterm investments comprised us government securities state local government securities corporate debt securities see note 7 notes consolidated financial statements also outstanding letters credit totaling approximately 20 million place satisfy certain facility lease requirements generated cash operating activities totaling 1495 million 2007 1477 million 2006 1174 million 2005 increase cash provided operating activities 2007 2006 due primarily increased net income noncash expenses larger increases accounts payable taxes payable offsetting positive effects larger increase accounts receivable larger increase inventories smaller decrease deferred taxes smaller increase accrued liabilities larger increase prepaid expenses current assets increase cash provided operating activities 2006 2005 due primarily increased net income noncash expenses larger increases accounts payable taxes payable accrued liabilities smaller increase inventories offsetting positive effects larger increase accounts receivable smaller decrease deferred taxes increase prepaid expenses current assets total net change cash equivalents year ended 2007 decrease 368 million primary sources cash 1495 million operating activities 665 million associated exercise stock options purchases employee stock purchase plan 155 million excess tax benefit stock based compensation 1635 million proceeds sales maturities investments net purchases primary uses cash period 2759 million net cash paid acquisitions 1259 million purchases common stock 301 million purchases property equipment positive cash operating activities primarily result net income adjusted noncash expenses items depreciation amortization provision doubtful accounts inventory writedowns excess obsolescence noncash stock based compensation excess tax benefit stock based compensation gain sale discontinued operations amortization unearned stockbased compensation gain strategic investments purchase inprocess research development tax benefits exercise employee stock options reductions deferred taxes net increases accounts payable taxes payable accrued liabilities offsetting positive effect items net increases trade receivables inventories prepaid expenses assets days sales outstanding dso metric 48 days december 31 2007 compared 39 days december 31 2006 increase dso due primarily fluctuations revenue linearity expect dso remain 40 50 day range could vary result number factors fluctuations revenue linearity increase international receivables typically longer payment terms increases receivables service providers government entities longer payment terms 45 60 days respectively compared 30 day terms customers inventory turns decreased slightly 60 turns december 31 2006 59 turns december 31 2007 believe inventory turns fluctuate depending ability reduce lead times well changes product mix greater mix ocean freight versus air freight reduce freight costs additionally payments make income taxes may increase 2008 available net operating losses depleted enter foreign currency forwardexchange contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record balance sheet reporting period fair value forwardexchange contracts record fair value adjustments results operations gains losses associated currency rate changes contracts recorded income expense offsetting transaction gains losses related assets liabilities additionally also hedging program uses forwardexchange contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated israeli shekels reporting period record fair value unrealized forward contracts balance sheet related unrealized gains losses component accumulated comprehensive income separate element stockholders’ equity realized gains losses associated effective portion forwardexchange contracts recorded within revenue operating expense depending upon underlying exposure hedged ineffective portion hedging instrument would recorded income expense part destiny conferencing acquisition destiny shareholders may receive additional 100 million consideration end 2008 payable cash based achievement certain financial milestones relating operating results destiny part dstmedia acquisition dstmedia shareholders may receive additional 200 million consideration end 2008 payable cash based achievement certain financial milestones relating operating results dstmedia time board directors approved plans purchase shares common stock open market years ended december 31 2007 2006 2005 purchased approximately 43 million 48 million 114 million shares respectively common stock open market cash 1257 million 1036 million 1840 million respectively december 31 2007 authorized purchase additional 1400 million 2007 share repurchase plan december 31 2007 open purchase orders related contract manufacturers contractual obligations approximately 1264 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition bank issued letters credit totaling approximately 20 million secure leases offices table set forth shows december 31 2007 future minimum lease payments due current lease obligations total estimated sublease income 2008 less 01 million netted 2008 amounts addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2007 follows thousands discussed note 13 notes consolidated financial statements adopted provisions fin 48 january 1 2007 december 31 2007 liability unrecognized tax benefits accrual related interest totaling 589 million none expected due within next 12 months believe available cash equivalents investments sufficient meet operating expenses capital requirements foreseeable future however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2007 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements additional discussion accounting policies revenue recognition product returns recognize revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally recognize extended service revenue hardware software products ratably service period generally one five years video solutions products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts accordingly account revenue products accordance statement position 972 “software revenue recognition” related interpretations use residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement defer revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements defer revenue sufficient evidence exists elements delivered accrue sales returns allowances reduction revenues upon shipment based upon contractual obligations historical experience channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered coop marketing funds accounted accordance eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” guidelines accrue coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments review allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances writtenoff management determined likelihood collection probable excess obsolete inventory record write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis stockbased compensation expense measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values accordance sfas 123r requires us estimate fair value sharebased payment awards date grant using optionpricing model determination fair value stock option awards date grant using blackscholes optionpricing model affected stock price well assumptions regarding number highly complex subjective variables include limited expected stock price volatility term awards actual projected employee stock option exercise behaviors changes underlying factors assumptions may result significant variability stockbased compensation costs record makes amounts difficult accurately predict value portion award ultimately expected vest recognized expense requisite service period consolidated statements operations prior adoption sfas 123r accounted employee equity awards employee stock purchases using intrinsic value method accordance apb 25 allowed statement financial accounting standards 123 “accounting stockbased compensation” “sfas 123” intrinsic value method stockbased compensation expense recognized consolidated statements operations related acquisitions exercise price stock options granted employees directors equaled fair market value underlying stock date grant deferred refundable taxes estimate actual current tax expense together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2007 464 million net deferred tax assets order fully utilize deferred tax assets need generate sufficient amounts future us taxable income believe based upon financial projections likely generate sufficient future taxable income utilize assets therefore december 31 2007 established valuation allowance assets january 1 2007 adopted provisions fasb interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 “fin 48” clarifies accounting uncertainty income tax positions interpretation requires us recognize consolidated financial statements tax positions determined likely sustained upon adoption decreased reserves uncertain tax positions 126 million 34 million decrease relation interest penalties various tax reserves accounted cumulative adjustment beginning balance retained earnings 92 million decrease related preacquisition tax reserves accounted adjustment goodwill addition recognized certain net operating loss carryovers picturetel recognized previously resulted establishment deferred tax asset 404 million corresponding reduction goodwill continue follow practice recognizing interest penalties related income tax matters part provision income taxes fair value assets acquired liabilities assumed purchase combinations purchase combinations completed require us identify estimate fair value assets acquired including intangible assets goodwill liabilities assumed combinations estimates fair value based business plan entities acquired including planned redundancies restructuring use assets acquired assumptions ultimate resolution obligations assumed future benefit received example spectralink acquisition identified vacated redundant facilities intend sublease intend negotiate lease termination settlement actual use assets resolution obligations differ estimates revisions estimated fair value would required changes occurring estimates allocation period defined statement financial accounting standards 38 “accounting preacquisition contingencies purchased enterprises” would recognized consolidated statements operations actual costs less estimates charges would continue recognized adjustment goodwill purchased intangibles assess impairment goodwill indefinite lived intangibles least annually unless impairment indicators exist sooner assess impairment whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following • significant underperformance relative projected future operating results • significant changes manner use acquired assets strategy overall business • significant negative industry economic trends determine carrying value goodwill indefinite lived intangibles may recoverable based upon existence one indicators impairment would typically measure impairment based projected discounted cash flow method using discount rate determined us commensurate risk inherent current business model fourth quarter 2007 completed annual goodwill impairment test assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date based results impairment tests determined goodwill assets impaired december 31 2007 assess purchased intangibles impairment ongoing basis assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment based events fourth quarters 2007 2006 2005 performed assessment purchased intangibles determined certain purchased intangible assets acquired part voyant acquisition impaired december 31 2007 2006 2005 recorded impairment charges approximately 36 million 14 million 19 million respectively screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests nonmarketable securities periodically make strategic investments companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant write carrying value investment believe investment experienced decline value temporary example date due factors recorded cumulative charges earnings totaling 215 million associated impairment investments including 74 million second quarter 2007 december 31 2007 december 31 2006 strategic investments carrying value 17 million 89 million respectively derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated accounting hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements september 2006 fasb issued statement financial accounting standards 157 sfas 157 “fair value measurements” clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions sfas 157 fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective first quarter 2008 fiscal year yet determined impact implementation sfas 157 financial statements february 2007 financial accounting standards board issued statement financial accounting standards 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” effective fiscal years beginning november 15 2007 statement permits entity choose measure many financial instruments certain items fair value specified election dates subsequent unrealized gains losses items fair value option elected reported earnings currently evaluating potential impact statement december 2007 fasb issued statement financial accounting standards 141 revised 2007 “business combinations” “sfas 141r” sfas 141r changes requirements acquirer’s recognition measurement assets acquired liabilities assumed business combination sfas 141r effective annual periods beginning december 15 2008 applied prospectively business combinations entered date adoption december 2007 fasb issued statement financial accounting standards 160 “noncontrolling interests consolidated financial statementsan amendment arb 51” “sfas 160” sfas 160 requires noncontrolling minority interests reported component shareholders’ equity ii net income attributable parent noncontrolling interest separately identified consolidated statement operations iii changes parent’s ownership interest parent retains controlling interest accounted equity transactions iv retained noncontrolling equity investment upon deconsolidation subsidiary initially measured fair value v sufficient disclosures provided clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective annual periods beginning december 15 2008 applied prospectively however presentation disclosure requirements statement shall applied retrospectively periods presented adoption provisions sfas 160 anticipated materially impact consolidated financial position results operations item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview leading global provider highquality easytouse communications solutions enable enterprise public sector customers effectively collaborate distance time zones organizational boundaries solutions built architectures enable unified voice video content collaboration offerings organized three segments video solutions voice communications solutions services important drivers polycom products current economy need companies reduce costs travel expenses increasing productivity quickly achieving returns investments roi globalization enterprise polycom technologyespecially high definition telepresence video conferencing solutionsis redefining way organizations able communicate thus achieve goals customers also looking polycom solutions help meet goals regarding “green” initiatives comply mandates reduce corporate carbon footprint believe demand solutions meet core business initiatives increase next decade shift circuitswitched telephony networks internet protocol ip based networks enabling new technologies continues significant driver polycom’s collaborative communications markets business high definition hd voice video content another key driver polycom significant improvement quality provided hd enabling telepresence communications models believe approximate inperson communications strategically polycom investing research development sales marketing efforts delivering superior ipbased hd collaborative communications solution using polycom proprietary technology evolving standardsbased ip communications environment goal deliver bestofbreed hd collaborative communications solutions integrate call management system unified communications environment revenues 11 billion 2008 increase 15 2007 revenues 9299 million increase revenues primarily reflects increased sales volumes video solutions voice communications solutions products lesser extent increases service revenues 2008 excluding impact spectralink acquisition 2007 growth rates experienced slower growth 2007 particularly north america voice product lines due part global economic conditions well increased competition fourth quarter 2008 total net revenues declined 5 sequentially third quarter 2008 essentially flat compared fourth quarter 2007 north america experienced sequential yearoveryear declines 12 6 respectively worldwide voice product revenues declined 12 sequentially 13 yearover year video solutions voice communications solutions services segment revenues grew 14 13 26 respectively 2007 accounted 52 33 15 respectively revenues 2008 see note 14 notes consolidated financial statements information segments including summary segment revenues segment contribution margin segment inventory revenue geography believe voice communications solutions products susceptible general economic conditions products lead longer sales cycles voice products fourth quarter 2008 experienced yearoveryear declines voice product revenues particular believe video product lines may better able sustain impact current economic conditions recessionary factors voice products provide return investment profile believe video products provide customers curtailing travel related expenditures economy making voice products susceptible current economic downturn although believe video solutions products offer rapid return investment tightened corporate budgets capital expenditures economic environment likely negatively impact video solutions product revenues gross margins decreased 2008 2007 primarily result acquisitionrelated charges related spectralink acquisition amortization purchased intangibles decreased margins voice communications solutions products due shift product mix toward lower margin voip wireless products hdx rpx products away higher margin infrastructure products effects partially offset increased margins services revenues operating margins increased 2008 2007 primarily result cost control measures implemented fourth quarter 2008 time order control operating expenses given quarter may take actions reduce costs delay limit scope marketing programs projects impose travel restrictions request employees use paid time implement cost control measures may also periodically benefit onetime expense adjustments fourth quarter 2008 operating expenses decreased sequentially third quarter 2008 approximately 20 million including approximately 7 million related cost control measures approximately 5 million stockbased compensation expense approximately 5 million benefit onetime expense adjustments 2008 generated approximately 1670 million cash flow operating activities impact investing share repurchases financing activities described detail “liquidity capital resources” resulted 1139 million net decrease total cash equivalents january 5 2007 completed acquisition destiny conferencing corporation destiny designed manufactured immersive telepresence solutions polycom incorporated destiny’s products rpx telepresence offering prior acquisition terms oem distribution agreement companies products also became foundation tpx telepresence offering result acquisition several patents core telepresence destiny’s results operations included results operations part video solutions services segments january 5 2007 date acquisition march 26 2007 completed acquisition spectralink corporation spectralink designs manufactures sells onpremises wireless telephone products customers worldwide complement existing telephone systems providing mobile communications building campus environment spectralink wireless telephone products increase efficiency employees enabling remain telephone contact moving throughout workplace believe spectralink acquisition positions us independent provider fixed mobile solutions seamlessly encompass voice video data collaboration solutions desktop meeting room mobile individual spectralink’s results operations included results operations part voice communications solutions services segments march 26 2007 date acquisition see notes 2 3 4 notes consolidated financial statements information acquisitions related costs charges discussion results operations consolidated level followed discussion results operations segment three years ended december 31 2008 results operations three years ended december 31 2008 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues total revenues 2008 11 billion increase 1394 million 15 2007 2008 excluding impact spectralink acquisition 2007 growth rates experienced slower growth 2007 particularly voice communication product lines due part global economic conditions well increased competition increase revenues primarily reflects increased sales volumes video solutions voice communications solutions products lesser extent increase service revenues wireless voice products acquired spectralink acquisition accounted approximately 258 million year increase included voice communications solutions services segments video solutions segment revenues include revenues sales video communications infrastructure product lines revenue video communications products increased 4814 million 2008 4083 million 2007 18 increase primarily due increase sales volumes average selling prices group video products consisted primarily vsx hdx product families revenues infrastructure products 2008 787 million decrease 7 compared 2007 revenues 850 million due primarily decreases voice infrastructure revenues partially offset increases revenues video infrastructure products voice communications solutions product revenues increased primarily result increases revenues voiceoverip products well full year revenues wireless voice products acquired spectralink acquisition last week first quarter 2007 services segment revenues increased primarily result increases revenues video communications products increases revenues related products acquired spectralink acquisition lesser extent increases video infrastructure services total revenues 2007 9299 million increase 2475 million 36 2006 revenues wireless voice products acquired spectralink acquisition accounted approximately 1135 million year increase remaining increase revenues primarily reflects increased sales volumes video voice communications solutions products lesser extent increase service revenues infrastructure product revenues essentially flat video solutions segment revenues include revenues sales video communications infrastructure product lines revenue video communications products increased 4083 million 2007 3275 million 2006 25 increase primarily due increase sales volumes average selling prices group video products consisted primarily vsx hdx product families revenues infrastructure products 2007 850 million essentially flat compared 2006 revenues 852 million due primarily increases revenues video infrastructure software product sales substantially offset decreases voice infrastructure revenues infrastructure product revenues impacted decrease video infrastructure product average selling prices due part increased competition voice communications solutions product revenues increased primarily result revenues wireless voice products acquired spectralink acquisition well increases sales volumes voiceoverip circuit switched products services revenues increased primarily due increases voicerelated services result acquired spectralink product lines well increased videorelated services video infrastructure services international sales defined revenues outside canada us accounted 47 44 43 total revenues 2008 2007 2006 respectively regional basis north america europe asia pacific latin america accounted 53 26 18 3 respectively total 2008 revenues north america europe asia pacific latin america revenues increased 8 29 17 23 respectively 2008 2007 revenues north america europe asia pacific latin america increased 2008 2007 result increase video solutions voice communication product revenues increased services revenues 2008 experienced slower growth 2007 particularly north america due part global economic conditions well increased competition regional basis north america europe asia pacific latin america accounted 56 24 17 3 respectively total 2007 revenues north america europe asia pacific latin america revenues increased 35 44 31 40 respectively 2007 2006 excluding spectralink revenues north america europe increased 13 24 respectively 2007 2006 asia pacific latin america significantly impacted spectralink revenues 2007 revenues north america europe asia pacific latin america increased 2007 2006 primarily result increase video voice communication product revenues lesser extent increased services infrastructure revenues 2008 one channel partner accounted 11 video solutions segment revenues one channel partner accounted 10 total net revenues voice communications solutions services segment revenues 2008 2007 one channel partner accounted 10 total net revenues video solutions voice communications solutions services segment revenues 2006 one channel partner accounted 10 total net revenues video solutions segment revenues one channel partner accounted 10 voice communications solutions services segment revenues 2006 believe unlikely loss channel partners would long term material adverse effect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period also sell voice infrastructure products directly endusers revenues video solutions segment endusers subject variability revenues reseller customers typically ship products within short time receive order therefore backlog necessarily good indicator future revenues december 31 2008 605 million order backlog compared 577 million december 31 2007 include backlog open product orders expect ship services expect bill record revenue following quarter billed unrecorded service revenue included deferred revenue believe current level backlog continue fluctuate primarily result level timing orders received customer delivery dates requested outside quarter level backlog given time also dependent part ability forecast revenue mix plan manufacturing accordingly ongoing service deferrals service revenues increase percent total revenue addition orders channel partners based part level demand enduser customers decline uncertainty enduser demand could negatively impact enduser orders turn could negatively affect orders channel partners given quarter result backlog could decline current levels cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments amortization impairment certain intangible assets stockbased compensation costs allocation overhead expenses including facilities costs cost product revenues product gross margins included charges stockbased compensation 24 million 27 million 15 million years ended december 31 2008 2007 2006 respectively generally video solutions segment products higher gross margin products voice communications solutions segment overall product gross margins decreased 1 percentage point 2008 compared 2007 due part increase amortization core existing technology purchased intangibles result spectralink acquisition completed end first quarter 2007 shift product mix toward lower margin voiceoverip hdx rpx products away higher margin infrastructure products partially offset decrease impact purchase accounting adjustments write certain inventory fair value time spectralink acquisition resulted higher product costs recorded certain inventory sold first half 2007 excluding costs allocated segments amortization purchased intangibles stockbased compensation expense fair value adjustments inventory related acquisition accounting gross margins decreased slightly video solutions voice communications solutions segments 2008 compared 2007 gross margins services segment increased slightly 2008 compared 2007 fluctuation segments’ gross margin primarily due changes product mix video solutions gross margins negatively impacted decrease revenues voice infrastructure products typically higher gross margins video communications products lower video solutions gross margin also due lower video communications product gross margins attributable part new video product offerings typically lower gross margins period time introduction due higher component costs technological complexity newer products lower initial production volumes number initiatives focused value engineering design certain hdx products began see positively impact gross margins third quarter 2008 value engineering process production costs reduced activities component redesign board configuration test processes transformation processes launched number new products recent quarters including additional products hdx rpx product lines newer products becoming increasing percentage revenues example hdx rpx products accounted almost half video communications product revenues 2008 compared approximately 22 2007 voiceoverip handset products wireless products acquired spectralink lower gross margin consolidated gross margin voice communications products change mix toward voiceoverip products together increase wireless product revenues resulted lower voice communications solutions gross margins 2008 depending upon product mix sales volumes voice communications solutions gross margins could lower future overall product gross margins decreased 4 percentage points 2007 compared 2006 due part amortization core existing technology purchased intangibles result recent acquisitions increased stockbased compensation costs addition cost product revenues increased result writeup inventory fair value time acquisitions increased costs allocated segments accounted approximately 2 percentage points decrease gross margin 2007 excluding unallocated costs gross margins decreased video solutions voice communications solutions segments 2007 versus comparable 2006 period fluctuation segments’ gross margin primarily due changes product mix voiceoverip handset products wireless products acquired spectralink lower gross margin consolidated gross margin voice communications products resulted lower gross margins 2007 depending upon product mix could result lower voice communications solutions gross margins future gross margins wireless products also negatively impacted changes distribution model whereby transitioned certain direct customers resellers purchase distributors negative impact may continue decrease gross margins video solutions segment primarily due decreased margins video infrastructure products result decreased average selling prices substantially offset higher gross margins group video systems december 31 2008 finished goods inventory levels significantly higher december 31 2007 levels primarily result lower revenues planned difference planned versus actual sales mix products well weaker revenue linearity factors experienced first quarter 2008 however inventory levels decreased sequentially since march 31 2008 inventory turns remained flat improved slightly quarter continue monitor inventory levels closely take actions expect impact reducing inventory improving inventory turns coming quarters inventory levels associated inventory turns future fluctuate depending upon number factors including differences planned versus actual sales mix increase inventory purchases transported via ocean freight versus air freight factors forecasting future product gross margin percentages difficult number risks related ability maintain improve current gross margin levels uncertainties surrounding revenue levels including future potential discounts result economy response strengthening us dollar international markets related production level variances competition changes technology changes product mix variability stockbased compensation costs potential resulting royalties third parties manufacturing efficiencies subcontractors manufacturing purchased price variances warranty recall costs timing sales next quarters cause cost revenues percentage vary significantly addition may experience higher prices commodity components included products addition cost variances associated manufacturing ramp new products writeoff initial inventory purchases due product launch delays lack market acceptance new products could occur would increase cost revenues percentage revenues new products typically lower gross margins period time introduction due higher component costs attributable technological complexity newer products lower initial production volumes launched number new products last several quarters new products becoming increasing percentage revenues also number initiatives focused value engineering design certain hdx products began positively impact gross margins third quarter 2008 addition uncertainties listed cost revenues percentage revenues may increase due change mix distribution channels mix international versus north american revenues cost service revenues service gross margins cost service revenues consists primarily material direct labor including stockbased compensation costs depreciation allocation overhead expenses including facilities costs generally services lower gross margin product gross margins cost service revenues service gross margins included charges stockbased compensation 32 million 34 million 17 million years ended december 31 2008 2007 2006 respectively overall service gross margins increased 2008 2007 primarily result increased videorelated maintenance services benefited economies scale well achieving greater efficiencies product installation implementation services overall service gross margins increased 2007 2006 result revenues increasing faster pace related service costs well shift mix services revenues toward higher margin video maintenance revenues offset partially increased expenses related stockbased compensation service inventory levels december 31 2008 also increased significantly december 31 2007 levels result increase number products service level inventory required service growing installed base forecasting future service gross margin percentages difficult number risks related ability maintain improve current gross margin levels uncertainties surrounding revenue levels including future potential discounts result economy response strengthening us dollar international markets related attach rates new service well maintenance renewal rates utilization professional services personnel develop professional services practice expand offerings ability achieve greater efficiencies installations rpx telepresence product increasing costs freight repair costs timing sales next quarters cause cost services revenues percentage vary quarter sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force stockbased compensation costs advertising promotional expenses product marketing expenses allocation overhead expenses including facilities costs sales marketing expenses except direct marketing expenses allocated segments sales marketing expenses included charges stockbased compensation 112 million 127 million 68 million years ended december 31 2008 2007 2006 respectively sales marketing expense percentage revenue increased 2 percentage points 2008 compared 2007 increase sales marketing expense absolute dollars 2008 2007 due primarily increase compensation costs result increases sales marketing headcount well increases revenue lesser extent increases marketing programs sales marketing headcount increased 14 december 31 2007 december 31 2008 increase sales marketing expenses percentage revenue due primarily significant investments made sales team time required new sales personnel achieve optimal sales productivity levels sales marketing expense percentage revenue increased 1 percentage point 2007 compared 2006 increase sales marketing expense absolute dollars percentage revenues 2007 2006 due primarily increase sales commissions coop marketing charges result increased revenues increases sales marketing headcount due acquisition spectralink expansion sales marketing efforts well increased compensation charges due incentive compensation costs stockbased compensation expense expect sales marketing expenses remain relatively stable absolute dollars result previous investments made increasing sales coverage across markets including emerging markets key vertical markets time expect sales marketing expenses decrease percentage revenue sales productivity new sales personnel increases revenues increase however forecasting sales marketing expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved marketing expenses also fluctuate depending upon timing extent marketing programs market new products also depending upon timing trade shows sales marketing expenses may also fluctuate due increased international expenses impact changes foreign currency exchange rates time order control operating expenses given quarter may take actions reduce costs delay limit scope marketing programs projects impose travel restrictions request employees use paid time implement cost control measures actions may able implemented timely fashion may successful completely offsetting impact lower anticipated revenues research development expenses research development expenses expensed incurred consist primarily compensation costs including stockbased compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development expenses included charges stockbased compensation 98 million 125 million 73 million years ended december 31 2008 2007 2006 respectively research development expenses percentage revenue decreased 2008 compared 2007 primarily due spending decreasing 3 2008 2007 compared revenues increasing 15 2008 2007 decrease absolute dollars 2008 compared 2007 due primarily 26 million decrease stockbased compensation decrease headcount video solutions segment partially offset increase voice communications solutions segment spending spectralink included full year addition increasing percentage research development performed lower cost jurisdictions research development expenses percentage revenue decreased 2007 compared 2006 primarily due spending increasing 22 2007 2006 compared revenues increasing 36 2007 2006 increase absolute dollars 2007 compared 2006 due planned increases program development expenses support increased investment new product initiatives high definition video voice products enhancements infrastructure products well increased compensation charges related increased headcount due acquisition spectralink incentive accruals stockbased compensation expense research development expenses increased 2007 compared 2006 video solutions voice communications solutions segments currently investing research development resources enhance upgrade products comprise unified collaboration communications solutions encompass products services across product lines including enhancements existing infrastructure products address high definition video conferencing market additional voiceoverip wireless products addition investing research development resources support strategic partnerships also anticipate committing greater proportion research development expenses toward enhancing integration interoperability entire video solutions product suite believe technological leadership critical future success committed continuing significant level research development develop new technologies products combat competitive pressures also continued investment new product initiatives require significant research development spending expect research development expenses decrease absolute dollars percentage revenues 2009 2008 continue manage headcount related expenses increasing percentage research development performed lower cost jurisdictions time order control operating expenses given quarter may take actions reduce costs delay limit scope engineering projects impose travel restrictions request employees use paid time implement cost control measures actions may able implemented timely fashion may successful completely offsetting impact lower anticipated revenues general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs professional service fees allocation overhead expenses including facilities costs litigation costs bad debt expense general administrative expenses allocated segments general administrative expenses included charges stockbased compensation 80 million 105 million 60 million years ended december 31 2008 2007 2006 respectively general administrative expenses decreased absolute dollars percentage revenues 2008 compared 2007 decrease spending absolute dollars general administrative 2008 2007 primarily due decreased stockbased compensation charges legal outside services partially offset increased bad debt expense compensation charges related increased headcount well increased facilities information technology costs 2008 decrease stockbased compensation accounted 24 million decrease legal outside services accounted 28 million decrease decreases partially offset increased compensation charges 12 million increased bad debt expense 13 million increased infrastructure costs 19 million remaining changes related numerous smaller items percentage revenues general administrative expenses remained flat 2007 compared 2006 increase spending absolute dollars general administrative 2007 2006 primarily due increased compensation charges related increased headcount spectralink acquisition increased incentive accruals stockbased compensation expense well increased legal project related outside services costs 2007 increase compensation charges including stock compensation costs accounted 89 million increase legal outside services accounted 37 million increase increases infrastructure costs accounted 06 million increase remaining changes related numerous smaller items future charges related costs associated litigation uncollectibility receivables could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing litigation bad debt expense difficult future general administrative expense increases decreases absolute dollars difficult predict due lack visibility certain costs including legal costs associated defending claims us asserting enforcing rights concerning intellectual property portfolio factors believe general administrative expenses likely remain flat absolute dollars percentage revenues 2009 time order control operating expenses given quarter may take actions reduce costs delay limit scope administrative projects impose travel restrictions request employees use paid time implement cost control measures actions may able implemented timely fashion may successful completely offsetting impact lower anticipated revenues acquisition related integration costs recorded charges operations 02 million 2008 43 million 2007 02 million 2006 acquisitionrelated integration costs charges primarily include outside financial advisory accounting legal consulting fees costs directly related integrating acquired companies 2008 2007 charges primarily related professional services costs integrate spectralink acquired march 2007 lesser extent destiny acquired january 2007 charges 2006 primarily related professional services costs integrate dstmedia acquired august 2005 acquire additional businesses future may incur material acquisition expenses related transactions purchased inprocess research development 2007 recorded charges totaling 94 million inprocess research development acquired part acquisition spectralink charges 2008 2006 research development acquired part spectralink acquisition related primarily projects associated enhancements upgrades functionality performance spectralink 6000 spectralink 8000 dect products amount allocated purchased inprocess research development determined management considering among factors established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects acquisition date significant process research development projects completed december 31 2007 amortization impairment purchased intangibles 2008 2007 2006 recorded 71 million 115 million 75 million respectively amortization impairment purchased intangibles acquired acquisitions addition amounts recorded operating expenses 2008 2007 recorded amortization totaling 137 million 109 million respectively related certain technology intangibles cost product revenues purchased intangible assets amortized expense estimated useful lives range several months eight years 2007 2006 36 million 14 million respectively total operating expense related impairment certain intangibles acquired voyant acquisition impairment 2008 decrease absolute dollars 2008 compared 2007 primarily due lower amortization certain intangibles acquired voyant acquisition due impairment fourth quarter 2007 increase absolute dollars 2007 compared 2006 primarily due purchased intangibles spectralink destiny acquisitions early 2007 partially offset decreases related certain purchased intangibles related voyant acquisition becoming fully amortized december 31 2006 evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment based results 2007 2006 impairment assessments determined certain purchased intangible assets acquired part voyant acquisition impaired respective year end periods recorded impairment charges approximately 36 million 14 million respectively 2007 2006 assets written result decline projected future cash flows future products utilize technology acquired acquisition december 31 2008 carrying value purchased intangibles 654 million restructure costs 2008 2007 2006 recorded 103 million 04 million 24 million respectively related restructuring actions resulted elimination relocation various positions part restructuring plans approved management 2008 actions intended streamline focus efforts properly align cost structure projected revenue streams 2007 actions primarily related reorganization video infrastructure divisions one combined business unit video solutions group elimination certain executive positions 2006 actions included relocation asia pacific headquarters hong kong singapore well elimination certain sales administrative functions see note 6 notes consolidated financial statements information restructure costs january 6 2009 announced implementation workforce reduction designed reduce cost structure maintaining flexibility invest strategic growth areas business plan includes elimination approximately 150 positions six percent global workforce reductions taking effect immediately currently expect record restructuring charges make cash expenditures totaling approximately 67 million first quarter 2009 resulting actions primarily related severance employee termination benefits future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed litigation reserves payments 2008 recorded charges totaling 74 million result trial preparation costs fee arrangement outside legal counsel represented us litigation codian pursuant owed additional legal fees based upon favorable outcome achieved first quarter 2008 expenses 2007 2006 see note 9 notes consolidated financial statements information also subject variety claims suits arise time ordinary course business matters subject inherent uncertainties management’s view matters may change future could result charges would material adverse impact financial position results operations cash flows interest income net interest income net consists primarily interest earned cash equivalents investments net bank charges resulting use bank accounts interest income net interest expense 79 million 2008 186 million 2007 212 million 2006 interest income decreased 2008 2007 primarily due lower average cash investment balances due stock repurchase activity 2008 lower average investment returns average interest rate returns cash investments 294 2008 compared 514 2007 interest income decreased 2007 2006 primarily due lower average cash investment balances result net cash paid acquisitions spectralink destiny first quarter 2007 well due stock repurchase activity 2007 partially offset higher average investment returns average interest rate returns cash investments 514 2007 compared 461 2006 interest income net likely fluctuate 2009 due movement cash balances changes market interest rates cash balance could decrease depending upon cash used future acquisitions stock repurchase activity factors income expense net income expense net expense 55 million 2008 compared net expense 07 million 2007 net income 05 million 2006 2008 recognized foreign currency related losses 27 million 10 million related otherthan temporary impairment recognized investments 14 million related taxes licensing extent foreign currency related losses otherthantemporary impairment occur prior years income expense net could fluctuate significantly depending upon foreign exchange fluctuations impairments investments due recent credit crisis changes interest exchange rates underlying cost hedging subject greater fluctuation current economic environment resulted increased amount unrealized losses certain investments could result additional realized losses future current market conditions deteriorate anticipated recovery market values occur gain loss strategic investments strategic reasons made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value review investments impairment events changes circumstances indicate impairment may exist make appropriate reductions carrying value necessary evaluate number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2008 2007 investments carrying value 22 million 17 million respectively recorded “other assets” consolidated balance sheets 2008 2007 2006 made additional investments three private companies totaling 05 million 02 million 30 million respectively 2007 investments permanently written 74 million original cost reflected “gain loss strategic investments” consolidated statements operations writedown 74 million second quarter 2007 based upon evaluation investee’s financial position including cash usage status investee’s business prospects june 30 2007 rights privileges associated investment based evaluation intent june 30 2007 participate round additional funding investee process time determined based upon preferences including liquidation preferences would held senior securities write carrying value zero necessary provision income taxes overall effective tax rates 2008 2007 2006 224 283 300 respectively resulted provision income taxes 219 million 248 million 308 million 2008 2007 2006 respectively decrease effective tax rate 2008 versus 2007 primarily related release 42 million tax reserves related interest penalties due lapse statutes limitation various foreign jurisdictions 2008 combined nondeductibility 2007 inprocess research development acquired spectralink acquisition decrease effective tax rate 2007 versus 2006 due relative increase foreign earnings subject lower tax rates combined settlement certain audits foreign tax authorities substantially offset nondeductibility inprocess research development acquired spectralink acquisition december 31 2008 approximately 37 million tax net operating loss carryforwards 157 million tax credit carryovers well deferred tax assets arising temporary differences addition december 31 2008 valuation allowance 11 million related net operating loss carryforwards certain foreign jurisdictions see note 13 notes consolidated financial statements january 1 2007 adopted fasb interpretation 48 accounting uncertainty income taxes fin 48 fin 48 impact uncertain income tax position income tax expense must recognized largest amount likely sustained uncertain income tax position recognized less 50 likelihood sustained result decreased reserves uncertain tax positions 126 million 34 million decrease relation interest penalties various tax reserves accounted cumulative adjustment beginning balance retained earnings 92 million decrease related preacquisition tax reserves accounted adjustment goodwill adoption date january 1 2007 615 million unrecognized tax benefits 266 million would affect income tax expense recognized remaining balance unrecognized tax benefits 349 million would adjustment goodwill stockholders’ equity addition recognized certain net operating loss carryovers picturetel recognized previously resulted establishment deferred tax asset 404 million corresponding reduction goodwill see note 13 notes consolidated financial statements future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income non taxdeductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies believe future effective tax rate may volatile result factors segment information description products services well annual financial data segment found business section form 10k note 14 notes consolidated financial statements results discussions include results segments years ended december 31 2008 2007 2006 segment contribution margin includes segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing stockbased compensation costs general administrative costs legal accounting costs acquisitionrelated integration costs amortization impairment purchased intangible assets purchase accounting adjustments made inventory purchased inprocess research development costs restructuring costs interest income net expense net video solutions revenues video solutions segment increased 668 million 14 2007 5601 million 2008 revenue video communications products increased 4814 million 2008 4083 million 2007 18 increase primarily due increase sales volumes average selling prices group video products consisted primarily vsx hdx product families increasing adoption high definition hd throughout 2008 hdx products comprised increasing percentage group video units sold contributed higher average selling prices fourth quarter 2008 approximately 60 video communications product revenues derived high definition hdx products versus standard definition vsx products revenues also increased result increased revenues sales rpx tpx telepresence products return investment video may helping drive growth video solutions segment may make segment business resilient current economic environment revenues infrastructure products 2008 787 million decrease 7 compared 2007 revenues 850 million due primarily decreases voice infrastructure product revenues partially offset increases revenues video infrastructure products revenues video solutions segment increased 806 million 20 2006 4933 million 2007 revenue video communications products increased 4083 million 2007 3275 million 2006 25 increase primarily due increase sales volumes average selling prices group video products consisted primarily vsx hdx product families revenues infrastructure products 2007 850 million essentially flat compared 2006 revenues 852 million due primarily increases revenues video infrastructure software product sales substantially offset decreases voice infrastructure revenues infrastructure product revenues impacted decrease video network system average selling prices due part increased competition international revenues defined revenues outside canada us accounted 58 52 49 video solutions segment revenues 2008 2007 2006 respectively 2008 2006 one channel partner accounted 10 total net revenues video solutions segment 2007 one channel partner accounted 10 total net revenues video solutions segment believe unlikely loss one channel partner would long term material adverse effect consolidated revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period contribution margin percentage video solutions segment revenues 48 2008 compared 46 2007 contribution margins increased primarily result engineering expenses decreasing percent revenues absolute dollars partially offset slightly lower gross margins increased direct marketing expenses gross margins decreased primarily due changes product mix video solutions gross margins negatively impacted yearoveryear decrease revenues voice infrastructure products typically higher gross margins video communications products lower video solutions gross margins 2008 compared 2007 also due lower video communications product gross margins due part new products typically lower gross margins period time introduction due higher component costs attributable technological complexity newer products lower initial production volumes recently launched number new products including hdx rpx product lines newer products becoming increasing percentage revenues also number initiatives focused reducing new product costs value engineering design certain hdx products began see positively impact gross margins third quarter 2008 contribution margin percentage video solutions segment revenues 46 2007 compared 45 2006 contribution margins increased primarily result engineering expenses decreasing percent revenues although increasing absolute dollars offset slightly lower gross margins 2007 compared 2006 video infrastructure product lines due part new products typically lower gross margins period time introduction direct marketing expenses increased absolute dollars slightly percent revenues direct marketing engineering spending video solutions segment fluctuate depending upon timing new product launches marketing programs voice communications solutions revenues voice communications solutions segment 2008 increased 13 2007 3537 million due primarily increases sales volumes voiceoverip installed voice products well full year revenues wireless voice products acquired spectralink acquisition first quarter 2007 revenues products acquired spectralink acquisition accounted approximately 43 increase revenues segment partially offset yearoveryear decreases revenues circuitswitch products 2008 excluding impact spectralink acquisition 2007 growth rates experienced slower growth 2007 voice product lines due part global economic conditions example fourth quarter 2008 worldwide voice product revenues declined 12 third quarter 2008 13 compared fourth quarter 2007 voice products provide return investment profile believe video solutions products provide customers curtailing travel related expenditures economy making voice products susceptible current economic downturn revenues voice communications solutions segment 2007 increased 67 2006 3132 million due primarily revenues spectralink wireless voice products acquired first quarter 2007 well increased sales volumes voiceoverip products circuit switched products revenues products acquired spectralink acquisition accounted 1135 million increase 2006 excluding spectralink revenues voice communications solutions segment revenues 2007 increased 19 2006 international revenues defined revenues outside canada us accounted 37 36 35 total voice communications solutions segment revenues 2008 2007 2006 respectively 2008 2007 2006 one customer accounted 10 total net revenues voice communications solutions segment revenues contribution margin percentage voice communications segment revenues 42 2008 2007 contribution margin remained flat primarily due lower gross margins partially offset engineering expenses decreasing percent revenues although increasing absolute dollars decrease gross margins due higher mix voiceoverip handset wireless product revenues generally lower gross margin circuit switched installed voice products engineering expenses increased absolute dollars primarily result spectralink acquisition completed last week first quarter 2007 direct marketing spending increased absolute dollars 2008 remaining flat percentage revenues compared 2007 contribution margin percentage voice communications solutions segment revenues 42 2007 compared 44 2006 decrease contribution margin primarily due lower gross margins due higher mix voiceoverip handset wireless product revenues generally lower gross margin circuit switched installed voice products increased engineering expenses increased percent revenues well absolute dollars 2007 compared 2006 due primarily spectralink acquisition end first quarter 2007 gross margins wireless products also negatively impacted changes distribution model whereby transitioned certain direct customers resellers purchase distributors may continue direct marketing spending increased absolute dollars 2007 decreasing percentage revenues year direct marketing engineering spending voice communications solutions segment fluctuate depending upon timing new product launches marketing programs services revenues services segment increased 26 2008 2007 1556 million due primarily increased videorelated services lesser extent increased video infrastructure product related services addition full year revenues services related products acquired spectralink acquisition accounted 26 increase year ago period revenues services segment 2007 increased 51 2006 1234 million due primarily increased revenues spectralink acquisition first quarter 2007 well increases video solutions related services including video endpoints video infrastructure increases partially offset decreases voice infrastructure maintenance services revenues services related products acquired spectralink acquisition accounted 235 million increase year ago period international revenues defined revenues outside canada us accounted 34 30 34 total service revenues 2008 2007 2006 respectively one customer accounted 10 total revenues services segment 2008 2007 2006 overall services segment contribution margin remained flat percentage service segment revenues 2008 versus 2007 gross margins operating expenses essentially flat percentage revenues gross margins impacted increased service costs including increased headcountrelated costs repair costs shipping costs service gross margins negatively impacted 2008 negative gross margins installation rpx telepresence product expect improve margins product installations train additional personnel achieve greater efficiencies well evaluate pricing model overall increase services segment contribution margin percentage service segment revenues 2007 versus 2006 due primarily increased gross margins offsetting increases operating expenses service gross margins increased 2007 compared 2006 result revenue increasing faster pace related service costs liquidity capital resources december 31 2008 principal sources liquidity included cash equivalents 1657 million shortterm investments 1524 million longterm investments 64 million cash equivalents includes cash bank approximately 647 million remaining 1010 million comprised primarily highly liquid investments commercial paper us government securities time deposits savings accounts money market funds corporate debt securities original maturities 90 days less time purchase substantially shortterm longterm investments comprised us government securities corporate debt securities corporate preferred equity securities see note 7 notes consolidated financial statements also outstanding letters credit totaling approximately 12 million place satisfy certain facility lease requirements total cash equivalents investments held united states totaled 1561 million december 31 2008 remaining 1684 million held outside united states various foreign subsidiaries would need access cash equivalents investments held outside united states order fund acquisitions share repurchases working capital needs may subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes generated cash operating activities totaling 1670 million 2008 1495 million 2007 1477 million 2006 increase cash provided operating activities 2008 2007 due primarily increased net income noncash expenses decrease accounts receivable larger increase accrued liabilities offsetting positive effects larger increase inventories large decrease accounts payable larger increase prepaid expenses current assets larger increase accrued liabilities increase cash provided operating activities 2007 2006 due primarily increased net income noncash expenses larger increases accounts payable taxes payable offsetting positive effects larger increase accounts receivable larger increase inventories smaller decrease deferred taxes smaller increase accrued liabilities larger increase prepaid expenses current assets total net change cash equivalents year ended 2008 decrease 1139 million primary sources cash 1670 million operating activities 521 million associated exercise stock options purchases employee stock purchase plan primary uses cash period 2226 million purchases common stock 675 million purchases investments net proceeds sales maturities investments 475 million purchases property equipment positive cash operating activities primarily result net income adjusted noncash expenses items depreciation amortization provision doubtful accounts inventory writedowns excess obsolescence noncash stock based compensation excess tax benefit stock based compensation tax benefits exercise employee stock options reductions deferred taxes net increases accounts receivables taxes payable accrued liabilities offsetting positive effect items net decreases accounts payable increases inventories prepaid expenses assets days sales outstanding dso metric 44 days december 31 2008 compared 48 days december 31 2007 expect dso remain 40 50 day range could vary result number factors fluctuations revenue linearity increase international receivables typically longer payment terms increases receivables service providers government entities longer payment terms 45 60 days respectively compared 30 day terms customers dso could negatively impacted current economic environment partners experience difficulty financing purchases results delays payment us inventory turns decreased 59 turns december 31 2007 49 turns december 31 2008 decrease inventory turns result significant growth finished goods inventory levels year primarily result lower revenues planned difference planned versus actual sales mix products well weaker revenue linearity growth service inventory levels factors believe inventory turns fluctuate depending ability reduce lead times well changes product mix greater mix ocean freight versus air freight reduce freight costs enter foreign currency forwardexchange contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record balance sheet reporting period fair value forwardexchange contracts record fair value adjustments results operations gains losses associated currency rate changes contracts recorded income expense offsetting transaction gains losses related assets liabilities additionally hedging costs vary depending upon size hedge program whether purchasing selling foreign currency relative us dollar interest rate spreads us foreign markets may subject greater fluctuations less predictability due recent credit crisis additionally also hedging program uses forwardexchange contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated israeli shekels reporting period record fair value unrealized forward contracts balance sheet related unrealized gains losses component accumulated comprehensive income separate element stockholders’ equity realized gains losses associated effective portion forwardexchange contracts recorded within revenue operating expense depending upon underlying exposure hedged ineffective portion hedging instrument would recorded income expense time board directors approved plans us purchase shares common stock discretion open market years ended december 31 2008 2007 2006 purchased approximately 89 million 43 million 48 million shares respectively common stock open market cash 2200 million 1257 million 1036 million respectively december 31 2008 authorized purchase additional 2200 million 2008 share repurchase plan december 31 2008 open purchase orders related contract manufacturers contractual obligations approximately 968 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition bank issued letters credit totaling approximately 12 million secure leases offices table set forth shows december 31 2008 future minimum lease payments due current lease obligations total estimated sublease income 2009 less 01 million netted 2009 amounts addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2008 follows thousands discussed note 13 notes consolidated financial statements adopted provisions fin 48 january 1 2007 december 31 2008 liability unrecognized tax benefits accrual related interest totaling 559 million included table timing payments cannot reasonably estimated believe available cash equivalents investments sufficient meet operating expenses capital requirements least next twelve months however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources additional financing may available particularly current credit environment available financing may obtainable terms favorable us could dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2008 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements additional discussion accounting policies revenue recognition product returns recognize revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally recognize extended service revenue hardware software products ratably service period generally one five years video solutions products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts accordingly account revenue products accordance statement position 972 “software revenue recognition” related interpretations use residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement defer revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements defer revenue sufficient evidence exists elements delivered accrue sales returns allowances reduction revenues upon shipment based upon contractual obligations historical experience channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered coop marketing funds accounted accordance eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” guidelines accrue coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments review allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances writtenoff management determined likelihood collection probable excess obsolete inventory record write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis stockbased compensation expense measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values accordance sfas 123r requires us estimate fair value sharebased payment awards date grant using optionpricing model determination fair value stock option awards date grant using blackscholes optionpricing model affected stock price well assumptions regarding number highly complex subjective variables include limited expected stock price volatility term awards actual projected employee stock option exercise behaviors changes underlying factors assumptions may result significant variability stockbased compensation costs record makes amounts difficult accurately predict value portion award ultimately expected vest recognized expense requisite service period consolidated statements operations deferred refundable taxes estimate actual current tax expense together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2008 458 million net deferred tax assets included net deferred tax asset balance 11 million valuation allowance recorded 2008 related net operating losses generated certain foreign jurisdictions january 1 2007 adopted provisions fasb interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 “fin 48” clarifies accounting uncertainty income tax positions interpretation requires us recognize consolidated financial statements tax positions determined likely sustained upon adoption decreased reserves uncertain tax positions 126 million 34 million decrease relation interest penalties various tax reserves accounted cumulative adjustment beginning balance retained earnings 92 million decrease related preacquisition tax reserves accounted adjustment goodwill addition recognized certain net operating loss carryovers picturetel recognized previously resulted establishment deferred tax asset 404 million corresponding reduction goodwill continue follow practice recognizing interest penalties related income tax matters part provision income taxes fair value assets acquired liabilities assumed purchase combinations purchase combinations completed require us identify estimate fair value assets acquired including intangible assets goodwill liabilities assumed combinations estimates fair value based business plan entities acquired including planned redundancies restructuring use assets acquired assumptions ultimate resolution obligations assumed future benefit received example spectralink acquisition identified vacated redundant facilities intend sublease intend negotiate lease termination settlement actual use assets resolution obligations differ estimates revisions estimated fair value would required changes occurring estimates allocation period defined statement financial accounting standards 38 “accounting preacquisition contingencies purchased enterprises” would recognized consolidated statements operations actual costs less estimates charges would continue recognized adjustment goodwill purchased intangibles assess impairment goodwill indefinite lived intangibles least annually unless impairment indicators exist sooner assess impairment whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following • significant underperformance relative projected future operating results • significant changes manner use acquired assets strategy overall business • significant negative industry economic trends determine carrying value goodwill indefinite lived intangibles may recoverable based upon existence one indicators impairment would typically measure impairment based projected discounted cash flow method using discount rate determined us commensurate risk inherent current business model fourth quarter 2008 completed annual goodwill impairment test assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date based results impairment tests determined goodwill assets impaired december 31 2008 assess purchased intangibles impairment ongoing basis assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment based events fourth quarters 2007 2006 performed assessment purchased intangibles determined certain purchased intangible assets acquired part voyant acquisition impaired december 31 2007 2006 recorded impairment charges approximately 36 million 14 million respectively impairment charges recorded 2008 impairment indicators existed screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests nonmarketable securities periodically make strategic investments companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant write carrying value investment believe investment experienced decline value temporary example date due factors recorded cumulative charges earnings totaling 215 million associated impairment investments including 74 million second quarter 2007 december 31 2008 december 31 2007 strategic investments carrying value 22 million 17 million respectively derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated accounting hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements april 2008 financial accounting standards board released fasb staff position fsp fas 1423 determination useful life intangible assets fsp amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” sfas 142 objective fsp improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r principles gaap fsp applies intangible assets whether acquired business combination otherwise shall effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years applied prospectively intangible assets acquired effective date early adoption prohibited since guidance applied prospectively adoption impact current consolidated financial statements march 2008 financial accounting standards board issued statement financial accounting standards 161 “sfas 161” “disclosures derivative instruments hedging activities” sfas 161 requires companies derivative instruments disclose information enable financialstatement users understand company uses derivative instruments derivative instruments related hedged items affect company’s financial position financial performance cash flows sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 sfas 161 requires additional disclosure adoption impact consolidated financial position results operations cash flows december 2007 financial accounting standards board issued statement financial accounting standards 141 revised 2007 “sfas 141r” “business combinations” sfas 141r change business acquisitions accounted impact financial statements acquisition date subsequent periods provisions sfas 141r effective beginning 2009 exception adjustments made acquired tax contingencies future adjustments made acquired tax contingencies associated acquisitions closed prior beginning 2009 would apply provisions sfas 141r evaluated based outcome matters expect adoption sfas 141r material impact consolidated financial statements december 2007 financial accounting standards board issued statement financial accounting standards 160 “sfas 160” “noncontrolling interests consolidated financial statements” amendment accounting research bulletin 51” sfas 160 change accounting reporting minority interests recharacterized noncontrolling interests classified component equity sfas 160 effective financial statements issued fiscal years beginning december 15 2008 early adoption permitted since guidance applied prospectively adoption impact current consolidated financial statements september 2006 financial accounting standards board issued statement financial accounting standards 157 “sfas 157” “fair value measurements” sfas 157 defines fair value establishes framework gives guidance regarding methods used measuring fair value expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods fiscal years february 2008 fasb released fasb staff position fsp fas 1572effective date fasb statement 157 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fiscal years beginning november 15 2008 nonfinancial items include assets liabilities reporting units measured fair value goodwill impairment test nonfinancial assets acquired liabilities assumed business combination partial adoption sfas 157 january 1 2008 financial assets liabilities material impact consolidated financial position results operations cash flows see note 7 notes condensed consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview leading provider highquality easytouse unified communications uc solutions enable enterprise government education healthcare customers collaborate effectively solutions built architectures enable unified video voice content collaboration polycom uses open standards removes distance organizational barriers enable dispersed work teams easily meet collaborate via video voice communications devices choose bringing people together efficiently increasing productivity business operates three segments video communications solutions voice communications solutions services video communications solutions segment comprised video communications products telepresence room desktop personal video conferencing products network systems products uc media servers network management security streaming recording solutions voice communications solutions segment includes conference phone products wired desktop voice products wireless handset voice products services segment encompasses maintenance contracts products well wide range professional service support offerings customers channels strategic partners 2009 video communications solutions along attached services comprised 69 polycom revenues voice communications solutions along attached services comprised remaining 31 revenues important drivers adoption polycom uc solutions include 1 return investment roi achieved productivity gains faster decisionmaking reduction travel costs 2 significant improvement quality customer experience immersive telepresence high definition video voice solutions 3 ease connectivity businesstobusiness emerging cloudbased solutions 4 environmental “green” benefits using polycom’s solutions based drivers polycom’s increasingly unique position large collaboration independent solutions provider launched strategic investment plan capture strong position growing uc collaboration market believe polycom opportunity serve pivotal role broader communications ecosystem provide integrated collaboration solution regardless call management presencebased solution particular customer adopted best capitalize factors announced strategic investment plan fourth quarter 2009 executing five core strategic initiatives capture collaboration market opportunity optimize position partner choice global communications providers provider choice customers initiatives include enhancements gotomarket capability building strategic partnerships companies avaya broadsoft hewlettpackard ibm juniper microsoft siemens focusing service providers’ enhanced sellthrough well specific products services support growing offerings managed hosted space innovation surrounding telepresence solutions expansion professional services practice revenues 2009 9670 million decrease 1023 million 10 2008 decrease revenues primarily reflects significant decrease sales volumes voice communications solutions products lesser extent decrease sales video communication products partially offset increases network systems product sales increases service revenues believe overall decrease revenues primarily due global economic climate resulted longer sales cycles delays new equipment purchases particularly voice communications solutions segment although believe video communications solutions products better able sustain impact current economic conditions offer rapid return investment tightened corporate budgets reduced capital expenditures 2009 also negatively impacted video communications solutions product revenues video communications solutions segment accounted 54 revenues 2009 decreased 7 compared 2008 voice communication solutions segment accounted 28 revenues 2009 decreased 24 compared 2008 services segment revenues accounted 18 revenues 2009 increased 13 compared 2008 geographically revenues decreased 11 15 9 north america emea europe middle east africa latin america respectively 2009 2008 asia pacific revenues increased 1 2009 2008 see note 14 notes consolidated financial statements information segments including summary segment revenues segment contribution margin segment inventory revenue geography revenues decreased yearoveryear across many product lines geographies business improved sequentially across product lines geographies returned overall yearoveryear growth fourth quarter 2009 despite recent signs stabilization continue cautious future outlook light global economic climate gross margins decreased 1 percentage point 2009 compared 2008 due primarily lower sales volumes video communications solutions voice communications products shift product mix toward lower margin products partially offset higher gross margins network systems products increased margins services segment revenues however increase service segment revenues percentage total revenues contributed overall decrease gross margins 2009 compared 2008 service gross margins lower product gross margins operating margins decreased 2009 2008 primarily result lower gross margins operating expenses increasing percentage revenues operating expenses decreased absolute dollars 9 2009 compared 2008 revenues decreased 10 period took actions including certain restructuring actions realign reinvest resources strategic growth areas business order control operating expenses 2009 took actions reduce costs delaying limiting scope engineering marketing programs projects imposing travel restrictions postponed salary increases requested employees use paid time implemented cost control measures actions necessarily sustainable long term need increase spending order maintain build business future periods among factors may negatively impact operating margins particularly reinstatement merit increases currently planned third quarter 2010 bonus programs currently plan phase commencing second quarter 2010 elimination encouraged paid timeoff programs 2010 also plan significantly increase spending levels sales marketing lesser extent research development general administrative areas part strategic investment plan increased investment level lower profits shortterm designed yield increased growth revenues profitability future 2009 generated approximately 1808 million cash flow operating activities impact investing share repurchases financing activities described detail “liquidity capital resources” resulted 1654 million net increase total cash equivalents see notes 2 3 4 notes consolidated financial statements information acquisitions related costs charges discussion results operations consolidated level followed discussion results operations segment three years ended december 31 2009 results operations three years ended december 31 2009 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues total revenues 2009 9670 million decrease 1023 million 10 2008 decrease revenues primarily reflects significant decrease sales volumes voice communications products lesser extent decreases sales video communications solutions products partially offset increase service revenues video communications solutions segment revenues include revenues sales video communications network systems product lines revenue video communications products decreased 4268 million 2009 4814 million 2008 11 decrease revenue decrease primarily due decrease sales volumes vsx® product family lesser extent lower sales revenues rpx immersive telepresence products partially offset increases sales volumes hdx® product family new products polycom® cx5000 qdx™ 6000 video communications solutions revenues network systems products 2009 965 million increase 23 compared 2008 revenues 787 million due primarily increases video network systems software revenues driven primarily introduction new products enhancements existing products voice communications solutions segment revenues decreased 24 2008 2682 million due primarily lower sales volumes voice communications products including circuitswitched wireless voiceoverip conference phones installed voice product lines revenues voice communications solutions declined yearoveryear since fourth quarter 2008 believe declines primarily result global economic climate business improve economy improves third quarter 2009 experienced sequential growth first time since second quarter 2008 voice communication revenues growing 15 second quarter 2009 fourth quarter 2009 voice communication revenues continued show sequential growth growing 4 third quarter 2009 resulting yearoveryear decline quarter 6 compared doubledigit yearoveryear declines 21 34 experienced first three quarters 2009 services segment revenues increased 1755 million 199 million 13 due primarily increases videorelated services lesser extent increased network systemsrelated services partially offset decrease voicerelated services total revenues 2008 11 billion increase 1394 million 15 2007 2008 excluding impact spectralink acquisition 2007 growth rates experienced slower growth 2007 particularly voice communication product lines due part global economic conditions well increased competition increase revenues primarily reflects increased sales volumes video communications solutions voice communications solutions products lesser extent increase service revenues wireless voice products acquired spectralink acquisition accounted approximately 258 million year increase included voice communications solutions services segments revenue video communications products increased 4814 million 2008 4083 million 2007 18 increase primarily due increase sales volumes average selling prices group video products consisted primarily vsx hdx product families revenues network systems products 2008 787 million decrease 7 compared 2007 revenues 850 million due primarily decreases voice network systems revenues partially offset increases revenues video network systems products voice communications solutions product revenues increased primarily result increases revenues voiceoverip products well full year revenues wireless voice products acquired spectralink acquisition last week first quarter 2007 services segment revenues increased primarily result increases revenues video communications products increases revenues related products acquired spectralink acquisition lesser extent increases video network systems services international sales defined revenues outside canada us accounted 48 47 44 total revenues 2009 2008 2007 respectively regional basis north america emea asia pacific latin america accounted 52 25 20 3 respectively total 2009 revenues north america emea latin america revenues decreased 11 15 9 respectively 2009 2008 asia pacific revenues increased 1 2009 2008 revenue decreases across geographic regions primarily voice communications solutions segment video communications products partially offset increases video network systems products service segment revenues although asia pacific also experienced declines revenue voice communications solutions segment revenues video communications products essentially flat yearoveryear declines voice communications solutions segment revenues offset growth video network systems products service revenues yearoveryear regional basis north america emea asia pacific latin america accounted 53 26 18 3 respectively total 2008 revenues north america emea asia pacific latin america revenues increased 8 29 17 23 respectively 2008 2007 revenues north america emea asia pacific latin america increased 2008 2007 result increase video communications voice communication product revenues increased services revenues 2008 experienced slower growth 2007 particularly north america due part global economic conditions well increased competition 2009 one channel partner accounted 10 total net revenues video communications solutions voice communication solutions segment revenues one channel partner accounted 10 service segment revenues 2008 one channel partner accounted 10 video communications solutions segment revenues one channel partner accounted 10 total net revenues voice communications solutions services segment revenues 2008 2007 one channel partner accounted 10 total net revenues video communications solutions voice communications solutions services segment revenues believe unlikely loss channel partners would long term material adverse effect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period typically ship products within short time receive order therefore consider backlog good indicator future revenues december 31 2009 691 million order backlog compared 605 million december 31 2008 include backlog open product orders expect ship services expect bill expect record revenue following quarter billed unrecorded service revenue included deferred revenue earned believe current level backlog continue fluctuate primarily result level timing orders received customer delivery dates requested outside quarter level backlog given time also dependent part ability forecast revenue mix plan manufacturing accordingly ongoing service deferrals service revenues increase percent total revenue addition orders channel partners based part level demand enduser customers decline uncertainty enduser demand could negatively impact enduser orders turn could negatively affect orders channel partners given quarter result backlog could decline current levels cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments amortization impairment certain intangible assets stockbased compensation costs allocation overhead expenses including facilities costs generally video communications solutions segment products higher gross margin products voice communications solutions segment cost product revenues product gross margins included charges stockbased compensation 19 million 24 million 27 million years ended december 31 2009 2008 2007 respectively overall product gross margins decreased 1 percentage point 2009 compared 2008 due decreases gross margins video communications solutions voice communications solutions segments decrease video communications solutions segment gross margins primarily due lower gross margins video communications products due shift product mix toward lower margin products lower sales volumes video communications products partially offset higher gross margins network systems products decrease voice communication solutions segment gross margins due primarily lower sales volumes particularly wireless circuitswitched product lines mix shift toward lower margin products voiceoverip handsets overall product gross margins decreased 1 percentage point 2008 compared 2007 due part increase amortization core existing technology purchased intangibles result spectralink acquisition completed end first quarter 2007 shift product mix toward lower margin voiceoverip hdx rpx products away higher margin network systems products partially offset decrease impact purchase accounting adjustments write certain inventory fair value time spectralink acquisition resulted higher product costs recorded certain inventory sold first half 2007 excluding costs allocated segments amortization purchased intangibles stockbased compensation expense fair value adjustments inventory related acquisition accounting gross margins decreased slightly video communications solutions voice communications solutions segments 2008 compared 2007 fluctuation segments’ gross margin primarily due changes product mix video communications solutions gross margins negatively impacted decrease revenues voice network systems products typically higher gross margins video communications products lower video communications solutions gross margin also due lower video communications product gross margins attributable part new video product offerings typically lower gross margins period time introduction due higher component costs technological complexity newer products lower initial production volumes december 31 2009 finished goods inventory levels lower december 31 2008 levels primarily due lower planned build result lower revenues inventory turns improved 2009 compared 2008 inventory turns future may fluctuate depending upon number factors including differences planned versus actual sales mix increase inventory purchases transported via ocean freight versus air freight factors sustainability global economic recovery expect product gross margins remain relatively flat near term margins could higher lower depending mix variations factors forecasting future product gross margin percentages difficult number risks related ability maintain improve current gross margin levels uncertainties surrounding revenue levels including future potential discounts result economy response strengthening us dollar international markets related production level variances competition changes technology changes product mix variability stockbased compensation costs potential resulting royalties third parties manufacturing efficiencies subcontractors manufacturing purchased price variances warranty recall costs timing sales cause cost revenues percentage vary significantly addition may experience higher prices commodity components included products cost service revenues service gross margins cost service revenues consists primarily material direct labor including stockbased compensation costs depreciation allocation overhead expenses including facilities costs generally services lower gross margin product gross margins cost service revenues service gross margins included charges stockbased compensation 28 million 32 million 34 million years ended december 31 2009 2008 2007 respectively overall service gross margins increased 2009 2008 primarily result revenues increasing faster pace related service costs well shift mix services revenues toward higher margin video maintenance revenues addition increase service segment revenues percentage total revenues contributed overall decrease gross margins 2009 compared 2008 service gross margins lower product gross margins overall service gross margins increased 2008 2007 primarily result increased videorelated maintenance services benefited economies scale well achieving greater efficiencies product installation implementation services forecasting future service gross margin percentages difficult number risks related ability maintain improve current gross margin levels uncertainties surrounding revenue levels including future pricing andor potential discounts result economy response strengthening us dollar international markets related attach rates new service well maintenance renewal rates utilization professional services personnel develop professional services practice make investments expand professional services offerings part recently announced strategic investment plan ability achieve greater efficiencies installations rpx™ telepresence product increasing costs freight repair costs timing sales cause cost services revenues percentage vary quarter order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force stockbased compensation costs advertising promotional expenses product marketing expenses allocation overhead expenses including facilities costs sales marketing expenses except direct marketing expenses allocated segments sales marketing expenses included charges stockbased compensation 105 million 112 million 127 million years ended december 31 2009 2008 2007 respectively sales marketing expense percentage revenue increased 2 percentage points 2009 compared 2008 due primarily lower revenue due global economic conditions sales marketing expense decreased absolute dollars 2009 2008 due primarily decrease compensation costs primarily commissions result decreases revenue lower travel entertainment expenses reduced spending marketing programs well decreased recruitment training costs partially offset increased spending demonstration equipment facilities sales marketing expenses percentage revenue increased 2 percentage points 2008 compared 2007 increase sales marketing expense absolute dollars 2008 2007 due primarily increase compensation costs result increases sales marketing headcount well increases revenue lesser extent increases marketing programs sales marketing headcount increased 14 december 31 2007 december 31 2008 increase sales marketing expenses percentage revenue due primarily significant investments made sales team time required new sales personnel achieve optimal sales productivity levels expect sales marketing expenses increase absolute dollars near term result incurring costs recruit hire new sales marketing personnel expenses also likely increase future revenues increase also make additional investments sales marketing result strategic investment plan support key initiatives surrounding enhancing gotomarket capability increasing strategic partnerships focusing service providers’ enhanced sellthrough well specific products services support growing offerings managed hosted space order extend market reach grow business forecasting sales marketing expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter marketing expenses also fluctuate depending upon timing extent marketing programs market new products also depending upon timing trade shows sales marketing expenses may also fluctuate due increased international expenses impact changes foreign currency exchange rates order control operating expenses given quarter taken actions reduce costs delaying limiting scope marketing programs projects imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may implemented timely manner may successful completely offsetting impact lower anticipated revenues actions necessarily sustainable long term increase spending order maintain build business future periods among factors may negatively impact operating margins particularly reinstatement merit increases currently planned third quarter 2010 bonus programs currently plan phase commencing second quarter 2010 elimination encouraged paid timeoff programs research development expenses research development expenses expensed incurred consist primarily compensation costs including stockbased compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development expenses included charges stockbased compensation 77 million 98 million 125 million years ended december 31 2009 2008 2007 respectively research development expenses decreased 2009 177 million 13 percentage revenue 1 percentage point compared 2008 decrease absolute dollars primarily due decreases headcount primarily voice communications segment decreased program development expenses control costs video communications solutions voice communications segments stockbased compensation costs also decreased 22 million 2009 2008 addition continued increase percentage research development performed lower cost jurisdictions research development expenses percentage revenue decreased 2008 compared 2007 primarily due spending decreasing 3 2008 2007 compared revenues increasing 15 2008 2007 decrease absolute dollars 2008 compared 2007 due primarily 26 million decrease stockbased compensation decrease headcount video communications solutions segment partially offset increase voice communications solutions segment spending spectralink included full year addition increasing percentage research development performed lower cost jurisdictions currently investing research development resources enhance upgrade products comprise collaboration communications solutions encompass products services three segments including enhancements existing network systems products address high definition video conferencing market including immersive telepresence products additional voiceoverip products also anticipate committing greater proportion research development expenses toward enhancing integration interoperability entire video communications product suite also currently planning invest heavily research development result increased business opportunities strategic partners service provider customers result key strategic initiatives areas well key vertical markets us federal government believe technological leadership critical future success committed continuing significant level research development develop new technologies products combat competitive pressures also continued investment new product initiatives require significant research development spending expect research development expenses absolute dollars increase near term fluctuate depending timing number development activities given quarter research development expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter order control operating expenses given quarter taken actions reduce costs delaying limiting scope engineering projects imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may implemented timely manner may successful completely offsetting impact lower anticipated revenues actions necessarily sustainable long term need increase spending order maintain build business future periods among factors may negatively impact operating margins particularly reinstatement merit increases currently planned third quarter 2010 bonus programs currently plan phase commencing second quarter 2010 elimination encouraged paid timeoff programs general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs professional service fees allocation overhead expenses including facilities costs litigation costs bad debt expense general administrative expenses allocated segments general administrative expenses included charges stockbased compensation 75 million 80 million 105 million years ended december 31 2009 2008 2007 respectively general administrative expenses decreased absolute dollars remained flat percentage revenues 2009 compared 2008 decrease spending absolute dollars general administrative primarily due decreased compensation charges reductions outside services travel training costs reduced bad debt expenses general administrative expenses decreased absolute dollars percentage revenues 2008 compared 2007 decrease spending absolute dollars general administrative 2008 2007 primarily due decreased stockbased compensation charges legal outside services partially offset increased bad debt expense compensation charges related increased headcount well increased facilities information technology costs significant future charges due costs associated litigation uncollectibility receivables could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing litigation bad debt expense associated uncollectible receivables difficult future general administrative expense increases decreases absolute dollars difficult predict due lack visibility certain costs including legal costs associated defending claims us well legal costs associated asserting enforcing intellectual property portfolio factors believe general administrative expenses increase absolute dollar amounts near term could fluctuate make investments enhancements financial operating systems costs related supporting larger company increased costs associated regulatory requirements continued investments international regions general administrative expenses also increase result additional investments required support key strategic initiatives including adding additional infrastructure support increased gotomarket capability focus service providers order control operating expenses given quarter taken actions reduce costs delaying limiting scope administrative projects imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may implemented timely manner may successful completely offsetting impact lower anticipated revenues actions necessarily sustainable long term need increase spending order maintain build business future periods among factors may negatively impact operating margins particularly reinstatement merit increases currently planned third quarter 2010 bonus programs currently plan phase commencing second quarter 2010 elimination encouraged paid timeoff programs acquisition related integration costs recorded charges operations 02 million 2008 43 million 2007 acquisitionrelated integration costs charges 2009 charges primarily include outside financial advisory accounting legal consulting fees costs directly related integrating acquired companies 2008 2007 charges primarily related professional services costs integrate spectralink acquired march 2007 lesser extent destiny acquired january 2007 acquire additional businesses future may incur material acquisition expenses related transactions purchased inprocess research development 2007 recorded charges totaling 94 million inprocess research development acquired part acquisition spectralink charges 2009 2008 research development acquired part spectralink acquisition related primarily projects associated enhancements upgrades functionality performance spectralink 6000 spectralink 8000 dect products amount allocated purchased inprocess research development determined management considering among factors established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects acquisition date significant process research development projects completed december 31 2007 amortization impairment purchased intangibles 2009 2008 2007 recorded 58 million 71 million 115 million respectively amortization impairment purchased intangibles acquired acquisitions addition amounts recorded operating expenses 2009 2008 2007 recorded amortization totaling 135 million 137 million 109 million respectively related certain technology intangibles cost product revenues purchased intangible assets amortized expense estimated useful lives range several months eight years 2007 36 million total operating expense related impairment certain intangibles acquired voyant acquisition impairment 2009 2008 decrease absolute dollars 2009 compared 2008 primarily due lower amortization result certain intangibles acquired voyant dstmedia acquisitions becoming fully amoritized end 2008 decrease absolute dollars 2008 compared 2007 primarily due lower amortization certain intangibles acquired voyant acquisition due impairment fourth quarter 2007 evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment based results 2007 impairment assessment determined certain purchased intangible assets acquired part voyant acquisition impaired year end recorded impairment charge approximately 36 million assets written result decline projected future cash flows future products utilize technology acquired acquisition december 31 2009 carrying value purchased intangibles 463 million restructure costs 2009 2008 2007 recorded 159 million 103 million 04 million respectively related restructuring actions resulted elimination relocation various positions part restructuring plans approved management 2009 actions designed reduce cost structure maintaining flexibility invest strategic growth areas business expect record additional charges approximately 12 million first quarter 2010 result final notifications related actions 2008 actions intended streamline focus efforts properly align cost structure projected revenue streams 2007 actions primarily related reorganization video network systems divisions one combined business unit video communications solutions group elimination certain executive positions see note 6 notes consolidated financial statements information restructure costs future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed litigation reserves payments 2009 recorded reserve totaling 07 million related ongoing legal matter 2008 recorded charges totaling 74 million result trial preparation costs fee arrangement outside legal counsel represented us litigation codian pursuant owed additional legal fees based upon favorable outcome achieved first quarter 2008 expenses 2007 see note 9 notes consolidated financial statements information also subject variety claims suits arise time ordinary course business matters subject inherent uncertainties management’s view matters may change future could result charges would material adverse impact financial position results operations cash flows interest income expense net interest income expense net consists primarily interest earned cash equivalents investments less bank charges resulting use bank accounts gains losses investments nonincome related taxes fees foreign exchange related gains losses interest income expense net expense 21 million 2009 net income 24 million 179 million 2008 2007 respectively interest income expense net decreased 2009 2008 primarily due lower interest income lower average investment returns partially offset lower foreign exchange related losses decrease nonincome related taxes license fees losses recorded 2008 related investments considered temporarily impaired impairment losses 2009 interest income decreased 2009 comparable period prior year primarily due lower average investment returns average interest rate returns cash investments 044 2009 compared 294 2008 interest income expense net decreased 2008 2007 primarily due lower interest income foreign exchange related losses compared foreign exchange related gains period prior year partially offset increased nonincome related taxes license fees losses recorded 2008 related investments considered temporarily impaired impairment losses 2007 interest income decreased 2008 comparable period prior year primarily lower average cash investment balances due stock repurchase activity 2008 lower average investment returns average interest rate returns cash investments 294 2008 compared 514 2007 interest income expense net fluctuate due changes interest rates returns cash investments future impairment investments foreign currency rate fluctuations unhedged exposures fluctuations costs associated hedging program timing nonincome related taxes license fees cash balance could also decrease depending upon amount cash used future acquisitions stock repurchase activity factors would also impact interest income gain loss strategic investments strategic reasons made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value review investments impairment events changes circumstances indicate impairment may exist make appropriate reductions carrying value necessary evaluate number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2009 2008 investments carrying value 22 million recorded “other assets” consolidated balance sheets 2007 investments permanently written 74 million original cost reflected “gain loss strategic investments” consolidated statements operations writedown 74 million second quarter 2007 based upon evaluation investee’s financial position including cash usage status investee’s business prospects june 30 2007 rights privileges associated investment based evaluation intent june 30 2007 participate round additional funding investee process time determined based upon preferences including liquidation preferences would held senior securities write carrying value zero necessary writedowns required either 2009 2008 provision income taxes overall effective tax rates 2009 2008 2007 262 224 283 respectively resulted provision income taxes 177 million 219 million 248 million 2009 2008 2007 respectively increase effective tax rate 2009 versus 2008 primarily related lower releases tax reserves related interest penalties 2009 29 million compared 2008 released 42 million tax reserves related interest penalties due expiration statutes limitation us various foreign jurisdictions partially offsetting effect change release tax reserves relative increase foreign earnings 2009 subject lower tax rates decrease effective tax rate 2008 versus 2007 due relative increase foreign earnings subject lower tax rates combined settlement certain audits foreign tax authorities substantially offset nondeductibility inprocess research development acquired spectralink acquisition december 31 2009 approximately 48 million tax net operating capital loss carryforwards 80 million tax credit carryovers well deferred tax assets arising temporary differences addition december 31 2009 valuation allowance 14 million related net operating loss carryforwards denmark see note 13 notes consolidated financial statements december 31 2009 444 million unrecognized tax benefits compared 559 million december 31 2008 end 2010 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 53 million reserve releases would recorded adjustments stockholders’ equity amount 16 million 37 million would adjustment tax expense recognize interest andor penalties related income tax matters income tax expense december 31 2009 2008 approximately 35 million 36 million respectively accrued interest penalties related uncertain tax positions future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income non taxdeductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies believe future effective tax rate may volatile result factors also subject periodic examination income tax returns internal revenue service irs tax authorities cases received additional tax assessments currently certain tax years audit relevant tax authorities including examination us federal tax returns calendar years 2006 2007 irs currently underway timing resolution income tax examinations highly uncertain amounts ultimately paid upon resolution issues raised taxing authorities may differ materially amounts accrued year reasonably possible issues irs examination could resolved within next 12 months based current facts circumstances cannot estimate timing resolution range potential changes relates unrecognized tax benefits recorded part financial statements outcome examinations inherently uncertain segment information description products services well annual financial data segment found business section form 10k note 14 notes consolidated financial statements results discussions include results segments years ended december 31 2009 2008 2007 segment contribution margin includes segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing stockbased compensation costs general administrative costs legal accounting costs acquisitionrelated integration costs amortization impairment purchased intangible assets purchase accounting adjustments made inventory purchased inprocess research development costs restructuring costs interest income expense net video communications solutions video communications solutions segment revenues include revenues sales video communication products network systems product lines revenues video communications solutions segment decreased 367 million 7 2008 5233 million 2009 revenue video communications products consisted primarily hdx™ vsx® product families decreased 11 4268 million 2009 4814 million 2008 primarily due decrease sales volumes result global economic climate sales rpx tpx telepresence solutions also lower 2009 compared 2008 increasing adoption hd 2009 hd products comprised increasing percentage group video units sold 2009 approximately 80 video communication product revenues derived high definition hdx products versus standard definition vsx products believe return investment video may make segment business resilient voice communications solutions segment current economic environment however 2009 experienced may continue experience negative impact video communications product revenues due tightened capital operating budgets given current economic environment revenues network systems products 2009 965 million increase 23 compared 2008 revenues 787 million due primarily increases video network systems software revenues offsetting decreases voice network systems revenues total unit sales video network systems products increased 2009 compared 2008 continued see mix shift toward newer rmx product lines away mgc products rmx units comprising majority video network systems units shipped 2009 growth software revenues primarily reflects increased revenues sales polycom converged management application cma™ desktop software application products voice network systems product revenues declined 2009 compared 2008 essentially zero second half 2009 result increased adoption unified rmx product offering revenues video communications solutions segment increased 668 million 14 2007 5601 million 2008 revenue video communications products increased 4814 million 2008 4083 million 2007 18 increase primarily due increase sales volumes average selling prices group video products increasing adoption hd throughout 2008 hdx products comprised increasing percentage group video units sold contributed higher average selling prices fourth quarter 2008 approximately 60 video communications product revenues derived high definition hdx products versus standard definition vsx products revenues also increased result increased revenues sales rpx tpx telepresence products return investment video may helping drive growth video communications solutions segment may make segment business resilient economic environment revenues network systems products 2008 787 million decrease 7 compared 2007 revenues 850 million due primarily decreases voice network systems product revenues partially offset increases revenues video network systems products international revenues defined revenues outside canada us accounted 58 52 video communications solutions segment revenues 2009 2008 2007 respectively 2009 2008 one channel partner accounted 10 total net revenues video communications solutions segment 2007 one channel partner accounted 10 total net revenues video communications solutions segment believe unlikely loss one channel partner would long term material adverse effect consolidated revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period contribution margin percentage video communications solutions segment revenues 47 2009 compared 48 2008 contribution margins decreased primarily result lower gross margins video communications product lines partially offset higher gross margins network systems product lines decrease gross margins primarily due shift product mix toward lower margin products lower sales volumes video communications products engineering expenses decreased absolute dollars slightly percentage revenues direct marketing expenses remained relatively flat absolute dollars percent revenues contribution margin percentage video communications solutions segment revenues 48 2008 compared 46 2007 contribution margins increased primarily result engineering expenses decreasing percent revenues absolute dollars partially offset slightly lower gross margins increased direct marketing expenses gross margins decreased primarily due changes product mix video communications solutions gross margins negatively impacted yearoveryear decrease revenues voice network systems products typically higher gross margins video communications products direct marketing engineering spending video communications solutions segment fluctuate depending upon timing new product launches marketing programs voice communications solutions revenues voice communications solutions segment 2009 decreased 24 2008 2682 million due primarily lower sales volumes voice communications products including circuitswitched wireless voiceoverip conference phones installed voice product lines voice communications solutions segment revenues dependent partners’ rollouts ip call management systems system expansions current economic climate product sales segment continued slow 2009 compared 2008 revenues voice communications solutions declined yearoveryear since fourth quarter 2008 believe declines primarily result global economic climate business improve economy improves third quarter 2009 experienced sequential growth first time since second quarter 2008 voice communication revenues growing 15 second quarter 2009 fourth quarter 2009 voice communication revenues continued show sequential growth growing 4 third quarter 2009 resulting yearoveryear decline 6 compared doubledigit yearoveryear declines 21 34 experienced first three quarters 2009 believe improved results second half 2009 due part improvements economy revenues voice communications solutions segment 2008 increased 13 2007 3537 million due primarily increases sales volumes voiceoverip installed voice products well full year revenues wireless voice products acquired spectralink acquisition first quarter 2007 revenues products acquired spectralink acquisition accounted approximately 43 increase revenues segment partially offset yearoveryear decreases revenues circuitswitch products 2008 excluding impact spectralink acquisition 2007 growth rates experienced slower growth 2007 voice product lines due part global economic conditions international revenues defined revenues outside canada us accounted 35 37 36 total voice communications solutions segment revenues 2009 2008 2007 respectively 2009 one customer accounted 10 voice communications solutions segment revenues 2008 2007 one customer accounted 10 voice communications solutions segment revenues believe unlikely loss one channel partner would long term material adverse effect consolidated revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period contribution margin percentage voice communications segment revenues 38 2009 compared 42 2008 decrease 4 percentage points contribution margin decreased primarily due lower gross margins lesser extent higher engineering direct marketing expenses percentage revenue gross margins decreased primarily result lower sales volumes particularly wireless circuitswitched product lines shift product mix toward lower margin products voiceoverip handsets engineering direct marketing expenses decreased absolute dollars increased percent revenues due lower revenues 2009 compared 2008 contribution margin percentage voice communications segment revenues 42 2008 2007 contribution margin remained flat primarily due lower gross margins partially offset engineering expenses decreasing percent revenues although increasing absolute dollars decrease gross margins due higher mix voiceoverip handset wireless product revenues generally lower gross margin circuit switched installed voice products engineering expenses increased absolute dollars primarily result spectralink acquisition completed last week first quarter 2007 direct marketing spending increased absolute dollars 2008 remaining flat percentage revenues compared 2007 direct marketing engineering spending voice communications solutions segment fluctuate depending upon timing new product launches marketing programs services revenues services segment increased 13 2009 2008 1755 million due primarily increased videorelated services lesser extent increased network systemsrelated services partially offset decrease voicerelated services revenues videorelated services grew yearoveryear spite decline video communications product revenues result longterm maintenance contracts maintenance renewals installed base revenues services segment increased 26 2008 2007 1556 million due primarily increased videorelated services lesser extent increased network systems related services addition full year revenues services related products acquired spectralink acquisition accounted 26 increase year ago period international revenues defined revenues outside canada us accounted 38 34 30 total service revenues 2009 2008 2007 respectively one customer accounted 10 total revenues services segment 2009 2008 2007 overall services segment contribution margin percentage service segment revenues increased 4 percentage points 2009 versus 2008 due primarily increased gross margins lower operating expenses percentage revenues gross margins increased percentage revenue 2 percentage points primarily result revenues increasing faster pace related service costs well shift mix services revenues toward higher margin video maintenance revenues overall services segment contribution margin remained flat percentage service segment revenues 2008 versus 2007 gross margins operating expenses essentially flat percentage revenues gross margins impacted increased service costs including increased headcountrelated costs repair costs shipping costs service gross margins negatively impacted 2008 negative gross margins installation rpx telepresence product expect service segment operating expenses increase absolute dollars expand professional services practice leverage partnerships expand practice core service offerings liquidity capital resources december 31 2009 principal sources liquidity included cash equivalents 3311 million shortterm investments 1237 million longterm investments 127 million cash equivalents includes cash bank approximately 959 million remaining 2352 million comprised primarily highly liquid investments commercial paper us government securities municipal securities time deposits savings accounts money market funds corporate debt securities original maturities 90 days less time purchase substantially shortterm longterm investments comprised us government securities corporate debt securities corporate preferred equity securities see note 7 notes consolidated financial statements also outstanding letters credit totaling approximately 15 million place satisfy certain facility lease requirements total cash equivalents investments held united states totaled 1881 million december 31 2009 remaining 2794 million held outside united states various foreign subsidiaries would need access cash equivalents investments held outside united states order fund acquisitions share repurchases working capital needs may subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes generated cash operating activities totaling 1808 million 2009 1670 million 2008 1495 million 2007 increase cash provided operating activities 2009 2008 due primarily decreased inventory decreased prepaid expenses current assets increased accounts payable larger decrease deferred taxes partially offsetting positive effects decreased net income noncash expenses increase trade receivables smaller increase taxes payable accrued liabilities increase cash provided operating activities 2008 2007 due primarily increased net income noncash expenses decrease accounts receivable larger increase accrued liabilities offsetting positive effects larger increase inventories large decrease accounts payable larger increase prepaid expenses current assets larger increase accrued liabilities total net change cash equivalents year ended 2009 increase 1654 million primary sources cash 1808 million operating activities 365 million associated exercise stock options purchases employee stock purchase plan 183 million proceeds investments net purchases investments primary uses cash period 354 million purchases common stock 378 million purchases property equipment days sales outstanding dso metric 45 days december 31 2009 compared 44 days december 31 2008 expect dso remain 40 50 day range could vary result number factors fluctuations revenue linearity increase international receivables typically longer payment terms increases receivables service providers government entities also customarily longer payment terms dso could negatively impacted current economic environment partners experience difficulty financing purchases results delays payment us inventory turns increased 49 turns december 31 2008 60 turns december 31 2009 increase inventory turns result decrease finished goods inventory levels end 2009 compared end 2008 growth finished goods inventory levels year primarily result lower revenues planned difference planned versus actual sales mix products well weaker revenue linearity growth service inventory levels factors believe inventory turns fluctuate depending ability reduce lead times well changes product mix ocean freight versus air freight costs enter foreign currency forward contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record balance sheet reporting period fair value foreign currency forward contracts record fair value adjustments results operations gains losses associated currency rate changes contracts recorded income expense offsetting transaction gains losses related assets liabilities additionally hedging costs vary depending upon size hedge program whether purchasing selling foreign currency relative us dollar interest rate spreads us foreign markets additionally also hedging program uses foreign currency forward contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated israeli shekels reporting period record fair value unrealized forward contracts balance sheet related unrealized gains losses component cumulative comprehensive income separate element stockholders’ equity realized gains losses associated effective portion foreign currency forward contracts recorded within revenue operating expense depending upon underlying exposure hedged excluded ineffective portions hedging instrument would recorded income expense time board directors approved plans us purchase shares common stock open market years ended december 31 2009 2008 2007 purchased approximately 16 million 89 million 43 million shares respectively common stock open market cash 328 million 2200 million 1257 million respectively continue closely monitor repurchase program light current economic environment result substantially reduced share repurchase activity 2009 december 31 2009 authorized purchase additional 1872 million 2008 share repurchase plan see note 11 notes consolidated financial statements discussion accounting common stock repurchases resultant accumulated deficit included stockholder’s equity consolidated balance sheet december 31 2009 open purchase orders related contract manufacturers contractual obligations approximately 1842 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition bank issued letters credit totaling approximately 15 million secure leases offices table set forth shows december 31 2009 future minimum lease payments due current lease obligations total estimated sublease income 02 million netted amounts addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2009 follows thousands december 31 2009 444 million unrecognized tax benefits compared 559 million december 31 2008 end 2010 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 53 million reserve releases would recorded adjustments stockholders’ equity amount 16 million 37 million would adjustment tax expense believe available cash equivalents investments sufficient meet operating expenses capital requirements least next twelve months however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources additional financing may available particularly current credit environment available financing may obtainable terms favorable us could dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2009 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements additional discussion accounting policies revenue recognition product returns recognize revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally recognize extended service revenue hardware software products ratably service period generally one five years video communications products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts accordingly account revenue products accordance asc 985 “software” use residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement defer revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements defer revenue sufficient evidence exists elements delivered accrue sales returns allowances reduction revenues upon shipment based upon contractual obligations historical experience channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered company accrues coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments review allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances written management determined likelihood collection probable excess obsolete inventory record write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis stockbased compensation expense sharebased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock restricted stock units performance shares well employee stock purchase plan measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values estimated fair value awards including effect estimated forfeitures recognized expense requisite service period generally vesting period fair value stock option awards estimated grant date using blackscholes option valuation model fair value restricted stock units based market value common stock date grant fair value performance shares based market price stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes probable outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking stock among russell 2000 index companies performance period changes underlying factors assumptions utilized may result significant variability stockbased compensation costs record makes amounts difficult accurately predict deferred refundable taxes estimate actual current tax expense together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2009 451 million net deferred tax assets included net deferred tax asset balance 14 million valuation allowance related net operating losses generated denmark recognize measure benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions evaluate uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period make change could material impact effective tax rate operating results fair value fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires us use observable market data available minimize use unobservable inputs determining fair value recurring basis measure certain financial assets liabilities fair value including marketable securities foreign currency contracts company’s cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper preferred stocks puts treasury bond futures instruments generally classified within level 2 fair value hierarchy december 31 2009 fixed income availableforsale securities include us treasury obligations government agency instruments corporate bonds commercial paper municipal securities money market funds included availableforsale securities cash equivalents consist investments maturities three months less include money market funds nonfixed income availableforsale securities represent preferred stocks puts treasury bond futures part capital gains capture program generates capital gains offset capital losses principal market execute foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants company’s counterparties large money center banks regional banks company’s foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy fair value company’s marketable securities foreign currency contracts see note 7 notes consolidated financial statements goodwill purchased intangibles assess impairment goodwill indefinite lived intangibles least annually unless impairment indicators exist sooner assess impairment whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following • significant underperformance relative projected future operating results • significant changes manner use acquired assets strategy overall business • significant negative industry economic trends determine carrying value goodwill indefinite lived intangibles may recoverable based upon existence one indicators impairment would measure impairment based projected discounted cash flow method using discount rate determined us commensurate risk inherent current business model fourth quarter 2009 completed annual goodwill impairment test assessment goodwill impairment conducted determining comparing fair value reporting units reporting unit’s carrying value date based results impairment tests determined goodwill assets impaired december 31 2009 assess purchased intangibles impairment ongoing basis assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment based events fourth quarter 2007 performed assessment purchased intangibles determined certain purchased intangible assets acquired part voyant acquisition impaired december 31 2007 recorded impairment charges approximately 36 million impairment charges recorded 2008 impairment indicators existed screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests nonmarketable securities periodically make strategic investments companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant write carrying value investment believe investment experienced decline value temporary example date due factors recorded cumulative charges earnings totaling 215 million associated impairment investments including 74 million second quarter 2007 december 31 2009 december 31 2008 strategic investments carrying value 22 million derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk fasb accounting standards codification june 2009 financial accounting standards board “fasb” issued fasb accounting standards codification “codification” “asc” authoritative guidance gaap codification single source us gaap used nongovernmental entities preparation financial statements except rules interpretive releases securities exchange commission “sec” authority federal securities laws sources authoritative accounting guidance sec registrants codification meant simplify user access authoritative accounting guidance reorganizing us gaap pronouncements roughly 90 accounting topics within consistent structure purpose create new accounting reporting guidance codification supersedes existing nonsec accounting reporting standards effective company beginning july 1 2009 company incorporated current codification form 10k fasb longer issue new standards form statements fasb staff positions emerging issues task force abstracts instead issue accounting standards updates fasb consider accounting standards updates authoritative right updates serve update codification provide background information guidance provide bases conclusions changes codification recent accounting pronouncements october 2009 fasb issued authoritative guidance revenue recognition become effective company beginning january 1 2011 earlier adoption permitted new guidance arrangements include software elements tangible products software components essential functionality tangible product longer within scope software revenue recognition guidance softwareenabled products subject relevant revenue recognition guidance additionally fasb issued authoritative guidance revenue arrangements multiple deliverables outside scope software revenue recognition guidance new guidance vendor specific objective evidence third party evidence deliverables arrangement cannot determined best estimate selling price required separate deliverables allocate arrangement consideration using relative selling price method new guidance includes new disclosure requirements application relative selling price method affects timing amount revenue recognition company currently assessing potential effect financial statements june 2009 fasb issued authoritative guidance consolidation variable interest entities asu 201006 fair value measurements disclosures update” effective company beginning january 1 2010 new guidance requires revised evaluations whether entities represent variable interest entities ongoing assessments control entities additional disclosures variable interests company believes adoption new guidance material impact financial statements item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” “should” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview global leader unified communications uc solutions leading provider telepresence video voice infrastructure solutions based open standards uc solutions people world collaborate facetoface without physical location individuals teams connect solve create highly visual experience desktops meeting rooms classrooms mobile ultimately allows people make better decisions faster increase productivity saving time money environmentally responsible important drivers adoption polycom uc solutions include • growth video preferred method communication everywhere • increasing presence video desktop • virtualization move cloud • adoption uc small medium businesses • mobile devices playing important role uc • growing number teleworkers • demand uc solutions businesstobusiness communications move consumer applications business space • continued commitment organizations individuals reduce carbon footprint expenses choosing remote connectivity travel 2010 made strategic investments executed five key strategic initiatives capture uc collaboration market opportunity optimize position partner choice global communications providers provider choice customers initiatives included • enhancements gotomarket capability • building strategic partnerships companies avaya broadsoft hp ibm juniper microsoft siemens • focusing service providers’ enhanced sellthrough well developing specific products services support growing offerings managed hosted space • innovation surrounding telepresence products solutions • expansion professional services practice fourth quarter 2010 made organizational changes resulted changes way manage evaluate business product linefocused geographicallyfocused conduct business globally managed geographically three segments americas emea apac revenues 2010 12 billion increase 2515 million 26 2009 increase revenues due part improvements global economic conditions negatively impacted revenues 2009 resulted decline revenues yearoveryear quarter third quarter 2009 grown sequentially since first quarter 2009 grown yearoveryear quarter since fourth quarter 2009 increase revenues reflects increases revenues across three segments 2010 compared 2009 driven investments made gotomarket capabilities improvement global economic conditions americas emea apac segment revenues accounted 54 25 21 respectively revenues 2010 increased 22 26 37 respectively compared 2009 see note 12 notes consolidated financial statements information segments including summary segment revenues segment contribution margin segment accounts receivable discussion results operations consolidated level also followed discussion results operations segment three years ended december 31 2010 gross margins increased 2 percentage points 2010 compared 2009 due primarily higher sales volumes better management overhead costs increased use ocean freight lowered cost product revenues partially offset decreased margins services revenues result investments made expand professional services practice well increase mix professional services revenues percentage total services revenues generally professional services lower gross margin maintenance services operating margins increased 2010 2009 primarily result higher gross margins partially offset operating expenses increasing percentage revenues significantly increased spending levels sales marketing lesser extent research development general administrative areas support five key strategic initiatives increased investment level lowered profits beginning 2010 began yield growth revenues profitability second half 2010 generated approximately 1434 million cash flow operating activities impact investing share repurchases financing activities described detail “liquidity capital resources” resulted 69 million net decrease total cash equivalents moving forward 2011 developed strategic plan aimed capitalizing unique position capturing emerging network effect uc adoption enterprise public sector service providers smbs ultimately connected home central 2011 plan five strategic pillars 1 enabling cloudbased uc solutions 2 mobile uc solutions 3 leveraging uc ecosystem partners 4 delivery propagation uc intelligent core products 5 continued delivery solutions uc innovation engine strategic pillars drive key initiatives spending 2011 focus capturing opportunities within emerging highgrowth markets including mobile small medium businesses cloudbased delivery consumer markets results operations three years ended december 31 2010 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues manage business primarily geographic basis organized three geographic segments net revenues include product service revenues segment summarized following table total revenues 2010 12 billion increase 2515 million 26 2009 driven increases product services revenues product revenues increased 2194 million 28 services revenue increased 321 million 18 2010 compared 2009 increase revenues primarily reflected increases revenues across segments 2010 compared 2009 result investments made gotomarket capabilities improved global economic conditions 2010 increased sales volumes average selling prices remained relatively stable americas emea apac segment revenues increased 1198 million 22 619 million 26 698 million 37 respectively 2010 compared 2009 increases driven increased revenues across many key geographic markets including united states china france germany russia singapore united kingdom australia total revenues 2009 9670 million decrease 1023 million 10 2008 decrease revenues primarily reflects decrease sales volumes result global economic conditions product revenue decreased 1222 million 13 services revenue increased 199 million 13 2009 compared 2008 americas emea segment revenues decreased 684 million 11 409 million 15 respectively apac segment revenues increased 70 million 4 2009 compared 2008 decreases across key geographic markets especially united states however revenues countries china canada france actually increased 2010 2009 one channel partner americas segment accounted 10 total net revenues one channel partner accounted 10 revenues 2008 believe unlikely loss channel partners would long term material adverse effect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period addition primary view geographic basis also track revenues groups similar products services various purposes following table presents revenues groups similar products services uc group systems include immersive telepresence group video group voice systems products related service elements increase uc group systems 1739 million 28 2010 2009 primarily driven increases sales group video group voice products services geographic segments decrease uc group systems 670 million 10 2009 2008 driven decreased group voice sales segments lesser extent decreases group video sales primarily americas emea due primarily general economic conditions uc personal devices include desktop video devices desktop voice wireless lan products related service elements increase uc personal devices 383 million 19 2010 2009 primarily due increased sales desktop voice products geographic segments driven continued adoption voip decrease uc personal devices 543 million 21 2009 compared 2008 primarily due decreased sales wireless products services across segments due primarily general economic conditions network infrastructure includes network infrastructure hardware software products related service elements increase network infrastructure 393 million 27 2010 2009 driven increased revenues network infrastructure products segments increase network infrastructure 190 million 15 2009 2008 primarily driven adoption newer rmx platform rmx units comprised majority network infrastructure hardware shipped 2009 cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments amortization certain intangible assets stockbased compensation costs allocation overhead expenses including facilities costs cost product revenues product gross margins included charges stockbased compensation 26 million 19 million 24 million years ended december 31 2010 2009 2008 respectively cost product revenues segment level consists standard cost product revenues include items warranty expense royalties allocation overhead expenses including facilities costs overall product gross margins increased 2 percentage points 2010 compared 2009 due higher sales volumes better management overhead costs increased use ocean freight 2010 lowered cost product revenues overhead absorption costs cost sales freight warranty royalties allocated segments product gross margin remained flat americas segment decreased emea apac segments decrease emea segment gross margins primarily due foreign exchange fluctuations british pounds decrease apac segment gross margins primarily due shift product mix increased discounting overall product gross margins decreased 1 percentage point 2009 compared 2008 due primarily lower gross margins americas emea segments due global economic conditions resulting lower revenues increased discounting gross margins apac segment increased 2009 compared 2008 primarily due mix revenues toward products higher gross margins december 31 2010 finished goods inventory levels significantly higher december 31 2009 levels inventory turns decreased 60 turns december 31 2009 48 turns december 31 2010 increase inventory decrease inventory turns reflect desire shorten lead times fulfilling orders greater use ocean freight inventory turns future may fluctuate depending ability reduce lead times well changes product mix greater mix ocean freight versus air freight reduce freight costs inventory turns may also decrease future result flexibility required respond increased demands growing business sustainability global economic recovery expect product gross margins remain relatively flat near term forecasting future product gross margin percentages difficult number risks related ability maintain improve current gross margin levels uncertainties surrounding revenue levels including future potential discounts result economy response strengthening us dollar international markets related production level variances competition changes technology changes product mix variability stockbased compensation costs potential resulting royalties third parties manufacturing efficiencies subcontractors manufacturing purchase price variances warranty recall costs timing sales cause cost revenues percentage vary significantly addition may experience higher prices commodity components included products cost service revenues service gross margins cost service revenues consists primarily material direct labor including stockbased compensation costs depreciation allocation overhead expenses including facilities costs generally services lower gross margin product gross margins cost service revenues service gross margins included charges stockbased compensation 39 million 28 million 32 million years ended december 31 2010 2009 2008 respectively overall service gross margins decreased 2 percentage points 2010 2009 primarily result investments made expand professional services practice well increase mix professional services revenues percentage total services revenues generally professional services lower overall gross margin maintenance services overall service gross margins increased 2009 2008 primarily result revenues increasing faster pace related service costs well shift mix services revenues toward higher margin rmx revenues addition increase services revenues percentage total revenues contributed overall decrease gross margins 2009 compared 2008 service gross margins lower product gross margins forecasting future service gross margin percentages difficult number risks related ability maintain improve current gross margin levels uncertainties surrounding revenue levels including future pricing andor potential discounts result economy response strengthening us dollar international markets related attach rates new service well maintenance renewal rates utilization professional services personnel develop professional services practice make investments expand professional services offerings part recently announced strategic investment plan ability achieve greater efficiencies installations rpx™ telepresence product increasing costs freight repair costs timing sales cause cost services revenues percentage vary quarter sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force including stockbased compensation costs advertising promotional expenses product marketing expenses allocation overhead expenses including facilities costs sales marketing expenses except direct sales marketing expenses allocated segments sales marketing expenses included charges stockbased compensation 266 million 105 million 112 million years ended december 31 2010 2009 2008 respectively sales marketing expenses percentage revenues increased 3 percentage points increased absolute dollars 36 2010 compared 2009 due primarily increased headcount compensationrelated costs including commissions stock basedcompensation charges result investments made gotomarket strategy 2010 resulted sales marketing headcount increasing approximately 23 2010 2009 depreciation facilities allocations also increased result headcount increases well due expansion demonstration center capabilities support gotomarket strategy factors contributing increase sales marketing expenses included increased travel entertainment expenses recruitment training costs result increased headcount increased spending marketing programs reinstatement annual merit increases incentive programs third quarter 2010 sales marketing expenses percentage revenues increased 1 percentage point 2009 compared 2008 due primarily lower revenue due global economic conditions sales marketing expense decreased absolute dollars 2009 2008 due primarily decrease compensation costs primarily commissions result decreases revenue lower travel entertainment expenses reduced spending marketing programs well decreased recruitment training costs partially offset increased spending demonstration equipment facilities expect sales marketing expenses continue increase absolute dollars near term result incurring costs recruit hire new sales marketing personnel expenses also likely increase future revenues increase also make additional investments sales marketing order extend market reach grow business support key initiatives surrounding increasing strategic partnerships part uc ecosystem developing marketing cloudbased mobile uc solutions uc intelligent core innovations expected throughout 2011 forecasting sales marketing expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter marketing expenses also fluctuate depending upon timing extent marketing programs market new products also depending upon timing trade shows sales marketing expenses may also fluctuate due increased international expenses impact changes foreign currency exchange rates research development expenses research development expenses expensed incurred consist primarily compensation costs including stockbased compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development costs allocated segments research development expenses included charges stockbased compensation 103 million 77 million 98 million years ended december 31 2010 2009 2008 respectively research development expenses increased 2010 314 million 27 remaining flat percentage revenues increase absolute dollars primarily due increased headcount increased development expenses support strategic investment plan research development expenses also increased result reinstatement annual merit increases incentive programs third quarter 2010 increased stockbased compensation charges research development expenses decreased 2009 177 million 13 percentage revenue 1 percentage point compared 2008 decrease absolute dollars primarily due decreases headcount decreased program development expenses order control costs stockbased compensation costs also decreased 22 million 2009 2008 addition continued increase percentage research development performed lower cost jurisdictions believe innovation technological leadership critical future success committed continuing significant level research development develop new technologies products combat competitive pressures new svc standard address device application networks requirements mobile smb consumer networks also investing heavily research development result increased business opportunities strategic partners mobile service provider customers result key strategic initiatives areas also investing key vertical markets us federal government expect research development expenses absolute dollars increase near term fluctuate depending timing number development activities given quarter research development expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs professional service fees allocation overhead expenses including facilities costs litigation costs bad debt expense general administrative expenses allocated segments general administrative expenses included charges stockbased compensation 128 million 75 million 80 million years ended december 31 2010 2009 2008 respectively general administrative expenses increased absolute dollars remained flat percentage revenues 2010 compared 2009 primary drivers increase related increased stockbased compensation charges 2010 2009 severance legal costs associated ceo transition occurred may 2010 general administrative expenses also increased due reinstatement annual merit increases incentive programs third quarter 2010 remaining increase general administrative expenses absolute dollars primarily due increased legal fees outside services lesser extent increases headcount headcountrelated expenses general administrative expenses 2009 decreased absolute dollars remaining flat percentage revenue compared 2008 decrease spending absolute dollars general administrative expenses primarily due decreased compensation charges reductions outside services travel training costs reduced bad debt expenses significant future charges due costs associated litigation uncollectability receivables could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing litigation bad debt expense associated uncollectible receivables difficult future general administrative expense increases decreases absolute dollars difficult predict due lack visibility certain costs including legal costs associated defending claims us well legal costs associated asserting enforcing intellectual property portfolio factors expect general administrative expenses increase absolute dollar amounts near term could fluctuate make investments enhancements financial operating systems costs related supporting larger company increased costs associated regulatory requirements continued investments international regions general administrative expenses may also increase result additional investments required support key strategic initiatives amortization purchased intangibles 2010 2009 2008 recorded 56 million 58 million 71 million respectively amortization purchased intangibles acquired acquisitions addition amounts recorded operating expenses 2010 2009 2008 recorded amortization totaling 133 million 135 million 137 million respectively related certain technology intangibles cost product revenues purchased intangible assets amortized expense estimated useful lives range several months eight years amortization purchased intangibles 2010 remained relatively consistent prior year additions impairments changes useful lives recognized either 2010 2009 could increase decrease amortization expense amount decrease amortization purchased intangibles recorded operating expenses absolute dollars 2009 compared 2008 primarily due lower amortization result certain intangibles acquired voyant dstmedia acquisitions becoming fully amortized end 2008 evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charges recognized periods presented december 31 2010 2009 carrying value purchased intangibles 266 million 463 million respectively restructure costs 2010 2009 2008 recorded 81 million 159 million 103 million respectively related restructuring actions resulted elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus efforts properly align cost structure projected revenue streams 2010 actions designed reallocate resources strategic growth areas business resulted elimination certain positions enabling hiring additional positions better align execution strategic initiatives 2009 actions designed reduce cost structure maintaining flexibility invest strategic growth areas business 2008 actions intended streamline focus efforts properly align cost structure projected revenue streams see note 4 notes consolidated financial statements information restructure costs february 2011 management committed restructuring plan designed align various organizations new executive leadership reallocate resources strategic growth areas business restructuring plan result elimination approximately 2 global workforce reductions taking effect immediately enabling hiring new positions better align execution strategic initiatives currently expect record restructuring charges make cash expenditures approximately 30 million 40 million first quarter 2011 resulting action primarily related severance employee termination benefits additional charges approximately 16 million related consolidation colorado development facilities recorded second quarter 2011 upon vacating existing site future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed litigation reserves payments 2010 recorded 12 million litigation reserves payments consolidated statements operations related settlement legal matter period 07 million 2009 related legal matter subsequently settled 2008 recorded charges totaling 74 million result trial preparation costs fee arrangement outside legal counsel represented us litigation codian pursuant owed additional legal fees based upon favorable outcome achieved first quarter 2008 see note 7 notes consolidated financial statements information also subject variety claims suits arise time ordinary course business matters subject inherent uncertainties management’s view matters may change future could result charges would material adverse impact financial position results operations cash flows interest income expense net interest income expense net consists primarily interest earned cash equivalents investments less bank charges resulting use bank accounts gains losses investments nonincome related taxes fees foreign exchange related gains losses interest income expense net expense 78 million 21 million 2010 2009 respectively net income 24 million 2008 increase net expense 2010 2009 primarily due net losses realized sale investments 2010 increase nonincome related taxes fees 2010 compared 2009 writeoff nontrade note receivable 2010 investment losses nontrade receivable writeoffs 2009 increase net expense partially offset lower foreign exchange losses recognized 2010 compared 2009 interest income expense net expense 21 million 2009 compared net income 24 million 2008 change primarily due lower interest income lower average investment returns 044 294 2009 2008 respectively partially offset lower foreign exchange related losses decrease nonincome related taxes license fees investment losses recorded 2008 considered temporarily impaired impairment losses 2009 interest income expense net fluctuate due changes interest rates returns cash investments future impairment investments foreign currency rate fluctuations unhedged exposures fluctuations costs associated hedging program timing nonincome related taxes license fees cash balance could also decrease depending upon amount cash used future acquisitions stock repurchase activity factors would also impact interest income provision income taxes overall effective tax rates 2010 2009 2008 169 262 224 respectively resulted provision income taxes 139 million 177 million 219 million 2010 2009 2008 respectively decrease effective tax rate 2010 versus 2009 due relative increase foreign earnings subject lower tax rates reenactment increase us research development tax credits increase release tax reserves related interest penalties accrued uncertain tax positions amounted 53 million 2010 compared 29 million 2009 increase effective tax rate 2009 versus 2008 primarily related lower releases tax reserves related interest penalties 2009 29 million compared 2008 released 42 million tax reserves related interest penalties due expiration statutes limitation us various foreign jurisdictions partially offsetting effect change release tax reserves relative increase foreign earnings 2009 subject lower tax rates december 31 2010 approximately 31 million tax effected nonus net operating losses 58 million tax effected us capital loss carryforwards 74 million tax effected us credit carryovers well deferred tax assets arising temporary differences addition december 31 2010 valuation allowance 34 million primarily related net operating loss carryforwards denmark see note 11 notes consolidated financial statements information 2010 california franchise tax board completed audit 2005 2006 tax years audit resulted payment 08 million certain audit issues also settled year resulting release accrued taxes 15 million additionally 34 million tax reserves related cost sharing stock based compensation released adjustment stockholders’ equity 07 million tax reserves released due changes foreign exchange rates year 21 million tax reserves released due expiration statutes limitation us foreign jurisdictions december 31 2010 369 million unrecognized tax benefits compared 444 million december 31 2009 end 2011 uncertain tax positions may reduced result lapse applicable statutes limitations resolution audits various tax jurisdictions anticipate reduction would approximate 76 million reserve releases would recorded adjustments tax expense period released recognize interest andor penalties related income tax matters income tax expense december 31 2010 2009 approximately 25 million 35 million respectively accrued interest penalties related uncertain tax positions future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income non taxdeductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies believe future effective tax rate may volatile result factors also subject periodic examination income tax returns internal revenue service irs tax authorities cases received additional tax assessments currently certain tax years audit relevant tax authorities including examination us federal tax returns calendar years 2006 2007 limited review us federal tax returns calendar years 2008 2009 anticipate irs audit 2006 2007 limited review 2008 2009 concluded next 12 months segment information fourth quarter 2010 made organizational changes resulted changes way manage evaluate business product linebased reporting video communication solutions voice communication solutions services geographically based americas emea apac description products services well annual financial data segment found business section form 10k note 12 notes consolidated financial statements discussions include results segments years ended december 31 2010 2009 2008 result change segments revenue operating results prior periods restated conform current period presentation segment contribution margin includes segment revenues less related cost sales direct marketing sales expenses management allocates infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing stockbased compensation costs research development costs general administrative costs legal accounting costs acquisitionrelated integration costs amortization purchased intangible assets restructuring costs interest income expense net following summary financial information segments fiscal years ended december 31 2010 2009 2008 thousands americas segment revenues increased 22 2010 compared 2009 primarily due improvement economic environment particularly united states brazil canada resulted increased demand products services increase revenues driven increases uc group systems uc personal devices network infrastructure revenues increases uc group systems revenues americas primarily driven increased group voice revenues increased group video revenues lesser extent increased immersive telepresence revenues increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip network infrastructure revenues growth result increased sales uc intelligent core products services americas segment revenues decreased 11 2009 compared 2008 primarily due economic recession resulted lower revenues within region particularly united states slightly offset increased revenue canada decrease revenue primarily driven decreases uc personal devices uc group systems revenues partially offset increases network infrastructure revenues period 2010 2009 2008 one channel partner americas segment accounted 24 20 16 americas net revenues respectively believe unlikely loss channel partners would long term material adverse effect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period contribution margin percentage americas segment revenues 40 2010 2009 contribution margin percentage revenue remained consistent due primarily flat gross margins direct sales marketing expenses increasing absolute dollars remained flat percentage revenue contribution margin percentage americas segment revenues 40 2009 compared 42 2008 decreased contribution margin 2009 primarily due lower gross margins direct sales marketing expenses decreasing absolute dollars remained relatively flat percentage revenues gross margins decreased primarily result shift product mix toward lower margin products emea segment revenues increased 26 2010 compared 2009 primarily due improvement economic environment resulted increased demand products services revenues western european countries france germany united kingdom contributed growth emea followed russia united arab emirates ireland south africa increase revenues driven increases uc group systems network infrastructure uc personal devices revenues increases uc group systems revenues emea primarily driven increased group video revenues lesser extent increased group voice revenues increased immersive telepresence revenues network infrastructure revenues growth result increased sales products services comprise uc intelligent core increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip increase wireless product revenues emea segment revenues decreased 15 2009 compared 2008 primarily due economic recession lowered revenues within region particularly united kingdom russia germany netherlands spain partially offset increase france decrease revenue primarily driven decreases uc group systems uc personal devices revenues partially offset increases network infrastructure revenues period 2010 one channel partner emea segment accounted 12 emea net revenues 2009 2008 one channel partner emea segment accounted 10 emea net revenues contribution margin percentage emea segment revenues 36 2010 compared 38 2009 contribution margin percentage revenue decreased primarily due lower gross margins direct sales marketing expenses increasing absolute dollars remained relatively flat percentage revenues decrease gross margins driven primarily fluctuations foreign currencies primarily british pound contribution margin percentage emea segment revenues 38 2009 compared 41 2008 decrease contribution margin 2009 primarily due direct sales marketing expenses increasing percentage revenues lower gross margins direct sales marketing expenses decreasing absolute dollars increased percentage revenues result lower revenues 2009 compared 2008 gross margins decreased primarily result increased discounting response economic environment impact fluctuations foreign currencies apac segment revenues increased 37 2010 compared 2009 primarily due investments made gotomarket capabilities improved economic environment resulted increased demand products services revenues china singapore australia japan india contributed strong growth apac increase revenues driven increases uc group systems network infrastructure uc personal devices revenues increases uc group systems revenues apac primarily driven increased group video revenues lesser extent increased group voice revenues increased immersive telepresence revenues increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip network infrastructure revenues growth result increased sales products services comprise uc intelligent core apac segment revenues increased 4 2009 compared 2008 primarily due earlier recoveries economic conditions major countries within region compared segments although general economic conditions resulted lower uc group systems uc personal devices revenues 2009 compared 2008 increase network infrastructure revenues offset decreases 2010 2009 2008 two channel partners apac segment aggregate accounted 25 27 respectively apac net revenues contribution margin percentage apac segment revenues 46 2010 compared 47 2009 contribution margin percentage revenue decreased primarily due lower gross margins direct sales marketing expenses increasing absolute dollars remained relatively flat percentage revenues decrease gross margins driven primarily changes product mix lower average selling prices due increased discounting contribution margin percentage apac segment revenues 47 2009 compared 46 2008 increase contribution margin 2009 primarily due higher gross margins partially offset higher direct sales marketing expenses percentage revenue gross margins increased primarily result improved product mix toward higher margin products direct sales marketing expenses increased due investments made support gotomarket initiative liquidity capital resources december 31 2010 principal sources liquidity included cash equivalents 3242 million shortterm investments 1702 million longterm investments 413 million substantially shortterm longterm investments comprised us government agency securities corporate debt securities see note 5 notes consolidated financial statements information shortterm longterm investments also outstanding letters credit totaling approximately 21 million majority place satisfy certain facility lease requirements total cash equivalents investments held united states totaled 1938 million december 31 2010 remaining 3419 million held various foreign subsidiaries outside united states would need access cash equivalents investments held outside united states order fund acquisitions share repurchases working capital needs may subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes generated cash operating activities totaling 1434 million 2010 1808 million 2009 1670 million 2008 decrease cash provided operating activities 2010 2009 due primarily increased inventory prepaid expenses current assets higher increase accounts receivable lower increase accounts payable lesser extent increase deferred taxes partially offsetting negative effects increases accrued liabilities noncash expenses net income increase cash provided operating activities 2009 2008 due primarily decreased inventory decreased prepaid expenses current assets increased accounts payable larger decrease deferred taxes partially offsetting positive effects decreased net income noncash expenses increase trade receivables smaller increase taxes payable accrued liabilities total net change cash equivalents year ended 2010 decrease 69 million primary sources cash 1434 million operating activities 649 million associated exercise stock options purchases employee stock purchase plan 116 million excess tax benefit stockbased compensation primary uses cash period 842 million purchases common stock 732 million purchases investments net proceeds investments 693 million purchases property equipment days sales outstanding dso metric 41 days december 31 2010 compared 45 days december 31 2009 expect dso remain 40 50 day range could vary result number factors fluctuations revenue linearity increase international receivables typically longer payment terms increases receivables service providers government entities also customarily longer payment terms dso could negatively impacted partners experience difficulty financing purchases results delays payment us inventory turns decreased 60 turns december 31 2009 48 turns december 31 2010 decrease inventory turns result increase finished goods inventory levels end 2010 compared end 2009 increase inventory decrease inventory turns reflect desire shorten lead times fulfilling orders greater use ocean freight believe inventory turns fluctuate depending ability reduce lead times well changes product mix greater mix ocean freight versus air freight reduce freight costs inventory turns may also decrease future result flexibility required respond increased demands growing business cash used purchases property equipment increased significantly 2010 693 million compared 378 million 2009 result strategic investment plan including upgrading enterprise resource planning “erp” systems addingexpanding demonstration centers expect purchases property equipment 2011 increase 2010 levels continued support strategic investments business grows enter foreign currency forward contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record balance sheet reporting period fair value foreign currency forward contracts record fair value adjustments results operations gains losses associated currency rate changes contracts recorded interest income expense net offsetting transaction gains losses related assets liabilities additionally hedging costs vary depending size hedging program whether purchasing selling foreign currency relative us dollar interest rate spreads us foreign markets additionally also hedging program uses foreign currency forward contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated israeli shekels reporting period record fair value unrealized forward contracts balance sheet related unrealized gains losses component cumulative comprehensive income loss separate element stockholders’ equity realized gains losses associated effective portion foreign currency forward contracts recorded within revenue operating expense depending upon underlying exposure hedged excluded ineffective portions hedging instrument would recorded interest income expense net time board directors approved plans us purchase shares common stock open market years ended december 31 2010 2009 2008 purchased approximately 24 million 16 million 89 million shares respectively common stock open market cash 692 million 328 million 2200 million respectively december 31 2010 authorized purchase additional 1180 million 2008 share repurchase plan see note 9 notes consolidated financial statements discussion accounting common stock repurchases resultant accumulated deficit included stockholder’s equity consolidated balance sheet december 31 2010 open purchase orders related contract manufacturers contractual obligations approximately 2045 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition bank issued letters credit totaling approximately 21 million majority used secure leases offices table set forth shows december 31 2010 future minimum lease payments due current lease obligations total estimated sublease income 01 million netted amounts addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2010 follows thousands december 31 2010 369 million unrecognized tax benefits compared 444 million december 31 2009 end 2011 uncertain tax positions may reduced result lapse applicable statutes limitations resolution audits varying jurisdictions anticipate reduction 2011 approximate 76 million reserve releases would recorded adjustments tax expense period released believe available cash equivalents investments sufficient meet operating expenses capital requirements least next twelve months however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2010 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements additional discussion accounting policies revenue recognition product returns recognize revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally recognize extended service revenue hardware software products ratably service period generally one five years products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts october 2009 financial accounting standards board “fasb” amended accounting standards revenue recognition remove tangible products containing software components nonsoftware components function together deliver product’s essential functionality scope software revenue recognition guidance october 2009 fasb also amended accounting standards multiple deliverable revenue arrangements • provide updated guidance whether multiple deliverables exist deliverables arrangement separated consideration allocated • require entity allocate revenue arrangement using estimated selling price “esp” deliverables vendor first vendorspecific objective evidence “vsoe” selling price secondly thirdparty evidence “tpe” selling price • eliminate use residual method require entity allocate revenue using relative selling price method elected early adopt accounting guidance beginning first quarter fiscal year 2010 prospective basis applicable transactions originating materially modified december 31 2009 result products longer within scope software revenue recognition guidance multipleelement arrangement includes sale one tangible products one associated services offerings considered separate units accounting beginning new materially modified arrangements january 1 2010 allocate revenue element multipleelement arrangement based upon relative selling price deliverable applying relative selling price method determine selling price deliverable using vsoe selling price exists tpe selling price neither vsoe tpe selling price exist deliverable use best estimate selling price deliverable revenue allocated element recognized revenue recognition criteria met element adoption new revenue accounting guidance resulted 71 million increase revenues year ended december 31 2010 material impact revenues results operations year ended december 31 2010 accrue sales returns allowances reduction revenues upon shipment based upon contractual obligations historical experience channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered accrue coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments review allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances written management determined likelihood collection probable excess obsolete inventory record write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis stockbased compensation expense sharebased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock restricted stock units performance shares well employee stock purchase plan measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values estimated fair value awards including effect estimated forfeitures recognized expense requisite service period generally vesting period fair value stock option awards estimated grant date using blackscholes option valuation model fair value restricted stock units based market value common stock date grant fair value performance shares based market price stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes probable outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking stock relation target index companies performance period changes underlying factors assumptions utilized may result significant variability stockbased compensation costs record makes amounts difficult accurately predict deferred refundable taxes estimate actual current tax expense together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2010 487 million net deferred tax assets included net deferred tax asset balance 34 million valuation allowance primarily related net operating losses generated denmark recognize measure benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions evaluate uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period make change could material impact effective tax rate operating results fair value fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires us use observable market data available minimize use unobservable inputs determining fair value recurring basis measure certain financial assets liabilities fair value including marketable securities foreign currency contracts cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy december 31 2010 fixed income availableforsale securities include us treasury obligations government agency instruments corporate bonds commercial paper municipal securities money market funds included availableforsale securities cash equivalents consist investments original maturities three months less include money market funds principal market execute foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants counterparties large money center banks regional banks foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy fair value marketable securities foreign currency contracts see note 5 notes consolidated financial statements goodwill purchased intangibles assess impairment goodwill indefinite lived intangibles least annually unless impairment indicators exist sooner assess impairment whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following • significant underperformance relative projected future operating results • significant changes manner use acquired assets strategy overall business • significant negative industry economic trends determine carrying value goodwill indefinite lived intangibles may recoverable based upon existence one indicators impairment would measure impairment based projected discounted cash flow method using discount rate determined us commensurate risk inherent current business model purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years annually assess whether impairment indicators exist purchased intangibles finite lives longlived assets including intangible assets finite lives tested impairment whenever events changes circumstances indicate carrying amount assets may recoverable assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charge recorded 2010 impairment indicators existed screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated qualifying cash flow hedge effective portion derivative’s gain loss initially reported component cumulative comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements july 2010 fasb issued accounting update provide guidance enhance disclosures related credit quality company’s financing receivables portfolio associated allowance credit losses pursuant accounting update company required provide greater level disaggregated information allowance credit loss objective facilitating users’ evaluation nature credit risk inherent portfolio financing receivables risk analyzed assessed arriving allowance credit losses changes reasons changes allowance credit losses revised disclosures end reporting period effective fiscal year 2010 annual financial statements upon adoption application revised disclosures material impact consolidated financial statements disclosures activity occurs reporting period effective interim annual reporting periods beginning december 15 2010 expect adoption disclosures material impact consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” “objective” “strategy” “goal” “should” “vision” “designed”and similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview global leader standardsbased unified communications “uc” solutions leading provider telepresence video voice infrastructure solutions based open standards polycom realpresence video voice solutions infrastructure endpoints people world collaborate facetoface without physical location individuals teams connect solve decide create highdefinition visual experience desktops meeting rooms classrooms mobile devices web browsers specialized solutions video carts bedside conferences hospitals patients remote physicians removing barriers distance time connecting experts needed creating greater trust understanding visual connection polycom enables people make better decisions faster increase productivity saving time money environmentally responsible sell solutions globally hightouch sales model leverages broad network channel partners including distributors valueadded resellers system integrators leading communications services providers retailers manufacture products outsourced model optimized quality reliability fulfillment agility important drivers adoption polycom’s uc solutions include • growth video preferred method communication everywhere including major growth markets brazil russia india china • increasing presence video desktop • growth videocapable mobile devices including tablets smartphones • expansion social business tools integrated webbased video collaboration • virtualization move cloud • adoption uc small medium businesses governments globally • growth number teleworkers globally • emergence bring device byod programs businesses sizes • demand uc solutions businesstobusiness communications move consumer applications business space • continued commitment organizations individuals reduce carbon footprint expenses choosing remote connectivity travel 2011 made strategic investments executed five key strategic initiatives capture uc collaboration market opportunity optimize position partner choice global communications providers partner choice customers initiatives included • enabling cloudbased uc solutions • mobile uc solutions • leveraging uc ecosystem partners • delivery propagation polycom realpresence platform • continued delivery solutions uc innovation engine revenues 2011 15 billion increase 2773 million 23 2010 revenues increased across segments 2011 compared 2010 driven primarily investments made gotomarket capabilities americas emea apac segment revenues accounted 51 25 24 respectively revenues 2011 increased 15 25 40 respectively compared 2010 see note 13 notes consolidated financial statements information segments including summary segment revenues segment contribution margin segment accounts receivable discussion results operations consolidated level also followed discussion results operations segment three years ended december 31 2011 gross margins increased 1 percentage point 2011 compared 2010 primarily due higher services gross margins product gross margins remained relatively flat services gross margins increased geographic segments primarily result increased revenues maintenance services decreased costs percentage revenue associated delivery service due higher productivity services employees improvements product quality lower outside services operating margins increased 2011 2010 primarily due operating expenses decreasing gross margin increasing percentage revenue 2011 compared 2010 decrease operating expenses percentage revenue resulted primarily decreases sales marketing expense percentage revenue due increased productivity sales force lower general administrative expenses percentage revenue 2011 generated approximately 2996 million cash flow operating activities impact cash paid acquisitions share repurchases financing investing activities described detail “liquidity capital resources” resulted 513 million net increase total cash equivalents 2011 completed three business combinations march 21 2011 acquired accordent privately held video content management delivery solutions company july 27 2011 acquired assets hpvc business including halo products managed services business october 14 2011 acquired vivu privatelyheld video collaboration software company total net cash paid 2011 business combinations 1636 million included financial results accordent hpvc vivu consolidated financial statements respective dates acquisition june 2011 board directors approved twoforone stock split outstanding shares common stock effected form 100 stock dividend “the stock split” stock split entitled stockholder record close business june 15 2011 receive one additional share common stock every one share common stock owned date paid transfer agent july 1 2011 par value common stock maintained presplit amount 00005 per share per share data restated stock split occurred earliest period presented adjusted stock split weighted average shares outstanding earnings per share past five years follows moving forward 2012 developed strategic plan designed capture emerging network effect uc adoption enterprise public sector service providers smbs mobile remote employees social business users believe uniquely positioned uc ecosystem partner choice strategic partnerships support open standards innovative technology customercentric gotomarket capabilities central 2012 strategic plan five strategic imperatives • cloudbased uc solutions • mobile uc solutions • focused ecosystem partnerships • realpresence platform expansion former uc intelligent core platform • growth markets expect strategic imperatives drive key initiatives spending 2012 results operations three years ended december 31 2011 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues manage business primarily geographic basis organized three geographic segments net revenues include product service revenues segment summarized following table total revenues 2011 15 billion increase 2773 million 23 2010 driven increases product services revenues product revenues increased 1968 million 19 services revenue increased 805 million 39 2011 compared 2010 increase revenues primarily reflected increases revenues across segments 2011 compared 2010 predominantly apac segment primarily result investments made gotomarket capabilities resulted increased sales volumes average selling prices remained relatively stable lesser extent driven revenue hpvc acquisition third quarter 2011 americas emea apac segment revenues increased 996 million 15 745 million 25 1032 million 40 respectively 2011 compared 2010 increases driven increased revenues across many key geographic markets including united states china brazil germany russia india nordics united kingdom australia total revenues 2010 12 billion increase 2515 million 26 2009 driven increases product services revenues product revenues increased 2194 million 28 services revenue increased 321 million 18 2010 compared 2009 increase revenues primarily reflected increases revenues across segments 2010 compared 2009 result investments made gotomarket capabilities improved global economic conditions 2010 increased sales volumes average selling prices remained relatively stable americas emea apac segment revenues increased 1198 million 22 619 million 26 698 million 37 respectively 2010 compared 2009 increases driven increased revenues across many key geographic markets including united states china france germany russia singapore united kingdom australia 2011 2010 2009 one channel partner americas segment accounted 10 total net revenues believe unlikely loss channel partners would longterm material adverse effect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period addition primary view geographic basis also track revenues groups similar products services various purposes following table presents revenues groups similar products services uc group systems include immersive telepresence group video group voice systems products related service elements increase uc group systems 1759 million 22 2011 2010 primarily driven increases sales group video immersive telepresence products related services lesser extent increases revenues group voice products related services uc group systems revenues grown sequentially yearoveryear 2011 recently seen slowdown growth group video revenues primarily north america increases immersive telepresence products related services 2011 compared 2010 partially driven hpvc acquisition third quarter 2011 increase uc group systems 1739 million 28 2010 2009 primarily driven increases sales group video group voice products services geographic segments uc personal devices include desktop video devices desktop voice wireless lan products related service elements increase uc personal devices 302 million 13 2011 2010 primarily due increased sales desktop voice products geographic segments driven continued adoption voip partially offset decreased revenue wireless products uc personal devices revenues grown yearoveryear 2011 uc personal devices revenues declined sequentially fourth quarter 2011 quarterly yearoveryear growth rate decreased 5 driven primarily lower revenues north america increase uc personal devices 383 million 19 2010 2009 primarily due increased sales desktop voice products geographic segments driven continued adoption voip network infrastructure includes network infrastructure hardware software products related service elements increase network infrastructure 711 million 39 2011 2010 driven increased revenues network infrastructure products segments increase network infrastructure 393 million 27 2010 2009 driven increased revenues network infrastructure products geographic segments cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight expense royalty payments amortization certain intangible assets stockbased compensation costs allocation overhead expenses including facilities costs cost product revenues product gross margins included charges stockbased compensation 28 million 26 million 19 million years ended december 31 2011 2010 2009 respectively cost product revenues segment level consists standard cost product revenues include items warranty expense royalties allocation overhead expenses including facilities costs overall product gross margins remained essentially flat 2011 compared 2010 across segments overhead absorption costs cost sales freight warranty royalties allocated segments overall product gross margins increased 2 percentage points 2010 compared 2009 due higher sales volumes better management overhead costs increased use ocean freight 2010 lowered cost product revenues overhead absorption costs cost sales freight warranty royalties allocated segments product gross margin remained flat americas segment decreased emea apac segments decrease emea segment gross margins primarily due foreign exchange fluctuations british pounds decrease apac segment gross margins primarily due shift product mix increased discounting december 31 2011 finished goods inventory levels lower december 31 2010 levels inventory turns increased 48 turns december 31 2010 61 turns december 31 2011 decrease inventory increase inventory turns reflect ability manage lead times fulfilling orders inventory turns future may fluctuate depending ability reduce lead times well changes product mix inventory turns may also decrease future result flexibility required respond increased demands growing business sustainability global economic recovery cost service revenues service gross margins cost service revenues consists primarily material direct labor including stockbased compensation costs depreciation allocation overhead expenses including facilities costs majority services revenue related maintenance agreements new product sales well renewal existing maintenance agreements historically services lower gross margin product gross margins cost service revenues service gross margins included charges stockbased compensation 39 million 39 million 28 million years ended december 31 2011 2010 2009 respectively overall service gross margins increased 8 percentage points 2011 2010 services gross margins increased geographic segments primarily result increased revenues maintenance services decreased costs percentage revenue associated delivery services due higher productivity services employees improvements product quality lower outside services service gross margins generally experience fluctuations due various factors timing contract initiations renewals mix service offerings overall service gross margins decreased 2 percentage points 2010 2009 primarily result investments made expand professional services practice well increase mix professional services revenues percentage total services revenues generally professional services lower overall gross margin maintenance services total cost revenues total gross margins overall total gross margins percentage revenues increased 1 percentage point 2011 compared 2010 increase total gross margins driven primarily increases services gross margins discussed cost service revenues service gross margins expect gross margins remain relatively flat near term compared 2011 forecasting future gross margin percentages difficult number risks related ability maintain improve current gross margin levels cost revenues percentage revenue vary significantly based upon number factors following uncertainties surrounding revenue levels including future pricing andor potential discounts result economy response strengthening us dollar international markets related production level variances competition extent new services sales accompany product sales well maintenance renewal rates changes technology changes product mix variability stockbased compensation costs potential royalties third parties utilization professional services personnel develop professional services practice make investments expand professional services offerings increasing costs freight repair costs ability achieve greater efficiencies installations immersive telepresence products manufacturing efficiencies subcontractors manufacturing purchase price variances warranty recall costs timing sales addition may experience higher prices commodity components included products order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lowerthananticipated revenues sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force including stockbased compensation costs advertising promotional expenses product marketing expenses allocation overhead expenses including facilities costs sales marketing expenses except direct sales marketing expenses allocated segments sales marketing expenses included charges stockbased compensation 274 million 266 million 105 million years ended december 31 2011 2010 2009 respectively sales marketing expenses percentage revenues decreased 3 percentage points increased absolute dollars 13 2011 compared 2010 due primarily increased headcount compensationrelated costs including commissions sales marketing headcount increased 17 december 31 2010 december 31 2011 travel entertainment expenses depreciation facilities allocations also increased result headcount increases well due expansion demonstration center capabilities support gotomarket strategy sales marketing expenses percentage revenues increased 3 percentage points increased absolute dollars 36 2010 compared 2009 due primarily increased headcount compensationrelated costs including commissions stockbased compensation charges result investments made gotomarket strategy 2010 resulted sales marketing headcount increasing approximately 23 2010 2009 depreciation facilities allocations also increased result headcount increases well due expansion demonstration center capabilities support gotomarket strategy factors contributing increase sales marketing expenses included increased travel entertainment expenses recruitment training costs result increased headcount increased spending marketing programs reinstatement annual merit increases incentive programs third quarter 2010 expect sales marketing expenses continue increase absolute dollars near term result incurring costs recruit hire new sales marketing personnel expenses also likely increase future revenues increase also make additional investments sales marketing order extend market reach grow business support key initiatives surrounding strategic partnerships part uc ecosystem developing marketing cloudbased mobile uc solutions realpresence network infrastructure products innovations expected throughout 2012 forecasting sales marketing expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter marketing expenses also fluctuate depending upon timing extent marketing programs market new products also depending upon timing trade shows sales marketing expenses may also fluctuate due increased international expenses impact changes foreign currency exchange rates order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues research development expenses research development expenses expensed incurred consist primarily compensation costs including stockbased compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development costs allocated segments research development expenses included charges stockbased compensation 154 million 103 million 77 million years ended december 31 2011 2010 2009 respectively research development expenses increased 2011 521 million 35 compared 2010 increased 1 percentage point percentage revenues 2011 compared 2010 increase absolute dollars primarily due increased compensation costs associated increased headcount increased development expenses support key strategic initiatives including strategic partnerships part uc ecosystem cloudbased mobile uc solutions realpresence network infrastructure products research development headcount increased 38 december 31 2011 compared december 31 2010 depreciation overhead allocations also increased 2011 2010 result headcount increases increased capital investments support development projects research development expenses increased 2010 314 million 27 remaining flat percentage revenues increase absolute dollars primarily due increased headcount increased development expenses support strategic investment plan research development expenses also increased result reinstatement annual merit increases incentive programs third quarter 2010 increased stockbased compensation charges believe innovation technological leadership critical future success committed continuing significant level research development develop new technologies products combat competitive pressures new scalable video coding standard address device application network requirements mobile smb consumer networks also investing heavily research development result increased business opportunities strategic partners mobile service provider customers result key strategic initiatives areas also investing key vertical markets us federal government expect research development expenses absolute dollars increase near term fluctuate depending timing number development activities given quarter research development expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter order control expenses given quarter time taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs professional service fees allocation overhead expenses including facilities costs litigation costs general administrative expenses allocated segments general administrative expenses included charges stockbased compensation 157 million 128 million 75 million years ended december 31 2011 2010 2009 respectively general administrative expenses increased absolute dollars decreased 1 percentage point percentage revenues 2011 compared 2010 primary driver increase absolute dollars related 14 increase headcount related increases compensation headcountrelated expenses including increased overhead allocations increase partially offset decreased expenses legal outside services 2010 incurred severance legal costs associated ceo transition may 2010 reoccur 2011 general administrative expenses increased absolute dollars remained flat percentage revenues 2010 compared 2009 primary drivers increase related increased stockbased compensation charges 2010 2009 severance legal costs associated ceo transition occurred may 2010 general administrative expenses also increased due reinstatement annual merit increases incentive programs third quarter 2010 remaining increase general administrative expenses absolute dollars primarily due increased legal fees outside services lesser extent increases headcount headcountrelated expenses significant future charges due costs associated litigation uncollectability receivables could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing litigation bad debt expense associated uncollectible receivables difficult increase international revenues resulted longer credit terms increased credit risk could result increased level bad debt expense future general administrative expense increases decreases absolute dollars difficult predict due lack visibility certain costs including legal costs associated defending claims us well legal costs associated asserting enforcing intellectual property portfolio factors expect general administrative expenses increase absolute dollar amounts near term could fluctuate make investments enhancements financial operating systems costs related supporting larger company increased costs associated regulatory requirements continued investments international regions general administrative expenses may also increase result additional investments required support key strategic initiatives order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues acquisitionrelated costs expense acquisitionrelated costs incurred costs generally include outside services legal accounting fees integration services addition includes amortization cash merger consideration vesting term related vivu acquisition spent continue spend significant resources identifying acquiring businesses 2011 recorded 97 million acquisitionrelated costs primarily related acquisition accordent closed march 21 2011 acquisition hpvc closed july 27 2011 acquisition vivu closed october 14 2011 activities occurred 2010 2009 see note 2 notes consolidated financial statements information amortization purchased intangibles 2011 2010 2009 recorded 98 million 56 million 58 million respectively amortization purchased intangibles acquired acquisitions addition amounts recorded operating expenses 2011 2010 2009 recorded amortization totaling 119 million 133 million 135 million respectively related certain technology intangibles cost product revenues increase 2011 compared 2010 primarily due amortization purchased intangibles acquired accordent first quarter 2011 hpvc third quarter 2011 vivu fourth quarter 2011 purchased intangible assets amortized expense estimated useful lives range several months eight years amortization purchased intangibles 2010 remained relatively consistent recorded 2009 additions impairments changes useful lives recognized either 2010 2009 would increase decrease amortization expense amount evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charges recognized periods presented december 31 2011 2010 carrying value purchased intangibles 789 million 266 million respectively increase purchased intangibles carrying value december 31 2010 december 31 2011 due acquisitions completed year restructuring costs 2011 2010 2009 recorded 94 million 81 million 159 million respectively related restructuring actions resulted elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus efforts properly align cost structure projected revenue streams 2011 management also completed consolidation colorado facilities began transition certain engineering product management related support functions andover massachusetts facility locations order gain efficiencies restructuring charges relating actions primarily included costs idle facilities lesser extent severance relocation costs impacted individuals october 2011 management committed restructuring plan designed better align allocate resources strategic growth areas business actions primarily related reorganization global gotomarket organizations restructuring plan result elimination approximately seven percent global workforce majority reductions taking effect fourth quarter 2011 first quarter 2012 enabling creation new positions better align strategic initiatives fourth quarter 2011 recorded charges totaling 50 million related actions currently expect record additional restructuring charges make cash expenditures approximately 60 million 70 million third quarter 2012 resulting action primarily related severance employee termination benefits addition approved plans consolidate eliminate certain facilities order gain efficiencies including combination headquarters san jose california operations one location result expect record approximately 120 million additional restructuring charges related idle facilities upon vacating facilities second quarter 2012 2010 actions designed reallocate resources strategic growth areas business resulted elimination certain positions enabling hiring additional positions better align execution strategic initiatives see note 5 notes consolidated financial statements information restructure costs future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed litigation reserves payments 2010 2009 recorded 12 million 07 million respectively litigation reserves payments consolidated statements operations related settlement legal matters periods expenses 2011 see note 8 notes consolidated financial statements information also subject variety claims suits arise time ordinary course business matters subject inherent uncertainties management’s view matters may change future could result charges would material adverse impact financial position results operations cash flows interest income expense net interest income expense net consists primarily interest earned cash equivalents investments less bank charges resulting use bank accounts gains losses investments nonincome related taxes fees foreign exchange related gains losses interest income expense net expense 16 million 78 million 21 million 2011 2010 2009 respectively decrease interest income expense net 2011 2010 primarily due writedown 2010 otherthan temporarily impaired investments partially offset decrease interest income net otherthan temporarily impaired investments 2011 increase net expense 2010 2009 primarily due net losses realized sale investments 2010 increase nonincome related taxes fees 2010 compared 2009 writeoff nontrade note receivable 2010 investment losses nontrade receivable writeoffs 2009 increase net expense partially offset lower foreign exchange losses recognized 2010 compared 2009 interest income expense net fluctuate due changes interest rates returns cash investments future impairment investments foreign currency rate fluctuations unhedged exposures fluctuations costs associated hedging program timing nonincome related taxes license fees cash balance could also decrease depending upon amount cash used future acquisitions stock repurchase activity factors would also impact interest income provision income taxes overall effective tax rates 2011 2010 2009 77 169 262 respectively resulted provision income taxes 114 million 139 million 177 million 2011 2010 2009 respectively decrease effective tax rate 2011 versus 2010 due relative increase foreign earnings subject lower tax rates increase us research development tax credits increase release uncertain tax positions inclusive related interest penalties 89 million 2011 compared 53 million 2010 partially offset us taxes accrued intercompany sale intellectual properties similarly decrease effective tax rate 2010 versus 2009 primarily related relative increase foreign earnings subject lower tax rates greater releases uncertain tax positions inclusive related interest penalties 2010 53 million compared 2009 released 29 million increase us research development tax credits 2010 december 31 2011 approximately 50 million tax effected net operating losses 39 million tax effected capital loss carryforwards 120 million tax effected credit carryforwards capital net operating loss carryforward assets tax credit carryforwards begin expire 2012 2016 respectively included net deferred tax asset balance 67 million valuation allowance recorded related primarily net operating losses credits jurisdictions history credits excess taxable profits see note 12 notes consolidated financial statements information 2011 recorded reserve releases 81 million 69 million due resolution multiyear tax audits expiration statutes limitation us foreign jurisdictions resulted reserve releases 08 million 04 million reduction reserves due changes foreign exchange rates 2010 california franchise tax board completed audit 2005 2006 tax years audit resulted payment 08 million certain audit issues also settled year resulting release accrued taxes 15 million additionally 34 million tax reserves related cost sharing stock based compensation released adjustment stockholders’ equity 07 million tax reserves released due changes foreign exchange rates year 21 million tax reserves released due expiration statutes limitation us foreign jurisdictions december 31 2011 324 million unrecognized tax benefits compared 369 million december 31 2010 end 2012 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 34 million reserve releases would recorded adjustments tax expense period released recognize interest andor penalties related income tax matters income tax expense december 31 2011 2010 approximately 20 million 25 million respectively accrued interest penalties related uncertain tax positions future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income non taxdeductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies believe future effective tax rate may volatile result factors also subject periodic examination income tax returns internal revenue service tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect net income financial condition possibly materially segment information leading global provider line highquality easytouse communications equipment enables businesses telecommunications service providers governmental educational institutions effectively conduct video voice data web communications business organized around four major geographic theatres north america central americalatin america “cala” europe middle east africa “emea” asia pacific “apac” reporting purposes aggregate north america cala one segment named americas report emea apac separate segments determined accordance management views evaluates business allocates resources based criteria outlined authoritative guidance prior fourth quarter 2010 organized offerings along three product categories video communications solutions voice communications solutions services also considered operating segments reporting purposes result change presentation revenue operating results prior periods revised conform current period presentation change segment reporting impact consolidated balance sheets income statements cash flows changes shareholders’ equity periods description products services well annual financial data segment found business section form 10k note 13 notes consolidated financial statements discussions include results segments years ended december 31 2011 2010 2009 segment contribution margin includes segment revenues less related cost sales direct marketing sales expenses management allocates infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing stockbased compensation costs research development costs general administrative costs legal accounting costs acquisitionrelated integration costs amortization purchased intangible assets restructuring costs interest income expense net following summary financial information segments fiscal years ended december 31 2011 2010 2009 thousands americas segment revenues increased 15 2011 compared 2010 primarily due increased revenues united states brazil partially offset decreases canada mexico increase revenues driven increases uc group systems uc personal devices network infrastructure revenues increases uc group systems revenues americas primarily driven increased group voice revenues increased group video revenues increased immersive telepresence revenues increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip partially offset decreased wireless product revenues decreased desktop video revenues network infrastructure revenues growth result increased sales realpresence products services north america revenues increased 2011 2010 seen decline quarterly yearoveryear growth rates including recently fourth quarter 2011 lowest level since fourth quarter 2009 believe decline primarily due execution issues recently made changes leadership structure sales organization intended realign optimize region americas segment revenues increased 22 2010 compared 2009 primarily due improvement economic environment particularly united states brazil canada resulted increased demand products services increase revenues driven increases uc group systems uc personal devices network infrastructure revenues increases uc group systems revenues americas primarily driven increased group voice revenues increased group video revenues lesser extent increased immersive telepresence revenues increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip network infrastructure revenues growth result increased sales realpresence products services 2011 2010 2009 one channel partner americas segment accounted 26 24 20 americas net revenues respectively believe unlikely loss channel partners would long term material adverse effect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period contribution margin percentage america’s segment revenues 42 2011 compared 40 2010 contribution margin percentage revenue increased 2 percentage points primarily due increased gross margins decrease sales marketing expenses percentage revenue increase gross margins driven primarily mix shift toward higher margin products realpresence network infrastructure product offerings decrease cost services percentage revenues direct sales marketing expenses increased absolute dollars decreased percentage revenue increases absolute dollars due increased headcount higher spend marketing programs decrease percentage revenue due increased productivity sales force contribution margin percentage revenue may fluctuate 2012 implement changes leadership structure north america sales organization intended realign optimize region contribution margin percentage america’s segment revenues 40 2010 2009 contribution margin percentage revenue remained consistent due primarily flat gross margins direct sales marketing expenses increasing absolute dollars remained flat percentage revenue emea segment revenues increased 25 2011 compared 2010 primarily due broadbased growth throughout emea led growth russia uk germany nordic countries partially offset decrease spain increase revenues driven increases uc group systems network infrastructure uc personal devices revenues increases uc group systems revenues emea primarily driven increased group video revenues increased group voice revenues increased immersive telepresence revenues network infrastructure revenues growth result increased sales products services comprise realpresence network infrastructure products services increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip technology increase wireless product revenues increase desktop video revenues emea segment revenues increased 26 2010 compared 2009 primarily due improvement economic environment resulted increased demand products services revenues western european countries france germany united kingdom contributed growth emea followed russia united arab emirates ireland south africa increase revenues driven increases uc group systems network infrastructure uc personal devices revenues increases uc group systems revenues emea primarily driven increased group video revenues lesser extent increased group voice revenues increased immersive telepresence revenues network infrastructure revenues growth result increased sales products services comprise realpresence increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip increase wireless product revenues 2011 2010 one channel partner emea segment accounted 10 12 emea net revenues respectively 2009 one channel partner emea segment accounted 10 emea net revenues contribution margin percentage emea segment revenues 41 2011 compared 36 2010 contribution margin percentage revenue increased primarily due higher gross margins lower direct sales marketing expenses percentage revenues increase gross margins driven primarily decrease cost services percentage revenues mix shift toward higher margin products realpresence network infrastructure product offerings direct sales marketing expenses increased absolute dollars decreased percentage revenue increases absolute dollars primarily due increased headcount partially offset decrease marketing program investments decrease percentage revenue primarily due increased productivity sales force well decrease marketing program investments contribution margin percentage emea segment revenues 36 2010 compared 38 2009 contribution margin percentage revenue decreased primarily due lower gross margins direct sales marketing expenses increasing absolute dollars remained relatively flat percentage revenues decrease gross margins driven primarily fluctuations foreign currencies primarily british pound apac segment revenues increased 40 2011 compared 2010 primarily due investments made gotomarket capabilities revenues china australia india contributed strong growth apac increase revenues driven increases uc group systems network infrastructure lesser extent uc personal devices revenues increases uc group systems revenues apac primarily driven increased group video revenues lesser extent increased group voice revenues increased immersive telepresence revenues network infrastructure revenues growth result increased sales realpresence network infrastructure products services increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip technologies apac segment revenues increased 37 2010 compared 2009 primarily due investments made gotomarket capabilities improved economic environment resulted increased demand products services revenues china singapore australia japan india contributed strong growth apac increase revenues driven increases uc group systems network infrastructure uc personal devices revenues increases uc group systems revenues apac primarily driven increased group video revenues lesser extent increased group voice revenues increased immersive telepresence revenues increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip network infrastructure revenues growth result increased sales products services comprise realpresence 2011 2010 2009 two channel partners apac segment aggregate accounted 33 25 respectively apac net revenues contribution margin percentage apac segment revenues 49 2011 compared 46 2010 contribution margin percentage revenue increased primarily due higher gross margins lower sales marketing expenses percentage revenue increase gross margins driven primarily decrease cost services percentage revenue product gross margin percentage revenue increased slightly increase gross margins driven primarily decrease cost services percentage revenues mix shift toward higher margin products realpresence network infrastructure product offerings direct sales marketing expenses increasing absolute dollars decreased percentage revenues decrease sales marketing expense percentage revenues due spending mix investments focused lower cost areas contribution margin percentage apac segment revenues 46 2010 compared 47 2009 contribution margin percentage revenue decreased primarily due lower gross margins direct sales marketing expenses increasing absolute dollars remained relatively flat percentage revenues decrease gross margins driven primarily changes product mix lower average selling prices due increased discounting liquidity capital resources december 31 2011 principal sources liquidity included cash equivalents 3754 million shortterm investments 1594 million longterm investments 568 million substantially shortterm longterm investments comprised us government agency securities corporate debt securities see note 6 notes consolidated financial statements information shortterm longterm investments also outstanding letters credit totaling approximately 23 million majority place satisfy certain facility lease requirements total cash equivalents investments held united states totaled 1514 million december 31 2011 remaining 4402 million held various foreign subsidiaries outside united states would need access cash equivalents investments held outside united states order fund acquisitions share repurchases working capital needs may subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes generated cash operating activities totaling 2996 million 2011 1434 million 2010 1808 million 2009 increase cash provided operating activities 2011 2010 due primarily higher net income noncash expenses decreased inventory smaller increase prepaid expenses current assets higher increase accounts payable accrued liabilities taxes payable partially offsetting positive effects increases accounts receivables deferred taxes decrease cash provided operating activities 2010 2009 due primarily increased inventory prepaid expenses current assets higher increase accounts receivable lower increase accounts payable lesser extent increase deferred taxes partially offsetting negative effects increases accrued liabilities noncash expenses net income total net change cash equivalents year ended 2011 increase 513 million primary sources cash 2996 million operating activities 408 million associated exercise stock options purchases employee stock purchase plan 134 million excess tax benefit stockbased compensation primary uses cash period 1636 million acquisitions 693 million purchases property equipment 649 million purchases common stock 47 million purchases investments net proceeds investments days sales outstanding dso metric 49 days december 31 2011 compared 41 days december 31 2010 expect continue experience upward pressure dso result increase international receivables typically longer payment terms dso could vary result number factors fluctuations revenue linearity change mix international receivables increases receivables service providers government entities also customarily longer payment terms dso could also negatively impacted partners experience difficulty financing purchases results delays payment us december 31 2011 finished goods inventory levels lower december 31 2010 levels inventory turns increased 48 turns december 31 2010 61 turns december 31 2011 decrease inventory increase inventory turns reflect ability manage lead times fulfilling orders inventory turns future may fluctuate depending ability reduce lead times well changes product mix inventory turns may also decrease future result flexibility required respond increased demands growing business sustainability global economic recovery cash used purchases property equipment remained flat 693 million 2011 compared 2010 expect purchases property equipment 2012 increase due headquarters move upgrades enterprise resource planning “erp” systems continued support strategic imperatives enter foreign currency forward contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record balance sheet reporting period fair value foreign currency forward contracts record fair value adjustments results operations gains losses associated currency rate changes contracts recorded interest income expense net offsetting transaction gains losses related assets liabilities additionally hedging costs vary depending size hedging program whether purchasing selling foreign currency relative us dollar interest rate spreads us foreign markets additionally also hedging program uses foreign currency forward contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated israeli shekels reporting period record fair value unrealized forward contracts balance sheet related unrealized gains losses component accumulated comprehensive income loss separate element stockholders’ equity realized gains losses associated effective portion foreign currency forward contracts recorded within revenue operating expense depending upon underlying exposure hedged excluded ineffective portions hedging instrument would recorded interest income expense net time board directors approved plans us purchase shares common stock open market years ended december 31 2011 2010 2009 purchased approximately 20 million 48 million 32 million shares adjusted stock split respectively common stock open market cash 400 million 692 million 328 million respectively december 31 2011 authorized purchase additional 780 million 2008 share repurchase plan see note 10 notes consolidated financial statements discussion accounting common stock repurchases resultant accumulated deficit related reduction retained earnings applicable included stockholders’ equity consolidated balance sheet december 31 2011 open purchase orders related contract manufacturers contractual obligations approximately 2280 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition bank issued letters credit totaling approximately 23 million majority used secure leases offices table set forth shows december 31 2011 future minimum lease payments due current lease obligations sublease income netted amounts addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2011 contractual obligations december 31 2011 follows thousands december 31 2011 324 million unrecognized tax benefits compared 369 million december 31 2010 end 2012 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 34 million reserve releases would recorded adjustments tax expense period released believe available cash equivalents investments sufficient meet operating expenses capital requirements least next twelve months however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2011 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements additional discussion accounting policies revenue recognition product returns recognize revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met generally recognize service revenues ratably service periods one five years upon completion installation professional services products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts sale involves multiple deliverables sales products include services multiple deliverables evaluated determine unit accounting entire fee arrangement allocated unit accounting based relative selling price deliverable applying relative selling price method determine selling price deliverable using vendorspecific objective evidence “vsoe” selling price exists thirdparty evidence “tpe” selling price neither vsoe tpe selling price exist deliverable use best estimate selling price deliverable revenue allocated element recognized revenue recognition criteria met element channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered accrue coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments review allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances written management determined likelihood collection probable excess obsolete inventory record writedowns excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis stockbased compensation expense stockbased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock restricted stock units performance shares well employee stock purchase plan measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values estimated fair value awards including effect estimated forfeitures recognized expense requisite service period generally vesting period fair values stock option awards shares purchased employee stock purchase plan estimated grant date using blackscholes option valuation model fair value restricted stock units based market value common stock date grant fair value performance shares based market price stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes probable outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking stock among russell 2000 index companies awards granted prior 2011 nasdaq composite index companies awards granted 2011 performance period changes underlying factors assumptions utilized may result significant variability stockbased compensation costs record makes amounts difficult accurately predict deferred refundable taxes estimate actual current tax expense together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2011 588 million net deferred tax assets included net deferred tax asset balance 67 million valuation allowance recorded related primarily net operating losses credits jurisdictions history credits excess taxable profits recognize measure benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions evaluate uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period make change could material impact effective tax rate operating results fair value fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires us use observable market data available minimize use unobservable inputs determining fair value recurring basis measure certain financial assets liabilities fair value including marketable securities foreign currency contracts cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy december 31 2011 fixed income availableforsale securities include us treasury obligations government agency instruments corporate bonds commercial paper municipal securities money market funds included availableforsale securities cash equivalents consist investments original maturities three months less include money market funds principal market execute foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants counterparties large money center banks regional banks foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy information fair values marketable securities foreign currency contracts see note 6 notes consolidated financial statements business combinations recognize separately goodwill fair value assets acquired liabilities assumed goodwill acquisition date measured excess consideration transferred net acquisition date fair values assets acquired liabilities assumed use best estimates assumptions part purchase price allocation process accurately value assets acquired liabilities assumed acquisition date estimates inherently uncertain subject refinement result measurement period may one year acquisition date may record adjustments retrospectively fair value assets acquired liabilities assumed corresponding offset goodwill upon conclusion measurement period final determination fair value assets acquired liabilities assumed whichever comes first subsequent adjustments recorded consolidated statements operations addition uncertain tax positions tax related valuation allowances assumed connection business combination initially estimated acquisition date reevaluate items quarterly record adjustments preliminary estimates goodwill provided within measurement period continue collect information order determine estimated fair values date acquisition subsequent measurement period final determination tax allowance’s estimated value changes uncertain tax positions tax related valuation allowances affect provision income taxes consolidated statements operations goodwill purchased intangibles goodwill amortized regularly reviewed potential impairment september 2011 fasb issued authoritative guidance goodwill impairment testing provides entities option perform qualitative assessment determine whether impairment testing necessary although new guidance provides qualitative assessment regard impairment entities must still follow preliminary steps identify reporting units assign assets liabilities reporting units assign goodwill applicable reporting units elected early adopt guidance 2011 adoption impact consolidated financial statements polycom’s business organized around four major geographic theatres north america central americalatin america “cala” europe middle east africa “emea” asia pacific “apac” determined reporting units 2011 goodwill reallocated four reporting units october 1 2011 based qualitative review company’s financial factors including market capitalization profitability well macroeconomic factors including size growth market company competes determined goodwill impaired december 31 2011 reporting purposes company aggregates north america cala one segment named americas reports emea apac separate segments december 31 2010 three reportable segments also determined reporting units 2010 testing assessment goodwill impairment conducted determining fair value reporting units company compared fair value new reporting units reporting unit’s carrying value date fair value determined using income approach market approach weighted equally income approach fair value asset based value estimated cash flows asset expected generate future estimated future cash flows discounted rates ranging 12 13 percent arrive respective fair values market approach fair value unit based analysis financial data publicly traded companies engaged similar lines business based results impairment tests indicated estimated fair values company’s reporting units substantially exceed carrying value company determined goodwill assets impaired december 31 2010 assess impairment indefinite lived intangibles least annually unless impairment indicators exist sooner assess impairment whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include following • significant underperformance relative projected future operating results • significant changes manner use acquired assets strategy overall business • significant negative industry economic trends determine carrying value goodwill indefinite lived intangibles may recoverable based upon existence one indicators impairment would measure impairment based projected discounted cash flow method using discount rate determined us commensurate risk inherent current business model purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years annually assess whether impairment indicators exist purchased intangibles finite lives longlived assets including intangible assets finite lives tested impairment whenever events changes circumstances indicate carrying amount assets may recoverable assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charge recorded 2011 impairment indicators existed screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests private company investments periodically make strategic investments companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant writedown carrying value investment believe investment experienced decline value temporary year ended december 31 2011 recorded 01 million impairment net recoveries investments interest income expense net consolidated statements operations years ended december 31 2010 2009 record impairment december 31 2011 2010 private company investments carrying value 20 million 25 million respectively recorded “other assets” consolidated balance sheets derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements june 2011 fasb issued authoritative guidance presentation comprehensive income become effective us beginning january 1 2012 earlier adoption permitted standard eliminates current option report comprehensive income components statement changes equity elected early adopt guidance 2011 adoption material impact consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” “objective” “strategy” “goal” “should” “vision” “designed” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview global leader open standardsbased unified communications collaboration “ucc” solutions voice video content collaboration solutions powered polycom® realpresence® platform comprehensive software infrastructure rich application programming interfaces “apis” interoperate broad set communication business mobile cloud applications devices deliver secure facetoface video collaboration across different environments polycom® realpresence® collaboration solutions infrastructure endpoints environments people world collaborate facetoface without physical location individuals teams connect communicate collaborate highdefinition visual experience desktops meeting rooms classrooms home offices mobile devices web browsers specialized solutions video carts healthcare applications removing barriers distance time connecting experts needed creating greater trust understanding visual connection enable people make better decisions faster increase productivity saving time money environmentally responsible sell solutions globally hightouch sales model leverages broad network channel partners including distributors valueadded resellers system integrators leading communications services providers retailers manufacture products outsourced model optimized quality reliability fulfillment agility believe important drivers adoption collaboration solutions include · ucc solutions including voice video offerings preferred method communication · increasing presence video desktop laptop devices · growth videocapable mobile devices including tablets smartphones · growth microsoft lync corporate environment resulting impact sales polycom’s lynccompactible voice video devices · expansion business applications integrated webbased video content collaboration · virtualization move private public hybrid clouds · adoption ucc small medium businesses · growth number teleworkers globally · new pricing models options video delivery including subscriptionbased software pricing asaservice offerings · emergence bring device byod programs businesses sizes across regions · demand ucc solutions businesstobusiness businesstoconsumer communications move consumer applications business space · continued commitment organizations individuals reduce carbon footprint expenses choosing video collaboration travel believe uniquely positioned ucc ecosystem partner choice strategic partnerships support open standards innovative technology multiple delivery modes customercentric gotomarket capabilities total revenues 2013 14 billion decrease 242 million 2 2012 yearoveryear basis total product revenues declined service revenues increased segments overall decrease product revenues primarily result lower sales uc group systems uc platform products partially offset increase product revenues uc personal devices products increase service revenues driven primarily increased maintenance revenues larger installed base increased maintenance service renewals yearoveryear segment perspective americas emea apac segment revenues accounted 50 25 respectively revenues 2013 emea apac segment revenues decreased 2 6 respectively americas segment revenues increased 1 2013 compared 2012 yearoveryear basis product revenues declined service revenues increased across segments see note 17 notes consolidated financial statements information segments including summary segment revenues segment contribution margins segment gross accounts receivable discussion results operations consolidated level also followed discussion results operations segment year ended december 31 2013 believe decline revenues 2013 due several factors including company industry transition point products solution selling resulted customers requiring additional time consider comprehensive ucc strategy versus point product end point deployments slower public sector spending north america lower revenues emea segment impacted economic conditions europe continuing slowdown government spending softer demand key geographies china india product revenues decreased yearoveryear since first quarter 2012 driven lower uc group systems products primarily group video products lower uc platform products primarily americas segment expect trend continue least near term operating margins decreased 1 percentage point 2013 compared 2012 decrease operating margin primarily driven decrease gross margin percentage revenue operating expenses percentage revenue remained relatively flat yearoveryear gross margin decreased 1 percentage point yearoveryear primarily result lower revenues changes product mix toward lower margin uc personal devices products 2013 compared 2012 operating expenses decreased slightly absolute dollars yearoveryear primarily due decreased headcountrelated costs lower transactionrelated costs largely offset higher restructuring charges 2013 generated approximately 1684 million cash flow operating activities impact cash received term loan cash payments share repurchases financing investing activities described detail “liquidity capital resources” resulted 844 million net decrease total cash equivalents results operations three years ended december 31 2013 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues manage business primarily geographic basis organized three geographic segments net revenues include product service revenues segment summarized following table total revenues 2013 14 billion decrease 242 million 2 2012 overall decrease revenues 2013 2012 due decreases product revenues 514 million 5 partially offset increases service revenues 271 million 8 2013 compared 2012 product revenues decreased 2013 primarily result decreases revenues uc group systems lesser extent decreases uc platform revenues partially offset increased product revenues uc personal devices increase service revenues primarily due increased maintenance revenues larger installed base increased maintenance service renewals yearoveryear segment perspective emea apac segment revenues decreased 77 million 2 220 million 6 respectively americas segment revenues increased 54 million 1 2013 compared 2012 overall decrease revenues 2013 driven primarily decreased revenues across many key geographic markets including india china germany nordic countries russia partially offset increases united states japan united kingdom australia product revenues decreased service revenues increased across segments 2013 compared 2012 total revenues 2012 14 billion decrease 96 million 1 2011 overall decrease revenues 2012 2011 due decreases product revenues 956 million 8 largely offset increases service revenues 860 million 33 2012 compared 2011 product revenues decreased 2012 primarily result decreases revenues uc group systems lesser extent decreases uc platform revenues partially offset increased product revenues uc personal devices increases service revenues primarily due increased maintenance revenues larger installed base increased managed service revenues result hpvc business acquisition completed third quarter 2011 total revenues decreased across segments 2012 compared 2011 americas emea apac segment revenues decreased 42 million 20 million 34 million respectively 2012 compared 2011 sequential decline 1 yearoveryear segment overall decrease driven decreased revenues across many key geographic markets including united states australia brazil nordic countries middle eastafrica turkey india japan china overall product revenues decreased service revenues increased across segments 2012 compared 2011 cisco informed us end life therefore longer resell ip conference phones purchase us 2013 generated approximately 426 million revenues relationship expect remaining revenues cisco less 50 million 2014 planning transition working evolve features functionality voip conference phone portfolio interoperable cisco environment 2013 2012 2011 one channel partner scansource communications accounted 16 14 respectively total revenues believe unlikely loss channel partners would longterm material adverse effect consolidated revenues segment revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period addition primary view geographic basis also track revenues groups similar products services various purposes following table presents revenues groups similar products services uc group systems include immersive telepresence group video group voice systems products related service elements decrease uc group systems revenue 512 million 5 2013 2012 primarily driven decreased sales group video systems immersive telepresence products related services geographic segments lesser extent decreased sales group voice systems products related services emea apac segments partially offset increased sales group voice systems products related services americas segment decrease uc group systems revenue 156 million 2 2012 2011 primarily driven decreased sales group video systems products related services geographic segments lesser extent decreased sales group voice systems products related services americas emea segments decreases partially offset increased sales immersive telepresence products related services across segments lesser extent increased sales group voice systems products related services apac segment uc personal devices include desktop video devices desktop voice products related service elements increase uc personal devices revenue 382 million 21 2013 2012 primarily due increased sales desktop voice products related services segments partially offset decreased sales desktop video products related services segments overall increase uc personal devices revenues due part increased demand microsoft® lync® interoperable solutions continued adoption voip technologies increase uc personal devices revenue 53 million 3 2012 2011 primarily due increased sales desktop voice products related services americas emea segments partially offset decreased revenues desktop video products related services geographic segments lesser extent decreased revenues desktop voice products related services apac segment uc platform includes realpresence platform hardware software products related service elements decrease uc platform revenue 112 million 4 2013 2012 primarily driven decreased sales uc platform products related services americas apac segments partially offset increased revenues emea segment uc platform revenues remained relatively flat 2012 compared 2011 primarily due increases revenues americas apac segments largely offset decreased revenues emea segment cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight royalty payments amortization certain intangible assets stockbased compensation costs allocation overhead expenses including facilities costs cost product revenues product gross margins included charges stockbased compensation 29 million 36 million 25 million years ended december 31 2013 2012 2011 respectively cost product revenues segment level consists standard cost product revenues include items warranty expense royalties allocation overhead expenses including facilities costs overall product gross margins decreased 2 percentage points 2013 compared 2012 primarily due lower expected product sales changes product mix uc platform uc group systems products typically higher gross margin uc personal products overall product gross margins fluctuate depending upon product mix given period geography product gross margin decreased across segments 2013 compared 2012 americas largest decline due greater mix uc personal products compared emea apac segments product gross margins also decreased 2013 compared 2012 result increased amortization purchased intangibles partially offset decreases warranty expense royalties also incurred higher costs 2013 2012 associated increased excess obsolete inventories result product transitions overall product gross margins decreased 2 percentage points 2012 compared 2011 primarily due lower expected product sales increased amortization purchased intangibles royalties partially offset lower warranty expense segment perspective product gross margins decreased americas apac segments increased emea segment 2012 compared 2011 inventory turns 58 turns december 31 2013 compared 57 turns december 31 2012 inventory turns decreased 64 turns december 31 2011 57 turns december 31 2012 primarily result higher inventory levels 2012 compared 2011 due increase uc group product inventories related new product introductions inventory turns future may fluctuate depending ability reduce lead times well changes product mix ocean freight versus air freight inventory turns may also decrease future result flexibility required respond customer demands cost service revenues service gross margins cost service revenues consists primarily material direct labor including stockbased compensation costs depreciation allocation overhead expenses including facilities costs majority service revenues related maintenance agreements new product sales renewal existing maintenance agreements managed services offerings cost service revenues service gross margins included charges stockbased compensation 59 million 66 million 38 million years ended december 31 2013 2012 2011 respectively overall service gross margins remained relatively flat 2013 compared 2012 primarily due increased service revenues substantially offset increased cost services service revenues increased 8 2013 2012 primarily due increased maintenance service revenues larger installed base increased maintenance service renewals increase direct spending costs result increased headcountrelated costs well facilities allocations partially offset decreased managed network costs service organization headcount increased 6 december 31 2012 december 31 2013 service gross margins percentage service revenue decreased americas segment increased emea apac segments 2013 compared 2012 overall service gross margins decreased 2 percentage points 2012 2011 primarily due lower margin managed services business acquired part hpvc acquisition 2011 direct spending costs increased primarily result increased headcountrelated costs including stockbased compensation costs well facilities allocations result 21 increase services organization headcount december 31 2011 december 31 2012 service gross margins percentage service revenue decreased emea apac segments americas segment 2012 compared 2011 total cost revenues total gross margins overall total gross margins percentage revenue decreased 1 percentage point 2013 compared 2012 primarily due decreases product gross margins discussed cost product revenues product gross margins total gross margins percentage revenue decreased 2 percentage points 2012 compared 2011 due decreases product service gross margins discussed cost product revenues product gross margins cost services revenues service gross margins expect gross margins remain relatively flat near term compared 2013 forecasting future gross margin percentages difficult number risks related ability maintain improve current gross margin levels cost revenues percentage revenue vary significantly based upon number factors following uncertainties surrounding revenue levels including future pricing andor potential discounts result economy response strengthening us dollar international markets related production level variances competition extent new services sales accompany product sales well maintenance renewal rates changes technology changes product mix variability stockbased compensation costs potential royalties third parties utilization professional services personnel develop professional services practice make investments expand professional services offerings increasing costs freight repair costs ability achieve greater efficiencies installations immersive telepresence products manufacturing efficiencies subcontractors manufacturing purchase price variances warranty recall costs timing sales addition may experience higher prices commodity components included products order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lowerthananticipated revenues sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force including stockbased compensation costs advertising promotional expenses product marketing expenses allocation overhead expenses including facilities costs sales marketing expenses except direct sales marketing expenses allocated segments sales marketing expenses included charges stockbased compensation 266 million 368 million 270 million years ended december 31 2013 2012 2011 respectively sales marketing expenses percentage revenue decreased 1 percentage point decreased absolute dollars 293 million 6 2013 compared 2012 primarily due decreased headcountrelated costs including compensation commission expenses headcountbased allocations stockbased compensation decreased marketing programs spending partially offset increased outside services costs sales marketing headcount decreased 7 december 31 2012 december 31 2013 order better align costs revenues sales marketing expenses percentage revenue increased 3 percentage points increased absolute dollars 355 million 8 2012 compared 2011 primarily due increased headcountrelated costs including compensation commission expenses stockbased compensation headcountbased allocations factors contributing increase include consulting outside services related rebranding product launches well increased telemarketing expenses increases partially offset decrease training expenses expect sales marketing expenses decrease absolute dollars near term expenses fluctuate depending revenue levels achieved certain expenses commissions determined based revenues achieved forecasting sales marketing expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter marketing expenses also fluctuate depending upon timing extent marketing programs market new products sales marketing expenses may also fluctuate due increased international expenses impact changes foreign currency exchange rates order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues research development expenses research development costs expensed incurred consist primarily compensation costs including stockbased compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development costs allocated segments research development expenses included charges stockbased compensation 156 million 202 million 149 million years ended december 31 2013 2012 2011 respectively research development expenses percentage revenue increased 1 percentage point increased absolute dollars 75 million 4 2013 compared 2012 primarily due increased headcountrelated costs including compensation expenses headcountbased allocations partially offset decreased outside services costs stockbased compensation decreased material expenses due less hardware development activities 2013 research development headcount increased 11 december 31 2012 december 31 2013 additionally 2013 capitalized approximately 24 million development costs internally developed software products marketed sold customers including direct labor related overhead costs well stockbased compensation costs capitalized prior 2013 software development costs qualifying capitalization significant expect amount capitalized software development costs fluctuate depending upon nature timing software development activities given period see notes 1 5 notes consolidated financial statements information software development costs research development expenses percentage revenue increased 1 percentage point increased absolute dollars 182 million 10 2012 compared 2011 increase absolute dollars primarily due increased compensation expenses outside services development expenses support key strategic initiatives research development headcount increased 3 december 31 2011 december 31 2012 depreciation overhead allocations also increased 2012 2011 result increased headcount capital investments support development projects believe innovation technological leadership critical future success committed continuing significant level research development develop new technologies products combat competitive pressures also investing research development result business opportunities strategic partners mobile service provider customers expect research development expenses absolute dollars remain relatively flat near term fluctuate depending timing number development activities given quarter research development expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter order control expenses given quarter time taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs professional service fees allocation overhead expenses including facilities costs litigation costs bad debt expense general administrative expenses allocated segments general administrative expenses included charges stockbased compensation 135 million 216 million 157 million years ended december 31 2013 2012 2011 respectively general administrative expenses percentage revenue remained relatively flat decreased absolute dollars 17 million 2 2013 compared 2012 decrease absolute dollars primarily due decreased stockbased compensation charges lower bad debt expense partially offset increases headcountrelated costs including compensation costs headcountbased allocations increased outside services including increased legal insurance costs general administrative expenses percentage revenue increased 1 percentage point increased absolute dollars 166 million 20 2012 compared 2011 increase absolute dollars primarily due increased compensation costs including stockbased compensation increased legal costs bad debt expense well headcountbased allocations result increased headcount headquarters building general administrative headcount increased 14 december 31 2011 december 31 2012 significant future charges due costs associated litigation uncollectability receivables could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing litigation bad debt expense associated uncollectible receivables difficult increase international revenues resulted longer credit terms increased credit risk could result increased level bad debt expense future general administrative expense increases decreases absolute dollars difficult predict due lack visibility certain costs including legal costs associated defending claims us current former officers directors well legal costs associated asserting enforcing intellectual property portfolio factors expect general administrative expenses remain relatively flat absolute dollar amounts near term could fluctuate depending level timing additional investments required support strategic initiatives order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues transactionrelated costs expense acquisition transaction related costs incurred costs generally include fees outside legal accounting services integration services addition incurred costs related planning executing divestiture enterprise wireless solutions business “ews” announced may 2012 closed december 2012 expect continue spend resources identify acquire businesses future 2013 recorded 34 million transactionrelated costs 2012 recorded 141 million transactionrelated costs primarily associated planning executing divestiture ews business including legal costs associated enforcing terms agreements see note 3 notes consolidated financial statements information decrease transactionrelated costs 2013 2012 primarily due legal administrative expenses incurred planning executing divestiture ews business 2012 2011 recorded 97 million transactionrelated costs primarily related acquisition accordent hpvc vivu closed 2011 see note 2 notes consolidated financial statements information amortization purchased intangibles 2013 2012 2011 recorded 104 million 98 million 55 million respectively operating expenses amortization purchased intangibles acquired acquisitions addition amounts recorded operating expenses 2013 2012 2011 recorded amortization expenses totaling 94 million 76 million 57 million respectively related certain technology intangibles cost product revenues sequential increases yearoveryear 2011 2013 primarily due amortization purchased intangibles acquired sentri first quarter 2013 accordent first quarter 2011 hpvc third quarter 2011 vivu fourth quarter 2011 purchased intangible assets amortized expense estimated useful lives range several months six years 2013 result change estimate shortened useful lives certain intangible assets acquired resulting higher amortization expenses 2013 evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charges recognized periods presented restructuring costs 2013 2012 2011 recorded 485 million 220 million 94 million respectively related restructuring actions resulted consolidation certain facilities elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus efforts properly align cost structure projected future revenue streams 2013 completed consolidation elimination certain facilities globally elimination four percent global workforce actions approved management august 2013 result recorded approximately 354 million net 28 million deferred rent restructuring charges related idle facilities upon vacating facilities 102 million charges severance onetime employee benefits individuals impacted addition recorded 29 million charges associated changes product roadmap focus products solutions greater revenue margin potential 2012 completed consolidation elimination certain facilities order gain efficiencies including combination headquarters san jose santa clara california one new location san jose california result recorded approximately 89 million net 28 million deferred rent restructuring charges related idle facilities upon vacating facilities second quarter 2012 addition recorded approximately 131 million charges primarily severance employee benefits related restructuring actions approved management october 2011 july 2012 action plan approved july 2012 resulted elimination approximately four percent global workforce enabling us focus resources product development product launch initiatives 2011 completed consolidation colorado facilities began transition certain engineering product management related support functions andover massachusetts facility locations order achieve efficiencies restructuring charges relating actions primarily included costs idle facilities lesser extent severance relocation costs impacted individuals additionally october 2011 committed restructuring plan designed better align allocate resources strategic growth areas business actions primarily related reorganization global gotomarket organizations restructuring plan resulted elimination approximately seven percent global workforce majority reductions taking effect fourth quarter 2011 first quarter 2012 enabling creation new positions better aligned strategic initiatives 2011 recorded approximately 87 million restructuring charges related severance employee benefits 07 million related idle facilities see note 7 notes consolidated financial statements information restructuring costs currently expect record additional restructuring charges 320 million 360 million third quarter 2014 primarily related actions reduce eliminate certain facilities elimination approximately six percent global workforce order better align expenses revenue gross margin profile position company improved operating performance future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed interest income expense net interest expense consists primarily imputed interest related certain long term obligations interest borrowings credit agreement entered september 2013 income expense consists primarily interest earned cash equivalents investments less bank charges resulting use bank accounts realized gains losses investments fixed asset disposals nonincome based taxes fees foreign exchange related gains losses interest expense 32 million 08 million 05 million 2013 2012 2011 respectively increase interest expense yearoveryear primarily due higher imputed interest expense associated certain long term obligations interest expense borrowings credit agreement expect interest expense increase 2014 result full year interest expense borrowings credit agreement income expense net expense 18 million 31 million 11 million 2013 2012 2011 respectively decrease net expense 2013 2012 primarily due increase net interest income decrease nonincome based taxes fees partially offset increased losses fixed asset disposals foreign exchange related gains losses essentially flat yearoveryear increase net expense 2012 2011 primarily due higher nonincome related taxes fees well foreign exchange related gains losses partially offset increase interest income expense fluctuate due changes interest rates returns cash investments future impairment investments foreign currency rate fluctuations unhedged exposures fluctuations costs associated hedging program timing nonincome related taxes license fees fixed asset disposals cash balance could also decrease depending upon amount cash used future acquisitions stock repurchase activity factors would also impact interest income provision income taxes continuing operations subject income taxes us numerous foreign jurisdictions effective tax rates differ statutory rate primarily due tax impact state taxes foreign operations lower tax jurisdictions rd tax credits domestic manufacturing deductions nondeductible stock based compensation changes reserves uncertain tax positions intercompany sales intellectual property addition 2012 effective tax rate includes impact 388 million federal state taxes recorded 1033 million related tax consequences global restructuring project designed accommodate trend toward software virtual based solutions versus traditional hardware distribution model effective tax rate 165 15799 47 2013 2012 2011 respectively december 31 2013 approximately 13 million tax effected net operating loss carryforwards 12 million tax effected capital loss carryforwards 165 million tax effected credit carryforwards net operating loss carryforwards 01 million credits relate acquisitions result limited amount recognized one year capital net operating loss carryforward assets tax credit carryforwards begin expire 2015 included net deferred tax asset balance 34 million valuation allowance 29 million relates research credits jurisdiction history credits excess taxable profits 05 million relates foreign tax credit carryforwards see note 15 notes consolidated financial statements information provide us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2013 cumulative amount earnings upon us income tax provided approximately 3044 million practicable determine income tax liability might incurred earnings repatriated us 2013 recorded reserve reductions 24 million due expiration statutes limitation us foreign jurisdictions 2012 recorded reserve reductions 100 million 08 million paid settlement multiyear state tax audit 57 million due reduction unrecognized tax benefits research credits acquired companies expiration statutes limitation us foreign jurisdictions also resulted reserve releases 35 million 2011 recorded reserve releases 81 million 69 million due resolution multiyear tax audits expiration statutes limitation us foreign jurisdictions resulted reserve releases 08 million 04 million reduction reserves due changes foreign exchange rates december 31 2013 220 million unrecognized tax benefits compared 230 million december 31 2012 end 2014 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 09 million reserve releases would recorded adjustments tax expense period released recognize interest andor penalties related income tax matters income tax expense december 31 2013 2012 approximately 15 million accrued interest penalties related uncertain tax positions future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income nontax deductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies example january 2 2013 “american taxpayer relief act 2012” signed law provided extension federal research credit retroactive 2012 extended 2013 impact 2012 federal research credit 23 million recorded first quarter 2013 believe future effective tax rate may volatile result factors also subject periodic examination income tax returns internal revenue service tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect net income financial condition possibly materially discontinued operations december 4 2012 completed disposition net assets ews business mobile devices holdings llc delaware limited liability corporation received cash consideration approximately 507 million resulting gain sale discontinued operations net taxes 354 million reflected consolidated financial statements year ended december 31 2012 2013 recorded additional gain sale discontinued operations net taxes approximately 05 million result net working capital adjustment accordance purchase agreement additional cash consideration 570 million payable next four years subject certain conditions including meeting certain agreedupon ebitdabased milestones additional cash consideration accounted gain sale discontinued operations net taxes realized realizable reported results operations ews discontinued operations consolidated statements operations periods presented see note 3 notes consolidated financial statements discussion discontinued operations decision divest ews business reflects focus initiatives extend leadership core unified communications business products services comprise core unified communications business historically experienced stronger sales growth higher gross margins ews products services ews product portfolio previously included uc personal devices product category includes wifi dect handsets related infrastructure accessories primarily sold americas emea segments summarized results discontinued operations follows thousands revenues discontinued operations 2012 711 million decrease 225 million 24 2011 decrease primarily due 2012 revenues including period 11 months closure ews sale transaction compared 12month period 2011 wireless revenues 2012 compared 2011 americas emea segments wireless revenues apac segment significant net income discontinued operations essentially flat 2012 compared 2011as continued reduce spending wireless business result smaller revenue base wireless products segment information business organized around four major geographic theatres north america caribbean latin america “cala” europe middle east africa “emea” asia pacific “apac” reporting purposes aggregate north america cala one segment named americas report emea apac separate segments determined accordance management views evaluates business allocates resources based criteria outlined authoritative guidance description products services well annual financial data segment found business section form 10k note 17 notes consolidated financial statements future changes organizational structure business may result changes reportable segments disclosed discussions include results segments years ended december 31 2013 2012 2011 segment contribution margin includes segment revenues less related cost sales direct marketing sales expenses management allocates infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing stockbased compensation costs research development costs general administrative costs legal accounting costs acquisitionrelated integration costs amortization purchased intangible assets restructuring costs interest income expense net effective january 1 2013 company began allocate certain service costs previously reported within americas segment emea apac segments order appropriately align costs among segments associated revenues prior periods reported also reclassified conform current year presentation following summary financial information segments fiscal years ended december 31 2013 2012 2011 thousands americas segment revenues increased 1 2013 compared 2012 primarily due increased revenues united states brazil partially offset decreased revenues mexico canada increase revenues driven increases uc personal devices largely offset decreases uc group systems uc platform revenues increases uc personal devices revenues primarily driven increased desktop voice sales result lync voice deployments continued adoption voip partially offset decreased desktop video revenues decreases uc group systems revenues primarily driven decreased group video revenues immersive telepresence revenues partially offset increased group voice revenues decreases uc platform revenues americas primarily result lower sales realpresence products services negatively impacted lower public sector spending north america americas segment revenues decreased 1 2012 compared 2011 primarily due decreased revenues united states brazil partially offset increased revenues canada mexico decrease driven decreases revenues uc group systems partially offset increases uc personal devices uc platform revenues decreases uc group systems revenues primarily driven decreased group voice group video revenues partially offset increased immersive telepresence revenues result 2011 hpvc acquisition increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip partially offset decreased desktop video revenues uc platform revenue growth 2012 result increased sales realpresence products services 2013 2012 2011 one channel partner americas segment accounted 32 27 respectively americas net revenues believe unlikely loss channel partners would long term material adverse effect segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period contribution margin percentage america’s segment revenue decreased 2 percentage points 2013 compared 2012 primarily due lower gross margins partially offset decrease direct sales marketing expenses percentage revenue decrease gross margins primarily due lower product gross margins driven product mix shift toward lower margin uc personal devices well lower service gross margins primarily result sentri acquisition direct sales marketing expenses decreased absolute dollars percentage revenue primarily due decreased compensation costs including commission expenses lower headcountbased allocations well decreased marketing programs spending contribution margin percentage america’s segment revenues increased 1 percentage point 2012 compared 2011 primarily due slightly higher gross margins partially offset slightly increased direct sales marketing expenses percentage revenue increase gross margins primarily due increased service gross margins increase direct sales marketing expenses primarily due increased compensation costs 2012 compared 2011 emea segment revenues decreased 2 2013 compared 2012 primarily due lower sales uc group systems products related services partially offset increased sales uc personal devices uc platform products related services decrease uc group systems revenues emea primarily due decreased group video immersive telepresence revenues lesser extent decreased group voice revenues increases uc personal devices revenues primarily driven increased desktop voice sales result lync voice deployments partially offset decreases desktop video sales decreases uc platform revenues result lower sales realpresence products services revenues germany nordic countries russia partially offset increases united kingdom turkey overall decline emea segment revenues primarily driven challenging macroeconomic environment region emea segment revenues decreased 1 2012 compared 2011 primarily due lower sales uc platform products related services uc personal devices products related services partially offset increased sales uc group systems products related services uc platform revenues decreased result lower sales realpresence products services uc personal devices revenues decreased primarily due decreases desktop video revenues partially offset increase desktop voice revenues uc group systems revenues increased primarily due increased immersive telepresence revenues result hpvc acquisition 2011 partially offset lower group video group voice revenues nordic countries middle east turkey eastern europe spain partially offset increases benelux germany 2013 2012 2011 one channel partner emea segment accounted 12 11 emea net revenues respectively believe unlikely loss channel partners would long term material adverse effect segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period contribution margins percentage emea segment revenue increased 2 percentage points 2013 compared 2012 primarily due increases gross margins decreases direct sales marketing expenses percentage segment revenue 2013 compared 2012 increase gross margins driven primarily higher service gross margins result increased productivity partially offset lower product gross margins due product mix shift direct sales marketing expenses decreased percentage segment revenue well absolute dollars primarily due decreased compensation costs including commission expenses lower facilities allocations contribution margin percentage emea segment revenue decreased 1 percentage point 2012 compared 2011 primarily due slightly decreased gross margins direct sales marketing expenses percentage segment revenue relatively flat 2012 compared 2011 decrease gross margins primarily driven lower service gross margins apac segment revenues decreased 6 2013 compared 2012 primarily driven decreased revenues uc group systems lesser extent uc platform products related services partially offset increased revenues uc personal devices products related services yearoveryear basis decreases uc group systems revenues apac primarily driven decreased group video revenues lesser extent decreased immersive telepresence group voice revenues decreases uc platform revenues result decreased sales realpresence products services increases uc personal devices revenues primarily driven increased desktop voice sales result lync voice deployments partially offset decreases desktop video revenues decreased yearoveryear india china partially offset increased revenues japan australia overall decline apac segment revenues primarily due softer demand challenging macroeconomic environment region apac segment revenues decreased 1 2012 compared 2011 primarily due decreased uc group systems uc personal devices revenues partially offset increased uc platform revenues decreases uc group systems revenues apac primarily driven decreased group video revenues partially offset increases group voice revenues immersive telepresence revenues result 2011 hpvc acquisition decreases uc personal devices revenues primarily driven decreases desktop video revenues lesser extent desktop voice revenues increases uc platform revenues result increased sales realpresence platform products services revenues decreased australia india japan china partially offset increase korea decline apac segment revenues primarily due reduced government spending elongated sales cycles 2013 2012 2011 two channel partners apac segment aggregate accounted 28 33 respectively apac net revenues believe unlikely loss channel partners would long term material adverse effect segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period contribution margin percentage apac segment revenue remained relative flat 2013 compared 2012 primarily due slightly lower gross margins direct sales marketing expenses percentage revenue essentially flat resulted less 1 percentage point change contribution margin decrease gross margins driven primarily lower product gross margins due lower product revenues well product mix shift toward lower margin uc personal devices partially offset higher service gross margins direct sales marketing expenses essentially flat percentage revenue despite decreasing absolute dollars primarily driven lower total revenues contribution margin percentage apac segment revenue decreased 8 percentage points 2012 compared 2011 primarily due lower gross margins higher direct sales marketing expenses percentage revenue decrease gross margins due decreases service gross margins lesser extent product gross margins driven primarily product mix shift increased discounting direct sales marketing expenses increased absolute dollars percentage revenue primarily due increased headcountrelated expenses liquidity capital resources december 31 2013 principal sources liquidity included cash equivalents 3926 million shortterm investments 1347 million longterm investments 564 million majority shortterm longterm investments comprised us government agency securities corporate debt securities see note 9 notes consolidated financial statements information shortterm longterm investments also outstanding letters credit totaling approximately 73 million place satisfy certain facility lease requirements well legal tax insurance obligations total cash equivalents investments held united states totaled 1671 million december 31 2013 remaining 4166 million held various foreign subsidiaries outside united states would need access cash equivalents investments held outside united states order fund acquisitions share repurchases working capital needs may subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes september 2013 entered credit agreement provides 2500 million term loan “term loan” matures september 13 2018 “maturity date” term loan bears interest option either base rate formula liborbased formula set forth credit agreement term loan payable quarterly installments principal equal approximately 16 million began december 31 2013 remaining outstanding principal amount term loan due payable maturity date credit agreement contains certain customary affirmative negative covenants also required maintain compliance consolidated fixed charge coverage ratio consolidated secured leverage ratio entered credit agreement conjunction purposes funding purchase common stock 2500 million value pursuant share repurchase authorization announced september 2013 compliance debt covenants december 31 2013 see note 8 notes consolidated financial statements details generated cash operating activities totaling 1684 million 2013 1894 million 2012 3023 million 2011 decrease cash provided operating activities 2013 2012 due primarily net loss 2013 compared net income 2012 adjusted noncash income expenses decrease taxes payable partially offset increases accounts payables accrued liabilities deferred revenue well decreases prepaid expenses decrease cash provided operating activities 2012 2011 due primarily lower net income adjusted noncash income expenses increased inventory decrease accounts payable smaller increase accrued liabilities deferred revenue partially offsetting negative effects decreases accounts receivable total net change cash equivalents year ended december 31 2013 decrease 844 million primary uses cash period 5150 million share repurchases including fees expenses associated stock repurchase programs 552 million purchases property equipment capitalized software development costs 80 million cash payments made acquisition primary sources cash 2473 million term loan net debt issuance costs 1684 million operating activities 547 million net sales maturities investments 233 million cash proceeds exercise stock options purchases employee stock purchase plan dayssalesoutstanding “dso” metric 48 days 50 days december 31 2013 2012 respectively decrease dso primarily due improved cash collections year dso could vary result number factors fluctuations revenue linearity change mix international receivables increases receivables service providers government entities also customarily longer payment terms dso could also negatively impacted partners experience difficulty financing purchases results delays payment us inventory turns 58 turns december 31 2013 compared 57 turns december 31 2012 believe inventory turns future may fluctuate depending ability reduce lead times well changes product mix ocean freight versus air freight inventory turns may also decrease future result flexibility required respond customer demands enter foreign currency forward contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record balance sheet reporting period fair value foreign currency forward contracts record fair value adjustments results operations gains losses associated currency rate changes contracts recorded interest income expense net offsetting transaction gains losses related assets liabilities additionally hedging costs vary depending size hedging program whether purchasing selling foreign currency relative us dollar interest rate spreads us foreign markets additionally also hedging program uses foreign currency forward contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated chinese yuan israeli shekel reporting period record fair value unrealized forward contracts balance sheet related unrealized gains losses component accumulated comprehensive income separate element stockholders’ equity realized gains losses associated effective portion foreign currency forward contracts recorded within revenue operating expense depending upon underlying exposure hedged excluded ineffective portions hedging instrument would recorded interest income expense net time board directors approved plans us purchase shares common stock open market years ended december 31 2013 2012 2011 purchased approximately 452 million 51 million 20 million shares respectively common stock cash 5023 million 550 million 400 million respectively september 2013 announced board directors authorized repurchase 4000 million approximately 20 percent outstanding common stock “return capital program” 2500 million modified “dutch auction” selftender offer “tender offer” subsequent open market purchases privately negotiated transactions funded program 1500 million cash 2500 million term loan 4000 million share repurchase authorization superseded remaining outstanding share repurchase authorization commencement tender offer tender offer commenced september 13 2013 subsequently amended expired october 30 2013 company accepted payment aggregate 274 million shares common stock purchase price 1040 per share aggregate cost approximately 2854 million excluding fees expenses relating tender offer december 4 2013 announced plans repurchase aggregate 1146 million common stock accelerated share repurchase “asr” program entered separate asr agreements two financial institutions announcement represented concluding phase 4000 million return capital program terms asr agreements paid aggregate 1146 million cash took initial delivery approximately 80 million shares december 5 2013 final number shares repurchased based company’s volumeweighted average stock price less agreed upon discount term transactions expected completed june 30 2014 earlier option counterparties later certain circumstances see note 13 notes consolidated financial statements details december 31 2013 open purchase orders related contract manufacturers contractual obligations approximately 1135 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition banks issued letters credit totaling approximately 73 million used secure leases offices well legal tax insurance obligations table set forth shows december 31 2013 future minimum lease payments due current lease obligations sublease income netted amounts material addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2013 follows thousands 1 estimated future interest payments calculated based assumptions principal repayments beyond required quarterly principal amortization b borrowings made libor tranches bear interest forecasted libor rates december 31 2013 plus spread 175 december 31 2013 220 million unrecognized tax benefits compared 230 million december 31 2012 end 2014 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 09 million reserve releases would recorded adjustments tax expense period released believe available cash equivalents investments sufficient meet operating expenses capital requirements least next twelve months however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2013 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements additional discussion accounting policies revenue recognition recognize revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met generally recognize service revenues ratably service periods one five years upon completion installation professional services products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts sale involves multiple deliverables sales products include services multiple deliverables evaluated determine unit accounting entire fee arrangement allocated unit accounting based relative selling price deliverable applying relative selling price method determine selling price deliverable using vendorspecific objective evidence “vsoe” selling price exists thirdparty evidence “tpe” selling price neither vsoe tpe selling price exist deliverable use best estimate selling price deliverable revenue allocated element recognized revenue recognition criteria met element sales returns channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered accrue coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues contracts generally provide right return products however limited number contracts contain stock rotation rights record estimate future returns based upon contractual rights historical returns experience allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments review allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances written management determined likelihood collection probable warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required excess obsolete inventory record writedowns excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis stockbased compensation expense stockbased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock units performance shares well employee stock purchase plan measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values estimated fair value awards including effect estimated forfeitures recognized expense requisite service period generally vesting period fair values stock option awards shares purchased employee stock purchase plan estimated grant date using blackscholes option valuation model fair value restricted stock units based market value common stock date grant fair value performance shares based market price stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes probable outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking stock among nasdaq composite index companies performance period changes underlying factors assumptions utilized may result significant variability stockbased compensation costs record makes amounts difficult accurately predict deferred refundable taxes estimate actual current tax expense together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2013 883 million net deferred tax assets included net deferred tax asset balance 34 million valuation allowance 29 million recorded related research credits jurisdiction history credits excess taxable profits 05 million relates foreign tax credit carryforwards recognize measure benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions evaluate uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period make change could material impact effective tax rate operating results fair value fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires us use observable market data available minimize use unobservable inputs determining fair value recurring basis measure certain financial assets liabilities fair value including marketable securities foreign currency contracts cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy december 31 2013 fixed income availableforsale securities include us treasury obligations government agency instruments corporate bonds commercial paper nonus government securities money market funds included availableforsale securities cash equivalents consist investments original maturities three months less include money market funds principal market execute foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants counterparties large money center banks regional banks foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy information fair values marketable securities foreign currency contracts see note 12 notes consolidated financial statements term loan credit agreement classified within level 2 instruments borrowings actively traded variable interest rate structure based upon market rates currently available us debt similar terms maturities elected record term loan fair value measured fair value disclosure purposes december 31 2013 carrying amount term loan approximated estimated fair value based observable market inputs business combinations recognize separately goodwill fair value assets acquired liabilities assumed goodwill acquisition date measured excess consideration transferred net acquisition date fair values assets acquired liabilities assumed use best estimates assumptions part purchase price allocation process accurately value assets acquired liabilities assumed acquisition date estimates inherently uncertain subject refinement result measurement period may one year acquisition date may record adjustments retrospectively fair value assets acquired liabilities assumed corresponding offset goodwill upon conclusion measurement period final determination fair value assets acquired liabilities assumed whichever comes first subsequent adjustments recorded consolidated statements operations addition uncertain tax positions tax related valuation allowances assumed connection business combination initially estimated acquisition date reevaluate items quarterly record adjustments preliminary estimates goodwill provided within measurement period continue collect information order determine estimated fair values date acquisition subsequent measurement period final determination tax allowance’s estimated value changes uncertain tax positions tax related valuation allowances affect provision income taxes consolidated statements operations goodwill purchased intangibles goodwill tested impairment reporting unit level one level operating segment adopted amended accounting guidance permits us choose first assess qualitative factors determine whether likely fair value reporting unit less carrying amount based assessment determine likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary business organized around four major geographic theatres north america caribbean latin america “cala” europe middle east africa “emea” asia pacific “apac” determined reporting units 2013 2012 reporting purposes aggregate north america cala one segment named americas report emea apac separate segments fourth quarter 2013 based qualitative assessment performed twostep goodwill impairment test assess potential impairment occurred measure impairment loss first step twostep test compares reporting unit’s fair value carrying amount fair value determined using income approach market approach weighted equally income approach fair value asset based value estimated cash flows asset expected generate future estimated future cash flows discounted rates ranging 12 14 percent arrive respective fair values market approach fair value unit based analysis financial data publicly traded companies engaged similar lines business carrying amount reporting unit determined assigning assets liabilities including goodwill reporting unit based first step test estimated fair value reporting unit exceeded respective carrying amount therefore second step twostep goodwill impairment test deemed necessary date fiscal 2013 annual impairment test total fair values reporting units segments exceeded total carrying values 30 based recent goodwill impairment assessment reporting units segments understanding currently projected trends business economy believe significant risk impairment reporting units reasonable period time although analysis regarding fair values goodwill indicates exceeded carrying value materially different assumptions regarding future performance businesses significant declines stock price could result goodwill impairment losses future purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months six years annually assess whether impairment indicators exist purchased intangibles finite lives longlived assets including intangible assets finite lives tested impairment whenever events changes circumstances indicate carrying amount assets may recoverable assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charge recorded 2013 2012 impairment indicators existed screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests private company investments periodically make strategic investments companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant writedown carrying value investment believe investment experienced decline value temporary december 31 2013 2012 private company investments carrying value 20 million recorded assets consolidated balance sheets software development costs software development costs incurred prior establishment technological feasibility included research development expenses incurred eligible material software development costs capitalized upon establishment technological feasibility general availability software products including direct labor related overhead costs well stockbased compensation defined technological feasibility establishment working model typically occurs beta testing commences capitalized costs amortized productbyproduct basis using straightline method estimated product life generally three years ratio current revenues total projected product revenues whichever greater believe capitalized software costs recoverable future gross profits generated products derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements july 2013 financial accounting standards board “fasb” issued accounting standard update clarifies unrecognized tax benefit presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward settlement required expected event uncertain tax position disallowed situations net operating loss carryforward similar tax loss tax credit carryforward available reporting date tax law applicable jurisdiction tax law jurisdiction require entity intend use deferred tax asset purpose unrecognized tax benefit presented financial statements liability combined deferred tax assets guidance effective prospectively reporting periods beginning december 15 2013 currently assessing potential impact adoption guidance consolidated financial statements march 2013 fasb issued accounting standard update requires release cumulative translation adjustments net income entity ceases controlling financial interest resulting complete substantially complete liquidation subsidiary group assets within foreign entity guidance effective prospectively reporting periods beginning december 15 2013 expect material impact adoption guidance consolidated financial statements february 2013 fasb issued accounting standard update requires entity expand disclosure reclassifications accumulated comprehensive income “aoci” update requires companies present reclassifications component reporting changes aoci balances report effect significant reclassifications respective line items net income guidance effective prospectively reporting periods beginning december 15 2012 adopted guidance quarter ended march 31 2013 adoption material impact consolidated financial statements december 2011 fasb issued accounting standard update requires disclosure effect potential effect offsetting arrangements company’s financial position well enhanced disclosure rights setoff associated company’s recognized assets liabilities january 2013 fasb issued another accounting standard update clarify scope standard issued december 2011 adopted guidance quarter ended march 31 2013 adoption material impact consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” “objective” “strategy” “goal” “should” “vision” “designed” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview global leader collaboration solutions help organizations unleash power human collaboration offer open standardsbased solutions voice video content sharing comprehensive line support service solutions ensure customer success solutions powered polycom® realpresence® platform flexible comprehensive infrastructure offering broad application programming interfaces “apis” deployed via software andor hardware onpremises cloud hybrid implementations realpresence platform interoperates broad set communication business mobile cloud applications devices deliver secure facetoface video collaboration across different environments polycom® realpresence® collaboration solutions infrastructure endpoints environments people world connect collaborate naturally without physical location individuals teams connect communicate collaborate high definition “hd” voice video content experiences desktops meeting rooms classrooms home offices mobile devices web browsers specialized solutions video carts healthcare applications videoprotect solutions government agencies judicial applications removing barriers distance time connecting experts needed creating greater trust understanding improved collaboration enable teams make better decisions faster increase productivity saving time money environmentally responsible sell solutions globally hightouch sales model leverages broad network channel partners including distributors valueadded resellers system integrators leading communications services providers retailers manufacture products outsourced model optimized quality reliability fulfillment agility believe important drivers adoption collaboration solutions include ● growth video preferred method communication ● increasing presence video desktop laptop devices ● growth videocapable mobile devices including tablets smartphones ● growth skype business formerly microsoft® lync® corporate environment resulting impact sales polycom’s skype businesscompactible voice video devices ● expansion business applications integrated webbased video content collaboration ● virtualization move private public hybrid clouds ● adoption unified communications collaborations “ucc” small medium businesses ● growth number teleworkers globally ● new pricing models options video delivery including subscriptionbased software pricing asaservice offerings ● emergence bring device “byod” programs businesses sizes across regions ● demand ucc solutions businesstobusiness businesstoconsumer communications move consumer applications “bring apps” business space ● continued commitment organizations individuals reduce carbon footprint expenses choosing voice video content collaboration travel believe uniquely positioned ucc ecosystem partner choice strategic partnerships open support standards innovative technology multiple delivery modes customercentric gotomarket capabilities total revenues 2014 13 billion decrease 232 million 2 2013 yearoveryear basis total product revenues declined service revenues increased decrease product revenues primarily result lower sales uc group systems products mainly driven lower ip conference phone revenues result cisco systems inc “cisco” longer reselling product previously purchased us lesser extent due lower uc platform product revenues decrease partially offset increased revenues uc personal devices products increase service revenues driven primarily increased maintenance service renewals yearoveryear result ongoing efforts increase maintenance service renewal rates lesser extent increased maintenance revenues larger installed base partially offset decreased revenues managed services related visual collaboration business acquired hewlettpackard 2011 managed services contracts expire customers may elect purchase polycom product solutions rather renew managed services contracts case 2014 trend likely continue segment perspective americas emea apac segment revenues accounted 49 26 25 respectively revenues 2014 americas apac segment revenues decreased 5 1 respectively emea segment revenues increased 3 2014 compared 2013 yearoveryear basis product service revenues declined americas segment increased emea segment apac segment product revenues decreased service revenues increased 2014 compared 2013 see note 20 notes consolidated financial statements information segments including summary segment revenues segment contribution margins segment gross accounts receivable discussion results operations consolidated level also followed discussion results operations segment year ended december 31 2014 operating margins increased 4 percentage points 2014 compared 2013 increase operating margin primarily due decreased operating expenses percentage revenues 4 percentage points gross margins percentage revenues remained relatively flat yearoveryear decrease operating expenses percentage revenues reflects lower headcount facility related costs due actions taken 2014 better align expenses revenue gross margin profile improve operating margins 2014 generated approximately 2054 million cash flow operating activities impact investing financing activities resulted 505 million net increase total cash equivalents december 31 2014 compared prior year results operations three years ended december 31 2014 following table sets forth percentage revenues unless indicated otherwise consolidated statements operations data periods indicated revenues manage business primarily geographic basis organized three geographic segments revenues include product service revenues segment summarized following table overall decrease revenues 2014 2013 due decrease product revenues 304 million 3 partially offset increase service revenues 71 million 2 compared 2013 overall decrease product revenues 2014 primarily result lower sales uc group systems products mainly driven lower ip conference phone revenues result cisco longer reselling product previously purchased us lesser extent due lower uc platform product revenues decrease partially offset increased sales uc personal devices product yearoveryear increase service revenues primarily driven increased maintenance service renewals yearoveryear increased maintenance service revenues larger installed base largely offset decreased revenues managed services related visual collaboration business acquired hewlettpackard 2011 managed services contracts expire customers may elect purchase polycom product solutions rather renew managed services contracts case 2014 trend likely continue 2013 cisco informed us would end life therefore longer resell ip conference phones purchase us resulting yearoveryear decrease revenues approximately 400 million 2014 expect revenues relationship decrease revenues ip conference phones result change accounted majority yearoveryear decrease product revenues 2014 planned transition working evolve features functionality voip conference phone portfolio interoperable cisco environment segment perspective total revenues decreased americas apac segments increased emea segment 2014 compared 2013 overall decrease americas segment revenues 2014 2013 driven primarily decreased revenues united states brazil canada partially offset increased revenues mexico yearoveryear basis product service revenues decreased americas segment 2014 primarily result lower ip conference phone revenues purchased cisco decrease apac segment revenues 2014 2013 driven primarily decreased revenues japan china partially offset increased revenues india australia yearoveryear basis product revenues decreased service revenues increased apac segment 2014 overall increase emea segment revenues primarily due growth united kingdom france turkey benelux switzerland partially offset decreased revenues russia nordic countries yearoveryear basis product service revenues increased emea segment 2014 overall decrease revenues 2013 2012 due decreases product revenues 514 million 5 partially offset increases service revenues 271 million 8 2013 compared 2012 product revenues decreased 2013 primarily result decreases revenues uc group systems lesser extent decreases uc platform revenues partially offset increased product revenues uc personal devices increase service revenues primarily due increased maintenance revenues larger installed base increased maintenance service renewals yearoveryear 2014 2013 2012 one channel partner scansource communications accounted 17 16 14 respectively total revenues believe unlikely loss channel partners would longterm material adverse effect consolidated revenues segment revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period addition primary view geographic basis also track revenues groups similar products services various purposes following table presents revenues groups similar products services uc group systems include immersive telepresence group video group voice systems products related service elements decrease uc group systems revenues 2014 2013 primarily driven decreased sales group voice products related services americas segment lesser extent decreased sales group video products related services apac segment decreased sales immersive telepresence products related services across segments decreases partially offset increased revenues group video products related services americas segment group video voice products related services emea segment decrease uc group systems revenue 2013 2012 primarily driven decreased sales group video systems immersive telepresence products related services geographic segments lesser extent decreased sales group voice systems products related services emea apac segments partially offset increased sales group voice systems products related services americas segment uc personal devices include desktop video devices desktop voice products related service elements increase uc personal devices revenue 2014 2013 primarily due increased sales desktop voice products related services partially offset decreased sales desktop video products related services across regions increase uc personal devices revenue 2013 2012 primarily due increased sales desktop voice products related services segments partially offset decreased sales desktop video products related services segments overall increases uc personal devices revenues due part increased demand skype business interoperable solutions continued adoption voip technologies uc platform includes realpresence platform hardware software products related service elements yearoveryear basis uc platform revenues decreased 2014 2013 primarily driven decreased sales uc platform products related services americas emea segments partially offset increased revenues apac segment cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight royalty payments amortization certain intangible assets stockbased compensation costs allocation overhead expenses including facilities costs cost product revenues product gross margins included charges stockbased compensation 25 million 29 million 36 million years ended december 31 2014 2013 2012 respectively cost product revenues segment level consists standard cost product revenues include items warranty expense royalties allocation overhead expenses including facilities costs uc platform uc group systems products typically higher gross margin uc personal products overall product gross margins fluctuate depending upon product mix given period geography overall increase product gross margins percentage revenues 2014 compared 2013 primarily due lower product cost revenues driven decreased amortization purchased intangibles largely offset favorable product mix shift toward higher margin products resulting less one percent decrease product gross margins percentage revenues segment perspective product gross margins increased yearoveryear americas segment decreased emea apac segments 2014 overall decrease product gross margins percentage revenues 2013 compared 2012 primarily due lower expected product sales changes product mix product gross margin decreased across segments 2013 compared 2012 americas largest decline due greater mix uc personal products compared emea apac segments product gross margins also decreased 2013 compared 2012 result increased amortization purchased intangibles partially offset decreases warranty expense royalties also incurred higher costs 2013 2012 associated increased excess obsolete inventories result product transitions inventory turns 59 turns 58 turns 57 turns december 31 2014 2013 2012 respectively inventory turns future may fluctuate depending ability reduce lead times well changes product mix ocean freight versus air freight inventory turns may also decrease future result flexibility required respond customer demands cost service revenues service gross margins cost service revenues consists primarily material direct labor including stockbased compensation costs depreciation allocation overhead expenses including facilities costs majority service revenues related maintenance agreements new product sales renewal existing maintenance agreements managed services offerings cost service revenues service gross margins included charges stockbased compensation 43 million 59 million 66 million years ended december 31 2014 2013 2012 respectively cost service revenues segment level consists standard cost service revenues include items warranty expense royalties allocation overhead expenses including facilities costs well stockbased compensation costs amortization purchased intangible assets increase service gross margins percentage revenues 2014 2013 primarily due increased service revenues driven increased maintenance service renewals cost service revenues remained relatively flat yearoveryear segment perspective service gross margins percentage revenues increased americas apac segments decreased emea segment service gross margins percentage revenues 2013 remained relative flat yearoveryear primarily due increased service revenues substantially offset increased cost services yearoveryear increase service revenues 2013 primarily due increased maintenance service revenues larger installed base increased maintenance service renewals increase direct spending costs result increased headcountrelated costs well facilities allocations partially offset decreased managed network costs service organization headcount increased 6 december 31 2012 december 31 2013 service gross margins percentage service revenue decreased americas segment increased emea apac segments 2013 compared 2012 total cost revenues total gross margins yearoveryear basis total gross margins remained relatively flat 2014 total gross margins decreased 2013 2012 primarily due decreased product gross margins percentage revenues discussed cost product revenues product gross margins service gross margins percentage revenues remained relatively flat yearoveryear discussed cost services revenues service gross margins expect gross margins remain relatively flat near term forecasting future gross margin percentages difficult number risks related ability maintain improve current gross margin levels cost revenues percentage revenues vary significantly based upon number factors following uncertainties surrounding revenue levels including future pricing andor potential discounts result economy response strengthening us dollar international markets related production level variances competition extent new services sales accompany product sales well maintenance renewal rates changes technology changes product mix variability stockbased compensation costs royalties third parties utilization professional services personnel develop professional services practice make investments expand professional services offerings fluctuations freight repair costs ability achieve greater efficiencies installations immersive telepresence products manufacturing efficiencies subcontractors manufacturing purchase price variances changes prices commodity components warranty recall costs timing sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force including stockbased compensation costs advertising promotional expenses product marketing expenses allocation overhead expenses including facilities costs sales marketing expenses except direct sales marketing expenses allocated segments sales marketing expenses included charges stockbased compensation 149 million 266 million 368 million years ended december 31 2014 2013 2012 respectively decrease sales marketing expenses 2014 2013 primarily due decreased headcountrelated costs including compensation commission expenses stockbased compensation cost lower headcountbased allocations well lower depreciation expensed materials decreased spending marketing programs travel entertainment expenses sales marketing headcount decreased 5 december 31 2013 december 31 2014 part plans improve operating performance decrease sales marketing expenses 2013 2012 primarily due decreased headcountrelated costs including compensation commission expenses headcountbased allocations stockbased compensation cost decreased spending marketing programs partially offset increased outside services costs sales marketing headcount decreased 7 december 31 2012 december 31 2013 order better align costs revenues expect sales marketing expenses remain relatively flat near term expenses also fluctuate depending revenue levels achieved certain expenses commissions determined based upon revenues achieved forecasting sales marketing expenses percentage revenues highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter marketing expenses also fluctuate depending upon timing extent marketing programs market new products research development expenses research development costs expensed incurred consist primarily compensation costs including stockbased compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development costs allocated segments research development expenses included charges stockbased compensation 103 million 156 million 202 million years ended december 31 2014 2013 2012 respectively decrease research development expenses 2014 2013 primarily due decreased headcountrelated costs including compensation expense stockbased compensation cost lower outside services costs well capitalization certain internal costs related internally developed software products sold research development headcount decreased 9 december 31 2013 december 31 2014 part plans improve operating performance starting third quarter 2013 capitalized certain development costs internally developed software products marketed sold customers including direct labor related overhead costs well stockbased compensation costs capitalized prior 2013 software development costs qualifying capitalization significant amount capitalized software development costs fluctuate depending upon nature timing software development activities given period see notes 2 6 notes consolidated financial statements information software development costs increase research development expenses 2013 2012 primarily due increased headcountrelated costs including compensation expenses headcountbased allocations partially offset decreased outside services costs stockbased compensation expense decreased material expenses due less hardware development activities 2013 research development headcount increased 11 december 31 2012 december 31 2013 believe innovation technological leadership critical future success committed continuing significant level research development develop new technologies products combat competitive pressures also investing heavily research development result increased business opportunities strategic partners service provider customers result key strategic initiatives areas expect research development expenses increase absolute dollars near term fluctuate depending timing number development activities given quarter research development expenses percentage revenues highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs professional service fees allocation overhead expenses including facilities costs litigation costs bad debt expense general administrative expenses allocated segments general administrative expenses included charges stockbased compensation 160 million 135 million 216 million years ended december 31 2014 2013 2012 respectively general administrative expenses increased slightly absolute dollars remained relatively flat percentage revenues 2014 compared 2013 primarily due increases stockbased compensation expense bad debt expense insurance costs outside services costs general administrative expenses decreased absolute dollars remained relatively flat percentage revenue 2013 compared 2012 primarily due decreased stockbased compensation charges lower bad debt expense partially offset increases headcountrelated costs including compensation costs headcountbased allocations increased outside services costs including increased legal insurance costs significant future charges due costs associated litigation uncollectability receivables could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing litigation bad debt expense associated uncollectible receivables difficult future general administrative expense increases decreases absolute dollars difficult predict due lack visibility certain costs including legal costs associated defending claims us well legal costs associated asserting enforcing intellectual property portfolio factors expect general administrative expenses decrease slightly near term could fluctuate depending level timing expenditures associated litigation described note 13 notes consolidated financial statements amortization purchased intangibles 2014 2013 2012 recorded 98 million 104 million 98 million respectively operating expenses amortization purchased intangibles acquired acquisitions addition recorded 30 million 94 million 76 million respectively cost product revenues related certain technology intangibles decreases amortization expenses 2014 2013 primarily due certain intangible assets acquired prior years fully amortized increases amortization expenses 2013 2012 primarily driven change estimated useful lives certain intangible assets acquired resulted higher amortization expenses 2013 lesser extent due amortization purchased intangibles acquired sentri first quarter 2013 purchased intangible assets amortized expense estimated useful lives range several months six years expect amortization expenses continue decline near term provided purchases new intangible assets certain existing intangible assets fully amortized 2015 evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charges recognized periods presented restructuring costs 2014 2013 2012 recorded 403 million 485 million 220 million respectively related restructuring actions resulted consolidation certain facilities elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus efforts properly align cost structure projected future revenue streams see note 8 notes consolidated financial statements information restructuring costs 2014 completed consolidation elimination certain facilities elimination six percent global workforce pursuant announcement january 2014 management completed certain actions designed better align expenses revenue gross margin profile position us improved operating performance result recorded approximately 286 million net 23 million deferred rent restructuring charges related idle facilities upon vacating facilities 118 million charges severance onetime employee benefits individuals impacted 2013 completed consolidation elimination certain facilities globally elimination four percent global workforce actions approved management august 2013 result recorded approximately 354 million net 28 million deferred rent restructuring charges related idle facilities upon vacating facilities 102 million charges severance onetime employee benefits individuals impacted addition recorded 29 million charges associated changes product roadmap focus products solutions greater revenue margin potential 2012 completed consolidation elimination certain facilities order gain efficiencies including combination headquarters san jose santa clara california one new location san jose california result recorded approximately 89 million net 28 million deferred rent restructuring charges related idle facilities upon vacating facilities second quarter 2012 addition recorded approximately 131 million charges primarily severance employee benefits related restructuring actions approved management october 2011 july 2012 action plan approved july 2012 resulted elimination approximately four percent global workforce enabling us focus resources product development product launch initiatives future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed addition restructuring reserve net estimated sublease income expect generate estimate sublease income based current comparable rates leases respective markets actual sublease income lower estimates reason takes us longer estimated sublease facilities associated cost recorded liability related subleasing terminating lease obligations facilities greater estimated would incur additional charges operations would harm business results operations cash flows litigation reserves payments 2014 recorded 31 million litigation reserves payments related ongoing litigation matters yet settled also subject variety claims suits arise time ordinary course business matters subject inherent uncertainties management’s view matters may change future could result charges would material adverse impact financial positions results operations cash flow expenses 2013 2012 see note 13 notes consolidated financial statements information transactionrelated costs expense acquisition transaction related costs incurred costs generally include fees outside legal accounting services integration services addition incurred costs related planning executing divestiture enterprise wireless solutions business “ews” announced may 2012 closed december 2012 2014 2013 2012 recorded 02 million 34 million 141 million respectively transactionrelated costs transactionrelated costs 2012 primarily associated planning executing divestiture ews business including legal costs associated enforcing terms agreements see note 4 notes consolidated financial statements information spent may future spend significant resources identifying acquiring businesses interest income expense net interest expense consists primarily interest borrowings credit agreement entered september 2013 imputed interest related certain long term obligations income expense consists primarily interest earned cash equivalents investments less bank charges resulting use bank accounts realized gains losses investments nonincome based taxes fees foreign exchange related gains losses yearoveryear increases interest expense primarily due interest expense borrowings credit agreement interest expense fluctuate interest rate changes increase net income 2014 2013 primarily due onetime business tax refund rebates nonincome based business tax partially offset lower interest income decrease net expense 2013 2012 primarily due increase net interest income decrease nonincome based taxes fees foreign exchange related gains losses essentially flat yearoveryear income expense fluctuate due changes interest rates returns cash investments future impairment investments foreign currency rate fluctuations unhedged exposures fluctuations costs associated hedging program timing nonincome related taxes license fees fixed asset disposals cash balance could also decrease depending upon amount cash used future acquisitions stock repurchase activity factors would also impact interest income provision income taxes continuing operations subject income taxes us numerous foreign jurisdictions effective tax rates differ statutory rate primarily due tax impact state taxes foreign operations lower tax jurisdictions rd tax credits domestic manufacturing deductions nondeductible stock based compensation changes reserves uncertain tax positions intercompany sales intellectual property addition 2012 effective tax rate includes impact 388 million federal state taxes recorded 1033 million related tax consequences global restructuring project designed accommodate trend toward software virtual based solutions versus traditional hardware distribution model december 31 2014 approximately 14 million tax effected net operating loss carryforwards 11 million tax effected capital loss carryforwards 212 million tax effected credit carryforwards net operating loss carryforwards 01 million credits relate acquisitions result limited amount recognized one year capital net operating loss carryforward assets tax credit carryforwards begin expire 2015 included net deferred tax asset balance 32 million valuation allowance 27 million relates research credits jurisdiction history credits excess taxable profits 05 million relates foreign tax credit carryforwards see note 18 notes consolidated financial statements information provide us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2014 cumulative amount earnings upon us income tax provided approximately 3396 million practicable determine income tax liability might incurred earnings repatriated us 2014 2013 recorded reserve reductions 09 million 24 million respectively due expiration statutes limitation us foreign jurisdictions 2012 recorded reserve reductions 100 million 08 million paid settlement multiyear state tax audit 57 million due reduction unrecognized tax benefits research credits acquired companies expiration statutes limitation us foreign jurisdictions also resulted reserve releases 35 million december 31 2014 216 million unrecognized tax benefits compared 220 million december 31 2013 end 2015 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 06 million reserve releases would recorded adjustments tax expense period released recognize interest andor penalties related income tax matters income tax expense december 31 2014 december 31 2013 16 million 15 million respectively accrued interest penalties related uncertain tax positions future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income nontax deductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies example january 2 2013 “american taxpayer relief act 2012” signed law provided extension federal research credit retroactive 2012 extended 2013 impact 2012 federal research credit 23 million recorded first quarter 2013 addition federal research credit lapsed 2014 extended end year part “tax increase prevention act 2014” result recorded 16 million benefit fourth quarter 2014we believe future effective tax rate may volatile result factors regularly assess ability realize deferred tax assets recorded entities based upon weight available evidence including factors recent earnings history expected future taxable income company’s future business profits support realization deferred tax assets valuation allowance could recorded foreseeable future event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made also subject periodic examination income tax returns internal revenue service tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect net income financial condition possibly materially discontinued operations december 4 2012 completed disposition net assets ews business mobile devices holdings llc delaware limited liability corporation received cash consideration approximately 507 million resulting gain sale discontinued operations net taxes 354 million reflected consolidated financial statements year ended december 31 2012 2013 recorded additional gain sale discontinued operations net taxes approximately 05 million result net working capital adjustment accordance purchase agreement realized gain loss sale discontinued operations 2014 additional cash consideration 375 million payable next three years subject certain conditions including meeting certain agreedupon ebitdabased milestones additional cash consideration accounted gain sale discontinued operations net taxes realized realizable reported results operations ews discontinued operations consolidated statements operations periods presented see note 4 notes consolidated financial statements discussion discontinued operations summarized results discontinued operations follows thousands segment information business organized around four major geographic theatres north america caribbean latin america “cala” europe middle east africa “emea” asia pacific “apac” reporting purposes aggregate north america cala one segment named americas report emea apac separate segments determined accordance management views evaluates business allocates resources based criteria outlined authoritative guidance description products services well annual financial data segment found business section form 10k note 20 notes consolidated financial statements future changes organizational structure business may result changes reportable segments disclosed following summary financial information segments periods indicated thousands americas decrease americas segment revenues 2014 2013 primarily due decreased revenues united states brazil canada partially offset increased revenues mexico yearoveryear basis overall decreases americas segment revenues primarily driven decreased revenues uc group systems result decreased sales ip conference phones previously purchased resold cisco lesser extent decreased revenues uc platform products related services partially offset increased revenues uc personal devices products related services primarily due increased desktop voice sales result increased demand skype business interoperable solutions continued adoption voip partially offset decreased desktop video revenue increase americas segment revenues 2013 2012 primarily due increased revenues united states brazil partially offset decreased revenues mexico canada increase revenues driven increases uc personal devices revenues largely offset decreases uc group systems uc platform revenues increases uc personal devices revenues primarily driven increased desktop voice sales result skype business voice deployments continued adoption voip partially offset decreased desktop video revenues decreases uc group systems revenues primarily driven decreased group video revenues immersive telepresence revenues partially offset increased group voice revenues decreases uc platform revenues americas primarily result lower sales realpresence products services negatively impacted lower public sector spending north america 2014 two channel partners americas segment aggregate accounted 44 americas revenues 2013 2012 one channel partner americas segment accounted 32 27 respectively americas revenues believe unlikely loss channel partners would long term material adverse effect segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period increase contribution margin percentage americas segment revenues 2014 2013 primarily due higher gross margins percentage revenues direct sales marketing expenses percentage revenues decreased slightly yearoveryear increase gross margins primarily due higher product gross margins driven product mix shift toward higher margin products within uc group systems product category lower product discounting decrease direct sales marketing expenses primarily driven lower headcountrelated costs result restructuring actions including decreased compensation commission expenses lower headcountbased allocations well decreased outside services costs decrease contribution margin percentage americas segment revenues 2013 2012 primarily due lower gross margins partially offset decrease direct sales marketing expenses percentage revenues decrease gross margins primarily due lower product gross margins driven product mix shift toward lower margin uc personal devices well lower service gross margins primarily result sentri acquisition direct sales marketing expenses decreased absolute dollars percentage revenue primarily due decreased compensation costs including commission expenses lower headcountbased allocations well decreased spending marketing programs emea increase emea segment revenues 2014 2013 primarily due increased revenues united kingdom france turkey benelux switzerland result slowly improving economic environment countries partially offset decreased revenues russia nordic countries yearoveryear basis increase emea segment revenues primarily due increased sales uc group systems uc personal devices related services increase uc group systems revenues primarily due increased revenues group voice sales lesser extent increased revenues group video products related services partially offset decreased revenues immersive telepresence products related services increase uc personal devices revenues primarily driven increased revenues desktop voice sales result increased demand skype business interoperable solutions continued adoption voip partially offset decreased revenues desktop video products related services sales uc platform products related services emea segment decreased slightly yearoveryear decrease emea segment revenues 2013 2012 primarily due lower sales uc group systems products related services partially offset increased sales uc personal devices uc platform products related services decrease uc group systems revenues emea primarily due decreased group video immersive telepresence revenues lesser extent decreased group voice revenues increases uc personal devices revenues primarily driven increased desktop voice sales result skype business voice deployments partially offset decreases desktop video sales decreases uc platform revenues result lower sales realpresence products related services revenues germany nordic countries russia partially offset increases united kingdom turkey 2014 2013 2012 one channel partner emea segment accounted 14 12 11 emea segment revenues respectively believe unlikely loss channel partners would long term material adverse effect segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period increase contribution margins percentage emea segment revenues 2014 2013 primarily due decreased sales marketing expenses percentage revenues partially offset lower gross margins decreases sales marketing expenses primarily due lower facility headcountrelated costs result restructuring actions decreases gross margins primarily due lower service gross margins driven increases lower margin installation services lower product margins result product mix shift away higher margin uc platform products increase contribution margins percentage emea segment revenue 2013 2012 primarily due increases gross margins decreases direct sales marketing expenses percentage segment revenue 2013 compared 2012 increase gross margins driven primarily higher service gross margins result increased productivity partially offset lower product gross margins due product mix shift direct sales marketing expenses decreased percentage segment revenue well absolute dollars primarily due decreased compensation costs including commission expenses lower facilities allocations apac decrease apac segment revenues 2014 2013 primarily due decreased revenues japan china partially offset increased revenues india australia yearoveryear basis decrease apac segment revenues primarily driven decreased revenues uc group systems partially offset increased revenues uc personal devices uc platform products related services decrease uc group systems revenues apac primarily driven decreased revenues group video immersive telepresence products related services partially offset increased group voice revenues although saw sequential revenue increases quarterbyquarter 2014 certain countries region overall macroeconomic environment apac region still remained challenging decrease apac segment revenues 2013 2012 primarily driven decreased revenues uc group systems lesser extent uc platform products related services partially offset increased revenues uc personal devices products related services yearoveryear basis decreases uc group systems revenues apac primarily driven decreased group video revenues lesser extent decreased immersive telepresence group voice revenues decreases uc platform revenues result decreased sales realpresence products services increases uc personal devices revenues primarily driven increased desktop voice sales result skype business voice deployments partially offset decreases desktop video revenues decreased yearoveryear india china partially offset increased revenues japan australia overall decline apac segment revenues 2013 primarily due softer demand challenging macroeconomic environment region 2014 2013 2012 two channel partners apac segment aggregate accounted 30 28 33 respectively apac segment revenues believe unlikely loss channel partners would long term material adverse effect segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period increase contribution margin percentage apac segment revenues 2014 2013 primarily due decreased sales marketing expenses percentage revenues partially offset slightly lower gross margins decrease direct sales marketing expenses driven lower headcountrelated costs result restructuring actions including lower compensation commission expenses lower headcountrelated allocations well decreased spending marketing programs slightly decreased gross margins primarily due decreased product gross margins percentage revenues result product mix shift higher percentage revenues china india typically lower gross margins largely offset increased service gross margins yearoveryear contribution margin percentage apac segment revenues remained relative flat 2013 compared 2012 primarily due slightly lower gross margins direct sales marketing expenses percentage revenue essentially flat resulted less 1 percentage point change contribution margin decrease gross margins driven primarily lower product gross margins due lower product revenues well product mix shift toward lower margin uc personal devices partially offset higher service gross margins selected quarterly financial data following table provides unaudited selected quarterly financial data eight quarters ended december 31 2014 financial information read conjunction consolidated financial statements related notes included annual report form 10k prepared unaudited quarterly financial information basis audited consolidated financial statements operating results quarter necessarily indicative results future quarters full year liquidity capital resources december 31 2014 principal sources liquidity included cash equivalents 4431 million shortterm investments 1858 million longterm investments 592 million majority shortterm longterm investments comprised us government agency securities corporate debt securities see note 10 notes consolidated financial statements information shortterm longterm investments also outstanding letters credit totaling approximately 72 million place satisfy certain facility lease requirements well legal tax insurance obligations total cash equivalents investments located united states totaled 2695 million remaining 4186 million held various foreign subsidiaries outside united states december 31 2014 would need access cash equivalents investments held outside americas order fund acquisitions share repurchases working capital needs may subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes september 2013 entered credit agreement provides 2500 million term loan “term loan” matures september 13 2018 “maturity date” term loan bears interest option either base rate formula liborbased formula set forth credit agreement term loan payable quarterly installments principal equal approximately 16 million began december 31 2013 remaining outstanding principal amount term loan due payable maturity date credit agreement contains certain customary affirmative negative covenants also required maintain compliance consolidated fixed charge coverage ratio consolidated secured leverage ratio entered credit agreement conjunction purposes funding purchase common stock 2500 million value pursuant share repurchase authorization announced september 2013 compliance debt covenants december 31 2014 see note 9 notes consolidated financial statements details generated cash operating activities totaling 2054 million 2014 1684 million 2013 1894 million 2012 increase cash provided operating activities 2014 2013 due primarily higher net income adjusted noncash income expenses primarily depreciation amortization stockbased compensation expense increased working capital due increases accounts payable taxes payable well decrease inventory partially offset smaller yearoveryear increase accrued liabilities decrease cash provided operating activities 2013 2012 due primarily net loss 2013 compared net income 2012 adjusted noncash income expenses primarily consisting depreciation amortization stockbased compensation expense offset increased working capital due increase accrued liabilities primarily deferred revenues well decreases prepaid expenses smaller yearoveryear decline accounts payable partially offset decrease taxes payable cash operations fluctuate significantly quarter generally lower first third fiscal quarters due timing payments related certain employee related compensation plans seasonality business total net change cash equivalents year ended december 31 2014 increase 505 million primary sources cash 2054 million operating activities 237 million cash proceeds exercise stock options purchases employee stock purchase plan 34 million excess tax benefits primary uses cash period 648 million share repurchases including fees expenses associated stock repurchase programs 549 million purchases property equipment capitalized software development costs 560 million net purchases investments 63 million debt payments dayssalesoutstanding “dso” metric ranged 44 days 51 days 2014 compared range 47 days 54 days 2013 dso could vary result number factors fluctuations revenue linearity change mix international receivables changes payment terms increases receivables service providers government entities also customarily longer payment terms dso could also negatively impacted partners experience difficulty financing purchases results delays payment us inventory turns ranged 52 turns 59 turns 2014 compared range 53 turns 58 turns 2013 believe inventory turns future may fluctuate depending ability reduce lead times well changes product mix ocean freight versus air freight inventory turns may also decrease future result flexibility required respond customer demands enter foreign currency forward contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record balance sheet reporting period fair value foreign currency forward contracts record fair value adjustments results operations gains losses associated currency rate changes contracts recorded “interest income expense net” consolidated statements operations offsetting transaction gains losses related assets liabilities additionally hedging costs vary depending size hedging program whether purchasing selling foreign currency relative us dollar interest rate spreads us foreign markets additionally also hedging program uses foreign currency forward contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated chinese yuan israeli shekel reporting period record fair value unrealized forward contracts balance sheet related unrealized gains losses component accumulated comprehensive income separate element stockholders’ equity realized gains losses associated effective portion foreign currency forward contracts recorded within revenue operating expense depending upon underlying exposure hedged excluded ineffective portions hedging instrument would recorded interest income expense net time board directors approved plans us purchase shares common stock open market privately negotiated transactions september 2013 board directors authorized repurchase 4000 million approximately 20 outstanding common stock “return capital program” 2500 million modified “dutch auction” selftender offer “tender offer” subsequent privately negotiated transactions funded program 1500 million cash 2500 million term loan tender offer expired october 30 2013 december 4 2013 announced plans repurchase aggregate 1146 million common stock accelerated share repurchase “asr” program entered separate asr agreements two financial institutions asr program represents last phase 4000 million return capital program terms asr agreements paid aggregate 1146 million cash took initial delivery approximately 80 million shares december 2013 asr contracts settled june 2014 whereby received additional 15 million shares upon settlement aggregate 95 million shares ultimately purchased asr program determined based volumeweighted average stock price less agreed upon discount term transactions total shares repurchased immediately retired upon delivery july 2014 board directors approved new share repurchase plan “the 2014 repurchase plan” may discretion purchase shares open market aggregate value 2000 million years ended december 31 2014 2013 2012 purchased approximately 53 million 452 million 51 million shares respectively common stock cash 500 million 5023 million 550 million respectively including shares repurchased tender offer asr programs december 31 2014 1500 million remained authorized 2014 repurchase plan see note 15 notes consolidated financial statements details december 31 2014 open purchase orders related contract manufacturers contractual obligations approximately 1743 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition banks issued letters credit totaling approximately 72 million used secure leases offices well legal tax insurance obligations table set forth shows december 31 2014 future minimum lease payments due current lease obligations table excludes approximately 103 million related current portion future minimum lease payments associated leased space restructured noncurrent portion minimum lease payments associated leased space restructured included longterm liabilities table addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2014 follows thousands 1 estimated future interest payments calculated based assumptions principal repayments beyond required quarterly principal amortization b borrowings made libor tranches bear interest forecasted libor rates december 31 2014 plus spread 175 additionally december 31 2014 233 million unrecognized tax benefits inclusive interest included table compared 235 million december 31 2013 end 2015 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 07 million reserve releases would recorded adjustments tax expense period released believe available cash equivalents investments sufficient meet operating expenses capital requirements least next 12 months based current business plans however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2014 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 2 notes consolidated financial statements additional discussion accounting policies revenue recognition recognize revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met generally recognize service revenues ratably service periods one five years upon completion installation professional services products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts sale involves multiple deliverables sales products include services multiple deliverables evaluated determine unit accounting entire fee arrangement allocated unit accounting based relative selling price deliverable applying relative selling price method determine selling price deliverable using vendorspecific objective evidence “vsoe” selling price exists thirdparty evidence “tpe” selling price neither vsoe tpe selling price exist deliverable use best estimate selling price deliverable revenue allocated element recognized revenue recognition criteria met element sales returns channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered accrue coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues contracts generally provide right return products however limited number contracts contain stock rotation rights record estimate future returns based upon contractual rights historical returns experience allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments review allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances written management determined likelihood collection probable warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required excess obsolete inventory record writedowns excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis stockbased compensation expense stockbased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock units performance shares well employee stock purchase plan measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values estimated fair value awards including effect estimated forfeitures recognized expense requisite service period generally vesting period fair values stock option awards shares purchased employee stock purchase plan estimated grant date using blackscholes option valuation model fair value restricted stock units based market value common stock date grant fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking stock among nasdaq composite index companies performance period changes underlying factors assumptions utilized may result significant variability stockbased compensation costs record makes amounts difficult accurately predict deferred refundable taxes estimate actual current tax expense together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2014 927 million net deferred tax assets included net deferred tax asset balance 32 million valuation allowance 27 million recorded related research credits jurisdiction history credits excess taxable profits 05 million relates foreign tax credit carryforwards recognize measure benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions evaluate uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period make change could material impact effective tax rate operating results fair value fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires us use observable market data available minimize use unobservable inputs determining fair value recurring basis measure certain financial assets liabilities fair value including marketable securities foreign currency contracts cash equivalents investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy december 31 2014 fixed income availableforsale securities include us treasury obligations government agency instruments corporate bonds commercial paper nonus government securities money market funds included availableforsale securities cash equivalents consist investments original maturities three months less include money market funds principal market execute foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants counterparties large money center banks regional banks foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy information fair values marketable securities foreign currency contracts see note 11 notes consolidated financial statements term loan credit agreement classified within level 2 instruments borrowings actively traded variable interest rate structure based upon market rates currently available us debt similar terms maturities elected record term loan fair value measured fair value disclosure purposes december 31 2014 2013 estimated fair value term loan approximately 2349 million 2475 million respectively based observable market inputs goodwill purchased intangibles review goodwill impairment annually fourth quarter calendar year whenever events changes circumstances indicate carrying amount goodwill may recoverable adopted amended accounting guidance permits us choose first assess qualitative factors determine whether likely fair value reporting unit less carrying amount based assessment determine likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary identification measurement goodwill impairment involves estimation fair value reporting units based best information available date assessment primarily incorporates management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities goodwill tested impairment reporting unit level one level operating segment business organized around four major geographic theatres north america caribbean latin america “cala” europe middle east africa “emea” asia pacific “apac” determined reporting units 2014 2013 reporting purposes aggregate north america cala one segment named americas report emea apac separate segments fourth quarter 2014 performed qualitative assessment four reporting units reporting unit weighed relative impact factors specific reporting unit well industry macroeconomic factors reporting unit specific factors considered included results recent impairment tests well financial performance changes reporting units’ carrying amounts since recent impairment tests industry reporting units operate considered growth projections independent sources significant developments transactions within industry 2014 applicable concluded reporting unit specific industry factors either positive neutral impact fair value reporting units also determined macroeconomic factors 2014 significant impact discount rates growth rates used valuation performed based qualitative assessment concluded four reporting units likely fair value reporting unit exceeded carrying amount indication impairment result determined performing twostep impairment test unnecessary impairment charge required although analysis regarding fair values goodwill indicates exceeded carrying value materially different assumptions regarding future performance businesses significant declines stock price could result goodwill impairment losses future purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months six years periodically assess whether impairment indicators exist purchased intangibles finite lives longlived assets including intangible assets finite lives tested impairment whenever events changes circumstances indicate carrying amount assets may recoverable assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charge related purchased intangible assets recorded 2014 2013 impairment indicators existed screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests software development costs software development costs incurred prior establishment technological feasibility included research development expenses incurred eligible material software development costs capitalized upon establishment technological feasibility general availability software products including direct labor related overhead costs well stockbased compensation defined technological feasibility establishment working model typically occurs beta testing commences capitalized costs amortized productbyproduct basis using straightline method estimated product life generally three years ratio current revenues total projected product revenues whichever greater believe capitalized software costs recoverable future gross profits generated products derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements information respect recent accounting pronouncements impact pronouncements consolidated financial statements see note 2 notes consolidated financial statements included elsewhere annual report item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” “objective” “strategy” “goal” “should” “vision” “designed” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview global leader helping organizations achieve new levels teamwork efficiency productivity unleashing power human collaboration offer open standardsbased unified communications collaboration “ucc” solutions voice video content sharing comprehensive line support service solutions ensure customer success solutions powered polycom® realpresence® platform flexible comprehensive infrastructure offering broad application programming interfaces “apis” deployed via software andor hardware onpremises cloud hybrid implementations realpresence platform interoperates broad set communication business mobile cloud applications devices deliver secure facetoface collaboration across different environments realpresence collaboration solutions infrastructure endpoints environments people world connect collaborate naturally without physical location individuals teams communicate collaborate high definition “hd” voice video content experiences desktops meeting rooms classrooms home offices mobile devices web browsers specialized solutions video carts healthcare education manufacturing applications solutions government agencies judicial applications removing barriers distance time connecting experts needed creating greater trust understanding improved collaboration polycom enables teams make better decisions faster increase productivity saving time money environmentally responsible sell solutions globally hightouch sales model leverages broad network channel partners including distributors valueadded resellers direct market resellers “dmr” system integrators leading communications services providers retailers manufacture products outsourced model optimized quality reliability fulfillment agility believe important drivers adoption collaboration solutions include · ease use ease deployment · growth video preferred method communication · increasing presence video desktop laptop devices · growth videocapable mobile devices including tablets smartphones · growth skype business corporate environment resulting impact sales polycom’s skype businesscompatible voice video devices · expansion business applications integrated webbased video content collaboration · virtualization move private public hybrid clouds · adoption ucc smbs · growth number teleworkers globally · new pricing models options video delivery including subscriptionbased software pricing asaservice offerings · emergence bring device “byod” programs businesses sizes across regions · demand ucc solutions b2b b2c communications move consumer applications business space · continued commitment organizations individuals reduce carbon footprint expenses choosing voice video content collaboration travel believe uniquely positioned ucc ecosystem partner choice strategic partnerships open support standards innovative technology multiple delivery modes customercentric gotomarket capabilities total revenues 2015 13 billion decrease 779 million 6 2014 product service revenues declined yearoveryear basis overall decrease product revenues primarily due lower revenue uc group systems lesser extent uc platform products partially offset increased uc personal devices revenue driven increase desktop voice sales exception fourth quarter 2014 uc group systems uc group system uc platform product revenues declined yearoveryear since first quarter 2012 primarily due lower group video product revenues lesser extent decreased sales uc group voice products realpresence platform hardware software products expect trend continue least near term service revenues decreased slightly 2014 result decrease halo related managed service revenues lower new maintenance service revenues due decrease uc group systems uc platform products revenues offset increase service revenues related maintenance renewals platform implementation services halo related managed services resulted visual collaboration business acquired 2011 revenue services decreased managed services contracts expire cases customers elect purchase polycom product solutions rather renew managed services contracts segment perspective americas emea apac segment revenues accounted 49 26 25 respectively revenues 2015 americas emea apac segment revenues decreased 7 4 6 respectively compared 2014 yearoveryear basis product revenues declined across geographical segments 2015 compared 2014 service revenues declined americas emea segments increased apac segment 2015 compared 2014 see note 19 notes consolidated financial statements information segments including summary segment revenues segment contribution margins discussion results operations consolidated level also followed discussion results operations segment year ended december 31 2015 operating margins increased approximately 4 percentage points 2015 compared 2014 increase operating margins primarily driven decreased operating expenses resulting lower headcountrelated costs including compensation commission costs lower outside services lower restructuring costs overall decreases operating expenses result continued focus optimizing cost structure improving operating margins 2015 generated approximately 1195 million cash flow operating activities operating cash inflows offset impact investing financing activities foreign exchange rate changes described detail “liquidity capital resources” resulting 80 million net decrease total cash equivalents december 31 2015 compared prior year results operations three years ended december 31 2015 revenues manage business primarily geographic basis organized three geographic segments revenues include product service revenues segment summarized following table revenues decreased across geographic segments 2015 compared 2014 primarily driven decreased revenues several key markets primarily united states australia russia partially offset yearoveryear growth germany india united kingdom yearoveryear basis product revenues decreased across segments service revenues decreased americas emea segments increased apac segment overall decrease revenues 2015 2014 primarily due decrease product revenues 670 million 7 lesser extent service revenues decreased 110 million 3 compared 2014 overall decrease product revenues 2015 primarily due lower revenue uc group systems lesser extent uc platform products partially offset increased uc personal devices revenue driven increase desktop voice sales decrease service revenues primarily driven decrease halo related managed service revenues lower new maintenance service revenues due decrease uc group systems uc platform products revenues offset increase service revenues related maintenance renewals platform implementation services result declines product revenues well greater mix uc personal devices revenues lower service attach rates compared uc group systems uc platform products service revenues new maintenance contracts declined last two years trend likely continue segment perspective total revenues decreased americas apac segments increased emea segment 2014 compared 2013 overall decrease americas segment revenues 2014 2013 driven primarily decreased revenues united states brazil canada partially offset increased revenues mexico product service revenues decreased americas segment 2014 primarily result lower ip conference phone revenues purchased cisco decrease apac segment revenues 2014 2013 driven primarily decreased revenues japan china partially offset increased revenues india australia product revenues decreased service revenues increased apac segment 2014 overall increase emea segment revenues primarily due growth united kingdom france turkey benelux switzerland partially offset decreased revenues russia nordic countries yearoveryear basis product service revenues increased emea segment 2014 overall decrease revenues 2014 2013 due decrease product revenues 304 million 3 partially offset increase service revenues 71 million 2 compared 2013 overall decrease product revenues 2014 primarily result lower sales uc group systems products mainly driven lower ip conference phone revenues result cisco longer reselling product previously purchased us lesser extent due lower uc platform product revenues decrease partially offset increased sales uc personal devices product yearoveryear increase service revenues primarily driven increased maintenance service renewals yearoveryear increased maintenance service revenues larger installed base largely offset decreased revenues managed services related visual collaboration business acquired 2011 managed services contracts expire customers may elect purchase polycom product solutions rather renew managed services contracts case 2014 2015 2014 2013 one channel partner scansource communications accounted 20 17 16 respectively total revenues believe unlikely loss channel partners would longterm material adverse effect consolidated revenues segment revenues believe endusers would likely purchase products different channel partner however loss one channel partners could shortterm material adverse impact following table presents revenues groups similar products services uc group systems include group video group voice immersive telepresence systems products related service elements decrease uc group systems revenues 2015 compared 2014 primarily driven decreased sales uc group video products related services lesser extent decreased sales immersive telepresence products related services across three geographic segments decrease uc group systems revenues 2014 compared 2013 primarily driven decreased sales uc group voice products related services americas segment lesser extent decreased sales uc group video products related services apac segment decreased sales immersive telepresence products related services across segments decreases partially offset increased revenues uc group video products related services americas segment uc group video voice products related services emea segment uc personal devices include desktop voice products desktop video devices increase uc personal devices revenues 2015 compared 2014 primarily due increased sales desktop voice products americas emea segments partially offset decreased sales apac segment increase uc personal devices revenues 2014 2013 primarily due increased sales desktop voice products partially offset decreased sales desktop video products across regions uc platform includes realpresence platform hardware software products related service elements yearoveryear basis uc platform products related services decreased 2015 compared 2014 primarily driven decreased sales americas emea segments partially offset increased sales apac segment decrease uc platform revenues 2014 2013 primarily driven decreased sales uc platform products related services americas emea segments partially offset increased revenues apac segment cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization costs freight expense tooling depreciation royalty payments stockbased compensation costs allocation overhead expenses including facilities costs amortization certain intangible assets warranty expense cost product revenues product gross margins included charges stockbased compensation expense 29 million 25 million 29 million years ended december 31 2015 2014 2013 respectively uc platform uc group systems products typically higher gross margin uc personal products overall product gross margins fluctuate depending upon product mix given period geography overall decrease product gross margins percentage revenues 2015 compared 2014 primarily due changes product mix toward lower margin uc personal devices lesser extent due higher reserves excess obsolete inventories overall increase product gross margins percentage revenues 2014 2013 primarily due lower product cost revenues driven decreased amortization purchased intangibles largely offset favorable product mix shift toward higher margin products inventory turns 61 turns 59 turns 58 turns december 31 2015 2014 2013 respectively inventory turns future may fluctuate depending ability reduce lead times well changes product mix ocean freight versus air freight inventory turns may also decrease future result flexibility required respond customer demands cost service revenues service gross margins cost service revenues consists primarily material direct labor including outside services allocation overhead expenses including facilities costs managed network expenses stockbased compensation costs cost service revenues service gross margins included charges stockbased compensation expense 47 million 43 million 59 million years ended december 31 2015 2014 2013 respectively increase service gross margins 2015 compared 2014 primarily due decreased cost services primarily driven decreased spending managed network expenses outside services lower compensation costs increase service gross margins 2014 2013 primarily due increased service revenues driven increased maintenance service renewals cost service revenues remained relatively flat yearoveryear total cost revenues total gross margins total gross margins remained relatively flat 2015 compared 2014 primarily due increase service gross margins offset decreased product gross margins total gross margins remained relatively flat 2014 compared 2013 increases service product gross margins minimal discussed expect gross margins decrease near term forecasting future gross margin percentages difficult number risks related ability maintain improve current gross margin levels cost revenues percentage revenues vary significantly based upon number factors following uncertainties surrounding revenue levels including future pricing andor potential discounts result economy response strengthening us dollar international markets related production level variances impact foreign currency rate fluctuations competition extent new services sales accompany product sales well maintenance renewal rates changes technology changes product mix variability stockbased compensation costs royalties third parties utilization professional services personnel develop professional services practice make investments expand professional services offerings fluctuations freight repair costs ability achieve greater efficiencies installations immersive telepresence products manufacturing efficiencies subcontractors manufacturing purchase price variances changes prices commodity components warranty recall costs timing sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force allocation overhead expenses including facilities costs outside services advertising promotional expenses product marketing expenses stockbased compensation costs sales marketing expenses except direct sales marketing expenses allocated segments sales marketing expenses included charges stockbased compensation expense 132 million 149 million 266 million years ended december 31 2015 2014 2013 respectively decrease sales marketing expenses 2015 compared 2014 primarily due lower headcountrelated costs including compensation commission expenses lower headcountbased allocations decreased spending outside services well lower facilities costs sales marketing headcount decreased 5 december 31 2014 december 31 2015 overall decreases sales marketing expenses line plans improve operating performance decrease sales marketing expenses 2014 2013 primarily due decreased headcountrelated costs including compensation commission expenses stockbased compensation expense lower headcountbased allocations well lower depreciation expensed materials decreased spending marketing programs decreased travel entertainment expenses sales marketing headcount decreased 5 december 31 2013 december 31 2014 part plans improve operating performance expect sales marketing expenses decrease near term expenses fluctuate depending revenue levels achieved certain expenses commissions determined based upon revenues achieved forecasting sales marketing expenses percentage revenues highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter timing stockbased compensation expense marketing expenses also fluctuate depending upon timing extent marketing programs market new products research development expenses research development costs expensed incurred consist primarily compensation costs allocation overhead expenses including facilities costs depreciation outside services stockbased compensation expensed materials research development costs allocated segments research development expenses included charges stockbased compensation expense 93 million 103 million 156 million years ended december 31 2015 2014 2013 respectively research development expense decreased absolute dollars remained relatively flat percentage revenue 2015 compared 2014 primarily due lower headcountrelated costs largely compensation related benefits partially offset higher program expenses headcountrelated costs decreased despite research development headcount increasing slightly 2 december 31 2014 december 31 2015 due shift research development lower cost locations overall decreases research development expenses line plans improve operating performance investing accretive areas development new products decrease research development expenses 2014 2013 primarily due decreased headcountrelated costs including compensation expense stockbased compensation cost lower outside services costs well capitalization certain internal costs related internally developed software products sold research development headcount decreased 9 december 31 2013 december 31 2014 part plans improve operating performance starting third quarter 2013 capitalized certain development costs internally developed software products marketed sold customers including direct labor related overhead costs well stockbased compensation costs capitalized prior 2013 software development costs qualifying capitalization significant amount capitalized software development costs fluctuate depending upon nature timing software development activities given period see notes 2 5 notes consolidated financial statements information software development costs believe innovation technological leadership critical future success committed continuing significant level research development develop new technologies products combat competitive pressures also investing research development projects designed key strategic initiatives strategic partners service provider customers research development expenses percentage revenues highly dependent expected revenue levels could vary significantly depending actual revenues achieved timing stockbased compensation expense number development activities given quarter expect research development costs decrease near term general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs allocation overhead expenses including facilities costs litigation costs professional service fees general administrative expenses allocated segments general administrative expenses included charges stockbased compensation expense 150 million 160 million 135 million years ended december 31 2015 2014 2013 respectively general administrative expense decreased absolute dollars remained relatively flat percentage revenue 2015 compared 2014 primarily due lower headcountrelated costs including compensation related benefits stockbased compensation expense lower legal costs decreased facilities costs general administrative headcount decreased 5 december 31 2014 december 31 2015 overall decreases general administrative expenses line plans improve operating performance general administrative expenses increased slightly absolute dollars remained relatively flat percentage revenues 2014 2013 primarily due increases stockbased compensation expense bad debt expense insurance costs outside services costs general administrative headcount decreased 5 december 31 2013 december 31 2014 part plans improve operating performance significant future charges due costs associated litigation uncollectible receivables could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing litigation bad debt expense associated uncollectible receivables difficult future general administrative expense increases decreases absolute dollars difficult predict due lack visibility certain costs including legal costs associated defending claims us well legal costs associated asserting enforcing intellectual property portfolio factors expect general administrative expenses decrease absolute dollars near term could fluctuate depending level timing stockbased compensation expense expenditures associated litigation described note 12 notes consolidated financial statements amortization purchased intangibles 2015 2014 2013 recorded approximately 95 million 98 million 104 million respectively operating expenses amortization purchased intangibles acquired acquisitions addition recorded 10 million 30 million 94 million respectively cost product revenues related certain technology intangibles yearoveryear decrease amortization expenses 2015 2014 primarily due certain intangible assets acquired prior years fully amortized expect amortization expenses continue decline near term provided purchases new intangible assets certain existing intangible assets fully amortized 2016 evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charges recognized periods presented restructuring costs 2015 2014 2013 recorded 111 million 403 million 485 million respectively related restructuring actions resulted consolidation certain facilities elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus efforts properly align cost structure projected future revenue streams see note 7 notes consolidated financial statements information restructuring costs 2015 initiated reduction elimination certain leased facilities elimination approximately 11 global workforce expected substantially complete third quarter 2016 actions designed improve profitability strategically investing accretive areas business leveraging outsource partners pursuant announcement december 2015 result fourth quarter 2015 recorded approximately 94 million charges severance onetime employee benefits individuals impacted restructuring charges 2015 also include approximately 46 million severance payments certain employees approximately 43 million facilitiesrelated charges part discrete followon actions previous restructuring actions net 16 million deferred rent adjustments approximately 80 million related change assumptions used facilitiesrelated restructuring reserves estimate 2014 completed consolidation elimination certain facilities elimination 6 global workforce pursuant announcement january 2014 management completed certain actions designed better align expenses revenue gross margin profile position us improved operating performance result recorded approximately 286 million net 23 million deferred rent restructuring charges related idle facilities upon vacating facilities 118 million charges severance onetime employee benefits individuals impacted 2013 completed consolidation elimination certain facilities globally elimination 4 global workforce actions approved management august 2013 result recorded approximately 354 million net 28 million deferred rent restructuring charges related idle facilities upon vacating facilities 102 million charges severance onetime employee benefits individuals impacted addition recorded 29 million charges associated changes product roadmap focused products solutions greater revenue margin potential future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed addition restructuring reserve net estimated sublease income expect generate estimate sublease income based current comparable rates leases respective markets actual sublease income lower estimates reason takes us longer estimated sublease facilities associated cost recorded liability related subleasing terminating lease obligations facilities greater estimated would incur additional charges operations would harm business results operations cash flows litigation reserves payments 2015 incur charges related litigation reserves payments new ongoing litigation matters 2014 recorded 31 million litigation reserves payments related ongoing litigation matters yet settled also subject variety claims suits arise time ordinary course business matters subject inherent uncertainties management’s view matters may change future could result charges would material adverse impact financial positions results operations cash flow expenses 2013 see note 12 notes consolidated financial statements information transactionrelated costs time engage corporate development merger acquisition activities normal course business expense acquisition transaction related costs incurred costs generally include fees outside legal accounting services integration services 2015 2014 2013 recorded 06 million 02 million 34 million transactionrelated costs respectively spent may future spend significant resources identifying acquiring businesses interest income expense net interest expense consists primarily interest borrowings credit agreement entered september 2013 imputed interest related certain long term obligations income expense net consists primarily nonincome based taxes fees interest earned cash equivalents investments less bank charges resulting use bank accounts foreign exchange related gains losses realized gains losses investments expect interest expense gradually increase near term interest expense fluctuate due changes interest rates outstanding debt balances longterm obligations record imputed interest increase net income 2015 compared 2014 primarily due foreign exchange related gains higher interest income vat refunds partially offset higher nonincome based taxes fees higher interest expense increase net income 2014 compared 2013 primarily due onetime business tax refund rebates nonincome based business tax partially offset lower interest income expense net fluctuate due changes interest rates returns cash equivalents investments future impairment investments foreign currency rate fluctuations unhedged exposures fluctuations costs associated hedging program timing nonincome based taxes license fees balance cash equivalents investments could decrease depending upon amount cash used stock repurchase activity future acquisitions factors would also impact interest income provision income taxes continuing operations subject income taxes us numerous foreign jurisdictions effective tax rate reflects applicable tax rates effect various tax jurisdictions around world income earned effective tax rates differ us federal statutory rate 35 primarily due tax impact foreign profits lower tax jurisdictions state taxes rd tax credits domestic manufacturing deductions nondeductible stock based compensation changes reserves uncertain tax positions intercompany sales intellectual property significant portion pretax income earned taxed outside us impacts tax provision due lower statutory tax rates foreign jurisdictions benefits approximately 177 million 140 million 2015 2014 respectively expense approximately 71 million 2013 foreign effective tax rates 2015 2014 2013 155 152 2029 respectively addition effective income tax rate impacted year discrete factors events effective tax rates 2015 2014 2013 significantly impacted discrete items discussion income tax provision see note 17 notes consolidated financial statements december 31 2015 approximately 63 million tax effected net operating loss carryforwards 03 million tax effected capital loss carryforwards 255 million tax effected credit carryforwards net operating loss carryforwards credits include 14 million 01 million respectively related acquisitions result limited amount recognized one year capital net operating loss carryforward assets begin expire 2019 tax credit carryforwards begin expire 2016 included net deferred tax asset balance 114 million valuation allowance 30 million relates research credits jurisdiction history credits excess taxable profits 84 million includes net operating losses 44 million deferred tax assets 40 million foreign subsidiary history losses provide us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2015 cumulative amount earnings upon us income tax provided approximately 4038 million practicable determine income tax liability might incurred earnings repatriated us 2015 2014 2013 recorded reserve reductions 19 million 09 million 24 million respectively due expiration statutes limitation us foreign jurisdictions december 31 2015 201 million unrecognized tax benefits compared 216 million december 31 2014 end 2016 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 13 million reserve releases would recorded adjustments tax expense period released recognize interest andor penalties related income tax matters income tax expense december 31 2015 december 31 2014 19 million 16 million respectively accrued interest penalties related uncertain tax positions july 27 2015 united states tax court issued taxpayerfavorable opinion respect altera corporation altera’s litigation internal revenue service “irs” litigation relates treatment sharebased compensation expense intercompany costsharing arrangement taxpayer’s foreign subsidiary fiscal years 2004 2007 opinion court accepted altera’s position excluding sharebased compensation cost sharing arrangement concluded related irs regulations invalid tax court opinion complete tax computation finalized entered tax court record tax court granted irs additional extension time submit tax computation november 12 2015 upon finalization tax computation tax court opinion became final irs 90 day period appeal irs appeals could take two three years litigation resolved currently unable predict irs appeal opinion outcome appeal adjustment consolidated financial statement recorded time monitoring case material impact consolidated financial statement potential favorable implications costsharing arrangement future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income nontax deductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies example federal research credit lapsed 2014 2015 reinstated part tax increase prevention act 2014 made permanent part “protecting americans tax hikes act 2015” believe future effective tax rate may volatile result factors regularly assess ability realize deferred tax assets recorded entities based upon weight available evidence including factors recent earnings history expected future taxable income company’s future business profits support realization deferred tax assets valuation allowance could recorded foreseeable future event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made also subject periodic examination income tax returns internal revenue service tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect net income financial condition possibly materially discontinued operations december 4 2012 completed disposition net assets ews business mobile devices holdings llc delaware limited liability corporation 2013 recorded additional gain sale discontinued operations net taxes approximately 05 million result net working capital adjustment accordance purchase agreement realized gain loss sale discontinued operations 2014 2015 additional cash consideration 250 million payable next two years subject certain conditions including meeting certain agreedupon ebitdabased milestones fiscal 2015 2016 additional cash consideration accounted gain sale discontinued operations net taxes realized realizable segment information business conducted globally managed geographically three segments 1 americas consists north america caribbean latin america “cala” reporting units 2 europe middle east africa “emea” 3 asia pacific “apac” segments determined accordance management views evaluates business allocates resources based criteria outlined authoritative guidance description products services well annual financial data segment found business section form 10k note 19 notes consolidated financial statements future changes organizational structure business may result changes reportable segments disclosed following summary financial information segments periods indicated thousands americas decrease americas segment revenues 2015 2014 primarily due decreased revenues united states brazil rest cala partially offset increased revenues canada yearoveryear basis overall decrease americas segment revenues primarily driven decreased revenues uc group systems related services result decreased sales uc group video uc group voice lesser extent decreased revenues uc platform products related services partially offset increased revenues uc personal devices products primarily due increased desktop voice sales result continued adoption voip increased demand skype businesscompatible solutions decrease americas segment revenues 2014 2013 primarily due decreased revenues united states brazil canada partially offset increased revenues mexico yearoveryear basis overall decrease americas segment revenues primarily driven decreased revenues uc group systems result decreased sales ip conference phones previously purchased resold cisco lesser extent decreased revenues uc platform products related services partially offset increased revenues uc personal devices products related services primarily due increased desktop voice sales result increased demand skype business interoperable solutions continued adoption voip partially offset decreased desktop video revenue 2015 three channel partners americas segment accounted 38 13 12 americas revenues 2014 two channel partners americas segment accounted 34 10 americas revenues 2013 one channel partner americas segment accounted 32 americas revenues believe unlikely loss channel partners would long term material adverse effect consolidated revenues believe endusers would likely purchase products different channel partner however loss one channel partners could shortterm material adverse impact decrease contribution margin percentage americas segment revenues 2015 2014 primarily due lower gross margins well increased direct sales marketing expenses percentage revenues yearoveryear decrease gross margins primarily driven lower product gross margins due lower product revenues well mix shift toward lower margin uc personal devices higher product discounting increase contribution margin percentage americas segment revenues 2014 2013 primarily due higher gross margins percentage revenues direct sales marketing expenses percentage revenues decreased slightly yearoveryear increase gross margins primarily due higher product gross margins driven product mix shift toward higher margin products within uc group systems product category lower product discounting decrease direct sales marketing expenses primarily driven lower headcountrelated costs result restructuring actions including decreased compensation commission expenses lower headcountbased allocations well decreased outside services costs emea decrease emea segment revenues 2015 2014 primarily due decreased revenues russia austria switzerland nordic countries partially offset increased revenues germany united kingdom overall decrease emea segment revenues primarily driven decreased sales uc group systems products related services result decreased sales uc group video immersive telepresence products lesser extent due decreased sales uc platform products related services partially offset increased revenues uc personal devices products related services primarily due increased desktop voice sales increase emea segment revenues 2014 2013 primarily due increased revenues united kingdom france turkey benelux switzerland result slowly improving economic environment countries partially offset decreased revenues russia nordic countries yearoveryear basis increase emea segment revenues primarily due increased sales uc group systems uc personal devices related services increase uc group systems revenues primarily due increased revenues group voice sales lesser extent increased revenues uc group video products related services partially offset decreased revenues immersive telepresence products related services increase uc personal devices revenues primarily driven increased revenues desktop voice sales result increased demand skype business interoperable solutions continued adoption voip partially offset decreased revenues desktop video products related services sales uc platform products related services emea segment decreased slightly yearoveryear 2015 2014 2013 one channel partner emea segment accounted 12 14 12 emea revenues respectively believe unlikely loss channel partners would long term material adverse effect consolidated revenues believe endusers would likely purchase products different channel partner however loss one channel partners could shortterm material adverse impact decrease contribution margin percentage emea segment revenues 2015 2014 primarily due lower gross margin offset part decreased direct sales marketing expenses absolute dollars percentage revenues decrease gross margin primarily driven lower product gross margin resulting product mix shift away higher margin uc platform products toward lower margin uc personal devices products unfavorable impact foreign currency exchange rates decrease sales marketing expenses primarily due lower headcountrelated costs result decrease headcount impact foreign currency exchange rates reducing overall sales marketing expenses increase contribution margin percentage emea segment revenues 2014 2013 primarily due decreased sales marketing expenses percentage revenues partially offset lower gross margin decrease sales marketing expenses primarily due lower facility headcountrelated costs result restructuring actions decrease gross margin primarily due lower service gross margin driven increase lower margin installation services lower product margin result product mix shift away higher margin uc platform products apac decrease apac segment revenues 2015 2014 primarily due decreased revenues australia japan offset increased revenues india decrease apac segment revenues primarily driven decreased revenues uc group systems products related services uc personal devices declined partially offset increased revenues uc platform products related services decrease apac segment revenues 2014 2013 primarily due decreased revenues japan china partially offset increased revenues india australia yearoveryear basis decrease apac segment revenues primarily driven decreased revenues uc group systems partially offset increased revenues uc personal devices uc platform products related services decrease uc group systems revenues apac primarily driven decreased revenues uc group video immersive telepresence products related services partially offset increased uc group voice revenues 2015 three channel partners apac segment accounted 17 12 10 apac revenues 2014 two channel partners apac segment accounted 15 apac revenues 2013 two channel partners apac segment accounted 16 12 apac revenues believe unlikely loss channel partners would long term material adverse effect consolidated revenues believe endusers would likely purchase products different channel partner however loss one channel partners could shortterm material adverse impact increase contribution margin percentage apac segment revenues 2015 2014 primarily due higher gross margin well decreased direct sales marketing expenses absolute dollars percentage revenues increase gross margin primarily driven increased service gross margin due decreased cost services result lower managed network expenses headcountrelated costs decrease direct sales marketing expenses driven lower headcountrelated costs including lower compensation commission expenses well decreased spending marketing programs increase contribution margin percentage apac segment revenues 2014 2013 primarily due decreased sales marketing expenses percentage revenues partially offset slightly lower gross margins decrease direct sales marketing expenses driven lower headcountrelated costs result restructuring actions including lower compensation commission expenses lower headcountrelated allocations well decreased spending marketing programs slightly decreased gross margins primarily due decreased product gross margins percentage revenues result product mix shift higher percentage revenues china india typically lower gross margins largely offset increased service gross margins yearoveryear due typical seasonality business macroeconomic factors expect revenue apac segment decrease first quarter 2016 compared fourth quarter 2015 addition first quarter 2016 transitioning management responsibilities china operations new general manager risks associated transition including disruption business delays orders potentially significant loss future revenue distribution partners customers service providers china selected quarterly financial data following table provides unaudited selected quarterly financial data last eight quarters financial information read conjunction consolidated financial statements related notes included annual report form 10k prepared unaudited quarterly financial information basis audited consolidated financial statements operating results quarter necessarily indicative results future quarters full year january 26 2016 issued press release announcing results fourth quarter fiscal 2015 press release reported operating income 122 million net income 145 million basic net income per share 011 subsequent issuance press release recorded adjustment approximately 17 million related change assumptions used facilitiesrelated restructuring reserves estimate resulted operating income 139 million net income 156 million basic net income per share 012 fourth quarter fiscal 2015 liquidity capital resources cash equivalents investments principal sources liquidity include cash equivalents investments cash provided operating activities substantially investments comprised corporate debt securities us government securities agency securities nonus government securities include state municipal foreign government securities see note 9 notes consolidated financial statements information investments following table presents cash equivalents shortterm investments longterm investments held united states foreign subsidiaries outside united states thousands december 31 2015 cash equivalents investments held united states totaled 2323 million remaining 4335 million held various foreign subsidiaries outside united states need access cash equivalents investments held outside united states order fund acquisitions share repurchases working capital needs may subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes current intent permanently reinvest earnings foreign operations appropriate operational needs cash international business current operating plans demonstrate need repatriate foreign earnings fund us operations cash flows following table summarizes consolidated cash flow information thousands operating activities decrease net cash provided operating activities 2015 compared 2014 primarily due higher cash outflows result decreases accounts payable accrued liabilities driven timing payments lower restructuring liabilities well increase trade receivables driven timing receipts cash outflows partially offset yearoveryear increase net income adjusted noncash items lower cash outflows related prepaid expenses deferred taxes increase cash provided operating activities 2014 2013 due primarily higher net income adjusted noncash items increased working capital due increases accounts payable taxes payable well decrease inventory partially offset smaller yearoveryear increase accrued liabilities dayssalesoutstanding “dso” metric ranged 46 days 54 days 2015 compared range 44 days 51 days 2014 respectively dso could vary result number factors fluctuations revenue linearity increase international receivables increases receivables service providers government entities customarily longer payment terms dso could also negatively impacted current economic environment partners experience difficulty financing purchases results delays payment us inventory turns range 50 61 turns 2015 compared range 52 turns 59 turns 2014we believe inventory turns fluctuate depending ability reduce lead times well due changes anticipated product demand product mix ocean freight versus air freight inventory turns may also decrease future result flexibility required respond customer demands investing activities decrease net cash used investing activities 2015 compared 2014 primarily due lower purchases investments net sales maturities increase net cash used investing activities 2014 2013 primarily due higher purchases investments net sales maturities 2015 2014 2013 net cash used investing activities includes purchases property equipment 527 million 549 million 552 million respectively financing activities increase net cash used financing activities 2015 2014 primarily due 900 million shares repurchased current share repurchase program compared 500 million 2014 decrease net cash used financing activities 2014 2013 primarily due 500 million shares repurchased 2014 compared 5059 million 2013 debt september 2013 entered credit agreement “credit agreement” provides 2500 million term loan “term loan” matures september 13 2018 “maturity date” term loan bears interest option either base rate formula liborbased formula set forth credit agreement term loan payable quarterly installments principal equal approximately 16 million began december 31 2013 remaining outstanding principal amount term loan due payable maturity date credit agreement contains certain customary affirmative negative covenants also required maintain compliance consolidated fixed charge coverage ratio consolidated secured leverage ratio entered credit agreement conjunction purposes funding purchase common stock 2500 million value pursuant share repurchase authorization announced september 2013 december 31 2015 total 2345 million term loan outstanding net unamortized debt issuance cost 14 million compliance debt covenants see note 8 notes consolidated financial statements details also outstanding letters credit totaling approximately 15 million place satisfy certain facility lease requirements well legal tax insurance obligations foreign currency enter foreign currency forward contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record fair value foreign currency forward contracts consolidated balance sheet reporting period record fair value adjustments consolidated statement operations gains losses associated currency rate changes contracts recorded “interest income expense net” consolidated statement operations offsetting remeasurement gains losses related assets liabilities additionally hedging costs vary depending size hedging program whether purchasing selling foreign currency relative us dollar interest rates spreads us foreign markets additionally also hedging program uses foreign currency forward contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated chinese yuan israeli shekel reporting period record fair value unrealized forward contracts consolidated balance sheet related unrealized gains losses component “accumulated comprehensive loss income” separate element stockholders’ equity realized gains losses associated effective portion foreign currency forward contracts recorded within revenues operating expenses depending upon underlying exposure hedged excluded ineffective portions hedging instrument would recorded “interest income expense net” share repurchases time board directors approved plans us purchase shares common stock open market privately negotiated transactions july 2014 board directors approved share repurchase plan “the 2014 repurchase plan” may discretion purchase shares open market aggregate value 2000 million 2015 purchased 70 million shares common stock open market 900 million 2014 repurchase plan december 31 2015 601 million remained authorized 2014 repurchase plan see note 14 notes consolidated financial statements details contractual obligations commitments december 31 2015 open purchase orders related contract manufacturers contractual obligations approximately 1739 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition banks issued letters credit totaling approximately 15 million used secure leases offices well legal tax insurance obligations table set forth shows december 31 2015 future minimum lease payments due current lease obligations table excludes approximately 69 million related current portion minimum lease payments associated leased space restructured noncurrent portion future minimum lease payments associated leased space restructured included longterm liabilities table addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2015 follows thousands 1 estimated future interest payments calculated based assumptions principal repayments beyond required quarterly principal amortization b borrowings made libor tranches bear interest forecasted libor rates december 31 2015 plus spread 175 additionally december 31 2015 220 million unrecognized tax benefits inclusive interest included table due uncertainty might settled compared 233 million december 31 2014 end 2016 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 15 million reserve releases would recorded adjustments tax expense period released believe available cash equivalents investments continuing cash flows operations sufficient meet operating expenses capital requirements least next 12 months based current business plans however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive offbalance sheet arrangements december 31 2015 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 2 notes consolidated financial statements additional discussion accounting policies revenue recognition recognize revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured generally recognize service revenues ratably service periods one five years upon completion implementation professional services products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts sale involves multiple deliverables sales products include services multiple deliverables evaluated determine unit accounting entire fee arrangement allocated unit accounting based relative selling price deliverable applying relative selling price method determine selling price deliverable using vendorspecific objective evidence “vsoe” selling price exists thirdparty evidence “tpe” selling price neither vsoe tpe selling price exist deliverable use best estimate selling price deliverable revenue allocated element recognized revenue recognition criteria met element sales returns channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered accrue joint marketing funds marketing expense receive separable identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues contracts generally provide right return products however contracts distributors contain stock rotation rights record estimate future returns based upon contractual rights historical returns experience allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments review allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience delinquent account balances written management determined likelihood collection probable warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required excess obsolete inventory record writedowns excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis stockbased compensation expense stockbased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock units performance shares well employee stock purchase plan measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values estimated fair value awards including effect estimated forfeitures recognized expense requisite service period generally vesting period fair values stock option awards shares purchased employee stock purchase plan estimated grant date using blackscholes option valuation model fair value restricted stock units based market value common stock date grant fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking stock among nasdaq composite index companies performance period deferred taxes estimate actual current tax expense together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2015 897 million net deferred tax assets included net deferred tax asset balance 114 million valuation allowance 30 million recorded related research credits jurisdiction history credits excess taxable profits 84 million includes net operating losses 44 million deferred tax assets 40 million foreign subsidiary history losses consider earnings certain nonus subsidiaries indefinitely invested outside united states basis estimates future domestic cash generation sufficient meet future domestic cash needs specific plans reinvestment subsidiary earnings recorded deferred tax liability related us federal state income taxes foreign withholding taxes undistributed earnings foreign subsidiaries indefinitely invested outside united states decide repatriate foreign earnings would need adjust income tax provision period determined earnings longer indefinitely invested outside united states recognize measure benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions evaluate uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period make change could material impact effective tax rate operating results fair value fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires us use observable market data available minimize use unobservable inputs determining fair value recurring basis measure certain financial assets liabilities fair value including marketable securities foreign currency contracts cash equivalents investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate debt securities instruments generally classified within level 2 fair value hierarchy december 31 2015 fixed income availableforsale securities include us treasury obligations government agency instruments corporate debt securities nonus government securities money market funds included availableforsale securities cash equivalents consist investments original maturities three months less include money market funds principal market execute foreign currency contracts retail market overthecounter environment relatively high level price transparency foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy information fair values marketable securities foreign currency contracts see note 10 notes consolidated financial statements term loan credit agreement classified within level 2 instruments borrowings actively traded variable interest rate structure based upon market rates currently available us debt similar terms maturities elected record term loan fair value measured fair value disclosure purposes december 31 2015 2014 estimated fair value term loan approximately 2265 million 2349 million respectively based observable market inputs goodwill purchased intangibles review goodwill impairment annually fourth quarter calendar year whenever events changes circumstances indicate carrying amount goodwill may recoverable adopted amended accounting guidance permits us choose first assess qualitative factors determine whether likely fair value reporting unit less carrying amount based assessment determine likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary identification measurement goodwill impairment involves estimation fair value reporting units based best information available date assessment primarily incorporates management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities goodwill tested impairment reporting unit level one level operating segment business organized around four major geographic theatres north america caribbean latin america “cala” europe middle east africa “emea” asia pacific “apac” determined reporting units 2015 2014 reporting purposes aggregate north america cala one segment named americas report emea apac separate segments fourth quarter 2015 performed qualitative assessment four reporting units reporting unit weighed relative impact factors specific reporting unit well industry macroeconomic factors reporting unit specific factors considered included results recent impairment tests well financial performance changes reporting units’ carrying amounts since recent impairment tests industry reporting units operate considered growth projections independent sources significant developments transactions within industry 2015 applicable also determined macroeconomic factors 2015 significant impact discount rates growth rates used valuation performed based qualitative assessment concluded four reporting units likely fair value reporting unit exceeded carrying amount indication impairment result determined performing twostep impairment test unnecessary impairment charge recognized although analysis regarding fair values goodwill indicates exceeded carrying value materially different assumptions regarding future performance businesses significant declines stock price could result goodwill impairment losses future purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months six years periodically assess whether impairment indicators exist purchased intangibles finite lives longlived assets including intangible assets finite lives tested impairment whenever events changes circumstances indicate carrying amount assets may recoverable assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charge related purchased intangible assets recorded 2015 2014 impairment indicators existed screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests software development costs software development costs incurred prior establishment technological feasibility included research development expenses incurred eligible material software development costs capitalized upon establishment technological feasibility general availability software products including direct labor related overhead costs well stockbased compensation defined technological feasibility establishment working model typically occurs beta testing commences capitalized costs amortized productbyproduct basis using straightline method estimated product life generally three years ratio current revenues total projected product revenues whichever greater believe capitalized software costs recoverable future gross profits generated products derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements information respect recent accounting pronouncements impact pronouncements consolidated financial statements see note 2 notes consolidated financial statements included elsewhere annual report item 7aitem 7 management’s discussion analysis financial condition results operations read following discussion analysis conjunction consolidated financial statements related notes except historical information following discussion contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 used report words “may” “believe” “could” “anticipate” “would” “might” “plan” “expect” “will” “intend” “potential” “objective” “strategy” “goal” “should” “vision” “designed” similar expressions negative terms intended identify forwardlooking statements forwardlooking statements including among things statements regarding anticipated products customer geographic revenue levels mix gross margins operating costs expenses channel inventory levels involve risks uncertainties actual results may differ significantly projected forwardlooking statements factors might cause future results differ materially discussed forwardlooking statements include limited discussed “risk factors” document well information found elsewhere annual report form 10k overview global leader open standardsbased unified communications collaboration “ucc” solutions voice video collaboration solutions powered polycom® realpresence® platform comprehensive software infrastructure rich application programming interfaces “apis” interoperate broad set communication business mobile cloud applications devices deliver secure facetoface video collaboration across different environments polycom® realpresence® video voice solutions infrastructure endpoints environments people world collaborate facetoface without physical location individuals teams connect communicate collaborate highdefinition visual experience desktops meeting rooms classrooms home offices mobile devices web browsers specialized solutions video carts healthcare applications removing barriers distance time connecting experts needed creating greater trust understanding visual connection enable people make better decisions faster increase productivity saving time money environmentally responsible sell solutions globally hightouch sales model leverages broad network channel partners including distributors valueadded resellers system integrators leading communications services providers retailers manufacture products outsourced model optimized quality reliability fulfillment agility believe important drivers adoption polycom ucc solutions include • growth video preferred method communication everywhere • increasing presence video desktop • growth videocapable mobile devices including tablets smartphones • expansion social business tools integrated webbased video collaboration • adoption ucc small medium businesses governments globally • growth number teleworkers globally • emergence bring device byod programs businesses sizes • demand ucc solutions businesstobusiness communications move consumer applications business space • continued commitment organizations individuals reduce carbon footprint expenses choosing remote connectivity travel believe uniquely positioned ucc ecosystem partner choice strategic partnerships support open standards innovative technology customercentric gotomarket capabilities 2012 made strategic investments executed five key strategic imperatives capture emerging network effect ucc adoption enterprise public sector service providers smbs mobile remote employees social business users five key strategic imperatives included • cloudbased ucc solutions • mobile ucc solutions • focused ecosystem partnerships • polycom® realpresence® platform • growth markets december 4 2012 completed sale enterprise wireless voice solutions “ews” business third party decision divest ews reflects focus initiatives expect extend leadership core unified communications business products services comprise core unified communications business historically experienced stronger sales growth higher gross margins ews products services ews product portfolio part uc personal devices product category included wifi dect handsets related infrastructure accessories generated revenues approximately 711 million 936 million 996 million 2012 2011 2010 respectively reported results operations financial position ews discontinued operations within consolidated statements operations balance sheets periods presented see note 3 notes consolidated financial statements discussion discontinued operations following discussion results operations based upon results continuing operations unless otherwise indicated revenues 2012 14 billion decrease 96 million 1 2011 yearoveryear basis total product revenues declined service revenues increased segments decrease product revenues primarily result lower sales uc group systems products uc platform products partially offset increase product revenues uc personal devices products increase service revenues driven primarily increased maintenance revenues larger installed base well increase managed service revenues result acquisition hewlettpackard visual collaboration “hpvc” business third quarter 2011 revenues decreased across segments 2012 compared 2011 americas emea apac segment revenues accounted 49 25 26 respectively revenues 2012 decreased 1 compared 2011 americas segment revenues negatively impacted part lower us federal public sector revenues decline emea segment revenues driven difficult macroeconomic environment decline apac segment revenues due primarily reduced government spending elongated sales cycles particularly china past several quarters seen increased conservatism china end users partners due current government transition believe conservatism persist first quarter 2013 see note 15 notes consolidated financial statements information segments including summary segment revenues segment contribution margin segment accounts receivable discussion results operations consolidated level also followed discussion results operations segment three years ended december 31 2012 experienced slight decline total revenues compared revenue growth 25 2011 28 2010 believe revenue decline due several factors including company industry transition point products solution selling resulted customers requiring additional time consider ucccentric strategy versus point product end point deployments lower revenues emea segment impacted recent economic conditions europe lower spending key geographies china india australia united states operating margins decreased 9 percentage points 2012 compared 2011 decreases primarily due operating expenses increasing absolute dollars 13 yearoveryear revenues 1 yearoveryear operating expenses increased percentage revenues 59 2012 52 2011 increases operating expenses absolute dollars percentage revenues primarily due increased headcountrelated costs including stockbased compensation increased restructuring costs including consolidation certain facilities increased sales marketing expenses result recent rebranding product launches well increased telemarketing expenses increases continuing support key strategic initiatives anticipation revenue growth gross margins two percentage points lower 2012 compared 2011 also contributed lower operating margins lower gross margins primarily due lower overall revenue levels change product mix 2012 compared 2011 2012 generated approximately 1870 million cash flow operating activities impact cash received sale wireless business cash paid share repurchases financing investing activities described detail “liquidity capital resources” resulted 1016 million net increase total cash equivalents results operations three years ended december 31 2012 following table sets forth percentage total revenues unless indicated otherwise consolidated statements operations data periods indicated revenues manage business primarily geographic basis organized three geographic segments net revenues include product service revenues segment summarized following table total revenues 2012 14 billion decrease 96 million 1 2011 overall decrease revenues 2012 2011 due decreases product revenues 956 million 8 largely offset increases service revenues 860 million 33 2012 compared 2011 product revenues decreased 2012 primarily result decreases revenues uc group systems lesser extent decreases uc platform revenues partially offset increased product revenues uc personal devices increases service revenues primarily due increased maintenance revenues larger installed base increased managed service revenues result hpvc business acquisition completed third quarter 2011 segment perspective total revenues decreased across segments 2012 compared 2011 americas emea apac segment revenues decreased 42 million 20 million 34 million respectively 2012 compared 2011 sequential decline 1 yearoveryear segment decreases driven decreased revenues across many key geographic markets including united states australia brazil nordics middle eastafrica turkey india japan china overall product revenues decreased service revenues increased across segments 2012 compared 2011 total revenues 2011 14 billion increase 2833 million 25 2010 driven increases product services revenues product revenues increased 2009 million 21 service revenues increased 824 million 45 2011 compared 2010 increase revenues 2011 2010 across segments predominantly apac segment primarily result investments made gotomarket capabilities resulted increased sales volumes average selling prices remained relatively stable lesser extent driven revenues hpvc acquisition third quarter 2011 americas emea apac segment revenues increased 1068 million 18 735 million 27 1030 million 40 respectively 2011 compared 2010 increases driven increased revenues across many key geographic markets including united states china australia brazil russia united kingdom india germany nordics 2012 2011 2010 one channel partner scansource communications americas segment accounted 14 total revenues believe unlikely loss channel partners would longterm material adverse effect consolidated revenues segment revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period addition primary view geographic basis also track revenues groups similar products services various purposes following table presents revenues groups similar products services uc group systems include immersive telepresence group video group voice systems products related service elements decrease uc group systems 156 million 2 2012 2011 primarily driven decreases sales group video systems products related services geographic segments lesser extent decreases sales group voice systems products related services americas emea segments decreases partially offset increases sales immersive telepresence products related services across segments lesser extent increase sales group voice systems products related services apac segment increase uc group systems 1759 million 22 2011 2010 primarily driven increases sales group video immersive telepresence products related services lesser extent increases revenues group voice products related services uc personal devices include desktop video devices desktop voice products related service elements increase uc personal devices 53 million 3 2012 2011 primarily due increased sales desktop voice products related services americas emea segments partially offset decreased revenues desktop video products related services geographic segments lesser extent decreased revenues desktop voice products related services apac increase uc personal devices 362 million 26 2011 2010 primarily due increased sales desktop voice products related services geographic segments driven continued adoption voip uc platform includes realpresence platform hardware software products related service elements uc platform revenues remained relatively flat 2012 compared 2011 primarily due increases revenues americas apac segments largely offset decreases revenues emea segment increase uc platform revenues 711 million 39 2011 2010 driven increased revenues uc platform products related services segments cost revenues gross margins cost product revenues product gross margins cost product revenues consists primarily contract manufacturer costs including material direct labor manufacturing organization tooling depreciation warranty expense freight royalty payments amortization certain intangible assets stockbased compensation costs allocation overhead expenses including facilities costs cost product revenues product gross margins included charges stockbased compensation 36 million 25 million 23 million years ended december 31 2012 2011 2010 respectively cost product revenues segment level consists standard cost product revenues include items warranty expense royalties allocation overhead expenses including facilities costs overall product gross margins decreased 2 percentage points 2012 compared 2011 primarily due lower expected product sales increases amortization purchased intangibles royalties partially offset lower warranty expense segment perspective product gross margins decreased americas apac segments increased emea segment 2012 compared 2011 overall product gross margins decreased 1 percentage point 2011 compared 2010 primarily due increases warranty expenses royalties amortization purchased intangibles cost sales partially offset higher product revenues segment perspective product gross margins increased slightly percentage revenue emea apac segments remained flat americas segment 2012 compared 2011 december 31 2012 finished goods inventory levels higher december 31 2011 levels inventory turns decreased 64 turns december 31 2011 57 turns december 31 2012 decreased inventory turns result higher inventory levels 2012 compared 2011 primarily due increase uc group product inventories related new product introductions inventory turns future may fluctuate depending ability reduce lead times changes product mix flexibility required respond increased demands growing business sustainability global economic recovery cost service revenues service gross margins cost service revenues consists primarily material direct labor including stockbased compensation costs depreciation allocation overhead expenses including facilities costs majority service revenues related maintenance agreements new product sales renewal existing maintenance agreements well managed services offerings cost service revenues service gross margins included charges stockbased compensation 66 million 38 million 38 million years ended december 31 2012 2011 2010 respectively overall service gross margins decreased 2 percentage points 2012 2011 decrease primarily due lower margin managed services business acquired part hpvc acquisition 2011 direct spending costs increased primarily result increased headcountrelated costs including stockbased compensation costs well facilities allocations result 21 increase services organization headcount december 31 2011 december 31 2012 service gross margins decreased emea apac segments americas segment 2012 compared 2011 overall service gross margins increased 8 percentage points 2011 2010 services gross margins increased geographic segments primarily result increased revenues maintenance services decreased costs percentage revenue associated delivery services due higher productivity services employees improvements product quality lower outside services total cost revenues total gross margins overall total gross margins percentage revenues decreased 2 percentage points 2012 compared 2011 due decreases product service gross margins discussed cost product revenues product gross margins cost services revenues service gross margins total gross margins percentage revenues remained flat 2011 compared 2010 expect gross margins remain relatively flat near term compared 2012 forecasting future gross margin percentages difficult number risks related ability maintain improve current gross margin levels cost revenues percentage revenue vary significantly based upon number factors following uncertainties surrounding revenue levels including future pricing andor potential discounts result economy response strengthening us dollar international markets related production level variances competition extent new services sales accompany product sales well maintenance renewal rates changes technology changes product mix variability stockbased compensation costs potential royalties third parties utilization professional services personnel develop professional services practice make investments expand professional services offerings increasing costs freight repair costs ability achieve greater efficiencies installations immersive telepresence products manufacturing efficiencies subcontractors manufacturing purchase price variances warranty recall costs timing sales addition may experience higher prices commodity components included products order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lowerthananticipated revenues sales marketing expenses sales marketing expenses consist primarily salaries commissions sales force including stockbased compensation costs advertising promotional expenses product marketing expenses allocation overhead expenses including facilities costs sales marketing expenses except direct sales marketing expenses allocated segments sales marketing expenses included charges stockbased compensation 368 million 270 million 252 million years ended december 31 2012 2011 2010 respectively sales marketing expenses increased 3 percentage points percentage revenue increased 8 absolute dollars 2012 compared 2011 due primarily increased compensationrelated costs including commissions stockbased compensation costs factors contributing increase include consulting outside services related recent rebranding product launches well increased telemarketing expenses facilities allocations also increased increases partially offset decrease training expenses sales marketing expenses percentage revenues decreased 3 percentage points increased absolute dollars 15 2011 compared 2010 due primarily increased headcount compensationrelated costs including commissions sales marketing headcount increased 11 december 31 2010 december 31 2011 depreciation facilities allocations also increased result headcount increases well due expansion demonstration center capabilities support gotomarket strategy expect sales marketing expenses remain relatively flat absolute dollars near term expenses fluctuate depending revenue levels achieved certain expenses commissions determined based revenues achieved forecasting sales marketing expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter marketing expenses also fluctuate depending upon timing extent marketing programs market new products sales marketing expenses may also fluctuate due increased international expenses impact changes foreign currency exchange rates order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues research development expenses research development costs expensed incurred consist primarily compensation costs including stockbased compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs research development costs allocated segments research development expenses included charges stockbased compensation 202 million 149 million 97 million years ended december 31 2012 2011 2010 respectively research development expenses increased 182 million 10 2012 compared 2011 increased 1 percentage point percentage revenues 2012 compared 2011 increase absolute dollars primarily due increased compensation costs associated increased headcount compensationrelated costs including stockbased compensation increased outside services development expenses support key strategic initiatives research development headcount increased 3 december 31 2011 december 31 2012 depreciation overhead allocations also increased 2012 2011 result headcount increases increased capital investments support development projects research development expenses increased 524 million 38 2011 compared 2010 increased 2 percentage points percentage revenues 2011 compared 2010 increase absolute dollars primarily due increased compensation costs associated increased headcount increased development expenses support key strategic initiatives including strategic partnerships part ucc ecosystem cloudbased mobile ucc solutions realpresence platform hardware software products research development headcount increased 41 december 31 2010 december 31 2011 depreciation overhead allocations also increased 2011 2010 result headcount increases increased capital investments support development projects believe innovation technological leadership critical future success committed continuing significant level research development develop new technologies products combat competitive pressures new scalable video coding standard address device application network requirements mobile smb consumer networks technologies incorporated nextgeneration products also investing heavily research development result increased business opportunities strategic partners mobile service provider customers result strategic initiatives areas expect research development expenses absolute dollars remain relatively flat near term fluctuate depending timing number development activities given quarter research development expenses percentage revenue highly dependent expected revenue levels could vary significantly depending actual revenues achieved given quarter order control expenses given quarter time taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues general administrative expenses general administrative expenses consist primarily compensation costs including stockbased compensation costs professional service fees allocation overhead expenses including facilities costs litigation costs bad debt expense general administrative expenses allocated segments general administrative expenses included charges stockbased compensation 216 million 157 million 128 million years ended december 31 2012 2011 2010 respectively general administrative expenses increased 166 million 20 2012 compared 2011 increased 1 percentage point percentage revenues 2012 compared 2011 increase absolute dollars primarily due increased compensationrelated costs including stockbased compensation general administrative headcount increased 14 december 31 2011 december 31 2012 remaining increases general administrative expenses attributed increases legal bad debt expenses allocation expenses result increased headcount new headquarters building san jose california general administrative expenses increased absolute dollars 83 million 11 decreased 1 percentage point percentage revenue 2011 compared 2010 primary driver increase absolute dollars related 14 increase headcount related increases compensation headcountrelated expenses including increased overhead allocations increase partially offset decreased expenses legal outside services 2010 incurred severance legal costs associated ceo transition may 2010 significant future charges due costs associated litigation uncollectability receivables could increase general administrative expenses negatively affect profitability quarter recorded additionally predicting timing litigation bad debt expense associated uncollectible receivables difficult increase international revenues resulted longer credit terms increased credit risk could result increased level bad debt expense future general administrative expense increases decreases absolute dollars difficult predict due lack visibility certain costs including legal costs associated defending claims us well legal costs associated asserting enforcing intellectual property portfolio factors expect general administrative expenses remain relatively flat absolute dollar amounts near term could fluctuate depending level timing additional investments required support strategic initiatives order control expenses given quarter taken actions reduce costs imposing travel restrictions postponing salary increases requesting employees use paid time implementing cost control measures actions may able implemented timely manner may successful completely offsetting impact lower anticipated revenues acquisitionrelated costs expense acquisition transaction related costs incurred costs generally include fees outside legal accounting services integration services addition incurred costs related planning executing divestiture enterprise wireless solutions business announced may 2012 closed december 2012 including legal costs associated enforcing terms agreement spent continue spend significant resources identifying acquiring businesses 2012 recorded 141 million acquisitionrelated costs primarily associated planning executing divestiture enterprise wireless solutions business see note 3 note consolidated financial statements information 2011 recorded 97 million acquisitionrelated costs primarily related acquisition accordent closed march 2011 acquisition hpvc closed july 2011 acquisition vivu closed october 2011 activities occurred 2010 see note 2 notes consolidated financial statements information amortization purchased intangibles 2012 2011 2010 recorded 98 million 55 million 14 million respectively operating expenses amortization purchased intangibles acquired acquisitions addition amounts recorded operating expenses 2012 2011 2010 recorded amortization expenses totaling 76 million 57 million 26 million respectively related certain technology intangibles cost product revenues sequential increases yearoveryear 2010 2012 primarily due amortization purchased intangibles acquired accordent first quarter 2011 hpvc third quarter 2011 vivu fourth quarter 2011 purchased intangible assets amortized expense estimated useful lives range several months six years evaluate purchased intangibles possible impairment ongoing basis impairment indicators exist perform assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charges recognized periods presented restructuring costs 2012 2011 2010 recorded 220 million 94 million 81 million respectively related restructuring actions resulted consolidation certain facilities elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus efforts properly align cost structure projected revenue streams 2012 completed consolidation elimination certain facilities order gain efficiencies including combination headquarters san jose santa clara california one new location san jose california result recorded approximately 89 million net 28 million deferred rent restructuring charges related idle facilities upon vacating facilities second quarter 2012 addition recorded approximately 131 million charges primarily severance employee benefits related restructuring actions approved management october 2011 july 2012 action plan approved july 2012 resulted elimination approximately four percent global workforce enabling us focus resources product development product launch initiatives 2011 completed consolidation colorado facilities began transition certain engineering product management related support functions andover massachusetts facility locations order achieve efficiencies restructuring charges relating actions primarily included costs idle facilities lesser extent severance relocation costs impacted individuals additionally october 2011 committed restructuring plan designed better align allocate resources strategic growth areas business actions primarily related reorganization global gotomarket organizations restructuring plan resulted elimination approximately seven percent global workforce majority reductions taking effect fourth quarter 2011 first quarter 2012 enabling creation new positions better aligned strategic initiatives 2011 recorded approximately 87 million restructuring charges related severance employee benefits 07 million related idle facilities 2010 committed several restructuring plans eliminate relocate positions enable hiring additional positions better align execution strategic initiatives restructuring plans included elimination approximately two percent global workforce result actions taken 2010 recorded restructuring charges 81 million 2010 primarily related severance employee termination benefits see note 7 notes consolidated financial statements information restructuring costs currently expect record additional restructuring charges 100 million 150 million 2013 primarily related elimination consolidation certain facilities gain efficiencies first quarter 2013 also currently expect record restructuring charges approximately 40 million 60 million related severance employee termination benefits primarily related elimination relocation engineering positions result downsizing burnaby canada location future may take additional restructuring actions gain operating efficiencies reduce operating expenses simultaneously implementing additional cost containment measures expense control programs restructuring actions subject significant risks including delays implementing expense control programs workforce reductions failure meet operational targets due loss employees decrease employee morale would impair ability achieve anticipated cost reductions achieve anticipated cost reductions business could harmed litigation reserves payments recorded 12 million 2010 litigation reserves payments consolidated statements operations related settlement legal matters period expenses 2012 2011 see note 9 notes consolidated financial statements information also subject variety claims suits arise time ordinary course business matters subject inherent uncertainties management’s view matters may change future could result charges would material adverse impact financial position results operations cash flows interest income expense net interest income expense net consists primarily interest earned cash equivalents investments less bank charges resulting use bank accounts gains losses investments nonincome related taxes fees well foreign exchange related gains losses interest income expense net expense 39 million 17 million 79 million 2012 2011 2010 respectively increase net expenses interest income expense net 2012 2011 primarily due higher nonincome related taxes bank charges well higher foreign exchange related losses 2012 compared 2011 partially offset increase interest income decrease net expenses interest income expense net 2011 2010 primarily due writedown 2010 otherthan temporarily impaired investments recur 2011 partially offset decrease interest income interest income expense net fluctuate due changes interest rates returns cash investments future impairment investments foreign currency rate fluctuations unhedged exposures fluctuations costs associated hedging program timing nonincome related taxes license fees cash balance could also decrease depending upon amount cash used future acquisitions stock repurchase activity factors would also impact interest income provision income taxes continuing operations increase effective tax rate 2012 compared 2011 related primarily 388 million federal state taxes recorded 1033 million related tax consequences global restructuring project affecting existing legal entity structure designed accommodate trend towards software virtual based solutions versus traditional hardware distribution model addition taxes recorded related global restructuring effective tax rate also impacted benefit entities countries tax rates lower us statutory rate increase nondeductible share based compensation increase nondeductible acquisition divestiture related expenses decrease reserve reversals expiration federal research development tax credit 2012 compared 2011 decrease effective tax rate 2011 compared 2010 due relative increase foreign earnings subject lower tax rates increase us research development tax credits increase release uncertain tax positions inclusive related interest penalties 89 million 2011 compared 49 million 2010 partially offset us taxes accrued intercompany sale intellectual properties december 31 2012 approximately 19 million tax effected net operating losses 14 million tax effected capital loss carryforwards 130 million tax effected credit carryforwards capital net operating loss carryforward assets tax credit carryforwards begin expire 2015 included net deferred tax asset balance 32 million valuation allowance related primarily research credits jurisdiction history credits excess taxable profits see note 14 notes consolidated financial statements information provide us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2012 cumulative amount earnings upon us income tax provided approximately 3200 million practicable determine income tax liability might incurred earnings repatriated us 2012 recorded reserve reductions 100 million 08 million paid settlement multiyear state tax audit 57 million due reduction unrecognized tax benefits research credits acquired companies expiration statutes limitation us foreign jurisdictions also resulted reserve releases 35 million 2011 recorded reserve releases 81 million 69 million due resolution multiyear tax audits expiration statutes limitation us foreign jurisdictions resulted reserve releases 08 million 04 million reduction reserves due changes foreign exchange rates 2010 california franchise tax board completed audit 2005 2006 tax years audit resulted payment 08 million certain audit issues also settled year resulting release accrued taxes 15 million additionally 34 million tax reserves related cost sharing stock based compensation released adjustment stockholders’ equity 07 million tax reserves released due changes foreign exchange rates year 21 million tax reserves released due expiration statutes limitation us foreign jurisdictions december 31 2012 230 million unrecognized tax benefits compared 324 million december 31 2011 end 2013 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 25 million reserve releases would recorded adjustments tax expense period released recognize interest andor penalties related income tax matters income tax expense december 31 2012 2011 approximately 15 million 20 million respectively accrued interest penalties related uncertain tax positions future effective income tax rate depends various factors changes tax legislation accounting principles interpretations thereof geographic composition pretax income non taxdeductible expenses incurred connection acquisitions amounts taxexempt interest income research development credits percentage aggregate pretax income final resolution tax impact exercise incentive stock options issuance shares employee stock purchase plan effectiveness tax planning strategies example january 2 2013 “american taxpayer relief act 2012” signed law provides extension federal research credit retroactive 2012 extended 2013 impact 2012 federal research credit reflected first quarter 2013 estimated range 20 million 25 million believe future effective tax rate may volatile result factors also subject periodic examination income tax returns internal revenue service tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect net income financial condition possibly materially segment information business organized around four major geographic theatres north america central americalatin america “cala” europe middle east africa “emea” asia pacific “apac” reporting purposes aggregate north america cala one segment named americas report emea apac separate segments determined accordance management views evaluates business allocates resources based criteria outlined authoritative guidance description products services well annual financial data segment found business section form 10k note 15 notes consolidated financial statements discussions include results segments years ended december 31 2012 2011 2010 segment contribution margin includes segment revenues less related cost sales direct marketing sales expenses management allocates infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing stockbased compensation costs research development costs general administrative costs legal accounting costs acquisitionrelated integration costs amortization purchased intangible assets restructuring costs interest income expense net following summary financial information segments fiscal years ended december 31 2012 2011 2010 thousands americas segment revenues decreased 1 2012 compared 2011 primarily due decreased revenues united states brazil partially offset increases canada mexico decrease americas segment revenues driven decreases revenues uc group systems partially offset increases uc personal devices uc platform revenues decreases uc group systems revenues americas primarily driven decreased group voice group video revenues partially offset increased immersive telepresence revenues result 2011 hpvc acquisition increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip partially offset decreased desktop video revenues uc platform revenues growth result increased sales realpresence products services americas segment revenues increased 18 2011 compared 2010 primarily due increased revenues united states brazil partially offset decreases canada mexico increase revenues driven increases uc group systems uc personal devices uc platform revenues increases uc group systems revenues americas primarily driven increased group voice revenues increased group video revenues increased immersive telepresence revenues increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip partially offset decreased desktop video revenues uc platform revenues growth result increased sales realpresence products services 2012 2011 2010 one channel partner americas segment accounted 27 americas net revenues periods believe unlikely loss channel partners would long term material adverse effect consolidated net revenues segment net revenues believe endusers would likely purchase products different channel partner however loss one channel partners could material adverse impact transition period contribution margin percentage america’s segment revenues remained flat 2012 compared 2011 primarily due gross margins relatively flat direct sales marketing expenses percentage revenues increased slightly 2011 2012 resulting less percentage point change contribution margin increase direct sales marketing expenses primarily due increased compensation related costs 2012 compared 2011 contribution margin percentage america’s segment revenues remained flat 2011 compared 2010 primarily due increased gross margins offset increase direct sales marketing expenses percentage revenues emea segment revenues decreased 1 2012 compared 2011 primarily due lower sales uc platform products related services uc personal devices products related services partially offset increased sales uc group system products related services uc platform revenues decreased result lower sales realpresence products services uc personal devices revenues decreased primarily due decreases desktop video revenues partially offset increase desktop voice revenues uc group systems revenues increased primarily due increase immersive telepresence revenues result hpvc acquisition 2011 partially offset lower group video group voice revenues overall decline emea segment revenues primarily due current economic conditions region revenues nordic countries middle east turkey eastern europe spain partially offset increases benelux germany emea segment revenues increased 27 2011 compared 2010 primarily due broadbased growth throughout emea led growth russia uk germany nordic countries partially offset decrease spain increase revenues across product groups increases uc group systems revenues emea primarily driven increased group video revenues increased immersive telepresence revenues increased group voice revenues uc platform growth result increased sales products services comprise realpresence platform increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip technology increase desktop video revenues 2012 2011 2010 one channel partner emea segment accounted 11 13 emea net revenues respectively contribution margin percentage emea segment revenues remained flat 2012 compared 2011 primarily due slightly higher gross margins resulted less percentage point change contribution margin direct sales marketing expenses flat absolute dollars percentage revenue 2012 compared 2011 increase gross margins driven primarily higher product gross margins partially offset lower service gross margins contribution margin percentage emea segment revenues 41 2011 compared 35 2010 contribution margin percentage revenue increased primarily due lower direct sales marketing expenses percentage revenues lesser extent higher gross margins direct sales marketing expenses increased absolute dollars decreased percentage revenues increases absolute dollars primarily due increased headcount partially offset decrease marketing program investments decrease percentage revenue primarily due increased productivity sales force increase gross margins driven primarily decrease cost services percentage revenues mix shift toward higher margin products realpresence platform product offerings apac segment revenues decreased 1 2012 compared 2011 primarily due decreased uc group systems uc personal devices revenues partially offset increased uc platform revenues decreases uc group systems revenues apac primarily driven decreased group video revenues partially offset increases immersive telepresence revenues result 2011 hpvc acquisition group voice revenues decreases uc personal devices revenues primarily driven decreases desktop video revenues lesser extent desktop voice revenues increases uc platform revenues result increased sales realpresence platform products services revenues decreased australia india japan china partially offset increase korea overall decline apac segment revenues primarily due reduced government spending elongated sales cycles apac segment revenues increased 40 2011 compared 2010 primarily due investments made gotomarket capabilities revenues china australia india contributed strong growth apac 2011 increase revenues driven increases uc group systems uc platform revenues lesser extent uc personal devices revenues increases uc group systems revenues apac primarily driven increased group video revenues lesser extent increased immersive telepresence revenues result hpvc acquisition 2011 increased group voice revenues uc platform revenues growth result increased sales realpresence platform products services increases uc personal devices revenues primarily driven increased desktop voice sales resulting continued adoption voip technologies 2012 2011 2010 two channel partners apac segment aggregate accounted 33 29 respectively apac net revenues contribution margin percentage apac segment revenues 42 2012 compared 49 2011 contribution margin percentage revenue decreased primarily due lower gross margins higher direct sales marketing expenses percentage revenues decrease gross margins due decrease service gross margins lesser extent lower product gross margins driven primarily product mix shift increased discounting direct sales marketing expenses increased absolute dollars percentage revenue primarily due increased headcountrelated expenses contribution margin percentage apac segment revenues 49 2011 compared 46 2010 contribution margin percentage revenues increased primarily due higher gross margins lower sales marketing expenses percentage revenues increase gross margins driven primarily decrease cost services percentage revenues product gross margin percentage revenues increased slightly increase gross margins driven primarily decrease cost services percentage revenues mix shift toward higher margin products realpresence platform product offerings direct sales marketing expenses increasing absolute dollars decreased percentage revenues decrease sales marketing expense percentage revenues due spending mix investments focused lower cost areas discontinued operations may 10 2012 entered purchase sale agreement “purchase agreement” mobile devices holdings llc delaware limited liability corporation “mobile devices” pursuant would divest ews affiliate sun capital partners inc october 22 2012 purchase agreement amended “amended purchase agreement” per terms amended purchase agreement mobile devices would acquire spectralink corporation “spectralink” whollyowned subsidiary polycom purchasing outstanding stock intercompany note spectralink polycom december 4 2012 completed disposition assets ews business mobile devices received cash consideration approximately 507 million resulting gain sale discontinued operations net taxes 354 million decision divest ews reflects focus initiatives extend leadership core unified communications business products services comprise core unified communications business historically experienced stronger sales growth higher gross margins ews products services ews product portfolio previously included uc personal devices product category includes wifi dect handsets related infrastructure accessories primarily sold americas emea segments result reported results operations financial position ews discontinued operations within consolidated statements operations balance sheets periods presented see note 3 notes condensed consolidated financial statements discussion discontinued operations summarized results discontinued operations follows thousands revenues discontinued operations 2012 711 million decrease 225 million 24 2011 decrease primarily due 2012 revenues including period 11 months closure ews sale transaction compared 12month period 2011 revenues discontinued operations 2011 936 million decrease 60 million 6 2010 decrease wireless revenues result decreasing demand wireless related products services wireless revenues 2012 compared 2011 compared 2010 americas emea segments wireless revenues apac segment significant net income discontinued operations essentially flat 2012 compared 2011 increased 82 million 2011 compared 2010 increase 2011 2010 primarily due improvements gross margin decrease operating expenses 2011 2010 improvement wireless gross margins due lower mix sales lower margin products operating expenses discontinued operations decreased 92 million 2011 compared prior year continued reduce spending wireless business result smaller revenue base wireless products liquidity capital resources december 31 2012 principal sources liquidity included cash equivalents 4771 million shortterm investments 1972 million longterm investments 503 million substantially shortterm longterm investments comprised us government agency securities corporate debt securities see note 8 notes consolidated financial statements information shortterm longterm investments also outstanding letters credit totaling approximately 76 million place satisfy certain facility lease requirements well legal tax insurance obligations total cash equivalents investments held united states totaled 3028 million december 31 2012 remaining 4218 million held various foreign subsidiaries outside united states would need access cash equivalents investments held outside united states order fund acquisitions share repurchases working capital needs may subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes generated cash operating activities totaling 1870 million 2012 2996 million 2011 1434 million 2010 decrease cash provided operating activities 2012 2011 due primarily lower net income adjusted noncash income expenses increased inventory decrease accounts payable smaller increase accrued liabilities deferred revenue partially offsetting negative effects decreases accounts receivables increase cash provided operating activities 2011 2010 due primarily higher net income adjusted noncash income expenses decreased inventory smaller increase prepaid expenses current assets higher increase accounts payable accrued liabilities deferred revenue taxes payable partially offsetting positive effects increases accounts receivables deferred taxes total net change cash equivalents year ended december 31 2012 increase 1016 million primary sources cash 1870 million operating activities 504 million net cash proceeds sale ews business 258 million associated exercise stock options purchases employee stock purchase plan 93 million excess tax benefits stockbased compensation primary uses cash period 673 million purchases property equipment 679 million purchases common stock 311 million purchases investments net proceeds investments 46 million additional payments made acquisitions certain additional equipment days sales outstanding dso metric 50 days december 31 2012 compared 49 days december 31 2011 expect continue experience upward pressure dso result increase international receivables typically longer payment terms dso could vary result number factors fluctuations revenue linearity change mix international receivables increases receivables service providers government entities also customarily longer payment terms dso could also negatively impacted partners experience difficulty financing purchases results delays payment us december 31 2012 finished goods inventory levels higher december 31 2011 levels inventory turns decreased 57 turns december 31 2012 64 turns december 31 2011 decreased inventory turns result higher inventory levels 2012 compared 2011 primarily due increase uc group product inventories related new product introductions inventory turns future may fluctuate depending ability reduce lead times well changes product mix inventory turns may also decrease future result flexibility required respond increased demands growing business sustainability global economic recovery cash used purchases property equipment decreased slightly 673 million 2012 693 million 2011 expect purchases property equipment 2013 increase due upgrades enterprise resource planning “erp” systems continued support strategic alliances new product offerings enter foreign currency forward contracts typically mature one month hedge exposure foreign currency fluctuations foreign currencydenominated receivables payables cash balances record balance sheet reporting period fair value foreign currency forward contracts record fair value adjustments results operations gains losses associated currency rate changes contracts recorded interest income expense net offsetting transaction gains losses related assets liabilities additionally hedging costs vary depending size hedging program whether purchasing selling foreign currency relative us dollar interest rate spreads us foreign markets additionally also hedging program uses foreign currency forward contracts hedge portion anticipated revenues operating expenses denominated euro british pound well operating expenses denominated israeli shekels reporting period record fair value unrealized forward contracts balance sheet related unrealized gains losses component accumulated comprehensive income loss separate element stockholders’ equity realized gains losses associated effective portion foreign currency forward contracts recorded within revenue operating expense depending upon underlying exposure hedged excluded ineffective portions hedging instrument would recorded interest income expense net time board directors approved plans us purchase shares common stock open market years ended december 31 2012 2011 2010 purchased approximately 51 million 20 million 48 million shares adjusted stock split respectively common stock open market cash 550 million 400 million 692 million respectively board directors approved increase current share repurchase authorization include 497 million net proceeds sale ews business december 31 2012 authorized purchase additional 728 million 2008 share repurchase plan see note 12 notes consolidated financial statements discussion accounting common stock repurchases related reduction retained earnings included stockholders’ equity consolidated balance sheet december 31 2012 open purchase orders related contract manufacturers contractual obligations approximately 1447 million primarily related inventory purchases also currently commitments consist obligations operating leases event decide cease using facility seek sublease facility terminate lease obligation lease buyout means may incur material cash outflow time transaction negatively impact operating results overall cash flows addition facilities rental rates decrease takes longer expected sublease facilities could incur significant charge operations operating overall cash flows could negatively impacted period changes events occur purchase commitments lease obligations reflected consolidated financial statements goods services received time obligated make payments related goods services leases addition bank issued letters credit totaling approximately 76 million used secure leases offices well legal tax insurance obligations table set forth shows december 31 2012 future minimum lease payments due current lease obligations sublease income netted amounts material addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance contractual obligations december 31 2012 follows thousands december 31 2012 230 million unrecognized tax benefits compared 324 million december 31 2011 end 2013 uncertain tax positions may reduced result lapse applicable statutes limitations anticipate reduction would approximate 25 million reserve releases would recorded adjustments tax expense period released believe available cash equivalents investments sufficient meet operating expenses capital requirements least next twelve months however may require desire additional funds support operating expenses capital requirements purposes acquisitions may seek raise additional funds public private equity financing debt financing sources cannot assure additional financing available financing obtainable terms favorable us would dilutive future liquidity cash requirements depend numerous factors including introduction new products potential acquisitions related businesses technology offbalance sheet arrangements december 31 2012 offbalancesheet arrangements defined item 303a4ii sec regulation sk critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america review accounting policies used reporting financial results regular basis preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate process used develop estimates including related product returns accounts receivable inventories investments intangible assets income taxes warranty obligations stock compensation costs restructuring contingencies litigation base estimates historical experience various assumptions believed reasonable making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates due actual outcomes different based assumptions estimates judgments reviewed management ongoing basis audit committee end quarter prior public release financial results believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements see note 1 notes consolidated financial statements additional discussion accounting policies revenue recognition product returns recognize revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met generally recognize service revenues ratably service periods one five years upon completion installation professional services products integrated software essential functionality equipment additionally provide unspecified software upgrades enhancements related products maintenance contracts sale involves multiple deliverables sales products include services multiple deliverables evaluated determine unit accounting entire fee arrangement allocated unit accounting based relative selling price deliverable applying relative selling price method determine selling price deliverable using vendorspecific objective evidence “vsoe” selling price exists thirdparty evidence “tpe” selling price neither vsoe tpe selling price exist deliverable use best estimate selling price deliverable revenue allocated element recognized revenue recognition criteria met element channel partner programs incentives record estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives market conditions decline competition increase may take future actions increase channel partner incentive offerings possibly resulting incremental reduction revenues time incentive offered accrue coop marketing funds marketing expense receive identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues warranty provide estimated cost product warranties time revenue recognized warranty obligation affected estimated product failure rates material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revision estimated warranty liability would required allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments review allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances written management determined likelihood collection probable excess obsolete inventory record writedowns excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions actual product life cycles product demand market conditions less favorable projected management additional inventory writedowns may required point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis stockbased compensation expense stockbased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock units performance shares well employee stock purchase plan measure recognize compensation expense sharebased payment awards made employees directors based estimated fair values estimated fair value awards including effect estimated forfeitures recognized expense requisite service period generally vesting period fair values stock option awards shares purchased employee stock purchase plan estimated grant date using blackscholes option valuation model fair value restricted stock units based market value common stock date grant fair value performance shares based market price stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes probable outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking stock among russell 2000 index companies awards granted prior 2011 nasdaq composite index companies awards granted 2011 2012 performance period changes underlying factors assumptions utilized may result significant variability stockbased compensation costs record makes amounts difficult accurately predict deferred refundable taxes estimate actual current tax expense together temporary differences resulting differing treatment items deferred revenue tax accounting purposes temporary differences result deferred tax assets liabilities must assess likelihood deferred tax assets recovered future taxable income extent believe recovery likely must establish valuation allowance tax assets significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets extent establish valuation allowance period must include expense allowance within tax provision consolidated statement operations december 31 2012 771 million net deferred tax assets included net deferred tax asset balance 32 million valuation allowance related primarily research credits jurisdiction history credits excess taxable profits recognize measure benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions evaluate uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period make change could material impact effective tax rate operating results fair value fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires us use observable market data available minimize use unobservable inputs determining fair value recurring basis measure certain financial assets liabilities fair value including marketable securities foreign currency contracts cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy december 31 2012 fixed income availableforsale securities include us treasury obligations government agency instruments corporate bonds commercial paper nonus government securities money market funds included availableforsale securities cash equivalents consist investments original maturities three months less include money market funds principal market execute foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants counterparties large money center banks regional banks foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy information fair values marketable securities foreign currency contracts see note 8 notes consolidated financial statements business combinations recognize separately goodwill fair value assets acquired liabilities assumed goodwill acquisition date measured excess consideration transferred net acquisition date fair values assets acquired liabilities assumed use best estimates assumptions part purchase price allocation process accurately value assets acquired liabilities assumed acquisition date estimates inherently uncertain subject refinement result measurement period may one year acquisition date may record adjustments retrospectively fair value assets acquired liabilities assumed corresponding offset goodwill upon conclusion measurement period final determination fair value assets acquired liabilities assumed whichever comes first subsequent adjustments recorded consolidated statements operations addition uncertain tax positions tax related valuation allowances assumed connection business combination initially estimated acquisition date reevaluate items quarterly record adjustments preliminary estimates goodwill provided within measurement period continue collect information order determine estimated fair values date acquisition subsequent measurement period final determination tax allowance’s estimated value changes uncertain tax positions tax related valuation allowances affect provision income taxes consolidated statements operations goodwill purchased intangibles goodwill tested impairment reporting unit level one level operating segment adopted amended accounting guidance permits us choose first assess qualitative factors determine whether likely fair value reporting unit less carrying amount based assessment determine likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary business organized around four major geographic theatres north america central americalatin america “cala” europe middle east africa “emea” asia pacific “apac” determined reporting units 2012 2011 reporting purposes aggregate north america cala one segment named americas report emea apac separate segments fourth quarter 2012 performed qualitative assessment four reporting units reporting unit estimated fair value excess carrying value 50 based valuation reporting segments performed may 2012 connection announcement divestiture ews business reporting unit weighed relative impact factors specific reporting unit well industry macroeconomic factors reporting unit specific factors considered included results recent impairment tests well financial performance changes reporting units’ carrying amounts since recent impairment tests industry reporting units operate considered growth projections independent sources significant developments transactions within industry 2012 applicable concluded reporting unit specific industry factors either positive neutral impact fair value reporting units also determined macroeconomic factors 2012 significant impact discount rates growth rates used valuation performed based qualitative assessment concluded four reporting units performing twostep impairment test unnecessary impairment charge required purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months six years annually assess whether impairment indicators exist purchased intangibles finite lives longlived assets including intangible assets finite lives tested impairment whenever events changes circumstances indicate carrying amount assets may recoverable assessment purchased intangibles impairment conducted first estimating undiscounted expected future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment charge recorded 2012 2011 impairment indicators existed screening assessing whether impairment indicators exist events changes circumstances occurred including market conditions operating fundamentals competition general economic conditions requires significant judgment additionally changes hightechnology industry occur frequently quickly therefore assurance charge operations occur result future goodwill purchased intangible impairment tests private company investments periodically make strategic investments companies whose stock currently traded stock exchange quoted price exists cost method accounting used account investments hold nonmaterial ownership percentage review investments impairment events changes circumstances indicate carrying amount assets might recoverable examples events changes circumstances may indicate us impairment exists may significant decrease market value company poor deteriorating market conditions public private equity capital markets significant adverse changes legal factors within business climate company operates current period operating cash flow losses combined history operating cash flow losses projections forecasts demonstrate continuing losses associated company’s future business plans impairment indicators identified reporting period could result significant writedown carrying value investment believe investment experienced decline value temporary december 31 2012 2011 private company investments carrying value 20 million recorded “other assets” consolidated balance sheets derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change hold issue derivative financial instruments speculative trading purposes enter derivatives counterparties among largest us banks ranked assets order minimize credit risk recent accounting pronouncements december 2011 fasb issued accounting standard update requires disclosure effect potential effect offsetting arrangements company’s financial position well enhanced disclosure rights setoff associated company’s recognized assets liabilities january 2013 fasb issued another accounting standard update clarify scope standard update issued december 2011 accounting standard updates effective reporting periods beginning january 1 2013 believe material impact consolidated financial statements upon adoption guidance july 2012 fasb issued accounting standard update intended simplify entity tests indefinitelived intangible assets goodwill impairment providing entities option perform qualitative assessment determine whether impairment testing necessary accounting standard update effective us beginning first quarter fiscal 2013 believe material impact consolidated financial statements upon adoption guidance item 7a nannanitem 7a quantitative qualitative disclosures market risk polycoms exposure market risk changes interest rates relates primarily investment portfolio bank borrowings polycom use derivative financial instruments investment portfolio investment portfolio includes highly liquid instruments original maturity generally less one year polycom subject fluctuating interest rates may impact adversely otherwise results operations cash flows variable rate bank borrowings availableforsale securities cash equivalents table presents principal amounts related weighted average interest rates year maturity polycoms investment portfolio debt obligations december 31 1998 estimated fair value polycoms cash equivalents approximates principal amounts reflected based short maturities financial instruments estimated fair value polycoms debt obligations approximates principal amounts reflected based rates currently available polycom debt similar terms remaining maturities item 8item 7a quantitative qualitative disclosures market risk polycoms exposure market risk changes interest rates relates primarily investment portfolio bank borrowings polycom use derivative financial instruments investment portfolio investment portfolio includes highly liquid instruments polycom subject fluctuating interest rates may impact adversely otherwise results operations cash flows variable rate bank borrowings availableforsale securities cash equivalents table presents principal amounts related weighted average interest rates year maturity polycoms investment portfolio debt obligations december 31 1999 estimated fair value cash equivalents investments approximates principal amounts reflected based short maturities financial instruments estimated fair value debt obligations approximates principal amounts reflected based rates currently available us debt similar terms remaining maturities sales denominated us dollars small amount foreign bills paid currencies us dollar foreign exchange risk considered immaterial item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily investment portfolio bank borrowings use derivative financial instruments investment portfolio includes highly liquid instruments subject fluctuating interest rates may impact adversely otherwise results operations cash flows variable rate bank borrowings availableforsale securities cash equivalents table presents principal amounts related weighted average interest rates year maturity investment portfolio debt obligations december 31 2000 estimated fair value cash equivalents approximates principal amounts reflected based short maturities financial instruments also hold 07 million investment publicly traded equity securities marked market original 10 million investment value market risk investment driven movements market price investment made investments private companies investments included investments balance sheet carried cost less impairment loss monitor investments impairment make appropriate reductions carrying value necessary impairment losses evaluated regularly driven movements current valuations companies influenced general securities market conditions investment ownership less 20 company ability exercise significant influence operations sales denominated us dollars small amount foreign bills paid currencies us dollar foreign exchange risk considered immaterial consolidated financial position results operations cash flows item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily investment portfolio bank borrowings investment portfolio mainly includes highly liquid high quality instruments subject fluctuating interest rates may impact adversely otherwise results operations cash flows cash equivalents availableforsale securities variable rate bank borrowings table presents principal amounts related weighted average interest rates year maturity investment portfolio debt obligations december 31 2001 30day average libor 65 estimated fair value cash equivalents approximates principal amounts reflected based short maturities financial instruments also hold approximately 97 million investments publicly traded equity securities marked market original 95 million investment value made investments private companies classify longterm assets balance sheet value investments influenced many factors including operating effectiveness companies overall health companies industries strength private equity markets general market conditions past recorded charges earnings associated impairment investments example recorded charges 59 million fiscal 2000 32 million fiscal 2001 associated impairment investments ownership less 20 company ability exercise significant influence operations majority sales denominated us dollars minor amount foreign bills paid currencies us dollar bills funded time payment however connection acquisition picturetel completed october 2001 selling ipower products related services local currencies increase foreign currency exchange rate fluctuation risk may also decide expand type products sell foreign currencies thereby increasing foreign exchange risk event significant transaction due foreign currency may enter foreign currency forward exchange contract hedging purposes third quarter entered contract aggregate face value 28 million mitigate exposure receivable foreign currency contract matured third quarter material effect consolidated financial position results operations cash flows connection acquisition picturetel completed october 2001 assumed picturetels existing hedging program hedge intercompany receivables picturetel foreign subsidiaries seven open foreign currency forward exchange contracts ranging sixty ninety days date acquisition total value 16 million seven contracts matured fourth quarter 2001 material effect consolidated financial position results operations cash flows two additional contracts entered month december 2001 17 million remained outstanding december 31 2001 item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily investment portfolio bank borrowings use derivative financial instruments investment portfolio includes highly liquid high quality instruments exception 04 million invested equity securities publicly traded companies may occasionally use forward contracts hedge currency exchange rate fluctuations may affect value trade receivables billed currencies united states dollar december 31 2002 open foreign currency hedging contracts estimated fair value cash equivalents approximates principal amounts reflected based short maturities financial instruments shortterm longterm investments consist us state municipal government obligations foreign domestic public corporate debt equity securities total 04 million strategically invested certain equity securities publicly traded companies december 31 2002 investments subject market price fluctuations primarily influenced changes interest rates credit quality marked market period recording unrealized gain loss stockholders equity except warrants purchase publicly traded equity securities marked market consolidated statement operations sell shortterm longterm investments prior maturity may incur charge operations period sale took place 2002 realized 44 million losses related sale writedown strategic investments certain equity securities publicly traded companies reflected loss strategic investments consolidated statements operations following tables present hypothetical changes fair values securities excluding cash equivalents investments equity securities publicly traded companies held december 31 2002 sensitive changes interest rates modeling technique used measures change fair values arising hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps six twelvemonth time horizons following table estimates fair value portfolio twelvemonth time horizon thousands following table estimates fair value portfolio sixmonth time horizon thousands substantial majority sales denominated us dollars minor amount foreign invoices paid currencies us dollar invoices funded time payment however connection acquisition picturetel selling ipower products related services local currencies primarily euros british pounds hong kong dollars singapore dollars japanese yen increased foreign currency exchange rate fluctuation risk may also decide expand type products sell foreign currencies thereby increasing foreign exchange risk hedge speculative purposes event significant transaction due foreign currency may enter foreign currency forward exchange contract hedging purposes connection acquisition picturetel completed october 2001 assumed picturetels existing hedging program hedge intercompany receivables picturetel foreign subsidiaries two forward contracts entered month december 2001 17 million matured first quarter 2002 material effect consolidated financial position results operations cash flows forward contracts outstanding december 31 2002 item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily investment portfolio bank borrowings use derivative financial instruments investment portfolio includes highly liquid high quality instruments exception 01 million invested equity securities publicly traded companies may occasionally use forward contracts hedge currency exchange rate fluctuations may affect value trade receivables billed currencies united states dollar december 31 2003 open foreign currency hedging contracts estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us state municipal government obligations foreign domestic public corporate debt equity securities total 01 million strategically invested certain equity securities publicly traded companies december 31 2003 investments equity securities publicly traded companies subject market price fluctuations primarily influenced changes interest rates credit quality marked market period recording unrealized gain loss consolidated statement operations sell shortterm longterm investments prior maturity may incur charge operations period sale took place 2003 2002 2001 realized 02 million 39 million 01 million losses related sale writedown strategic investments certain equity securities publicly traded companies reflected “loss strategic investments” consolidated statements operations following tables present hypothetical changes fair values securities excluding cash equivalents investments equity securities publicly traded companies held december 31 2003 sensitive changes interest rates modeling technique used measures change fair values arising hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps six twelvemonth time horizons following table estimates fair value portfolio twelvemonth time horizon thousands following table estimates fair value portfolio sixmonth time horizon thousands substantial majority sales denominated us dollars however selling ipower products related services local currencies primarily euros british pounds hong kong dollars singapore dollars japanese yen increased foreign currency exchange rate fluctuation risk may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies thereby increasing foreign exchange risk hedge speculative purposes event significant transaction due foreign currency may enter foreign currency forward exchange contract hedging purposes connection acquisition picturetel completed october 2001 assumed picturetel’s existing hedging program hedge intercompany receivables picturetel foreign subsidiaries two forward contracts entered month december 2001 17 million matured first quarter 2002 material effect consolidated financial position results operations cash flows forward contracts outstanding december 31 2003 2002 item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily investment portfolio bank borrowings investment portfolio primarily includes highly liquid highquality instruments exception 01 million invested equity securities publicly traded companies investments portfolio may contain embedded derivative interest rate hedges may placed tied specific investment group investments accordance investment policy however generally significant may occasionally use forward contracts hedge currency exchange rate fluctuations may affect value trade receivables billed currencies united states dollar december 31 2004 open foreign currency hedging contracts estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us state municipal government obligations foreign domestic public corporate debt equity securities less 01 million strategically invested nontransferable warrants purchase common stock publicly traded company december 31 2004 investments nontransferable warrants purchase common stock publicly traded company subject market price fluctuations primarily influenced changes interest rates marked market period recording unrealized gain loss consolidated statement operations sell shortterm longterm investments prior maturity may incur charge operations period sale took place 2004 2003 2002 realized 01 million 02 million 39 million losses related sale writedown strategic investments certain equity securities publicly traded companies reflected “loss strategic investments” consolidated statements operations following tables present hypothetical changes fair values securities excluding cash equivalents investments equity securities publicly traded companies held december 31 2004 sensitive changes interest rates modeling technique used measures change fair values arising hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps six twelvemonth time horizons following table estimates fair value portfolio twelvemonth time horizon thousands following table estimates fair value portfolio sixmonth time horizon thousands substantial majority sales denominated us dollars however selling ipower products related services local currencies primarily euros british pounds hong kong dollars singapore dollars japanese yen increased foreign currency exchange rate fluctuation risk based overall currency rate exposure december 31 2004 nearterm 10 appreciation depreciation us dollar relative foreign local currencies would immaterial effect financial position results operations cash flows based balances december 31 2004 may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies thereby increasing foreign exchange risk hedge speculative purposes event significant transaction due foreign currency may enter foreign currency forward exchange contract hedging purposes connection acquisition picturetel completed october 2001 assumed picturetel’s existing hedging program hedge intercompany receivables picturetel foreign subsidiaries two forward contracts entered month december 2001 17 million matured first quarter 2002 material effect consolidated financial position results operations cash flows forward contracts outstanding december 31 2004 2003 item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily investment portfolio bank borrowings investment portfolio primarily includes highly liquid highquality instruments investments portfolio may contain embedded derivative interest rate hedges may placed tied specific investment group investments accordance investment policy however generally significant may occasionally use forward contracts hedge currency exchange rate fluctuations may affect value trade receivables billed currencies united states dollar december 31 2005 open foreign currency hedging contracts estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us state municipal government obligations foreign domestic public corporate debt securities sell shortterm longterm investments prior maturity may incur charge operations period sale took place following tables present hypothetical changes fair values securities excluding cash equivalents held december 31 2005 sensitive changes interest rates modeling technique used measures change fair values arising hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps six twelvemonth time horizons following table estimates fair value portfolio twelvemonth time horizon thousands following table estimates fair value portfolio sixmonth time horizon thousands january 2006 substantial majority sales denominated us dollars effective january 1 2006 commenced selling products services european united kingdom regions euros british pounds increased foreign currency exchange rate fluctuation risk based overall currency rate exposure december 31 2005 nearterm 10 appreciation depreciation us dollar relative foreign local currencies would immaterial effect financial position results operations cash flows may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk hedge speculative purposes event significant transaction due foreign currency might enter foreign currency forward exchange contract hedging purposes exposure foreign currency exchange rate fluctuations increases may begin hedging program forward contracts outstanding december 31 2005 2004 item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily investment portfolio bank borrowings investment portfolio includes highly liquid highquality instruments investments portfolio may contain embedded derivative interest rate hedges may placed tied specific investment group investments accordance investment policy however generally significant estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us state municipal government obligations foreign domestic public corporate debt securities sell investments prior maturity may incur charge operations period sale takes place following tables present hypothetical changes fair values securities excluding cash equivalents held december 31 2006 sensitive changes interest rates modeling technique used measures change fair values arising hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps six twelvemonth time horizons following table estimates fair value portfolio twelvemonth time horizon thousands following table estimates fair value portfolio sixmonth time horizon thousands foreign currency exchange rate risk prior 2006 substantial majority sales denominated united states dollars effective january 1 2006 commenced selling products services certain european regions euros united kingdom british pounds increased foreign currency exchange rate fluctuation risk hedge speculative purposes result increasing exposure foreign currency exchange rate fluctuations began purchasing forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel third quarter 2006 december 31 2006 outstanding forward exchange contracts sell 102 million euros 132088 34 million british pounds 195175 buy 200 million israeli shekels 420865 forward exchange contracts hedge net position foreign currencydenominated receivables payables cash balances typically mature one month also commenced cash flow hedging program third quarter 2006 hedge portion anticipated revenues operating expenses denominated euro british pound israeli shekels december 31 2006 outstanding foreign exchange contracts sell 52 million euros 128504 28 million british pounds 189219 buy 55 million israeli shekels 43720 forward exchange contracts carried fair value typically maturities less six months based overall currency rate exposure december 31 2006 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would immaterial effect financial position results operations cash flows may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily investment portfolio bank borrowings investment portfolio includes highly liquid highquality instruments investments portfolio may contain embedded derivative interest rate hedges may placed tied specific investment group investments accordance investment policy however generally significant estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us state municipal government obligations foreign domestic public corporate debt securities sell investments prior maturity may incur charge operations period sale takes place following tables present hypothetical changes fair values securities excluding cash equivalents held december 31 2007 sensitive changes interest rates modeling technique used measures change fair values arising hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps six twelvemonth time horizons following table estimates fair value portfolio twelvemonth time horizon thousands following table estimates fair value portfolio sixmonth time horizon thousands foreign currency exchange rate risk majority sales denominated united states dollars also sell products services certain european regions euros british pounds increased foreign currency exchange rate fluctuation risk hedge speculative purposes result exposure foreign currency exchange rate fluctuations purchase forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel mitigate bank counterparty risk related foreign currency hedging program policy requires company purchase hedge contracts banks among world’s largest 100 banks ranked total assets us dollars december 31 2007 outstanding forward exchange contracts sell 73 million euros 136 sell 28 million british pounds 200 buy 181 million israeli shekels 413 forward exchange contracts hedge net position foreign currencydenominated receivables payables cash balances typically mature 60 days less also cash flow hedging program hedge portion anticipated revenues operating expenses denominated euro british pound israeli shekels december 31 2007 outstanding foreign exchange contracts sell 286 million euros 145 46 million british pounds 198 buy 42 million israeli shekels 41 forward exchange contracts carried fair value typically maturities less 360 days december 31 2007 also outstanding foreign exchange contracts sell 105 million euros 145 24 million british pounds 196 forward exchange contracts carried fair value typically maturities 360 days result acquisition spectralink operations horsens denmark time enter foreign currency contracts reduce exposure foreigndenominated inventory purchases made denmark operation year ended december 31 2007 gains foreign currency exchange contracts significant changes fair value forward contracts recognized income loss net end period material periods presented based overall currency rate exposure december 31 2007 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would immaterial effect financial position results operations cash flows may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk item 8item 7a quantitative qualitative disclosures market risk interest rate risk exposure market risk changes interest rates relates primarily investment portfolio generally invest excess cash marketable debt instruments us government agencies highquality corporate debt securities policy limit amount credit exposure one issuer also invest corporate preferred equity securities part dividend capture program investments dividend capture program typically hedged interest rate fluctuations may effective however generally significant estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us government obligations foreign domestic public corporate debt securities corporate preferred equity securities valuation investment portfolio subject uncertainties difficult predict particularly light recent credit market instability current market conditions deteriorate anticipated recovery market values occur may realize losses sale investments may incur temporary impairment charges requiring us record additional unrealized losses accumulated comprehensive loss could also incur additional otherthantemporary impairment charges resulting realized losses statement operations would reduce net income consider various factors determining whether recognize impairment charge including length time extent fair value less cost basis financial condition nearterm prospects security issuer intent ability hold investment period time sufficient allow anticipated recovery market value sell investments prior maturity may incur charge operations period sale takes place sensitivity analysis performed investment portfolio december 31 2008 modeling technique used measures change fair values arising hypothetical parallel shifts yield curve various magnitudes prior years analysis performed time periods 6 months 12 months current year modified analysis model effect immediate parallel shift yield curve methodology assumes immediate change interest rates reflect current economic environment following table presents hypothetical fair values securities excluding cash equivalents held december 31 2008 sensitive changes interest rates modeling technique used measures change fair values arising immediate parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps foreign currency exchange rate risk majority sales denominated united states dollars also sell products services certain european regions euros british pounds increased foreign currency exchange rate fluctuation risk hedge speculative purposes result exposure foreign currency exchange rate fluctuations purchase forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel mitigate bank counterparty risk related foreign currency hedging program policy requires company purchase hedge contracts banks among world’s largest 100 banks ranked total assets us dollars december 31 2008 outstanding forward exchange contracts sell 63 million euros 126 sell 10 million british pounds 115 buy 52 million israeli shekels 351 forward exchange contracts hedge net position foreign currencydenominated receivables payables cash balances typically mature 360 days less december 31 2008 also outstanding forward exchange contracts sell 105 million euros 145 sell 20 million british pounds 196 buy 160 million israeli shekels 387 maturities 360 days also cash flow hedging program hedge portion anticipated revenues operating expenses denominated euro british pound israeli shekels december 31 2008 outstanding foreign exchange contracts sell 48 million euros 139 06 million british pounds 184 buy 23 million israeli shekels 344 forward exchange contracts carried fair value typically maturities less 360 days december 31 2008 also outstanding foreign exchange contracts sell 271 million euros 148 41 million british pounds 187 buy 457 million israeli shekels 349 forward exchange contracts carried fair value typically maturities 360 days based overall currency rate exposure december 31 2008 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would positive negative impact approximately 119 million results operations may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk item 8item 7a quantitative qualitative disclosures market risk interest rate risk exposure market risk changes interest rates relates primarily investment portfolio generally invest excess cash marketable debt instruments us government agencies highquality corporate debt securities policy limit amount credit exposure one issuer also invest corporate preferred equity securities part capital gains capture program corporate preferred equity securities primarily comprised investmentgrade nonconvertible utility preferred stocks generally rated equivalent bbb better least one major credit rating agencies active market exists securities preferred equity securities actively traded common stock equity securities ability hold investments decided sell securities within short period time could incur significant losses december 31 2009 fair value corporate preferred equity securities 400 million compared cost basis 487 million investments capital gains capture program typically hedged interest rate fluctuations may effective however hedges generally significant estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us government obligations foreign domestic public corporate debt securities corporate preferred equity securities valuation investment portfolio subject uncertainties difficult predict particularly light recent credit market instability current market conditions deteriorate anticipated recovery market values occur may realize losses sale investments may incur temporary impairment charges requiring us record additional unrealized losses accumulated comprehensive loss could also incur additional otherthantemporary impairment charges resulting realized losses statement operations would reduce net income consider various factors determining whether recognize impairment charge including length time extent fair value less cost basis financial condition nearterm prospects security issuer intent ability hold investment period time sufficient allow anticipated recovery market value sell investments prior maturity may incur charge operations period sale takes place sensitivity analysis performed investment portfolio december 31 2009 modeling technique used measures change fair values arising hypothetical parallel shifts yield curve various magnitudes model effect immediate parallel shift yield curve methodology assumes immediate change interest rates reflect current economic environment following table presents hypothetical fair values securities excluding cash equivalents held december 31 2009 sensitive changes interest rates modeling technique used measures change fair values arising immediate parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps foreign currency exchange rate risk majority sales denominated united states dollars also sell products services certain european regions euros british pounds increased risk fluctuations foreign currency exchange rates hedge speculative purposes result exposure foreign currency exchange rate fluctuations enter forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel relative united states dollar mitigate bank counterparty risk related foreign currency hedging program policy requires company enter hedge contracts banks among world’s largest 100 banks ranked total assets us dollars december 31 2009 outstanding forward exchange contracts sell 127 million euros 131 sell 24 million british pounds 151 buy 154 million israeli shekels 398 forward exchange contracts hedge net position foreign currencydenominated receivables payables cash balances typically mature 360 days less also cash flow hedging program hedge portion anticipated revenues operating expenses denominated euro british pound israeli shekels december 31 2009 outstanding foreign exchange contracts sell 71 million euros 144 02 million british pounds 168 buy 101 million israeli shekels 379 forward exchange contracts carried fair value typically maturities less 360 days december 31 2009 also outstanding foreign exchange contracts sell 318 million euros 141 16 million british pounds 163 buy 447 million israeli shekels 391 forward exchange contracts carried fair value typically maturities 360 days based overall currency rate exposure december 31 2009 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would positive negative impact approximately 162 million results operations may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk item 8item 7a quantitative qualitative disclosures market risk interest rate risk exposure market risk changes interest rates relates primarily investment portfolio generally invest excess cash marketable debt instruments us government agencies highquality corporate debt securities policy limit amount credit exposure one issuer estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us government obligations foreign domestic public corporate debt securities valuation investment portfolio subject uncertainties difficult predict particularly light recent credit market instability current market conditions deteriorate anticipated recovery market values occur may realize losses sale investments may incur temporary impairment charges requiring us record additional unrealized losses cumulative comprehensive income loss could also incur additional otherthantemporary impairment charges resulting realized losses consolidated statements operations would reduce net income consider various factors determining whether recognize impairment charge including length time extent fair value less cost basis financial condition nearterm prospects security issuer intent ability hold investment period time sufficient allow anticipated recovery market value sell investments prior maturity may incur charge operations period sale takes place sensitivity analysis performed investment portfolio december 31 2010 modeling technique used measures change fair values arising hypothetical parallel shifts yield curve various magnitudes model effect immediate parallel shift yield curve methodology assumes immediate change interest rates reflect current economic environment following table presents hypothetical fair values securities excluding cash equivalents held december 31 2010 sensitive changes interest rates modeling technique used measures change fair values arising immediate parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps foreign currency exchange rate risk majority sales denominated united states dollars also sell products services certain european regions euros british pounds incur expenses israeli shekels increased risk fluctuations foreign currency exchange rates hedge speculative purposes result exposure foreign currency exchange rate fluctuations enter forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel relative united states dollar mitigate bank counterparty risk related foreign currency hedging program policy requires us enter hedge contracts banks among world’s largest 100 banks ranked total assets us dollars december 31 2010 net outstanding forward exchange contracts sell 34 million euros 124 19 million british pounds 157 113 million israeli shekels 346 forward exchange contracts hedge net position foreign currencydenominated receivables payables cash balances typically mature 360 days less december 31 2010 also net outstanding forward exchange contracts sell 113 million euros 143 10 million british pounds 159 buy 130 million israeli shekels 380 forward exchange contracts carried fair value typically maturities 360 days also cash flow hedging program hedge portion anticipated revenues operating expenses denominated euro british pound israeli shekels december 31 2010 outstanding foreign exchange contracts sell 133 million euros 133 buy 12 million british pounds 149 221 million israeli shekels 361 forward exchange contracts carried fair value typically maturities less 360 days december 31 2010 also outstanding foreign exchange contracts sell 508 million euros 131 46 million british pounds 154 buy 610 million israeli shekels 371 forward exchange contracts carried fair value typically maturities 360 days based overall currency rate exposure december 31 2010 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would immaterial impact results operations may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk item 8item 7a quantitative qualitative disclosures market risk interest rate risk exposure market risk changes interest rates relates primarily investment portfolio generally invest excess cash marketable debt instruments us government agencies highquality corporate debt securities policy limit amount credit exposure one issuer estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us foreign government obligations foreign domestic public corporate debt securities valuation investment portfolio subject uncertainties difficult predict particularly light credit market instability current market conditions deteriorate anticipated recovery market values occur may realize losses sale investments may incur temporary impairment charges requiring us record additional unrealized losses accumulated comprehensive income loss could also incur additional otherthantemporary impairment charges resulting realized losses consolidated statements operations would reduce net income consider various factors determining whether recognize impairment charge including length time extent fair value less cost basis financial condition nearterm prospects security issuer intent ability hold investment period time sufficient allow anticipated recovery market value sell investments prior maturity may incur charge operations period sale takes place sensitivity analysis performed investment portfolio december 31 2011 modeling technique used measures change fair values arising hypothetical parallel shifts yield curve various magnitudes model effect immediate parallel shift yield curve methodology assumes immediate change interest rates reflect current economic environment following table presents hypothetical fair values securities excluding cash equivalents held december 31 2011 sensitive changes interest rates modeling technique used measures change fair values arising immediate parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps thousands foreign currency exchange rate risk majority sales denominated united states dollars also sell products services certain european regions euros british pounds incur expenses israeli shekels increased risk fluctuations foreign currency exchange rates hedge speculative purposes result exposure foreign currency exchange rate fluctuations enter forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel relative united states dollar mitigate bank counterparty risk related foreign currency hedging program policy requires us enter hedge contracts banks among world’s largest 100 banks ranked total assets us dollars december 31 2011 net outstanding forward exchange contracts sell 86 million euros 140 43 million british pounds 157 113 million israeli shekels 388 53 million mexican pesos 1372 04 million brazilian real 184 forward exchange contracts hedge net position foreign currencydenominated receivables payables cash balances typically mature 360 days less december 31 2011 also net outstanding forward exchange contracts sell 243 million euros 131 05 million british pounds 153 buy 204 million israeli shekels 362 forward exchange contracts carried fair value typically maturities 360 days also cash flow hedging program hedge portion anticipated revenues operating expenses denominated euro british pound israeli shekels december 31 2011 outstanding foreign exchange contracts buy 07 million euros 115 01 million british pounds 152 116 million israeli shekels 377 forward exchange contracts carried fair value typically maturities less 360 days december 31 2011 also outstanding foreign exchange contracts sell 467 million euros 139 11 million british pounds 156 buy 581 million israeli shekels 358 forward exchange contracts carried fair value typically maturities 360 days based overall currency rate exposure december 31 2011 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would immaterial impact results operations may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk item 8item 7a quantitative qualitative disclosures market risk interest rate risk exposure market risk changes interest rates relates primarily investment portfolio generally invest excess cash marketable debt instruments us government agencies highquality corporate debt securities policy limit amount credit exposure one issuer estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us treasury obligations government agency instruments corporate bonds commercial paper nonus government securities money market funds valuation investment portfolio subject uncertainties difficult predict current market conditions deteriorate may realize losses sale investments may incur temporary impairment charges requiring us record unrealized losses accumulated comprehensive income could also incur additional otherthantemporary impairment charges resulting realized losses consolidated statements operations would reduce net income consider various factors determining whether recognize impairment charge including length time extent fair value less cost basis financial condition nearterm prospects security issuer intent ability hold investment period time sufficient allow anticipated recovery market value sell investments prior maturity may incur charge operations period sale takes place sensitivity analysis performed investment portfolio december 31 2013 modeling technique used measures change fair values arising hypothetical parallel shifts yield curve various magnitudes model effect immediate parallel shift yield curve methodology assumes immediate change interest rates reflect current economic environment following table presents hypothetical fair values securities excluding cash equivalents held december 31 2013 sensitive changes interest rates modeling technique used measures change fair values arising immediate parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps thousands september 2013 entered credit agreement provides 2500 million term loan matures september 2018 bears interest option either base rate plus spread 050 100 reserve adjusted libor rate defined credit agreement plus spread 150 200 interest due payable arrears quarterly loans bearing interest base rate end interest period three month interval case loans interest periods greater three months case loans bearing interest reserve adjusted libor rate term loan payable quarterly installments principal equal approximately 16 million began december 31 2013 remaining outstanding principal amount term loan due payable maturity date entering credit agreement assumed risks associated variable interest rates based upon variable base rate libor december 31 2013 weighted average interest rate term loan 199 effect immediate 10 change interest rates would significant impact results operations foreign currency exchange rate risk majority sales denominated united states dollars also sell products services certain european regions euros british pounds incur expenses chinese yuan euros british pounds israeli shekels foreign currencies exposes us risk fluctuations foreign currency exchange rates hedge speculative purposes result exposure foreign currency exchange rate fluctuations enter forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel japanese yen brazilian real mexican peso relative united states dollar mitigate bank counterparty risk related foreign currency hedging program policy requires us enter hedge contracts banks among world’s largest 100 banks ranked total assets us dollars december 31 2013 net outstanding forward exchange contracts sell 35 million euros 137 360 million israeli shekels 350 113 million mexican pesos 1318 4071 million japanese yen 10287 54 million brazilian reais 240 buy 16 million british pounds 163 forward exchange contracts hedge net position foreign currencydenominated receivables payables cash balances typically mature 360 days less december 31 2013 also net outstanding forward exchange contracts sell 370 million euros 136 26 million british pounds 142 buy 491 million israeli shekels 374 forward exchange contracts carried fair value typically maturities 360 days also cash flow hedging program hedge portion anticipated revenues operating expenses denominated chinese yuan euro british pound israeli shekel december 31 2013 outstanding foreign exchange contract buy 916 million chinese yuan 612 forward exchange contract carried fair value typically matures 360 days less december 31 2013 outstanding foreign exchange contracts sell 290 million euros 133 buy 19 million british pounds 143 873 million israeli shekels 363 forward exchange contracts carried fair value typically maturities 360 days based overall currency rate exposure december 31 2013 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would immaterial impact results operations may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk item 8item 7a quantitative qualitative disclosures market risk interest rate risk exposure market risk changes interest rates relates primarily investment portfolio generally invest excess cash marketable debt instruments us government agencies highquality corporate debt securities policy limit amount credit exposure one issuer estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us treasury obligations government agency instruments corporate bonds commercial paper nonus government securities money market funds valuation investment portfolio subject uncertainties difficult predict current market conditions deteriorate may realize losses sale investments may incur temporary impairment charges requiring us record unrealized losses accumulated comprehensive income could also incur additional otherthantemporary impairment charges resulting realized losses consolidated statements operations would reduce net income consider various factors determining whether recognize impairment charge including length time extent fair value less cost basis financial condition nearterm prospects security issuer intent ability hold investment period time sufficient allow anticipated recovery market value sell investments prior maturity may incur charge operations period sale takes place sensitivity analysis performed investment portfolio december 31 2014 modeling technique used measures change fair values arising hypothetical parallel shifts yield curve various magnitudes model effect immediate parallel shift yield curve methodology assumes immediate change interest rates reflect current economic environment following table presents hypothetical fair values securities excluding cash equivalents held december 31 2014 sensitive changes interest rates modeling technique used measures change fair values arising immediate parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps thousands september 2013 entered credit agreement provides 2500 million term loan matures september 2018 bears interest option either base rate plus spread 050 100 reserve adjusted libor rate defined credit agreement plus spread 150 200 interest due payable arrears quarterly loans bearing interest base rate end interest period three month interval case loans interest periods greater three months case loans bearing interest reserve adjusted libor rate term loan payable quarterly installments principal equal approximately 16 million began december 31 2013 remaining outstanding principal amount term loan due payable maturity date entering credit agreement assumed risks associated variable interest rates based upon variable base rate libor december 31 2014 weighted average interest rate term loan 204 effect immediate 10 change interest rates would significant impact results operations foreign currency exchange rate risk majority sales denominated united states dollars also sell products services certain european regions euros british pounds increased foreign currency exchange rates fluctuation risk hedge speculative purposes result exposure foreign currency exchange rate fluctuations enter forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel japanese yen brazilian real chinese yuan mexican peso relative united states dollar mitigate bank counterparty risk related foreign currency hedging program policy requires us enter hedge contracts banks among world’s largest 100 banks ranked total assets us dollars december 31 2014 net outstanding forward exchange contracts sell 426 million euros 132 181 million mexican pesos 1407 3346 million japanese yen 11803 111 million brazilian reals 264 14 million british pounds 164 buy 70 million chinese yuan 630 62 million israeli shekels 358 forward exchange contracts hedge net position foreign currencydenominated receivables payables cash balances typically mature 360 days less december 31 2014 outstanding forward exchange contracts maturities 360 days also cash flow hedging program hedge portion anticipated revenues operating expenses denominated chinese yuan euro british pound israeli shekel december 31 2014 outstanding foreign exchange contract buy 751 million chinese yuan 631 517 million israeli shekels 357 sell 208 million euros 131 24 million british pounds 163 forward exchange contract carried fair value typically matures 360 days less december 31 2014 outstanding foreign exchange contracts sell 251 million euros 123 58 million british pounds 156 buy 626 million chinese yuan 64 444 million israeli shekels 388 forward exchange contracts carried fair value typically maturities 360 days based overall currency rate exposure december 31 2014 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would immaterial impact results operations may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk item 8item 7a quantitative qualitative disclosures market risk interest rate risk exposure market risk changes interest rates relates primarily investment portfolio generally invest excess cash marketable debt instruments us government agencies highquality corporate debt securities policy limit amount credit exposure one issuer estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us treasury obligations government agency instruments corporate debt securities nonus government securities money market funds valuation investment portfolio subject uncertainties difficult predict current market conditions deteriorate may realize losses sale investments may incur temporary impairment charges requiring us record unrealized losses accumulated comprehensive loss income could also incur additional otherthantemporary impairment charges resulting realized losses consolidated statements operations would reduce net income consider various factors determining whether recognize impairment charge including length time extent fair value less cost basis financial condition nearterm prospects security issuer intent ability hold investment period time sufficient allow anticipated recovery market value sell investments prior maturity may incur realized loss consolidated statement operations period sale takes place sensitivity analysis performed investment portfolio december 31 2015 modeling technique used measures change fair values arising hypothetical parallel shifts yield curve various magnitudes following table presents hypothetical fair values securities excluding cash equivalents held december 31 2015 sensitive changes interest rates thousands september 2013 entered credit agreement provides 2500 million term loan matures september 2018 bears interest option either base rate plus spread 050 100 reserve adjusted libor rate defined credit agreement plus spread 150 200 interest due payable arrears quarterly loans bearing interest base rate end interest period three month interval case loans interest periods greater three months case loans bearing interest reserve adjusted libor rate term loan payable quarterly installments principal equal approximately 16 million began december 31 2013 remaining outstanding principal amount term loan due payable maturity date entering credit agreement assumed risks associated variable interest rates based upon variable base rate libor december 31 2015 weighted average interest rate term loan 230 effect immediate 10 change interest rates would significant impact results operations foreign currency exchange rate risk majority sales denominated us dollars also sell products services certain european regions euros british pounds increased foreign currency exchange rates fluctuation risk hedge speculative purposes result exposure foreign currency exchange rate fluctuations enter forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel brazilian real chinese yuan mexican peso relative united states dollar mitigate bank counterparty risk related foreign currency hedging program policy requires us enter hedge contracts banks among world’s largest 100 banks ranked total assets us dollars following table summarizes company’s notional position currency average rate outstanding nondesignated hedges december 31 2015 thousands following table summarizes company’s notional position currency average rate outstanding cash flow hedges december 31 2015 thousands based overall currency rate exposure december 31 2015 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would immaterial impact results operations may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk see note 13 notes consolidated financial statements information foreign exchange derivatives item 8item 7a quantitative qualitative disclosures market risk interest rate risk exposure market risk changes interest rates relates primarily investment portfolio generally invest excess cash marketable debt instruments us government agencies highquality corporate debt securities policy limit amount credit exposure one issuer estimated fair value cash equivalents approximates principal amounts reflected consolidated balance sheets based short maturities financial instruments shortterm longterm investments consist us treasury obligations government agency instruments corporate bonds commercial paper nonus government securities money market funds valuation investment portfolio subject uncertainties difficult predict current market conditions deteriorate may realize losses sale investments may incur temporary impairment charges requiring us record unrealized losses accumulated comprehensive income loss could also incur additional otherthantemporary impairment charges resulting realized losses consolidated statements operations would reduce net income consider various factors determining whether recognize impairment charge including length time extent fair value less cost basis financial condition nearterm prospects security issuer intent ability hold investment period time sufficient allow anticipated recovery market value sell investments prior maturity may incur charge operations period sale takes place sensitivity analysis performed investment portfolio december 31 2012 modeling technique used measures change fair values arising hypothetical parallel shifts yield curve various magnitudes model effect immediate parallel shift yield curve methodology assumes immediate change interest rates reflect current economic environment following table presents hypothetical fair values securities excluding cash equivalents held december 31 2012 sensitive changes interest rates modeling technique used measures change fair values arising immediate parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps thousands foreign currency exchange rate risk majority sales denominated united states dollars also sell products services certain european regions euros british pounds incur expenses euros british pounds israeli shekels foreign currencies exposes us risk fluctuations foreign currency exchange rates hedge speculative purposes result exposure foreign currency exchange rate fluctuations enter forward exchange contracts hedge foreign currency exposure euro british pound israeli shekel japanese yen brazilian real mexican peso relative united states dollar mitigate bank counterparty risk related foreign currency hedging program policy requires us enter hedge contracts banks among world’s largest 100 banks ranked total assets us dollars december 31 2012 net outstanding forward exchange contracts sell 158 million euros 130 16 million british pounds 163 161 million israeli shekels 377 62 million mexican pesos 1302 2065 million japanese yen 8242 21 million brazilian real 216 forward exchange contracts hedge net position foreign currencydenominated receivables payables cash balances typically mature 360 days less december 31 2012 also net outstanding forward exchange contracts sell 322 million euros 132 19 million british pounds 158 buy 261 million israeli shekels 384 forward exchange contracts carried fair value typically maturities 360 days also cash flow hedging program hedge portion anticipated revenues operating expenses denominated euro british pound israeli shekels december 31 2012 outstanding foreign exchange contracts maturities less 360 days december 31 2012 outstanding foreign exchange contracts sell 178 million euros 133 buy 03 million british pounds 142 752 million israeli shekels 396 forward exchange contracts carried fair value typically maturities 360 days based overall currency rate exposure december 31 2012 nearterm 10 appreciation depreciation united states dollar relative foreign local currencies would immaterial impact results operations may also decide expand type products sell foreign currencies may specific customer situations choose sell foreign currencies regions thereby increasing foreign exchange risk item 8 item 8 financial statements supplementary data financial statements supplementary data company required item set forth pages indicated item 16a item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 14d included following item 14 hereof supplemental data called item 8 applicable company item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 14d included following item 14 hereof supplemental data called item 8 applicable company item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 14d included pages s1 s4 supplemental data called item 8 applicable polycom item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 14d included pages s1 s2 supplemental data called item 8 presented page item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 14d included pages s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 14d included pages s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included pages s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included pages s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included pages s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included pages s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included pages s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included pages s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included see index page s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included herein beginning page s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included herein beginning page s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included herein beginning page s2 respectively supplemental data called item 8 presented page s1 item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included herein beginning page s1 respectively located signature page form 10k supplemental financial information required item 8 included part ii item 7 caption selected quarterly financial data incorporated herein reference item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included herein beginning page s1 respectively located signature page form 10k supplemental financial information required item 8 included part ii item 7 caption selected quarterly financial data incorporated herein reference item 9item 8 financial statements supplementary data financial statements required item 8 financial statement schedules required item 15a2 included herein beginning page s2 respectively supplemental data called item 8 presented page s1 item 9 nannannannannannanitem 15 exhibits financial statement schedules reports form 8k following documents filed part report 1financial statements see item 8 polycom inc consolidated financial statements december 31 2002 2001 three years period ended december 31 2002 2financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3exhibits following exhibits filed part incorporated reference report exhibit description 21 agreement plan merger reorganization dated december 5 2000 among registrant merger sub ltd accord networks ltd incorporated herein reference exhibit 21 form 8k filed registrant securities exchange commission december 12 2000 22 agreement plan merger dated may 24 2001 among registrant pharaoh acquisition corp picturetel corporation incorporated herein reference exhibit 21 registrants registration statement form s4 registration 33363252 filed commission june 18 2001 23 addendum agreement plan merger dated may 24 2001 among registrant pharaoh acquisition corp picturetel corporation incorporated herein reference exhibit 12d4 amendment 6 schedule filed commission october 3 2001 24 asset purchase agreement dated january 28 2003 polycom inc verilink corporation incorporated herein reference exhibit 21 form 8k filed commission february 12 2002 31 1 restated certificate incorporation polycom inc 32 amended restated bylaws polycom inc incorporated herein reference exhibit 32 registrants annual report form 10k filed commission march 12 2001 41 reference made exhibits 31 32 42 specimen common stock certificate incorporated herein reference exhibit 42 registrants registration statement form s1 registration 33302296 filed commission march 12 1996 s1 43 amended restated investor rights agreement dated may 17 1995 among registrant investors named therein incorporated herein reference exhibit 43 registrants 1996 s1 44 preferred shares rights agreement dated july 15 1998 amended march 2 2001 polycom inc fleet bank na fka bankboston na including certificate designation form rights certificate summary rights attached thereto exhibits b c respectively incorporated herein reference exhibit 1 registrants form 8aa filed commission march 2 2001 101 form indemnification agreement entered registrant directors officers incorporated herein reference exhibit 101 registrants 1996 s1 102 1 registrants 1996 stock incentive plan amended forms agreements thereunder 103 registrants 1996 employee stock purchase plan forms agreements thereunder incorporated herein reference exhibit 104 registrants 1996 s1 104 viavideo communications inc 1996 stock optionstock issuance plan related agreements incorporated herein reference exhibit 42 registrants registration statement form s8 registration 33345351 105 lease agreement registrant trinet essential facilities xxvi dated december 1 1999 regarding space located 1565 barber lane milpitas california incorporated herein reference exhibit 1018 registrants annual report form 10k filed commission march 29 2000 106 lease agreement registrant wjt llc dated february 19 2001 regarding space located 4750 willow road pleasanton california incorporated herein reference exhibit 1015 registrants annual report form 10k filed commission march 12 2001 107 accord networks ltd 1995 employee share ownership option plan form agreement thereunder incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 108 accord networks ltd share ownership option plan 2000 form agreement thereunder incorporated herein reference exhibit 42 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 109 accord networks ltd 2000 share option plan form agreement thereunder incorporated herein reference exhibit 43 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 1010 accord networks ltd 2000 nonemployee director stock option plan form agreement thereunder incorporated herein reference exhibit 44 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 1011 circa communications ltd stock option plan related agreements incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33359820 filed commission april 30 2001 1012 form change control severance agreement chief executive officer chief financial officer registrant effective march 28 2001 incorporated herein reference exhibit 101 registrants quarterly report form 10q filed commission may 16 2001 1013 form change control severance agreement management registrant chief executive officer chief financial officer effective march 28 2001 incorporated herein reference exhibit 102 registrants quarterly report form 10q filed commission may 16 2001 1014 amendment 1 lease registrant wjt llc dated october 5 2001 regarding space located 4750 willow road pleasanton california incorporated reference exhibit 1014 registrants annual report form 10k filed commission march 1 2002 1015 picturetel corporation 1998 acquisition stock option plan form nonstatutory stock option incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33372544 filed commission october 31 2001 1016 polycom inc 2001 nonstatutory stock option plan form agreement thereunder incorporated herein reference exhibit 101 registrants quarterly report form 10q filed commission november 13 2001 1017 atlanta signal processors incorporated 1997 incentive stock plan forms stock option grant exercise agreement employee shareholder agreement incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33376312 filed commission january 4 2002 1018 lease agreement picturetel corporation 100 minuteman limited partnership dated october 10 1995 amended regarding space located 100 minuteman rd andover massachusetts incorporated reference exhibit 1018 registrants annual report form 10k filed commission march 1 2002 1019 1 amended summary rescission arrangement registrant robert c hagerty 211 1 subsidiaries registrant 231 1 consent independent accountants 241 1 power attorney included page 64 annual report form 10k indicates management contract compensatory plan arrangement 1filed herewith breports form 8k october 15 2002 registrant filed current report form 8k commission dated september 27 2002 reporting change fiscal year 5253 week fiscal year ending sunday closest december 31 fiscal year ending december 31 accordingly fiscal quarters end last day calendar quarter march 31 june 30 september 30 december 31 change effective beginning fiscal quarter ended september 30 2002 cexhibits see item 15a3 dfinancial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city pleasanton state california 17th day march 2003 polycom inc robert c hagerty robert c hagerty chairman board directors chief executive officer president power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint michael r kourey lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 amended report signed following persons capacities dates indicated signature title date robert c hagerty robert c hagerty chairman board directors chief executive officer president principal executive officer march 17 2003 michael r kourey michael r kourey senior vice president finance administration chief financial officer secretary director principal financial officer march 17 2003 kathleen crusco kathleen crusco vice president worldwide controller principal accounting officer march 17 2003 betsy atkins betsy atkins director march 17 2003 john seely brown john seely brown director march 17 2003 durk jager durk jager director march 17 2003 john kelley john kelley director march 17 2003 stanley j meresman stanley j meresman director march 17 2003 william owens william owens director march 17 2003 thomas g stemberg thomas g stemberg director march 17 2003 certifications certification president chief executive officer pursuant section 302 sarbanesoxley act 2002 robert c hagerty certify 1i reviewed annual report form 10k polycom inc 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses march 17 2003 robert c hagerty name robert c hagerty title president chief executive officer certification senior vice president finance administration chief financial officer polycom inc pursuant section 302 sarbanesoxley act 2002 michael r kourey certify 1i reviewed annual report form 10k polycom inc 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses march 17 2003 michael r kourey name michael r kourey title senior vice president finance administration chief financial officer certification president chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act robert c hagerty certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 annual report polycom inc form 10k year ended december 31 2002 fully complies requirements section 13a 15d securities exchange act 1934 information contained annual report form 10k fairly presents material respects financial condition results operations polycom inc march 17 2003 robert c hagerty name robert c hagerty title president chief executive officer certification senior vice president finance administration chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 michael r kourey certify pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 annual report polycom inc form 10k year ended december 31 2002 fully complies requirements section 13a 15d securities exchange act 1934 information contained annual report form 10k fairly presents material respects financial condition results operations polycom inc march 17 2003 michael r kourey name michael r kourey title senior vice president finance administration chief financial officer polycom inc index consolidated financial statements report independent accountants board directors stockholders polycom inc opinion accompanying consolidated balance sheets related consolidated statements operations stockholders equity cash flows present fairly material respects financial position polycom inc subsidiaries december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america addition opinion financial statement schedule presents fairly material aspects information set forth therein read conjunction related consolidated financial statements financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp san jose california january 21 2003 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 business company polycom inc subsidiaries company delaware corporation develops manufactures markets services full range highquality easytouse voice video communication endpoints video management software web collaboration software multinetwork gateways multipoint conferencing network access solutions enables business users immediately realize benefits integrated video voice data web collaboration rapidly growing converged networks companys products distributed serviced globally company sells products marketing sales relationships wide network valueadded resellers distributors service providers retailers subsequent december 31 2002 company sold network access product line verilink corporation see note 20 notes consolidated financial statements 2 summary significant accounting policies fiscal year september 27 2002 company changed fiscal year 5253 week fiscal year ending sunday closest december 31 fiscal year ending december 31 accordingly companys fiscal quarters end last day calendar quarter march 31 june 30 september 30 december 31 change effective beginning fiscal quarter ended september 30 2002 result election year ended december 31 2002 included two additional business days december 30 31 2002 operating activities two additional business days period ended december 31 2002 included annual report form 10k year ended december 31 2002 change fiscal year increased revenue 130 million increased basic diluted net income per share approximately five cents per share material impact companys consolidated financial position cash flows years ended december 31 2001 2000 company used 5253 week fiscal year result periods may ended day calendar period however convenience presentation accompanying consolidated financial statements shown ending december 31 applicable period reclassifications certain items prior years consolidated financial statements reclassified conform current years format principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated consolidated financial statements company prepared give retroactive effect merger accord networks ltd february 28 2001 treated pooling interests financial reporting purposes use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents investments companys investments comprised us state municipal government obligations foreign domestic public corporate debt equity securities investments maturities less one year considered shortterm carried fair value nearly investments held companys name limited number major financial institutions specific identification method used determine cost securities disposed realized gains loses reflected interest income net december 31 2002 2001 companys investments classified availableforsale unrealized gains losses investments included separate component cumulative comprehensive income stockholders equity company also investments private companies investments included assets companys consolidated balance sheets carried cost less impairment loss company monitors investments impairment makes appropriate reductions carrying value fair value determined less reported value 2002 2001 company determined value investments impaired reduced carrying amount 30 million 31 million respectively company determined investments impaired based financial operating performance private companies december 31 2002 investments carried zero value inventories stated lower cost market cost determined standard cost basis approximates firstin firstout fifo method consideration given obsolescence excessive levels deterioration factors evaluating net realizable value property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided straightline basis estimated useful lives assets one seven years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three twelve years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill purchased intangible assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets generally three years goodwill purchased intangible assets determined indefinite useful lives amortized regularly reviewed potential impairment longlived assets longlived assets including identifiable intangible assets held used reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset eventual disposition measurement impairment loss longlived assets management expects hold use based fair value asset longlived assets disposed reported lower carrying amount fair value less costs sell product warranty obligations company provides estimated costs hardware software product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured us warranties generally start delivery date continue one three years depending product purchased software products generally carry 90day warranty date shipment liability warranties provide corrected copy portion software found substantial compliance specifications previously agreed factors affect warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures assess adequacy recorded warranty liabilities every quarter make adjustments liability necessary changes warranty obligation included component accrued liabilities consolidated balance sheet period follows thousands changes deferred service revenue consolidated balance sheet period follows thousands company unable provide cost providing extended warranty programs internal financial reporting systems track information level detail 2002 revenue recognition company recognizes revenue hardware product sales including freight charges accordance sec staff accounting bulletin 101 revenue recognition financial statements statement financial accounting standards sfas 48 revenue recognition right return exists company recognizes software revenue accordance sop 972 software revenue recognition amended sop 989 modification sop 972 software revenue recognition respect certain transactions guidelines company recognizes revenue transactions persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable payment reasonably assured company accrues sales returns coop advertising allowances reduction net revenues upon shipment based upon historical experience additionally company recognizes extended service revenue hardware products life service contract research development expenditures research development expenditures charged operations incurred software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2002 2001 2000 142 million 117 million 149 million respectively income taxes income tax expense based pretax financial accounting income deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled valuation allowances established necessary reduce deferred tax assets amount expected realized translation foreign currencies financial statements companys foreign subsidiaries operate functional currency us dollar translated us dollars yearend exchange rates monetary assets liabilities nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations assets liabilities companys foreign subsidiaries local currency functional currency translated us dollars exchange rates effect balance sheet date income expense accounts translated average exchange rates year translation gains losses significant date recorded cumulative comprehensive income within stockholders equity foreign exchange contracts company subsidiaries entered foreign currency forward contracts hedge specific intercompany foreign currency receivable transactions forward contracts involve agreements purchase sell foreign currencies specific rates future dates company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties one largest us banks ranked assets order minimize credit risk companys hedging activities subject company exchange rate risk gains losses contracts designed offset losses gains intercompany foreign currency receivable transactions hedged carrying amount forward contracts fair value determined obtaining quoted market prices gains losses forward contracts recognized reporting period offset gain loss hedged item period underlying transactions settled 2002 company two contracts mature first quarter first matured february 6 2002 second march 6 2002 purchase 769000 925000 respectively british pounds japanese yen new forward contracts entered 2002 contracts outstanding december 31 2002 computation net income loss per share basic net income loss per share computed dividing net income weighted average number common shares outstanding period less weighted average shares treasury stock common stock subject repurchase diluted net income loss per share reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding conversion preferred stock common stock shares common stock subject repurchase common equivalent shares including shares issued stock option plan subject repurchase excluded computation fully diluted net loss per share effect antidilutive fair value financial instruments carrying amounts certain companys financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm longterm investments based quoted market prices similar instruments stockbased compensation accordance sfas 123 sfas 123 accounting stockbased compensation company accounts employee stockbased compensation accordance accounting principles board opinion 25 apb 25 accounting stock issued employees financial interpretation 44 fin 44 accounting certain transactions involving stockbased compensation interpretation apb opinion 25 related interpretations accounting stockbased compensation plans stockbased compensation related nonemployees based fair value related stock options accordance sfas 123 interpretations expense associated stockbased compensation amortized vesting period individual award consistent disclosure provisions sfas 123 companys net income loss basic diluted net income loss per share would adjusted pro forma amounts indicated thousands except per share amounts impact pro forma net income loss per share net income loss table may indicative effect future years options vest several years company continues grant stock options new current employees recent pronouncements october 2001 fasb issued sfas 144 sfas 144 accounting impairment disposal longlived assets sfas 144 amends existing accounting guidance asset impairment provides single accounting model longlived assets disposed among provisions new rules change criteria classifying asset heldforsale standard also broadens scope businesses disposed qualify reporting discontinued operations changes timing recognizing losses operations adopted sfas 144 effective january 1 2003 expect adoption material effect results consolidated operations financial condition cash flows april 2002 fasb issued sfas 145 sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections among provisions sfas 145 rescinds sfas 4 reporting gains losses extinguishment debt accordingly gains losses extinguishment debt shall reported extraordinary items unless extinguishment qualifies extraordinary item criteria accounting principles board apb opinion 30 reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions gains losses extinguishment debt meet criteria apb 30 reclassified income continuing operations prior periods presented adopted sfas 145 effective january 1 2003 expect adoption material effect results consolidated operations financial condition cash flows june 2002 fasb issued sfas 146 sfas 146 accounting costs associated exit disposal activities sfas 146 provides guidance related accounting costs associated disposal activities covered sfas 144 exit restructuring activities previously covered eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 supercedes eitf issue 943 entirety sfas 146 requires costs related exiting activity restructuring recognized liability incurred sfas 146 applied prospectively exit disposal activities initiated december 31 2002 expect adoption sfas 146 material effect results consolidated operations financial condition cash flows november 2002 fasb issued financial interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including rollforward entitys product warranty liabilities apply recognition provisions fin 45 prospectively guarantees issued december 31 2002 disclosure provisions fin 45 effective financial statements fiscal year 2002 customary industry provided local law us jurisdictions standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time indemnify customers combinations loss expense liability arising various trigger events related sale use products services addition time also provide protection customers claims related undiscovered liabilities additional product liability environmental obligations experience claims made indemnifications rare believe adoption standard material impact results consolidated operations financial condition cash flows november 2002 eitf reached consensus issue 0021 revenue arrangements multiple deliverables eitf issue 0021 provides guidance account arrangements involve delivery performance multiple products services andor rights use assets provisions eitf issue 0021 apply revenue arrangements entered fiscal periods beginning june 15 2003 currently evaluating effect adoption eitf issue 0021 results consolidated operations financial condition cash flows december 2002 fasb issued sfas 148 sfas 148 accounting stockbased compensation transition disclosure sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires disclosures pro forma effect using fair value method accounting stockbased employee compensation displayed prominently tabular format additionally sfas 148 requires disclosure pro forma effect interim financial statements annual disclosure requirements sfas 148 included notes transition disclosure requirements effective fiscal year 2003 expect sfas 148 material effect results consolidated operations financial condition cash flows january 2003 fasb issued financial interpretation 46 fin 46 consolidation variable interest entities interpretation arb 51 fin 46 requires certain variable interest entities consolidated primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior february 1 2003 provisions fin 46 must applied first interim annual period beginning june 15 2003 expect fin 46 material effect results consolidated operations financial condition cash flows 3 business combinations meetucom inc june 20 2002 company completed acquisition privatelyheld development stage meetucom inc meetu leading developer web collaboration software primary reason acquisition factors contributed recognition goodwill relate meetus ability deliver core technology web collaboration arena company expects technology provide synergies meetus web collaboration software companys voice video network systems product lines thereby enabling company deliver complete endtoend collaboration solutions since june 21 2002 results operations meetu included companys consolidated statements operations pro forma results operations presented effect acquisition material company acquired outstanding capital stock meetu total consideration 27 million consisting 41553 shares polycom common stock aggregate value 06 million 18 million previous cash investments company approximately 30000 cash closing approximately 02 million acquisition costs additional shares polycom common stock issuable upon successful completion five revenue based earnout thresholds prior june 20 2005 company may required issue additional shares companys common stock time earnout threshold achieved assuming earnout thresholds achieved prior june 20 2005 company would required issue total 35 million 105 million common stock depending upon average closing price companys common stock thirty days prior achievement earnout threshold additional consideration would increase goodwill total purchase consideration acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date amounts allocated inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects cost approach uses concept replacement cost indicator fair value primary technique utilized valuing inprocess research development cost approach based premise prudent investor would pay asset cost replace asset new one replacement cost based total costs net unrealized income tax deduction benefit spent developing inprocess technology meetus inception acquisition date reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside companys control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product cost effectively accordance sfas 142 goodwill originating meetu acquisition amortized purchased intangible assets amortized straightline basis period three years year ended december 31 2002 amortization associated purchased intangible assets totaled approximately 05 million purchase price allocation related meetu acquisition final december 31 2002 except resolution certain earnout contingency payments would result increase total consideration paid period earnout achieved corresponding adjustment goodwill summary purchase price allocation outlined follows thousands atlanta signal processors incorporated november 30 2001 company completed acquisition atlanta signal processors incorporated aspi manufacturer voice products installed voice systems market exchange 49 million cash outstanding aspi shares assumption outstanding options exercisable 30687 shares polycom common stock aggregate value 09 million plus acquisition costs approximately 02 million acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date consolidated financial statements include operating results business date acquisition pro forma results operations presented effects acquisition material individual basis amounts allocated inprocess research development determined management considering among factors results independent appraisal using established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development projects estimated net free cash flows generated inprocess research development projects discounted 35 percent relation stage completion technical risks associated achieving technological feasibility reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside companys control change market resulting developed products addition time project complete reasonably possible completed products receive market acceptance company unable produce market product effectively goodwill originating acquisition amortized accordance sfas 142 intangible assets amortized straightline basis periods exceeding three years company recorded unearned stockbased compensation approximately 754000 associated unvested stock options assumed conjunction acquisition amount included component stockholders equity amortized vesting period options consistent guidance stated fin 44 year ended december 31 2002 2001 amortization associated unearned stock based compensation intangible assets associated acquisition totaled approximately 16 million 01 million respectively purchase price allocation related aspi acquisition final december 31 2002 summary final purchase price allocation outlined follows thousands picturetel corporation october 18 2001 company completed acquisition picturetel corporation picturetel leader visual collaboration exchange 01177 shares polycom common stock 311 cash outstanding share picturetel common stock total approximately 66 million shares companys common stock net 363557 treasury shares obtained acquisition approximately 183 million cash exchanged outstanding shares picturetels common stock primary reason acquisition factors contributed recognition goodwill polycom expects better equipped financial technological operational marketing resources capabilities necessary compete communications market addition polycom expects expand product service offerings reducing costs economies scale addition company assumed outstanding options warrants became exercisable approximately 12 million shares companys common stock acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date since october 18 2001 results operations picturetel included companys condensed consolidated statements operations accompanying consolidated financial statements reflect purchase price approximately 413 million consisting cash polycom common stock valued using average fair value polycoms outstanding common stock may 22 2001 may 29 2001 five trading days surrounding date acquisition agreement announced fair value options warrant assumed polycom acquisition costs directly related acquisition follows thousands purposes computing estimated fair value options warrants assumed blackscholes pricing model used following assumptions fair value polycoms stock 2774 expected life 55 years riskfree rate 55 expected dividend yield 0 volatility 90 purchase price allocation related picturetel acquisition final september 30 2002 except resolution certain tax related preacquisition contingencies would result adjustment goodwill period contingency resolved following summary final allocation purchase price thousands amount allocated inprocess research development intangible assets determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development estimated net free cash flows generated inprocess research development projects discounted rates ranging 30 40 percent relation stage completion technical risks associated achieving technological feasibility reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside companys control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product effectively goodwill originating acquisition picturetel amortized accordance guidance contained statement financial accounting standard 142 sfas 142 goodwill intangible assets none goodwill expected deductible tax purposes intangible assets amortized estimated useful lives three years ended december 31 2002 2001 amortization associated acquisition totaled approximately 143 million 29 million respectively following unaudited pro forma financial information presented reflect results operations three years ended december 31 2002 acquisition occurred january 1 2000 pro forma results exclude purchased inprocess research development impairment licenses arising acquisition picturetel 55 million due nonrecurring nature pro forma financial information includes nonrecurring items incurred picturetel follows 145 million nonrecurring charges incurred 2001 153 million nonrecurring gains 423 million non recurring charges 2000 pro forma results prepared comparative purposes purport indicative operating results would acquisition actually taken place january 1 2000 may indicative future operating results unaudited thousands except per share amounts circa communications ltd april 2 2001 company completed acquisition privatelyheld development stage circa communications ltd circa leading developer voice internet protocol voip telephony products exchange right 665884 shares common stock assumption outstanding options exercisable 248597 shares polycom common stock aggregate value 98 million 40 million cash preferred stock plus acquisition costs approximately 08 million additional 421555 shares polycom common stock issuable upon successful completion certain revenue based earnout thresholds expire 2010 acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date 2002 right exchange 375792 shares common stock exercised leaving balance 290092 still exchanged since april 2 2001 results operations circa included companys consolidated statements income company recorded unearned stockbased compensation approximately 780000 associated unvested stock options assumed employees conjunction acquisition amount included component stockholders equity amortized vesting period options purchase price allocation related circa acquisition final except resolution certain earnout contingency payments would result increase total consideration paid period earnout achieved corresponding adjustment goodwill following summary allocation purchase price acquisition circa thousands amount allocated purchased inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development projects estimated net free cash flows generated inprocess research development projects discounted 30 percent relation stage completion technical risks associated achieving technological feasibility reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside companys control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product effectively goodwill acquired intangible assets primarily representing existing partnerships acquired workforce amortized estimated useful lives three years year ended december 31 2002 2001 amortization goodwill unearned stockbased compensation intangible assets associated acquisition totaled approximately 12 million 32 million respectively following unaudited pro forma financial information reflects results operations three years ended december 31 2002 acquisition occurred january 1 2000 pro forma results prepared comparative purposes purport indicative operating results would acquisition actually taken place january 1 2000 may indicative future operating results unaudited thousands except per share amounts accord networks ltd february 28 2001 company completed acquisition accord networks ltd accord leading provider nextgeneration richmedia network products enable internet protocol ip network voice video communications customer premises service provider markets terms merger polycom exchanged approximately 65 million shares common stock outstanding accord shares assumed accord options exercisable approximately 13 million shares polycoms common stock exchange assumption rate 03065 polycom shares accord share transaction treated pooling interests financial reporting purposes consequently companys historical consolidated financial statements restated combined entity existed periods presented intercompany transactions two companies eliminated consolidation company accord fiscal year ends december 31 adjustments required conform accounting policies two companies primarily associated classification expenses insignificant following table reconciles companys original revenues earnings combined thousands except per share data 4 goodwill purchased intangibles following table presents details companys goodwill thousands unamortized balance acquired workforce totaling 05 million recorded part purchase price allocation circa acquisition reclassified purchased intangibles goodwill meet criteria outlined sfas 142 recorded separately goodwill fair value adjustments assets acquired liabilities assumed year ended december 31 2002 resulted primarily revisions net cost estimates associated elimination redundant facilities resolution certain preacquisition contingencies changes estimates fair value certain picturetel assets recorded initial purchase price allocation within allocation period company finalized purchase price allocation picturetel acquisition resulting net increase goodwill approximately 13 million adjustments goodwill resulted primarily increase facility closings liability approximately 150 million partially offset 79 million increase deferred tax assets 35 million net decrease acquisition related liabilities 23 million increase fair value certain acquired assets fourth quarter 2002 company incurred actual costs lower estimates made final allocation recorded investment equity securities publicly traded company acquired picturetel acquisition initially valued zero held escrow securities released escrow fourth quarter appropriately valued adjustments resulted goodwill decrease 11 million see note 5 notes consolidated financial statements regarding increase facility closings liability following table presents details companys total purchased intangible assets december 31 2002 thousands upon adoption sfas 142 company determined purchased trade name intangible indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances june 2002 completed transitional goodwill purchased intangibles impairment tests outlined sfas 142 required assessment goodwill purchased intangibles impairment january 1 2002 october 2002 completed annual impairment tests conducted determining comparing fair value reporting units defined sfas 142 reporting units carrying value date based results impairment tests determined goodwill assets purchased intangible assets impaired january 1 2002 plan conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner estimated future amortization expense purchased intangible assets december 31 2002 follows thousands accordance transitional disclosures outlined sfas 142 following tables reconcile summarize reported results years ended december 31 2002 2001 2000 adjusted exclude amortization goodwill trade name assembled workforce intangible assets nonamortization requirements sfas 142 applied beginning period presented thousands except per share amounts 5 acquisitionrelated costs liabilities year ended december 31 2002 company recorded charge operations 37 million acquisitionrelated integration costs primarily related picturetel acquisition charges include outside financial advisory legal accounting services year ended december 31 2001 company recorded charge operations 241 million related picturetel accord circa acquisitions year ended december 31 2000 company recorded charge operations 48 million acquisitionrelated costs related acquisition accord charges include cost actions designed improve companys combined competitiveness productivity future profitability primarily relate elimination redundant excess facilities workforce companys combined businesses elimination redundant assets following table summarizes status companys acquisitionrelated liabilities restructuring integration costs thousands company approximately 320 million 239 million december 31 2002 december 31 2001 respectively acquisitionrelated reserves classified longterm liabilities approximately 75 million 145 million december 31 2002 december 31 2001 respectively acquisitionrelated reserves classified current liabilities facility closings facility closings liability primarily related estimated lease termination costs net present value minimum lease payments vacated redundant facilities company intends sublease negotiate lease termination settlement company netted estimated sublease cash receipts lease obligations determine minimum lease payments facilities intends sublease longest lease term facilities identified sublease arrangement extends 2014 company also assumed liabilities related facility closings totaling 241 million acquisitions picturetel aspi meetu 2002 company finalized purchase price allocation related picturetel acquisition resulted additional accrual facility closings liability approximately 150 million adjustment resulted final clarifications related terms company could sublease certain redundant facilities changes estimates operating costs related facilities severance related benefits severance related benefits liability workforce reductions initiated 2002 2001 additionally company assumed liabilities related severance totaling 144 million acquisitions picturetel aspi meetu workforce reductions substantially complete december 31 2002 severance payments made end 2004 asset impairments writeoffs exit costs merger fees asset impairments amount 67 million asset writeoffs amount 08 million principally related elimination redundant excess equipment exit costs amount 03 million related payment obligations carried future benefit companys combined operations completed december 31 2002 mergerrelated transaction period expenses years ended december 31 2002 2001 2000 37 million 126 million 48 million respectively principally consisted financial advisory accounting legal consulting fees direct mergerrelated expenses incurred period 6 restructure costs 2002 companys management approved restructuring actions response continued global economic downturn improve companys overall cost structure prioritizing resources strategic areas business reducing operating expenses company recorded restructuring charge 17 million 2002 result actions charge consisted severance employee termination benefits related workforce reduction approximately six percent companys employees worldwide december 31 2002 company paid approximately 12 million 17 million charge remaining amount paid fiscal 2003 7 investments december 31 2002 2001 comprise thousands shortterm investments december 31 2002 2001 mature within one year longterm investments excluding equities mature within two years 2002 2001 company recorded net realized gains 43000 391000 respectively disposal investments 2000 realized gains losses disposal investments company used specific identification method determining cost basis resulting realized gain loss transactions included investments december 31 2002 2001 approximately 04 million 97 million respectively investments equity securities publicly traded companies marked market original 16 86 million investment value respectively 8 inventories consist following thousands 9 property equipment net property equipment net consist following thousands 10 accrued liabilities accrued liabilities consist following thousands inventory purchase commitment picturetel liability company assumed part acquisition entity october 2001 represents commitment purchase inventory volumes manufactured thirdparty vendor excess company estimates sell 11 business risks credit concentration company sells limited number products services serve communications equipment market substantial majority companys net revenues derived sales viewstation soundstation ipower network systems related services factor adversely affecting demand supply products services could materially adversely affect companys business financial performance currently company subcontracts manufacturing video voice products one subcontractor asia company believes number alternative contract manufacturers could produce products event reduction interruption supply could take significant period time qualify alternative subcontractor commence manufacturing effect reduction interruption supply results operations would material certain key components used products currently available one source others available limited number sources companys network systems products manufactured israel currently experiencing internal external conflicts include terrorist acts military action also war iraq middle eastern countries perceived threat united states government could cause us experience manufacturing disruption due acts associated conflicts could harm business addition certain technology used network system products developed grants office chief scientist israel israeli law prohibited transfer technology developed pursuant grants person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer technology third parties manufacture products outside israel may adversely affect companys operating results significantly reduce value technology developed grants companys cash equivalents investments maintained limited number international investment management companies commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations companys customers maintains allowance potential credit losses expansion polycoms product offerings may increase companys credit risk customers place larger orders new products assurance companys credit loss experience remain near historic levels december 31 2002 2001 single customer accounted 10 accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect companys consolidated results operations financial position cash flows 12 commitments contingencies litigation time company involved various legal proceedings arising normal course business activities addition time third parties assert patent trademark infringement claims company form letters forms communication believe legal proceedings claims likely material adverse effect consolidated results operations financial condition cash flows september 23 2002 suit captioned collaboration properties inc v polycom inc filed united states court northern district california complaint alleges polycoms viewstation viavideo ipower weboffice path navigator products infringe 4 us patents owned plaintiff complaint seeks unspecified compensatory exemplary damages past present infringement permanently enjoin polycom infringing patents future november 14 2002 company filed answer asserting among things infringement plaintiffs patents invalid unenforceable company believes meritorious defenses counterclaims intends vigorously defend action september 3 1997 vtel corporation vtel filed lawsuit state district court travis county texas viavideo communications inc founders formerly employed vtel may 27 1998 following acquisition viavideo vtel amended suit add polycom defendant lawsuit vtel alleged breach contract breach confidential relationship disclosure proprietary information related allegations viavideo founders polycom answered suit denying entirety vtels allegations march 3 2000 vtel voluntarily dismissed allegations polycom viavideo prejudice consideration onetime item first quarter 2000 excess accrual associated expenses company estimated incurred connection lawsuit totaling 18 million released since material expenses incurred november 20 1998 patent infringement claim filed accords us subsidiary accord networks inc united states district court district massachusetts alleging us subsidiary willfully deliberately infringing one ezenias patents complaint later amended allege us subsidiary also willfully deliberately infringing patents june 10 1999 accord added defendant lawsuit june 16 2000 accord us subsidiary entered written settlement agreement court entered order dismissing case lawsuit settlement cost 65 million final payment made december 28 2000 represents onetime charge resulting settlement reported litigation settlement consolidated statement operations june 2000 standby letters credit company several standby letters credit totaling approximately 791000 issued guarantee certain companys foreign office lease obligations contractual obligations license agreements march 3 2000 company entered patent licensing agreement vtel corporation vtel provided fullypaid royaltyfree license three patents related various videoconferencing technologies exchange licenses company paid vtel approximately 83 million sublicensed vtel royaltybearing patent videoconferencing technology royalty sublicense payable patent holder polycom amortization license computed using straightline method economic life license five years october 19 2001 company recorded charge 55 million related impairment vtel license management determined technology used picturetel superior obtained polycom vtel license picturetel technology would used polycoms products research development would better protect companys intellectual property charge included acquisitionrelated costs consolidated statement operations company also enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2003 2014 december 31 2002 following future minimum lease payments net sublease income due current lease obligations company approximately 152000 square foot building fully subleased third party sublease runs concurrent companys lease obligation result company currently showing lease obligation related facility addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases subject cancellation within twelve months december 31 2002 thousands company currently headquartered approximately 50000 square foot facility pleasanton california pursuant lease expires may 2012 facility accommodates executive administrative operations former headquarters milpitas california continues house research development manufacturing marketing sales customer support operations primarily voice business facility approximately 102000 square feet leased january 2007 majority companys video service operations located approximately 321000 square feet andover massachusetts pursuant lease expires september 2014 approximately 64000 square feet austin texas pursuant lease expires december 2004 network systems operations occupy approximately 40000 square feet petach tikva israel 32000 square feet atlanta georgia also shared installed voice business addition company leased space goleta california january 2003 network access products engineering manufacturing marketing organizations company leases space north vancouver canada voip development operation burlington massachusetts advanced voice development operations company leases approximately 55000 square foot facility tracy california used north american latin american distribution center company utilizes space manufacturing contractor thailand companys european distribution contractor united kingdom netherlands provide asian european distribution repair centers respectively included noncancelable operating leases assumed part acquisition picturetel company identified vacated redundant picturetel leased facilities company intends terminate sublease recognized liability assumed purchase combination liability valued estimated net present value lease commitments estimated net present value cost terminating leases net estimated sublease rent 365 million 47 million classified current liability 318 million classified long term liability rent expense years ended december 31 2002 2001 2000 146 million 83 million 63 million respectively grants december 2000 accord repaid outstanding grants office chief scientist israeli ministry industry trade accordingly amount approximately 55 million recorded expense consolidated statement operations 2000 previously accord obligated pay royalties office chief scientist proceeds sales systems resulting three research development projects office chief scientist helped fund grants accord following progressive royalty rates 3 annual system sales first three years system sales accord 4 next three years system sales 5 systems sales thereafter 100 aggregate amount grants received accord time funding received successful development related projects assured december 2000 accord repaid outstanding grants israelunited states binational industrial research development foundation bird accordingly amount approximately 04 million recorded expense consolidated statement operations 2000 accord obligated pay royalties bird proceeds sale leasing marketing commercial exploitation results research development bird helped fund grants accord royalties amount 150 aggregate amount grant paid rate 5 related products sales aggregate amount grant amount grant repaid royalties would payable rate 25 related products sales additional royalties amount 1650 aggregate grant amount paid bird royalty expenses related mentioned commitments year ended december 31 2000 approximately 16 million royalty expenses 2002 2001 13 credit arrangements company available 25 million revolving line credit bank agreement dated november 15 2001 borrowings line unsecured bear interest banks prime rate 425 december 31 2002 london interbank offered rate libor plus 065 approximately 206 207 depending term borrowings december 31 2002 borrowings line subject certain financial covenants restrictions liquidity indebtedness financial guarantees business combinations profitability levels related items line credit expires december 3 2003 balances outstanding line credit company compliance applicable financial covenants restrictions periods presented 14 mandatorily redeemable convertible preferred stock june 28 2000 accord converted 3693761 mandatorily redeemable convertible preferred shares common stock 15 stockholders equity public stock offering february 2002 company completed public offering sold 8050000 shares common stock including overallotment option 1050000 shares exercised underwriters price 3120 per share net proceeds company approximately 2375 million underwriting discounts commissions expenses company intends use net proceeds sale primarily general corporate purposes including working capital expenditures well acquisitions complementary businesses technologies august 2000 company completed public offering 5608976 shares common stock price 45438 per share shares sold approximately 35 million shares sold company net proceeds approximately 1483 million balance shares sold selling stockholder july 2000 accord completed initial public offering 1762376 shares common stock offering price 3589 per share shares sold 1732665 sold accord net proceeds approximately 549 million 29731 shares sold selling stockholders stock split august 2 2000 company announced board directors approved twoforone split companys common stock split effected stock dividend august 31 2000 payable stockholders record august 15 2000 references share per share amounts periods presented adjusted give effect stock split common stock december 31 2002 2001 2861 zero shares respectively common stock outstanding subject repurchase treasury stock result acquisition picturetel company acquired 363557 shares treasury stock aggregate value 112 million based market value companys common stock date acquisition 2002 shares retired reclassified authorized unissued share repurchase program june 2002 board directors approved plan repurchase 35 million shares companys common stock open market privately negotiated transactions december 31 2002 company repurchased approximately 1483000 shares cash 159 million open market 2002 company retired reclassified shares common stock authorized unissued stock option exchange program may 21 2001 company commenced voluntary stock option exchange program certain eligible employees consultants company program eligible employees consultants given option cancel outstanding stock option previously granted exercise price greater equal 2355 per share exchange new option buy 085 shares companys common stock granted december 26 2001 six months one day june 25 2001 date old options canceled total 11 million stock options canceled result program approximately 827000 stock options granted exchange program result additional compensation charges variable option plan accounting stock option plan 2001 board directors reserved 750000 shares common stock 2001 nonstatutory stock option plan nonstatutory plan issuance nonqualified stock options employees acquired companies foreignbased employees ineligible incentive stock options 1996 board directors reserved 6250000 shares common stock 1996 stock option plan issuance employees directors company additional 15000000 shares reserved approved stockholders plan supersedes 1991 stock option plan 91 plan viavideo plan assumed polycom january 2 1998 pursuant agreement plan reorganization among polycom venice acquisition corporation viavideo communications inc dated june 11 1997 amended september 2 1997 remaining option shares available grant subsequent cancellations option shares viavideo plan expired expire additional option shares granted viavideo plan subsequent merger atlas plan assumed polycom december 1 1999 pursuant agreement plan reorganization among polycom periscope acquisition corporation atlas communication engines inc dated november 18 1999 remaining option shares available grant subsequent cancellations option shares atlas plan expired expire additional option shares granted atlas plan subsequent merger 1995 accord reserved 5087 shares common stock 1995 accord networks ltd stock ownership option plan dated march 29 1995 issuance employees accord networks ltd additional 1250867 shares reserved year 2000 accord networks ltd 2000 share option plan accord networks ltd share ownership option plan 2000 accord networks ltd 2000 nonemployee directors option plan created initial reserves 229875 shares 229875 shares 61300 shares respectively accord networks ltd plans assumed polycom february 28 2001 pursuant agreement plan merger reorganization dated december 5 2000 amended remaining option shares available grant subsequent cancellations option shares accord networks ltd plans expired expire additional option shares granted accord networks ltd plans subsequent merger addition company assumed outstanding options upon acquisitions atlanta signal processors inc aspi plan picturetel corporation acquisition plan circa communications ltd circa plan fiscal 2001 total approximately 20 million shares companys common stock reserved issuance assumed plans related options included following table shares reserved issuance assumed plans 2002 terms plan 91 plan nonstatutory plan viavideo plan atlas plan accord plans circa plan options may granted prices lower fair market value date grant determined board directors options granted 91 plan aspi plan viavideo plan circa plan immediately exercisable expire ten years date grant unvested shares issued upon exercise options generally subject right repurchase company upon termination employment company options granted plan nonstatutory plan acquisition plan atlas plan accord plans circa plan expire ten years date grant generally exercisable upon vesting options granted plan prior december 1998 91 plan normally vest 20 completing one year service company remaining amount equally 48 months fully vested five years options granted viavideo plan normally vest monthly month service company fully vested four years options granted atlas plan normally vest 33 completing one year service company remaining amount equal quarterly installments next eight quarters fully vested three years options granted acquisition plan accord plans circa plan normally vest 25 completing one year service company remaining amount equal quarterly installments next twelve quarters fully vested four years options granted nonstatutory plan vest based conditions set forth plan administrator new options granted plan beginning december 1998 options normally vest 25 completing one year service company remaining amount equally 36 months fully vested four years addition special grant employees option grants become fully vested one year service company made plan atlas plan many option grants vesting schedules different described generally vesting options consistent within plans activity plans follows thousands except share per share data december 31 2002 2001 2000 6626657 4224324 2725647 outstanding options exercisable aggregate average exercise price 2339 2132 807 respectively options exercisable zero 109083 december 31 2002 2001 2000 respectively unvested shares received exercise would subject repurchase options outstanding currently exercisable exercise price december 31 2002 follows weighted average fair value options granted pursuant plans 752 1444 2336 2002 2001 2000 respectively fair value option grant estimated date grant using multiple options approach blackscholes option pricing model following weighted average assumptions company also estimated fair value purchase rights issued employee stock purchase plan rights plan also evaluated using blackscholes optionpricing model purchase periods occur twice yearly effectively contains 6month option weighted average fair value purchase rights granted pursuant employee stock purchase plan 2002 2001 2000 1473 1747 573 respectively fair value purchase right estimated blackscholes option pricing model following weighted average assumptions unearned stockbased compensation connection acquisitions circa aspi company recorded unearned stockbased compensation costs unvested stock options assumed company totaling 15 million recognized vesting period options connection certain stock option grants 1999 company recorded unearned stockbased compensation cost totaling 24 million recognized vesting period related options three years amortization expense associated unearned stock compensation totaled 544000 557000 845000 2002 2001 2000 respectively approximately 127000 343000 498000 unearned stock based compensation reversed 2002 2001 2000 respectively upon cancellation unvested stock option grants resulting termination certain employees warrants march 1996 1998 accord issued warrants purchase 178906 369402 shares series b preferred stock respectively total consideration 5000 several shareholders exercise price 731 per share accord issued 18130 160776 shares series b preferred stock december 1999 january 2000 respectively upon exercise warrants third quarter 2000 accord issued 294175 shares common stock upon cashless exercise warrant april 28 1999 accord granted warrant bank connection twoyear credit line warrant exercisable period three years purchase 42009 shares common stock exercise price 1191 per share december 2000 bank exercised warrant 30658 shares common stock december 31 2001 company significant warrants outstanding preferred share rights purchase plan july 1998 board directors approved preferred shares rights agreement board amended march 2001 rights agreement rights agreement intended protect stockholders rights event unsolicited takeover attempt interfere transaction approved board directors upon becoming exercisable right entitles stockholders buy 11000 share series preferred stock company exercise price 40000 subject adjustment rights exercisable person group acquiring person acquires announces tender exchange offer acquire 20 companys common stock event acquiring person acquires 20 companys common stock triggering event right held acquiring person entitle holder purchase exercise price number shares common stock market value equal two times exercise price addition event following triggering event company acquired merger sells 50 assets right held acquiring person entitle holder purchase exercise price number shares common stock acquiring company market value equal two times exercise price rights redeemable companys option price 0005 per right company may also exchange rights shares common stock certain circumstances rights expire earlier july 15 2008 date redemption exchange 16 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions 20 compensation subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan beginning fiscal year 2000 company matched cash 50 first 3 compensation employees contribute polycom 401k plan maximum 500 per participating employee per year fiscal year 2001 2002 maximum company cash match increased 1000 1500 respectively per participating employee per year company also 401k plan arose acquisition accord 401k plan covers substantially accord employees united states eligible employee may elect contribute accord 401k plan payroll deductions 15 compensation subject current statutory limitations company discretion board directors may make matching contributions accord 401k plan done 2000 connection acquisition accord 401k plan terminated 2001 beginning april 2 2001 eligible former accord employees may elect participate polycom 401k plan company also defined contribution profit sharing plan incorporating features section 401k internal revenue code arose acquisition picturetel plan covered substantially picturetel employees connection acquisition picturetel plan terminated 2001 beginning january 1 2002 eligible former picturetel employees may elect participate polycom 401k plan companys contributions polycom 401k plan accord 401k plan totaled approximately 956000 433000 183000 fiscal 2002 2001 2000 respectively employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees offering periods maximum 24 months purchase dates approximately every six months january july company reserved 2500000 shares common stock issuance plan shares purchased employees payroll deductions maximum 15 employees compensation purchase prices equal 85 lesser fair market value companys common stock either date employees entrance offering period purchase date participant may purchase 3000 shares 25000 worth common stock one calendar year 2002 2001 2000 283858 170250 223094 shares purchased average per share prices 1431 2274 1090 respectively december 31 2002 1203086 shares available granted plan benefit plans israeli labor laws agreements company required pay severance pay upon dismissal employee companys israeli subsidiaries upon termination employment specified circumstances companys severance pay employees israel based upon length service latest monthly salary one months salary year worked mainly covered purchased managerial insurance policies value policies recorded asset consolidated balance sheets net amount severance pay charged income totaled approximately 1124000 977000 739000 2002 2001 2000 respectively december 31 2002 2001 severance pay funded included assets approximately 1743000 1183000 respectively accrued severance pay included longterm liabilities approximately 3078000 2035000 respectively company also contributing funds behalf israeli employees individual insurance policy provides combination savings plan insurance severance pay benefits insured employee provides payments employee upon retirement death secures substantial portion severance pay employee legally entitled upon termination employment participating employee contributes amount equal 50 employees base salary employer contributes 133 158 employees base salary companys fulltime israeli employees participate benefit package net amount insurance expense charged income totaled approximately 383000 361000 297000 2002 2001 2000 respectively company also provides employees education fund participating employee contributes amount equal 25 employees base salary employer contributes amount equal 75 employees base salary education fund expenses charged income totaled approximately 439000 402000 312000 2002 2001 2000 respectively 17 income taxes income tax expense consists following thousands sources income loss provision income taxes follows thousands companys tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets presented thousands december 31 2002 company tax net operating loss carryforwards tax credit carryovers capital loss carryovers approximately 610 million 131 million 38 million respectively net operating loss carryforwards tax credit carryforwards capital loss carryforwards begin expire 2013 2007 respectively portion future utilization companys carryforwards subject certain limitations due change ownership occurred 1998 2001 deferred tax assets approximately 261 million december 31 2002 pertain certain net operating loss carryforwards credit carryforwards resulting exercise employee stock options company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2002 cumulative amount earnings upon us income tax provided approximately 674 million tax benefits 18 million 2002 125 million 2001 associated exercise employee stock plans added stockholders equity company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions several years following first year company israeli taxable income consideration tax losses carried forward company date realized tax savings approximately 37 million reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 failure comply conditions may result cancellation benefits whole part 18 business segment information polycom leading global provider line highquality easytouse communications equipment enables enterprise users effectively conduct video voice data web communications polycoms offerings organized along five product lines video communications voice communications network systems network access products services reporting purposes company aggregates video communications voice communications one segment named communications reports network systems network access separate segments services allocated amongst communications network systems meet disclosure thresholds separate segment reporting segments determined accordance management views evaluates polycoms business based aggregation criteria outlined sfas131 segment financial data years ended december 31 2001 2000 adjusted reflect segments description types products services provided reportable segment follows communications segment communications products include videoconferencing collaboration products network management software facilitate highquality video communications desktop conference analog digital ip voice communications products enhance business communication wide range service support offerings resellers directly enduser customers communication service offerings include integration services consisting consulting education design project management services consulting services consisting planning needs analysis endusers design services room design custom solutions providing customized videoconferencing solutions meet endusers unique requirements project management installation training provide endusers effective implementation videoconferencing systems network systems segment network systems products provide broad range video voice data conferencing collaboration capabilities businesses telecommunications service providers governmental educational institutions recently introduced mgc25 existing mgc50 mgc100 media servers provide seamless network connectivity across packetbased broadband networks traditional circuitswitched networks video voice multipoint conferencing advanced transcoding capabilities mgc systems enable reliable optimal communication among endpoints different video voice data parameters bandwidth capabilities addition mgc products combine fully featured voice conferencing fully featured video conferencing platform supported common management system gw25 gw45 gateways move translate traffic effectively securely one network type another also include checkmark registered firewall capability secure video communications across ip networks line network systems products also includes pathnavigator call processing server weboffice webconferencing software application pathnavigator offers powerful network management capabilities simplify use enterprise video throughout converged network ensures reliability security effectively manages network bandwidth weboffice provides webbased virtual office enabling users conduct online meetings share documents applications desktops secure interactive environment adhoc scheduled basis weboffice users also conduct instant message sessions colleagues launch voice video conferencing weboffice browser assist enduser customers implementing managing network systems products offer portfolio additional professional maintenance services ongoing support enduser customers network systems provide premium warranty plans maintenance services including telephone support parts exchange onsite assistance direct access support engineers realtime troubleshooting products services sold directly enduser customers resellers network access segment network access products consisted netengine family integrated access devices iads routers enabled enterprise customers access broadband vob services company sold segment verilink corporation january 2003 see note 20 notes consolidated financial statements three reportable segments disclosed consolidated financial statements based polycoms organization structure aggregation criteria defined sfas 131 future changes organizational structure business may result changes reportable segments disclosed segment revenue profit accounting policies used derive reportable segments described note 1 consolidated financial statements significant portion segments expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include sales marketing information technology services facilities infrastructure costs segment data results reportable segments derived directly polycoms management reporting system results based polycoms method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin asset data exception inventory reviewed management segment level products services within respective segments generally considered similar nature therefore separate disclosure similar classes products services segment level presented financial information reportable segment follows fiscal years ended december 31 2002 2001 2000 thousands segment contribution margin includes product line segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs sales marketing expenses infrastructure costs facilities costs contribution margin used part evaluate performance allocate resources segments certain operating expenses separately managed corporate level allocated segments unallocated costs include general administrative costs legal accounting acquisitionrelated costs charges inprocess research development amortization purchased intangible assets goodwill restructure costs grant repayments litigation settlement litigation reserve release interest income net loss strategic investments income expense net provision income taxes reconciliation segment information polycom consolidated totals follows thousands companys net revenues substantially denominated us dollars summarized follows thousands percentage total net revenues video communications voice communications network systems network access products ipowerrelated service follows customer accounted 10 companys net revenues 2002 2001 2000 companys fixed assets net accumulated depreciation located following geographical areas thousands 19 net income loss per share disclosures accordance disclosure requirements sfas 128 reconciliation numerator denominator basic diluted eps provided follows thousands except per share amounts 2001 options purchase 2998580 shares common stock weighted average basis included computation diluted net loss per share effect would antidilutive 2002 2001 2000 10949063 4635424 864887 options respectively weighted average basis excluded computation earnings per share since option exercise price greater average market price common shares period 20 subsequent event unaudited january 2003 company sold verilink corporation verilink certain fixed assets intellectual property rights relating polycoms network access product line including polycoms line netengine integrated devices total 30 million cash 10 million paid polycom closing ii 025 million paid polycom first anniversary closing iii 175 million paid polycom quarterly based ten percent verilinks revenues related sale netengine products concurrent closing certain employees joined verilink also agreed purchase polycoms existing netenginerelated inventories book value approximately 19 million closing date needed basis additionally connection sale polycom entered license agreement verilink pursuant verilink granted polycom license use develop network access technology related netengine product line company agreed compete verilink network access market period three years polycom inc supplementary financial data unaudited thousands except per share amounts historical financial information restated reflect acquisitions accounted pooling interests s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands aadditions allowance doubtful accounts 30 million include amounts acquired picturetel aspi acquisitions see note 3 notes consolidated financial statements s2 index exhibits exhibit description 21 agreement plan merger reorganization dated december 5 2000 among registrant merger sub ltd accord networks ltd incorporated herein reference exhibit 21 form 8k filed registrant securities exchange commission december 12 2000 22 agreement plan merger dated may 24 2001 among registrant pharaoh acquisition corp picturetel corporation incorporated herein reference exhibit 21 registrants registration statement form s4 registration 33363252 filed commission june 18 2001 23 addendum agreement plan merger dated may 24 2001 among registrant pharaoh acquisition corp picturetel corporation incorporated herein reference exhibit 12d4 amendment 6 schedule filed commission october 3 2001 24 asset purchase agreement dated january 28 2003 polycom inc verilink corporation incorporated herein reference exhibit 21 form 8k filed commission february 12 2002 311 restated certificate incorporation polycom inc 32 amended restated bylaws polycom inc incorporated herein reference exhibit 32 registrants annual report form 10k filed commission march 12 2001 41 reference made exhibits 31 32 42 specimen common stock certificate incorporated herein reference exhibit 42 registrants registration statement form s1 registration 33302296 filed commission march 12 1996 s1 43 amended restated investor rights agreement dated may 17 1995 among registrant investors named therein incorporated herein reference exhibit 43 registrants 1996 s1 44 preferred shares rights agreement dated july 15 1998 amended march 2 2001 polycom inc fleet bank na fka bankboston na including certificate designation form rights certificate summary rights attached thereto exhibits b c respectively incorporated herein reference exhibit 1 registrants form 8aa filed commission march 2 2001 101 form indemnification agreement entered registrant directors officers incorporated herein reference exhibit 101 registrants 1996 s1 1021 registrants 1996 stock incentive plan amended forms agreements thereunder 103 registrants 1996 employee stock purchase plan forms agreements thereunder incorporated herein reference exhibit 104 registrants 1996 s1 104 viavideo communications inc 1996 stock optionstock issuance plan related agreements incorporated herein reference exhibit 42 registrants registration statement form s8 registration 33345351 105 lease agreement registrant trinet essential facilities xxvi dated december 1 1999 regarding space located 1565 barber lane milpitas california incorporated herein reference exhibit 1018 registrants annual report form 10k filed commission march 29 2000 106 lease agreement registrant wjt llc dated february 19 2001 regarding space located 4750 willow road pleasanton california incorporated herein reference exhibit 1015 registrants annual report form 10k filed commission march 12 2001 107 accord networks ltd 1995 employee share ownership option plan form agreement thereunder incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 108 accord networks ltd share ownership option plan 2000 form agreement thereunder incorporated herein reference exhibit 42 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 109 accord networks ltd 2000 share option plan form agreement thereunder incorporated herein reference exhibit 43 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 1010 accord networks ltd 2000 nonemployee director stock option plan form agreement thereunder incorporated herein reference exhibit 44 registrants registration statement form s8 registration 33357778 filed commission march 28 2001 1011 circa communications ltd stock option plan related agreements incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33359820 filed commission april 30 2001 1012 form change control severance agreement chief executive officer chief financial officer registrant effective march 28 2001 incorporated herein reference exhibit 101 registrants quarterly report form 10q filed commission may 16 2001 1013 form change control severance agreement management registrant chief executive officer chief financial officer effective march 28 2001 incorporated herein reference exhibit 102 registrants quarterly report form 10q filed commission may 16 2001 1014 amendment 1 lease registrant wjt llc dated october 5 2001 regarding space located 4750 willow road pleasanton california incorporated reference exhibit 1014 registrants annual report form 10k filed commission march 1 2002 1015 picturetel corporation 1998 acquisition stock option plan form nonstatutory stock option incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33372544 filed commission october 31 2001 1016 polycom inc 2001 nonstatutory stock option plan form agreement thereunder incorporated herein reference exhibit 101 registrants quarterly report form 10q filed commission november 13 2001 1017 atlanta signal processors incorporated 1997 incentive stock plan forms stock option grant exercise agreement employee shareholder agreement incorporated herein reference exhibit 41 registrants registration statement form s8 registration 33376312 filed commission january 4 2002 1018 lease agreement picturetel corporation 100 minuteman limited partnership dated october 10 1995 amended regarding space located 100 minuteman rd andover massachusetts incorporated reference exhibit 1018 registrants annual report form 10k filed commission march 1 2002 10191 amended summary rescission arrangement registrant robert c hagerty 2111 subsidiaries registrant 2311 consent independent accountants 2411 power attorney included page 64 annual report form 10k indicates management contract compensatory plan arrangement 1filed herewith special note regarding forwardlooking statements item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common stock related stockholder matters item 6 selected consolidated financial data item 7 managements discussion analysis financial condition results operations factors affecting future operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial ownership management related stockholder matters item 13 certain relationships related transactions item 14 controls procedures part iv item 15 exhibits financial statement schedules reports form 8k signatures power attorney certifications polycom inc index consolidated financial statements report independent accountants polycom inc consolidated balance sheets thousands except share per share data polycom inc consolidated statements operations thousands except per share data polycom inc consolidated statements stockholders equity thousands except share data polycom inc consolidated statements cash flows thousands polycom inc notes consolidated financial statements polycom inc supplementary financial data unaudited thousands except per share amounts financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands index exhibitsitem 15 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2003 2002 three years period ended december 31 2003 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits following exhibits filed part incorporated reference report indicates management contract compensatory plan arrangement 1 filed herewith b reports form 8k october 16 2003 filed current report form 8k item 12 furnish press release reporting results three nine months ended september 30 2003 filed reports form 8k quarter ended december 31 2003 c exhibits see item 15a3 financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city pleasanton state california 9th day march 2004 polycom inc robert c hagerty robert c hagerty chairman board directors chief executive officer president power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint michael r kourey lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 amended report signed following persons capacities dates indicated polycom inc index consolidated financial statements page report independent auditors consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 report independent auditors board directors stockholders polycom inc opinion accompanying consolidated balance sheets related consolidated statements operations stockholders’ equity cash flows present fairly material respects financial position polycom inc subsidiaries “the company” december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america addition opinion financial statement schedule presents fairly material aspects information set forth therein read conjunction related consolidated financial statements financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 4 accompanying consolidated financial statements 2002 company changed method accounting goodwill pricewaterhousecoopers llp san jose california february 23 2004 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 summary significant accounting policies fiscal year september 27 2002 polycom inc “company” changed fiscal year 5253 week fiscal year ending sunday closest december 31 fiscal year ending december 31 accordingly company’s fiscal quarters end last day calendar quarter march 31 june 30 september 30 december 31 change effective beginning fiscal quarter ended september 30 2002 result election year ended december 31 2002 included two additional business days december 30 31 2002 operating activities two additional business days period ended december 31 2002 included statement operations year ended december 31 2002 annual report form 10k year ended december 31 2002 change fiscal year increased revenue 130 million increased basic diluted net income per share approximately five cents per share material impact company’s consolidated financial position cash flows year ended december 31 2001 company used 5253 week fiscal year result period may ended day calendar period however convenience presentation accompanying consolidated financial statements shown ending december 31 applicable period reclassifications certain items prior year’s consolidated financial statements reclassified conform current year’s format principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated consolidated financial statements company prepared give retroactive effect merger accord networks ltd february 28 2001 treated pooling interests financial reporting purposes use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents investments company’s shortterm longterm investments comprised us state municipal government obligations foreign domestic public corporate debt securities also included longterm investments 01 million 04 million investments certain publicly traded equity securities december 31 2003 2002 respectively investments equity securities publicly traded companies recorded fair value unrealized gain loss recorded consolidated statements operations loss strategic investments remaining maturities less one year classified shortterm nearly investments held company’s name limited number major financial institutions december 31 2003 2002 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period exception publicly traded equity securities identified unrealized gains losses recorded separate component cumulative comprehensive income stockholder’s equity investments sold loss considered temporarily declined value charge operations recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net strategic reasons made various investments private companies private company investments carried cost less impairment writedowns recorded “other assets” consolidated balance sheets review investments impairment events changes circumstances indicate impairment may exist make appropriate reductions carrying value necessary 2003 company made investments two private companies totaling 14 million investments private companies made 2002 2003 2002 2001 company determined value certain investments private companies impaired reduced carrying amount 05 million 30 million 31 million respectively company determined certain investments impaired based financial operating performance private companies december 31 2003 investments carried 09 million inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives one seven years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three twelve years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill purchased intangible assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets generally three years goodwill purchased intangible assets determined indefinite useful lives amortized regularly reviewed potential impairment identification measurement goodwill impairment involves estimation fair value reporting units estimates fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities although goodwill impairment recorded date assurances future goodwill impairments occur see note 4 discussion impairment longlived assets longlived assets including identifiable intangible assets held used reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset eventual disposition measurement impairment loss longlived assets management expects hold use based fair value asset longlived assets disposed reported lower carrying amount fair value less costs sell guarantees company provides estimated costs hardware software product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured us warranties generally start delivery date continue one three years depending product purchased software products generally carry 90day warranty date shipment liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures assess adequacy recorded warranty liabilities every quarter make adjustments liability necessary changes warranty obligation included component “other accrued liabilities” consolidated balance sheets period follows thousands changes deferred service revenue consolidated balance sheets period follows thousands cost providing company’s extended warranty programs years ended december 31 2003 2002 26038 27704 respectively indemnifications verilink corporation “verilink” connection sale network access product line verilink company agreed indemnify verilink certain contingent liabilities company believes estimated fair value indemnification material officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity indemnification obligations valid long director officer acted good faith manner person reasonably believed opposed best interests corporation respect criminal action proceeding reasonable cause believe conduct unlawful maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations minimal indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liability environmental obligations revenue recognition company recognizes revenue hardware product sales including freight charges accordance sec staff accounting bulletin 104 “revenue recognition” statement financial accounting standards sfas 48 “revenue recognition right return exists” eitf issue 0021 “revenue arrangements multiple deliverables” company recognizes software revenue accordance aicpa statement position 972 sop 972 “software revenue recognition amended sop 989 modification sop 972 software revenue recognition respect certain transactions” guidelines company recognizes revenue transactions persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable payment reasonably assured company accrues sales returns coop advertising allowances reduction net revenues upon shipment based upon contractual obligations historical experience additionally company recognizes extended service revenue hardware software products life service contract research development expenditures research development expenditures charged operations incurred software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2003 2002 2001 129 million 142 million 117 million respectively income taxes income tax expense based pretax financial accounting income deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled valuation allowances established necessary reduce deferred tax assets amount expected realized translation foreign currencies financial statements company’s foreign subsidiaries operate functional currency us dollar translated us dollars yearend exchange rates monetary assets liabilities nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations foreign exchange contracts company subsidiaries entered foreign currency forward contracts hedge specific intercompany foreign currency receivable transactions forward contracts involve agreements purchase sell foreign currencies specific rates future dates company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties one largest us banks ranked assets order minimize credit risk company’s hedging activities subject company exchange rate risk gains losses contracts designed offset losses gains intercompany foreign currency receivable transactions hedged carrying amount forward contracts fair value determined obtaining quoted market prices gains losses forward contracts recognized reporting period offset gain loss hedged item period underlying transactions settled 2002 company two contracts mature first quarter first matured february 6 2002 second march 6 2002 purchase 769000 925000 respectively british pounds japanese yen new forward contracts entered 2003 2002 contracts outstanding december 31 2003 computation net income loss per share continuing operations basic net income loss per share continuing operations computed dividing net income loss continuing operations weighted average number common shares outstanding period less weighted average shares treasury stock common stock subject repurchase diluted net income loss per share continuing operations reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding conversion preferred stock common stock shares common stock subject repurchase potentially dilutive shares including shares common stock subject repurchase excluded computation fully diluted net income loss per share continuing operations effect antidilutive fair value financial instruments carrying amounts certain company’s financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm longterm investments based quoted market prices similar instruments stockbased compensation accordance sfas 123 sfas 123 “accounting stockbased compensation” company accounts employee stockbased compensation accordance accounting principles board opinion 25 apb 25 “accounting stock issued employees” financial accounting standards board fasb interpretation 44 fin 44 “accounting certain transactions involving stockbased compensation interpretation apb opinion 25” related interpretations accounting stockbased compensation plans stockbased compensation related nonemployees based fair value related stock options accordance sfas 123 interpretations expense associated stockbased compensation amortized vesting period individual award consistent disclosure provisions sfas 123 company’s net income loss basic diluted net income loss per share would adjusted pro forma amounts indicated thousands except per share amounts impact pro forma net income loss per share net income loss table may indicative effect future years options vest several years company continues grant stock options new current employees recent pronouncements april 2002 fasb issued sfas 145 sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” among provisions sfas 145 rescinds sfas 4 sfas 4 “reporting gains losses extinguishment debt” accordingly gains losses extinguishment debt shall reported extraordinary items unless extinguishment qualifies extraordinary item criteria accounting principles board “apb” opinion 30 “reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions” gains losses extinguishment debt meet criteria apb 30 reclassified income continuing operations prior periods presented company adopted sfas 145 effective january 1 2003 adoption effect consolidated results operations financial condition cash flows june 2002 fasb issued sfas 146 sfas 146 “accounting costs associated exit disposal activities” sfas 146 provides guidance related accounting costs associated disposal activities covered sfas 144 exit restructuring activities previously covered eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” sfas 146 supercedes eitf issue 943 entirety sfas 146 requires costs related exiting activity restructuring recognized liability incurred sfas 146 applied prospectively exit disposal activities initiated december 31 2002 adoption sfas 146 material effect company’s consolidated results operations financial condition cash flows november 2002 fasb issued financial interpretation 45 “fin 45” “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 requires liability recorded guarantor’s balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including rollforward entity’s product warranty liabilities company applied recognition provisions fin 45 guarantees issued january 1 2003 company adopted fin 45 disclosure requirements adoption fin 45 material impact company’s consolidated results operations financial condition cash flows november 2002 eitf reached consensus issue 0021 “revenue arrangements multiple deliverables” eitf issue 0021 provides guidance account arrangements involve delivery performance multiple products services andor rights use assets provisions eitf issue 0021 apply revenue arrangements entered fiscal periods beginning june 15 2003 adoption eitf issue 0021 material impact company’s consolidated results operations financial condition cash flows december 2002 fasb issued sfas 148 sfas 148 “accounting stockbased compensation transition disclosure” sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires disclosures pro forma effect using fair value method accounting stockbased employee compensation displayed prominently tabular format additionally sfas 148 requires disclosure pro forma effect interim financial statements company adopted disclosure requirements beginning quarterly report form 10q filed may 18 2003 january 2003 fasb issued financial interpretation 46 “fin 46” “consolidation variable interest entities interpretation arb 51” fin 46 requires certain variable interest entities consolidated primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior february 1 2003 provisions fin 46 originally applied first interim annual period beginning june 15 2003 september 2003 fasb deferred adoption fin 46 variable interest entities acquired prior february 1 2003 end first interim annual period ending december 15 2003 adoption fin 46 effect company’s consolidated results operations financial condition cash flows 2 discontinued operations january 2003 company sold verilink corporation “verilink” certain fixed assets intellectual property rights relating polycom’s network access product line including polycom’s line netengine integrated devices total 30 million cash 10 million paid polycom closing ii 025 million paid polycom first anniversary closing iii 175 million paid polycom quarterly based ten percent verilink’s revenues related sale netengine products concurrent closing certain employees joined verilink also agreed purchase polycom’s existing netenginerelated inventories book value approximately 19 million closing date needed basis december 31 2003 verilink purchased 18 million netenginerelated inventories leaving balance 01 million classified assets held sale included assets consolidated balance sheets year ended december 31 2003 verilink paid 04 million related ten percent verilink’s revenues sale netengine products period additionally connection sale polycom entered license agreement verilink pursuant verilink granted polycom license use develop network access technology related netengine product line company agreed compete verilink network access market period three years closing date january 28 2006 company’s consolidated financial statements reflect network access product line discontinued operations accordance sfas 144 results operations company’s network access product line presented discontinued prior periods reclassified including reallocation general overhead charges company’s two remaining reporting segments company recorded aftertax gain 06 million result transaction year ended december 31 2003 company may record additional quarterly gains related sale product line verilink remits ten percent quarterly revenues sale netengine products subject maximum amount 175 million following table shows results operations company’s network access product line thousands includes operations january 1 2003 january 28 2003 transaction closing date following table shows components gain sale discontinued operations thousands 3 business combinations year ended december 31 2001 company completed acquisitions picturetel corporation “picturetel” leader visual collaboration atlanta signal processors inc “aspi” manufacturer voice products installed voice systems market circa communications ltd “circa” leading developer voice internet protocol voip telephony products accord networks ltd “accord” leading provider nextgeneration richmedia network products enable internet protocol ip network voice video communications customer premises service provider markets year ended december 31 2002 company completed acquisition meetucom inc “meetu” leading developer web collaboration software details acquisitions presented following table summarizes company’s purchase price allocations related purchase business combination transactions time acquisition thousands changes goodwill purchased intangibles fair value net tangible assets unearned stockbased compensation acquisition date december 31 2003 summarized follows thousands meetucom inc june 20 2002 company completed acquisition privately held development stage meetucom inc “meetu” leading developer web collaboration software primary reason acquisition factors contributed recognition goodwill relate meetu’s ability deliver core technology web collaboration arena company expects technology provide synergies meetu’s web collaboration software company’s voice video network systems product lines thereby enabling company deliver complete endtoend collaboration solutions since june 21 2002 results operations meetu included company’s consolidated statements operations pro forma results operations presented effect acquisition material company acquired outstanding capital stock meetu total consideration 27 million consisting 41553 shares polycom common stock aggregate value 06 million 18 million previous cash investments company approximately 30000 cash closing approximately 02 million acquisition costs additional shares polycom common stock issuable upon successful completion five revenue based earnout thresholds prior june 20 2005 company may required issue additional shares company’s common stock time earnout threshold achieved assuming earnout thresholds achieved prior june 20 2005 company would required issue total 35 million 105 million common stock depending upon average closing price company’s common stock thirty days prior achievement earnout threshold additional consideration would increase goodwill total purchase consideration acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date amounts allocated inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects cost approach uses concept replacement cost indicator fair value primary technique utilized valuing inprocess research development cost approach based premise prudent investor would pay asset cost replace asset new one replacement cost based total costs net unrealized income tax deduction benefit spent developing inprocess technology meetu’s inception acquisition date reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside company’s control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product cost effectively accordance statement financial accounting standard 142 sfas 142 “goodwill intangible assets” goodwill originating meetu acquisition amortized purchased intangible assets amortized straightline basis period three years year ended december 31 2003 2002 amortization associated purchased intangible assets totaled approximately 10 million 05 million respectively purchase price allocation related meetu acquisition final december 31 2002 except resolution certain earnout contingency payments would result increase total consideration paid period earnout achieved corresponding adjustment goodwill atlanta signal processors incorporated november 30 2001 company completed acquisition atlanta signal processors incorporated aspi manufacturer voice products installed voice systems market exchange 49 million cash outstanding aspi shares assumption outstanding options exercisable 30687 shares polycom common stock aggregate value 09 million plus acquisition costs approximately 02 million acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date consolidated financial statements include operating results business date acquisition pro forma results operations presented effects acquisition material individual basis amounts allocated inprocess research development determined management considering among factors results independent appraisal using established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development projects estimated net free cash flows generated inprocess research development projects discounted 35 percent relation stage completion technical risks associated achieving technological feasibility reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside company’s control change market resulting developed products addition time project complete reasonably possible completed products receive market acceptance company unable produce market product effectively accordance fas 142 goodwill originating aspi acquisition amortized purchased intangible assets amortized straightline basis periods exceeding three years company recorded unearned stockbased compensation approximately 754000 associated unvested stock options assumed conjunction acquisition amount included component stockholders’ equity amortized vesting period options consistent guidance fin 28 year ended december 31 2003 2002 2001 amortization associated unearned stock based compensation intangible assets associated acquisition totaled approximately 16 million 16 million 01 million respectively purchase price allocation related aspi acquisition final december 31 2002 picturetel corporation october 18 2001 company completed acquisition picturetel corporation picturetel leader visual collaboration exchange 01177 shares polycom common stock 311 cash outstanding share picturetel common stock total approximately 66 million shares company’s common stock net 363557 treasury shares obtained acquisition approximately 183 million cash exchanged outstanding shares picturetel’s common stock primary reason acquisition factors contributed recognition goodwill polycom expects better equipped financial technological operational marketing resources capabilities necessary compete communications market addition polycom expects expand product service offerings reducing costs economies scale connection acquisition company assumed outstanding options warrants became exercisable approximately 12 million shares company’s common stock acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date since october 18 2001 results operations picturetel included company’s consolidated statements operations accompanying consolidated financial statements reflect purchase price approximately 413 million consisting cash polycom common stock valued using average fair value polycom’s outstanding common stock may 22 2001 may 29 2001 five trading days surrounding date acquisition agreement announced fair value options warrants assumed polycom acquisition costs directly related acquisition follows thousands purposes computing estimated fair value options warrants assumed blackscholes pricing model used following assumptions fair value polycom’s stock 2774 expected life 55 years riskfree rate 55 expected dividend yield 0 volatility 90 purchase price allocation related picturetel acquisition final september 30 2002 except resolution certain tax related preacquisition contingencies would result adjustment goodwill period contingency resolved following summary final allocation purchase price thousands amount allocated inprocess research development intangible assets determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development estimated net free cash flows generated inprocess research development projects discounted rates ranging 30 40 percent relation stage completion technical risks associated achieving technological feasibility reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside company’s control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product effectively goodwill originating acquisition picturetel amortized accordance guidance contained sfas 142 none goodwill expected deductible tax purposes intangible assets amortized estimated useful lives three years ended december 31 2003 2002 2001 amortization associated acquisition totaled approximately 143 million 143 million 29 million respectively following unaudited pro forma financial information presented reflect results operations year ended december 31 2001 acquisition occurred january 1 2001 pro forma results exclude purchased inprocess research development impairment licenses arising acquisition picturetel 55 million due nonrecurring nature pro forma financial information includes 145 million nonrecurring charges incurred picturetel 2001 pro forma results prepared comparative purposes purport indicative operating results would acquisition actually taken place january 1 2001 may indicative future operating results unaudited thousands except per share amounts circa communications ltd april 2 2001 company completed acquisition privatelyheld development stage circa communications ltd circa leading developer voice internet protocol voip telephony products exchange right 665884 shares common stock assumption outstanding options exercisable 248597 shares polycom common stock aggregate value 98 million 40 million cash preferred stock plus acquisition costs approximately 08 million additional 421555 shares polycom common stock issuable upon successful completion certain revenue based earnout thresholds expire 2010 acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date 2002 2003 right exchange 375792 50778 shares respectively common stock exercised leaving balance 239309 still exchanged since april 2 2001 results operations circa included company’s consolidated statements income company recorded unearned stockbased compensation approximately 780000 associated unvested employee stock options assumed employees conjunction acquisition amount included component stockholders’ equity amortized vesting period options purchase price allocation related circa acquisition final except resolution certain earnout contingency payments would result increase total consideration paid period earnout achieved corresponding adjustment goodwill amount allocated purchased inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development projects estimated net free cash flows generated inprocess research development projects discounted 30 percent relation stage completion technical risks associated achieving technological feasibility reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside company’s control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product effectively goodwill acquired intangible assets primarily representing existing partnerships amortized estimated useful lives three years ended december 31 2003 2002 2001 amortization goodwill unearned stockbased compensation intangible assets associated acquisition totaled approximately 11 million 12 million 32 million respectively following unaudited pro forma financial information reflects results operations year ended december 31 2001 acquisition occurred january 1 2001 pro forma results prepared comparative purposes purport indicative operating results would acquisition actually taken place january 1 2001 may indicative future operating results unaudited thousands except per share amounts accord networks ltd february 28 2001 company completed acquisition accord networks ltd accord leading provider nextgeneration richmedia network products enable internet protocol ip network voice video communications customer premises service provider markets terms merger polycom exchanged approximately 65 million shares common stock outstanding accord shares assumed accord options exercisable approximately 13 million shares polycom’s common stock exchange assumption rate 03065 polycom shares accord share transaction treated pooling interests financial reporting purposes consequently company’s historical consolidated financial statements restated combined entity existed periods presented intercompany transactions two companies eliminated consolidation company accord fiscal year ends december 31 adjustments required conform accounting policies two companies primarily associated classification expenses insignificant following table reconciles company’s original revenues income loss continuing operations combined thousands except per share data 4 goodwill purchased intangibles following table presents details company’s goodwill segment thousands fair value adjustments assets acquired liabilities assumed year ended december 31 2003 resulted primarily revisions net cost estimates associated elimination redundant facilities resolution certain preacquisition contingencies changes estimates fair value certain picturetel assets recorded initial purchase price allocation see note 5 notes consolidated financial statements regarding reduction facility closings liability following table presents details company’s total purchased intangible assets december 31 2003 thousands upon adoption sfas 142 company determined purchased trade name intangible indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances unamortized balance acquired workforce totaling 05 million recorded part purchase price allocation circa acquisition reclassified purchased intangibles goodwill meet criteria outlined sfas 142 recorded separately goodwill fourth quarter 2003 2002 company completed annual goodwill purchased intangibles impairment tests outlined sfas 142 requires assessment goodwill purchased intangibles impairment annual basis assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date assessment purchased intangibles impairment conducted comparing fair value purchased intangible carrying amount date based results impairment test company determined goodwill assets purchased intangible assets impaired 2003 2002 company plans conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner estimated future amortization expense purchased intangible assets december 31 2003 follows thousands accordance transitional disclosures outlined sfas 142 following tables reconcile summarize reported results year ended december 31 2001 adjusted exclude amortization goodwill trade name assembled workforce intangible assets nonamortization requirements sfas 142 applied beginning period presented thousands except per share amounts 5 acquisitionrelated costs liabilities years ended december 31 2003 2002 company recorded charge operations 04 37 million respectively acquisitionrelated integration costs primarily related picturetel acquisition charges include outside financial advisory legal accounting services year ended december 31 2001 company recorded charge operations 241 million related picturetel accord circa acquisitions charges include cost actions designed improve company’s combined competitiveness productivity future profitability primarily relate elimination redundant excess facilities workforce company’s combined businesses elimination redundant assets following table summarizes status company’s acquisitionrelated liabilities restructuring integration costs thousands company approximately 216 million 320 million december 31 2003 december 31 2002 respectively acquisitionrelated reserves classified longterm liabilities approximately 46 million 75 million december 31 2003 december 31 2002 respectively acquisitionrelated reserves classified current liabilities facility closings facility closings liability primarily related estimated lease termination costs net present value minimum lease payments vacated redundant facilities company intends sublease negotiate lease termination settlement company netted estimated sublease cash receipts lease obligations determine minimum lease payments facilities intends sublease longest lease term facilities identified sublease arrangement extends 2007 company also assumed liabilities related facility closings totaling 241 million acquisitions picturetel aspi meetu 2002 company finalized purchase price allocation related picturetel acquisition resulted additional accrual facility closings liability approximately 150 million adjustment resulted final clarifications related terms company could sublease certain redundant facilities changes estimates operating costs related facilities november 2003 company entered lease amendment one facilities previously provided restructuring reserve original term lease ended 2014 amended allow company exit approximately onethird space facility currently unoccupied november 2006 cash payment 50 million exit additional approximately onethird space facility currently unoccupied november 2007 additional cash payment 50 million allow company option exiting remaining onethird facility november 2008 currently occupied amendment also gives landlord right november 2008 require company exit occupied space six months notice company either voluntarily required landlord exits occupied space company make 50 million payment landlord company would begin amortize remaining leasehold improvements net book value 20 million december 31 2003 six months lease agreement also amended allow landlord sublet unoccupied space earlier november 2006 november 2007 landlord successful releasing company space earlier amendment provides company would make related cash payments noted regards currently unoccupied space additional cash payments pertaining fifty percent cash savings related company longer pay rent common area maintenance charges portion building based new amendment company estimated 72 million restructuring reserve longer required therefore december 2003 amount released restructuring reserve recorded reduction goodwill severance related benefits severance related benefits liability workforce reductions initiated 2002 2001 additionally company assumed liabilities related severance totaling 144 million acquisitions picturetel aspi meetu workforce reductions substantially complete december 31 2002 severance payments made october 2004 asset impairments writeoffs exit costs merger fees asset impairments amount 67 million asset writeoffs amount 08 million principally related elimination redundant excess equipment exit costs amount 03 million related payment obligations carried future benefit company’s combined operations completed december 31 2002 mergerrelated transaction period expenses years ended december 31 2003 2002 2001 04 million 37 million 126 million respectively principally consisted financial advisory accounting legal consulting fees direct mergerrelated expenses incurred period 6 restructure costs 2002 company’s management approved restructuring actions response global economic uncertainty continued downturn technology spending improve company’s overall cost structure prioritizing resources strategic areas business reducing operating expenses company recorded restructuring charge 17 million 2002 result actions charge consisted severance employee termination benefits related workforce reduction approximately six percent company’s employees worldwide december 31 2003 company paid charge 2003 management approved additional restructuring actions primarily connection sale network access product line verilink response global economic uncertainty continued downturn technology spending actions meant improve company’s overall cost structure prioritizing resources strategic areas business reducing operating expenses company recorded restructuring charge 50 million 2003 result actions charge consisted severance employee termination benefits related workforce reduction approximately 12 percent company’s employees worldwide restructuring charge related network systems communications segments amounted 01 million 07 million respectively balance restructuring charge related operating activities separately managed corporate level allocated segments december 31 2003 company paid approximately 49 million 50 million charge remaining amount paid end second quarter 2004 recorded accrued liabilities consolidated balance sheets 7 investments december 31 2003 2002 comprise thousands shortterm investments december 31 2003 2002 mature within one year longterm investments excluding corporate equity securities mature within two years 2003 2002 2001 company recorded net realized gains 78000 43000 391000 respectively disposal investments company used specific identification method determining cost basis resulting realized gain loss transactions included investments december 31 2003 2002 approximately 01 million 04 million respectively investments equity securities publicly traded companies 8 inventories consist following thousands 9 property equipment net property equipment net consist following thousands 10 accrued liabilities accrued liabilities consist following thousands inventory purchase commitment picturetel liability company assumed part acquisition entity october 2001 represented commitment purchase inventory volumes manufactured thirdparty vendor excess company estimated could sell may 2003 company settled obligation full paying cash approximately 05 million thirdparty vendor balance accrual reversed corresponding reduction goodwill 11 business risks credit concentration company sells limited number products services serve communications equipment market substantial majority company’s net revenues derived sales video voice network systems products related services factor adversely affecting demand supply products services could materially adversely affect company’s business financial performance currently subcontract manufacture voice video product lines celestica thirdparty contract manufacturer use celestica’s thailand china singapore facilities company believes number alternative contract manufacturers could produce products event reduction interruption supply could take significant period time qualify alternative subcontractor commence manufacturing disruption services due natural disaster quarantines restrictions associated recurrence sars similar events economic political difficulties thailand asia reason disruption would harm business results operations also celestica currently primary source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints would experience delay shipping products would immediate negative impact revenues result may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes us certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations certain key components used products currently available one source others available limited number sources network systems products manufactured israel currently experiencing internal external conflicts include terrorist acts military action also military action iraq war middle eastern countries perceived threat united states government could cause us experience manufacturing disruption due acts associated conflicts could harm business addition certain technology used network systems products developed grants office chief scientist israel israeli law prohibited transfer technology developed pursuant grants person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer technology third parties manufacture products outside israel may adversely affect operating results significantly reduce value technology developed grants process developing implementing disaster recovery plan could call manufacturing performed outside israel limited basis extended basis event disaster implementation disaster recovery plan could subject us additional payments office chief scientist could adversely affect operating results cash flows company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses expansion polycom’s product offerings may increase company’s credit risk customers place larger orders initial stocking orders assurance company’s credit loss experience remain near historic levels december 31 2003 2002 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows 12 commitments contingencies litigation time company involved various legal proceedings arising normal course business activities addition time third parties assert patent trademark infringement claims company form letters forms communication believe legal proceedings claims likely material adverse effect consolidated results operations financial condition cash flows september 23 2002 suit captioned collaboration properties inc v polycom inc filed united states court northern district california complaint alleges polycom’s viewstation viavideo ipower weboffice path navigator products infringe 4 us patents owned plaintiff complaint seeks unspecified compensatory exemplary damages past present infringement permanently enjoin polycom infringing patents future november 14 2002 company filed answer asserting among things infringement plaintiff’s patents invalid unenforceable company believes meritorious defenses counterclaims intends vigorously defend action standby letters credit company several standby letters credit totaling approximately 876 000 issued guarantee certain company’s foreign office lease obligations contractual obligations license agreements march 3 2000 company entered patent licensing agreement vtel corporation vtel provided fully paid royaltyfree license three patents related various videoconferencing technologies exchange licenses company paid vtel approximately 83 million sublicensed vtel royaltybearing patent videoconferencing technology royalty sublicense payable patent holder polycom amortization license computed using straightline method economic life license five years october 19 2001 company recorded charge 55 million related impairment vtel license management determined technology used picturetel superior obtained polycom vtel license picturetel technology would used polycom’s products research development would better protect company’s intellectual property charge included “acquisitionrelated costs” consolidated statement operations company also enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2004 2014 december 31 2003 following future minimum lease payments net estimated sublease income due current lease obligations example approximately 152000 square foot building fully subleased third party sublease runs concurrent lease obligation result currently showing lease obligation related facility sublease terminated tenant defaulted payment would incur additional lease payments would negatively impact operating results overall cash flows addition minimum lease payments contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2003 thousands company currently headquartered approximately 50000 square foot facility pleasanton california pursuant lease expires may 2012 facility accommodates executive administrative operations former headquarters milpitas california continues house research development manufacturing marketing sales customer support operations primarily voice business facility approximately 102000 square feet leased january 2007 majority company’s video service operations located approximately 321000 square feet andover massachusetts pursuant lease expires september 2014 approximately 64000 square feet austin texas pursuant lease expires december 2004 network systems operations occupy approximately 40000 square feet petach tikva israel 32000 square feet atlanta georgia also shared installed voice business addition company leased space goleta california january 2003 network access products’ engineering manufacturing marketing organizations company leases space north vancouver canada voip development operation burlington massachusetts advanced voice development operations see note 5 discussion lease amendment signed december 2003 related andover massachusetts facility company leases approximately 55000 square foot facility tracy california used north american latin american distribution center company utilizes space manufacturing contractor thailand company’s european distribution contractor united kingdom netherlands provide asian european distribution repair centers respectively included noncancelable operating leases assumed part acquisition picturetel company identified vacated redundant picturetel leased facilities company intends terminate sublease recognized liability assumed purchase combination liability valued estimated net present value lease commitments estimated net present value cost terminating leases net estimated sublease rent 257 million 41 million classified current liability 216 million classified long term liability consolidated balance sheets rent expense years ended december 31 2003 2002 2001 165 million 146 million 83 million respectively 13 credit arrangements company available 25 million revolving line credit bank agreement dated november 11 2003 borrowings line unsecured bear interest bank’s prime rate 400 december 31 2003 london interbank offered rate libor plus 065 approximately 180 182 depending term borrowings december 31 2003 borrowings line subject certain financial covenants restrictions liquidity indebtedness financial guarantees business combinations profitability levels related items line credit expires december 3 2005 periods presented balances outstanding line credit however company outstanding letters credit total approximately 09 million secured line credit company compliance applicable financial covenants restrictions periods presented 14 stockholders’ equity public stock offering february 2002 company completed public offering sold 8050000 shares common stock including overallotment option 1050000 shares exercised underwriters price 3120 per share net proceeds company approximately 2375 million underwriting discounts commissions expenses company used net proceeds sale primarily general corporate purposes including working capital expenditures well acquisitions complementary businesses technologies treasury stock result acquisition picturetel company acquired 363557 shares treasury stock aggregate value 112 million based market value company’s common stock date acquisition 2002 shares retired reclassified authorized unissued share repurchase program june 2002 board directors approved plan repurchase 35 million shares company’s common stock open market privately negotiated transactions december 31 2002 company repurchased approximately 1483000 shares cash 159 million open market 2002 company retired reclassified shares common stock authorized unissued 2003 company repurchased approximately 755000 shares open market cash 69 million retired reclassified authorized unissued december 31 2003 company authorized repurchase additional approximately 13 million shares june 2002 repurchase plan stock option exchange program may 21 2001 company commenced voluntary stock option exchange program certain eligible employees consultants company program eligible employees consultants given option cancel outstanding stock option previously granted exercise price greater equal 2355 per share exchange new option buy 085 shares company’s common stock granted december 26 2001 six months one day june 25 2001 date old options canceled total 11 million stock options canceled result program approximately 827000 stock options granted exchange program result additional compensation charges variable option plan accounting may 28 2003 company commenced voluntary stock option exchange program certain eligible employees members board directors executive officers eligible participate exchange program eligible employees given option cancel outstanding stock option previously granted exercise price greater equal 1348 per share exchange 08 new options purchase shares company’s common stock granted december 29 2003 six months three days june 25 2003 date old options cancelled exercise price new options equal fair market value company’s common stock date grant new options term equal lesser remaining term exchanged options 5½ years generally new option vesting schedule exchanged option replaced new option vest cancellation date exchanged option new option grant date beginning new option grant date options immediately vested extent vested cancellation date vesting continues accordance vesting schedule exchanged option subject continued employment relevant vesting date however employees restricted exercising new options period six months following new option grant date total 41 million stock options cancelled result program approximately 33 million stock options granted exchange program result additional compensation charges variable option plan accounting stock option plan 2001 board directors reserved 750000 shares common stock 2001 nonstatutory stock option plan “the nonstatutory plan” issuance nonqualified stock options employees acquired companies foreignbased employees ineligible incentive stock options 1996 board directors reserved 6250000 shares common stock 1996 stock option plan “the plan” issuance employees directors company additional 16900000 shares reserved approved stockholders plan supersedes 1991 stock option plan “91 plan” viavideo plan assumed polycom january 2 1998 pursuant agreement plan reorganization among polycom venice acquisition corporation viavideo communications inc dated june 11 1997 amended september 2 1997 remaining option shares available grant subsequent cancellations option shares viavideo plan expired expire additional option shares granted viavideo plan subsequent merger atlas plan assumed polycom december 1 1999 pursuant agreement plan reorganization among polycom periscope acquisition corporation atlas communication engines inc dated november 18 1999 remaining option shares available grant subsequent cancellations option shares atlas plan expired expire additional option shares granted atlas plan subsequent merger 1995 accord reserved 5087 shares common stock 1995 accord networks ltd stock ownership option plan dated march 29 1995 issuance employees accord networks ltd additional 1250867 shares reserved year 2000 accord networks ltd 2000 share option plan accord networks ltd share ownership option plan 2000 accord networks ltd 2000 nonemployee directors option plan created initial reserves 229875 shares 229875 shares 61300 shares respectively accord networks ltd plans assumed polycom february 28 2001 pursuant agreement plan merger reorganization dated december 5 2000 amended remaining option shares available grant subsequent cancellations option shares accord networks ltd plans expired expire additional option shares granted accord networks ltd plans subsequent merger addition company assumed outstanding options upon acquisitions atlanta signal processors inc “aspi plan” picturetel corporation “acquisition plan” circa communications ltd “circa plan” fiscal 2001 total approximately 20 million shares company’s common stock reserved issuance assumed plans related options included following table shares reserved issuance assumed plans 2002 terms plan 91 plan nonstatutory plan viavideo plan atlas plan accord plans circa plan options may granted prices lower fair market value date grant determined board directors options granted 91 plan aspi plan viavideo plan circa plan immediately exercisable expire ten years date grant unvested shares issued upon exercise options generally subject right repurchase company upon termination employment company options granted plan nonstatutory plan acquisition plan atlas plan accord plans circa plan expire ten years date grant generally exercisable upon vesting options granted plan prior december 1998 91 plan normally vest 20 completing one year service company remaining amount equally 48 months fully vested five years options granted viavideo plan normally vest monthly month service company fully vested four years options granted atlas plan normally vest 33 completing one year service company remaining amount equal quarterly installments next eight quarters fully vested three years options granted acquisition plan accord plans circa plan normally vest 25 completing one year service company remaining amount equal quarterly installments next twelve quarters fully vested four years options granted nonstatutory plan vest based conditions set forth plan administrator new options granted plan beginning december 1998 options normally vest 25 completing one year service company remaining amount equally 36 months fully vested four years addition special grant employees option grants become fully vested one year service company made plan atlas plan many option grants vesting schedules different described generally vesting options consistent within plans activity plans follows thousands except share per share data december 31 2003 2002 2001 4692969 6626657 4224324 outstanding options exercisable aggregate average exercise price 1718 2339 2132 respectively options outstanding currently exercisable exercise price december 31 2003 follows weighted average fair value options granted pursuant plans 695 752 1444 2003 2002 2001 respectively fair value option grant estimated date grant using multiple options approach blackscholes option pricing model following weighted average assumptions company also estimated fair value purchase rights issued employee stock purchase plan rights plan also valued using blackscholes optionpricing model purchase periods occur twice yearly effectively contains 6month option weighted average fair value purchase rights granted pursuant employee stock purchase plan 2003 2002 2001 1725 1473 1747 respectively fair value purchase right estimated using blackscholes option pricing model following weighted average assumptions unearned stockbased compensation connection acquisitions circa aspi company recorded unearned stockbased compensation costs unvested stock options assumed company totaling 15 million recognized vesting period options connection certain stock option grants 1999 company recorded unearned stockbased compensation cost totaling 24 million recognized vesting period related options three years amortization expense associated unearned stock compensation totaled 320000 544000 557000 2003 2002 2001 respectively approximately 4000 127000 343000 unearned stock based compensation reversed 2003 2002 2001 respectively upon cancellation unvested stock option grants resulting termination certain employees preferred share rights purchase plan july 1998 board directors approved preferred shares rights agreement board amended march 2001 “rights agreement” rights agreement intended protect stockholders’ rights event unsolicited takeover attempt interfere transaction approved board directors upon becoming exercisable right entitles stockholders buy 11000 share series preferred stock company exercise price 40000 subject adjustment rights exercisable person group “acquiring person” acquires announces tender exchange offer acquire 20 company’s common stock event acquiring person acquires 20 company’s common stock “triggering event” right held acquiring person entitle holder purchase exercise price number shares common stock market value equal two times exercise price addition event following triggering event company acquired merger sells 50 assets right held acquiring person entitle holder purchase exercise price number shares common stock acquiring company market value equal two times exercise price rights redeemable company’s option price 0005 per right company may also exchange rights shares common stock certain circumstances rights expire earlier july 15 2008 date redemption exchange 15 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions 20 compensation subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan beginning fiscal year 2000 company matched cash 50 first 3 compensation employees contribute polycom 401k plan maximum 500 per participating employee per year fiscal year 2003 2002 2001 maximum company cash match 1500 1000 respectively per participating employee per year company also 401k plan arose acquisition accord 401k plan covers substantially accord employees united states eligible employee may elect contribute accord 401k plan payroll deductions 15 compensation subject current statutory limitations company discretion board directors may make matching contributions accord 401k plan done 2000 connection acquisition accord 401k plan terminated 2001 beginning april 2 2001 eligible former accord employees may elect participate polycom 401k plan company also defined contribution profit sharing plan incorporating features section 401k internal revenue code arose acquisition picturetel plan covered substantially picturetel employees connection acquisition picturetel plan terminated 2001 beginning january 1 2002 eligible former picturetel employees may elect participate polycom 401k plan company’s contributions polycom 401k plan accord 401k plan totaled approximately 861000 956000 433000 fiscal 2003 2002 2001 respectively employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees offering periods maximum 24 months purchase dates approximately every six months january july company reserved 2500000 shares common stock issuance plan shares purchased employees’ payroll deductions maximum 15 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 3000 shares 25000 worth common stock one calendar year 2003 2002 2001 271524 283858 170250 shares purchased average per share prices 1062 1431 2274 respectively december 31 2003 931562 shares available granted plan benefit plans israeli labor laws agreements company required pay severance pay upon dismissal employee company’s israeli subsidiaries upon termination employment specified circumstances company’s severance pay employees israel based upon length service latest monthly salary one month’s salary year worked mainly covered purchased managerial insurance policies value policies recorded asset consolidated balance sheets net amount severance pay charged income totaled approximately 983000 1124000 977000 2003 2002 2001 respectively december 31 2003 2002 severance pay funded included assets approximately 2547000 1743000 respectively accrued severance pay included longterm liabilities approximately 4229000 3078000 respectively company also contributing funds behalf israeli employees individual insurance policy provides combination savings plan insurance severance pay benefits insured employee provides payments employee upon retirement death secures substantial portion severance pay employee legally entitled upon termination employment participating employee contributes amount equal 50 employee’s base salary subject social contributions employer contributes 50 75 employee’s base salary subject social contributions company’s fulltime israeli employees participate benefit package net amount insurance expense charged income totaled approximately 440000 383000 361000 2003 2002 2001 respectively company also provides employees education fund participating employee contributes amount equal 25 employee’s base salary subject social contributions statutory cap employer contributes amount equal 75 employee’s base salary subject social contributions statutory cap education fund expenses charged income totaled approximately 459000 439000 402000 2003 2002 2001 respectively 16 income taxes income tax expense consists following thousands sources income loss provision income taxes follows thousands company’s tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2003 company tax net operating loss carryforwards tax credit carryovers capital loss carryovers approximately 783 million 116 million 90 million respectively net operating loss carryforwards tax credit carryforwards capital loss carryforwards begin expire 2013 2007 respectively portion future utilization company’s carryforwards subject certain limitations due change ownership occurred 1998 2001 deferred tax assets approximately 267 million december 31 2003 pertain certain net operating loss carryforwards credit carryforwards resulting exercise employee stock options company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2003 cumulative amount earnings upon us income tax provided approximately 600 million tax benefits 18 million 2003 2002 associated exercise employee stock plans allocated stockholders equity company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions several years following first year company israeli taxable income consideration tax losses carried forward company date realized tax savings approximately 83 million reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 failure comply conditions may result cancellation benefits whole part 17 business segment information polycom leading global provider line highquality easytouse communications equipment enables business telecommunication service provider government educational institution users effectively conduct video voice data web communications polycom’s offerings organized along four product lines video communications voice communications network systems services reporting purposes company aggregates video communications voice communications one segment named communications reports network systems separate segment services allocated amongst communications network systems segments determined accordance management views evaluates polycom’s business based aggregation criteria outlined sfas 131 2002 company third reportable segment named network access january 2003 product line sold accounted discontinued operation periods presented network access reported segment 2003 2002 2001 addition software revenue reported video revenue prior periods reclassified network systems revenue result organizational changes occurred second quarter 2003 future changes organizational structure business may result changes reportable segments disclosed description types products services provided reportable segment follows communications segment communications products include videoconferencing collaboration products facilitate highquality video communications desktop conference analog digital ip voice communications products enhance business communication wide range service support offerings resellers directly enduser customers communication service offerings include extended warranty maintenance programs integration services consisting consulting education design project management services consulting services consisting planning needs analysis endusers design services room design custom solutions project management installation training network systems segment network systems products provide broad range network infrastructure facilitate video voice data conferencing collaboration capabilities businesses telecommunications service providers governmental educational institutions media servers provide seamless network connectivity across packetbased broadband networks traditional circuitswitched networks video voice multipoint conferencing line network systems products also includes host software products manage video network systems products seamlessly pathnavigator call processing server provides support intelligent call routing easy system deployment system management global management system software enables webbased system management enterprisewide video communications network polycom conference suite enables easy scheduling conferences microsoft outlook web interface encompasses tools proactively monitor control track adjust network enables control conference room equipment remote location addition weboffice webconferencing software application virtual office allows users conduct online meetings share information files applications documents secure interactive environment using web browser assist enduser customers implementing managing network systems products offer portfolio additional professional maintenance services include extended warranty maintenance programs integration services consisting consulting education design project management services consulting services project management installation training two reportable segments disclosed consolidated financial statements based polycom’s organizational structure aggregation criteria defined sfas 131 future changes organizational structure business may result changes reportable segments disclosed segment revenue profit accounting policies used derive reportable segments described note 1 consolidated financial statements significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin asset data exception inventory reviewed management segment level products services within respective segments generally considered similar nature therefore separate disclosure similar classes products services segment level presented financial information reportable segment follows fiscal years ended december 31 2003 2002 2001 thousands total inventory reflected company’s balance sheet december 31 2002 also includes 2184 inventory related network access segment shown discontinued operations periods presented thus presented segment contribution margin includes product line segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses separately managed corporate level allocated segments unallocated costs include sales costs marketing costs direct marketing general administrative costs legal accounting acquisitionrelated costs amortization purchased intangible assets restructuring costs litigation settlements interest income net loss strategic investments income expense net provision income taxes reconciliation segment information polycom consolidated totals follows thousands company’s net revenues substantially denominated us dollars summarized geographically follows thousands percentage total net revenues video communications voice communications network systems ipowerrelated service follows customer accounted 10 company’s net revenues 2003 2002 2001 company’s fixed assets net accumulated depreciation located following geographical areas thousands 18 net income loss per share disclosures reconciliation numerator denominator basic diluted net income loss per share continuing operations provided follows thousands except per share amounts 2003 2002 2001 7013990 10949063 4635424 respectively potentially dilutive securities stock options stock subject repurchase excluded denominator computation diluted net income loss per share continuing operations option exercise price greater average market price common stock 19 subsequent event unaudited january 5 2004 company completed acquisition voyant technologies inc “voyant” pursuant terms agreement plan merger dated november 21 2003 “merger agreement” voyant designs delivers group voice communication solutions pursuant merger agreement voyant shareholders received 1093 million cash approximately 129 million cash placed escrow held security losses incurred company event certain breaches representations warranties covered merger agreement certain events voyant shareholders may receive additional 35 million consideration two year period payable cash company’s option polycom stock certain stockholders based achievement certain financial milestones relating sale voyant products addition upon completion merger options acquire shares voyant common stock outstanding terms voyant stock plans assumed converted approximately 13 million options acquire shares polycom common stock additional consideration earned company chooses issue shares polycom stock certain stockholders voyant lieu cash shares company’s common stock issued pursuant merger registered securities act 1933 amended “securities act” reliance upon exemptions provided section 42 securities act voyant reported part company’s network systems segment polycom inc supplementary financial data unaudited thousands except per share amounts net revenue gross profit information 2002 revised exclude amounts nap product line product line accounted discontinued operation beginning 2003 s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands additions allowance doubtful accounts 30 million include amounts acquired picturetel aspi acquisitions see note 3 notes consolidated financial statements s2 index exhibits indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2004 2003 three years period ended december 31 2004 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits b exhibits indicates management contract compensatory plan arrangement 1 filed herewith b exhibits see item 15a3 c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city pleasanton state california 10th day march 2005 polycom inc robert c hagerty robert c hagerty chairman board directors chief executive officer president power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint michael r kourey lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 amended report signed following persons capacities dates indicated polycom inc index consolidated financial statements page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may change time management assessed effectiveness internal control financial reporting december 31 2004 making assessment management used criteria set forth internal controlintegrated framework issued committee sponsoring organizations treadway commission coso based assessment internal controls financial reporting management concluded december 31 2004 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles assessment effectiveness company’s internal control financial reporting december 31 2004 audited pricewaterhouse coopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors stockholders polycom inc completed integrated audit polycom inc’s 2004 consolidated financial statements internal control financial reporting december 31 2004 audits 2003 2002 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15 1 present fairly material respects financial position polycom inc subsidiaries december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15 2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included management’s report internal control financial reporting appearing page company maintained effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail report independent registered public accounting firm continued accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp san jose california march 10 2005 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 summary significant accounting policies fiscal year september 27 2002 polycom inc “company” changed fiscal year 5253 week fiscal year ending sunday closest december 31 fiscal year ending december 31 accordingly company’s fiscal quarters end last day calendar quarter march 31 june 30 september 30 december 31 change effective beginning fiscal quarter ended september 30 2002 result election year ended december 31 2002 included two additional business days december 30 31 2002 operating activities two additional business days period ended december 31 2002 included statement operations year ended december 31 2002 annual report form 10k year ended december 31 2002 change fiscal year increased revenue 130 million increased basic diluted net income per share approximately five cents per share material impact company’s consolidated financial position cash flows reclassifications certain previously reported amounts reclassified conform current period presentation december 31 2004 company reclassified certain auction rate securities cash equivalents shortterm investments december 31 2004 prior periods december 31 2003 2002 2001 company held approximately 583 million 792 million 500 million respectively auction rate securities reclassified reclassifications impact results operations operating cash flows working capital company following table summarizes balance sheet amounts previously reported reclassified dollars thousands order conform 2004 presentation company also changed amounts previously reported gross trading activities investments purchases investments proceeds sales maturity investments years ended december 31 2003 2002 totaling approximately 256 million 260 million respectively consolidated statements cash flows related inclusion activity investments classified cash equivalents changes impact net cash used investing activities years ended december 31 2003 2002 addition gross trading activities net cash used investing activities consolidated statements cash flows changed years ended december 31 2003 2002 reflect impact auction rate securities reclassified cash equivalents shortterm investments reclassification resulted net decrease cash used investing activities 209 million 2003 corresponding increase cash equivalents net increase cash used investing activities 292 million 2002 corresponding decrease cash equivalents principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents allowances doubtful accounts company maintains allowances doubtful accounts estimated losses resulting inability company’s customers make required payments company considers following factors determining collection payment reasonably assured customer creditworthiness past transaction history customer current economic industry trends changes customer payment terms company previous experience customer company typically obtains reports various credit organizations ensure customer history paying creditors company may also request financial information including financial statements documents eg bank statements ensure customer means making payment factors indicate collection reasonably assured revenue deferred collection becomes reasonably assured generally upon receipt cash financial condition company’s customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances writtenoff management determined likelihood collection probable investments company’s shortterm longterm investments comprised us state municipal government obligations foreign domestic public corporate debt securities investments classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held company’s name limited number major financial institutions december 31 2004 2003 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period exception nontransferable warrants identified unrealized gains losses recorded separate component cumulative comprehensive income loss stockholder’s equity investments sold loss considered temporarily declined value charge operations recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net also included longterm investments december 31 2004 2003 less 01 million related nontransferable warrants purchase common stock publicly traded company warrants readily available fair market value exercised would represent less 1 outstanding common stock public company adjust carrying value warrants fair value period using black scholes option pricing model gains losses warrants recorded consolidated statements operations “loss strategic investments” 2004 2003 2002 company recorded losses totaling 01 million 01 million 04 million respectively related warrants strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2004 2003 investments carrying value 74 million 09 million respectively 2004 company made investments one private company totaling 65 million 2003 company made investments two private companies totaling 14 million 2003 2002 company determined value certain investments private companies impaired reduced carrying amount 05 million 30 million respectively company determined impairment 2004 investments recorded “other assets” condensed consolidated balance sheets inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives three thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill purchased intangible assets indefinite lives goodwill purchased intangible assets determined indefinite useful lives amortized regularly reviewed potential impairment identification measurement goodwill impairment involves estimation fair value company’s reporting units estimates fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities although goodwill impairment recorded date assurances future goodwill impairments occur see note 4 discussion impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years longlived assets including identifiable intangible assets finite lives held used reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset eventual disposition measurement impairment loss longlived assets management expects hold use based fair value asset longlived assets disposed reported lower carrying amount fair value less costs sell guarantees company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured us warranties generally start delivery date continue one three years depending product purchased software products generally carry 90day warranty date shipment liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures assess adequacy recorded warranty liabilities every quarter make adjustments liability necessary changes warranty obligation included component “other accrued liabilities” consolidated balance sheets period follows thousands deferred maintenance revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company recognizes maintenance revenue contracts life service contract changes deferred maintenance revenue 208 million 136 million shortterm included component “deferred revenue” december 31 2004 2003 respectively 52 million 37 million longterm included “longterm deferred revenue” december 31 2004 2003 respectively consolidated balance sheets follows thousands cost providing maintenance services years ended december 31 2004 2003 34651 26038 respectively indemnifications verilink corporation “verilink” connection sale network access product line verilink company agreed indemnify verilink certain contingent liabilities company believes estimated fair value indemnification material officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity indemnification obligations valid long director officer acted good faith manner person reasonably believed opposed best interests corporation respect criminal action proceeding reasonable cause believe conduct unlawful maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations minimal indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liability environmental obligations revenue recognition company recognizes revenue including freight charges accordance sec staff accounting bulletin 104 “revenue recognition” statement financial accounting standards sfas 48 “revenue recognition right return exists” eitf issue 0021 “revenue arrangements multiple deliverables” aicpa statement position 972 sop 972 “software revenue recognition amended sop 989 modification sop 972 software revenue recognition respect certain transactions” guidelines company recognizes revenue transactions persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable payment reasonably assured company accrues sales returns coop advertising allowances reduction revenues upon shipment based upon contractual obligations historical experience additionally company recognizes extended service revenue hardware software products services performed research development expenditures research development expenditures charged operations incurred software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2004 2003 2002 138 million 129 million 142 million respectively income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities determined based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized translation foreign currencies financial statements company’s foreign subsidiaries operate functional currency us dollar translated us dollars yearend exchange rates monetary assets liabilities nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations foreign exchange contracts company subsidiaries entered foreign currency forward contracts hedge specific intercompany foreign currency receivable transactions forward contracts involve agreements purchase sell foreign currencies specific rates future dates company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties one largest us banks ranked assets order minimize credit risk company’s hedging activities designed offset losses gains intercompany foreign currency receivable transactions hedged carrying amount forward contracts fair value determined obtaining quoted market prices gains losses forward contracts recognized reporting period offset gain loss hedged item period underlying transactions settled forward contracts entered 2004 2003 contracts outstanding december 31 2004 computation net income per share continuing operations basic net income per share continuing operations computed dividing net income continuing operations weighted average number common shares outstanding period less common stock subject repurchase diluted net income per share continuing operations reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding conversion preferred stock common stock shares common stock subject repurchase potentially dilutive shares including shares common stock subject repurchase excluded computation fully diluted net income per share continuing operations effect antidilutive fair value financial instruments carrying amounts certain company’s financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm longterm investments based quoted market prices similar instruments self insurance company selfinsured portion health claims certain employees portion losses liabilities associated workers compensations claims losses accrued based upon company’s estimates aggregate liability claims incurred using historical experience workers compensation certain actuarial assumptions followed insurance industry stockbased compensation accordance sfas 123 sfas 123 “accounting stockbased compensation” eitf 9618 “accounting equity instruments issued employees acquiring conjunction selling goods services” company accounts employee stockbased compensation accordance accounting principles board opinion 25 apb 25 “accounting stock issued employees” financial accounting standards board fasb interpretation 44 fin 44 “accounting certain transactions involving stockbased compensation interpretation apb opinion 25” related interpretations accounting stockbased compensation plans stockbased compensation related nonemployees based fair value related stock options accordance sfas 123 interpretations expense associated stockbased compensation amortized vesting period individual award consistent disclosure provisions sfas 123 company’s net income basic diluted net income per share would adjusted pro forma amounts indicated thousands except per share amounts impact pro forma net income loss per share net income loss table may indicative effect future years options vest several years company continues grant stock options new current employees recent pronouncements march 2004 fasb issued eitf 0301 “the meaning otherthantemporary impairment application certain investments” provides new guidance assessing impairment losses debt equity investments new impairment model applies investments accounted cost equity method investments accounted fas 115 “accounting certain investments debt equity securities” eitf 0301 also includes new disclosure requirements cost method investments unrealized loss position september 2004 fasb delayed adopting accounting provisions eitf 0301 however disclosure requirements remain effective applicable disclosures included within financial statements related notes financial statements company evaluate effect adopting eitf 0301 november 2004 fasb issued fasb statement 151 “inventory costsan amendment arb 43” “fas 151” result efforts converge us accounting standards inventories international accounting standards fas 151 requires idle facility expenses freight handling costs wasted material spoilage costs recognized currentperiod charges also requires allocation fixed production overheads costs conversion based normal capacity production facilities fas 151 effective inventory costs incurred fiscal years beginning june 15 2005 company anticipate implementation standard significant impact consolidated results operations financial condition cash flows december 2004 fasb issued sfas 123 revised 2004 “sharebased payment” “sfas 123r” sfas 123r addresses forms sharebased payment “sbp” awards including shares issued certain employee stock purchase plans stock options restricted stock appreciation rights sfas 123r require company expense sbp awards compensation cost sbp transactions measured fair value fasb originally stated preference lattice model believed lattice model fully captures unique characteristics employee stock options estimate fair value compared blackscholes model company currently uses footnote disclosure fasb decided remove explicit preference lattice model require particular valuation methodology sfas 123r requires company adopt new accounting provisions beginning third quarter 2005 although company process evaluating impact applying various provisions sfas 123r expects statement material impact consolidated results operations december 2004 fasb issued sfas 153 “exchanges nonmonetary assets amendment apb 29” requires nonmonetary exchanges recorded fair value assets exchanged certain exceptions standard requires exchanges productive assets accounted fair value rather carryover basis provisions sfas 153 effective fiscal years beginning june 15 2005 company adopt standard 2006 company determined impact statement consolidated financial position results operations december 2004 fasb issued fasb staff position fsp regarding “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 “ajca” fsp 1092 fsp 1092 allows company time beyond fourth quarter 2004 period enactment evaluate effect ajca plan reinvestment repatriation foreign earnings purposes applying sfas 109 “accounting income taxes” see discussion potential impact company note 16 various areas including revenue recognition fair value measurement business combinations financial reporting accounting standards practices continue evolve additionally sec fasb’s emerging issues task force continue address revenue fair value measurement business combinations financial reporting accounting issues changes generally accepted accounting principles areas could impact company’s future accounting operations 2 discontinued operations january 2003 company sold verilink corporation “verilink” certain fixed assets intellectual property rights relating polycom’s network access product line including polycom’s line netengine integrated devices total 30 million cash 10 million paid polycom closing ii 025 million paid polycom first anniversary closing january 2004 iii 175 million paid polycom quarterly based ten percent verilink’s revenues related sale netengine products verilink paid 07 million 04 million years ended december 31 2004 2003 respectively related ten percent verilink’s revenues sale netengine products periods cumulative basis paid 11 million towards 175 million commitment concurrent closing certain employees joined verilink also agreed purchase polycom’s existing netenginerelated inventories book value approximately 19 million closing date needed basis december 31 2004 verilink purchased remaining netenginerelated inventories approximately 23 million additionally connection sale polycom entered license agreement verilink pursuant verilink granted polycom license use develop network access technology related netengine product line company agreed compete verilink network access market period three years closing date january 28 2006 company’s consolidated financial statements reflect network access product line discontinued operations accordance sfas 144 results operations company’s network access product line presented discontinued prior periods reclassified including reallocation general overhead charges company’s three remaining reporting segments company recorded aftertax gain 05 million 06 million result transaction years ended december 31 2004 2003 respectively company may record additional quarterly gains related sale product line verilink remits ten percent quarterly revenues sale netengine products subject maximum amount 175 million following table shows results operations company’s network access product line thousands includes operations january 1 2003 january 28 2003 transaction closing date following table shows components gain sale discontinued operations thousands 3 business combinations year ended december 31 2002 company completed acquisition meetucom inc “meetu” leading developer web collaboration software january 5 2004 company completed acquisition voyant technologies inc “voyant” pursuant terms agreement plan merger dated november 21 2003 “merger agreement” voyant designs delivers group voice communication solutions details acquisitions presented following table summarizes company’s purchase price allocations related purchase business combination transactions time acquisition thousands additionally company completed acquisitions picturetel corporation “picturetel” atlanta signal processors inc “aspi” circa communications ltd “circa” accord networks ltd “accord” year ended december 31 2001 changes goodwill purchased intangibles fair value net tangible assets unearned stockbased compensation summarized follows thousands voyant technologies january 5 2004 company completed acquisition voyant technologies inc “voyant” pursuant terms agreement plan merger dated november 21 2003 “merger agreement” voyant designs delivers group voice communication solutions primary reason acquisition factors contributed recognition goodwill relate voyant’s ability deliver audio bridging capabilities network systems space pursuant merger agreement voyant shareholders received 1092 million cash approximately 129 million cash placed escrow held security losses incurred company event certain breaches representations warranties covered merger agreement certain events second quarter 2004 company received 01 million escrow account related certain working capital adjustments reducing purchase consideration 1255 million 1254 million third quarter 2004 company authorized release approximately 14 million escrow fund voyant shareholders certain prior sales tax liabilities voyant resolved voyant shareholders may receive additional 15 million consideration two year period payable cash company’s option polycom stock certain stockholders based achievement certain financial milestones relating sale voyant products additional consideration paid voyant shareholders would result increase goodwill addition upon completion merger options acquire shares voyant common stock outstanding terms voyant stock plans assumed converted approximately 14 million options acquire shares polycom common stock additional consideration earned company chooses issue shares polycom stock certain stockholders voyant lieu cash shares company’s common stock issued pursuant merger registered securities act 1933 amended “securities act” reliance upon exemptions provided section 42 securities act upon acquisition purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date based upon independent appraisal voyant reported part company’s network systems services segments accompanying condensed consolidated financial statements reflect purchase price approximately 1254 million consisting cash fair value options granted polycom acquisition costs directly related acquisition follows thousands purposes computing estimated fair value options granted blackscholes option pricing model used following assumptions fair value polycom’s stock 1969 expected life 32 years risk free interest rate 237 expected dividend yield 0 volatility 82 following summary allocation purchase price thousands amount allocated inprocess research development determined management using independent appraisal based established valuation techniques hightechnology industry expensed upon acquisition technological feasibility established future alternative uses existed income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing developed technology inprocess research development estimated net free cash flows generated inprocess research development projects discounted rates ranging 35 40 percent relation stage completion technical risks associated achieving technology feasibility reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside company’s control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product cost effectively accordance sfas 142 goodwill originating voyant acquisition amortized purchased intangible assets amortized straightline basis period three months eight years general goodwill deductible tax purposes year ended december 31 2004 amortization associated purchased intangible assets totaled approximately 67 million purchase price allocation presented table final january 5 2005 except resolution certain earnout contingency payments would result increase total consideration paid period earnout achieved corresponding adjustment goodwill since january 5 2004 results operations voyant included company’s consolidated statements operations following unaudited pro forma financial information reflects results operations years ended december 31 2003 2002 acquisition occurred january 1 2002 pro forma results prepared comparative purposes purport indicative operating results would acquisition actually taken place january 1 2002 may indicative future operating results unaudited thousands except per share amounts meetucom inc june 20 2002 company completed acquisition privately held development stage meetucom inc “meetu” leading developer web collaboration software primary reason acquisition factors contributed recognition goodwill relate meetu’s ability deliver core technology web collaboration arena company expects technology provide synergies meetu’s web collaboration software company’s voice video network systems product lines thereby enabling company deliver complete endtoend collaboration solutions since june 21 2002 results operations meetu included company’s consolidated statements operations pro forma results operations presented effect acquisition material company acquired outstanding capital stock meetu total consideration 27 million consisting 41553 shares polycom common stock aggregate value 06 million 18 million previous cash investments company approximately 30000 cash closing approximately 02 million acquisition costs additional shares polycom common stock issuable upon successful completion five revenue based earnout thresholds prior june 20 2005 company may required issue additional shares company’s common stock time earnout threshold achieved assuming earnout thresholds achieved prior june 20 2005 company would required issue total 35 million 105 million common stock depending upon average closing price company’s common stock thirty days prior achievement earnout threshold additional consideration would increase goodwill total purchase consideration acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date amounts allocated inprocess research development determined management considering among factors results independent appraisal based established valuation techniques hightechnology communications industry expensed upon acquisition technological feasibility established future alternative uses existed inprocess research development projects cost approach uses concept replacement cost indicator fair value primary technique utilized valuing inprocess research development cost approach based premise prudent investor would pay asset cost replace asset new one replacement cost based total costs net unrealized income tax deduction benefit spent developing inprocess technology meetu’s inception acquisition date reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside company’s control change market resulting developed products addition time project completed reasonably possible completed products receive market acceptance company unable produce market product cost effectively accordance statement financial accounting standard 142 sfas 142 “goodwill intangible assets” goodwill originating meetu acquisition amortized purchased intangible assets amortized straightline basis period three years year ended december 31 2004 2003 2002 amortization associated purchased intangible assets totaled approximately 10 million 10 million 05 million respectively purchase price allocation related meetu acquisition final december 31 2002 except resolution certain earnout contingency payments would result increase total consideration paid period earnout achieved corresponding adjustment goodwill pro forma results operations presented effects acquisition material individual basis 4 goodwill purchased intangibles following table presents details company’s goodwill segment thousands fair value adjustments assets acquired liabilities assumed year ended december 31 2004 resulted primarily revisions net cost estimates associated elimination redundant facilities resolution certain preacquisition contingencies changes estimates fair value certain picturetel voyant assets recorded initial purchase price allocation see note 5 notes consolidated financial statements regarding reduction facility closings liability following table presents details company’s total purchased intangible assets december 31 thousands upon adoption sfas 142 company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances unamortized balance acquired workforce totaling 05 million recorded part purchase price allocation circa acquisition reclassified purchased intangibles goodwill meet criteria outlined sfas 142 recorded separately goodwill fourth quarters 2004 2003 company completed annual goodwill purchased intangibles impairment tests outlined sfas 142 requires assessment goodwill purchased intangibles impairment annual basis assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date assessment purchased intangibles impairment conducted comparing fair value purchased intangible carrying amount date based results impairment test company determined goodwill assets purchased intangible assets impaired 2004 2003 company plans conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner estimated future amortization expense purchased intangible assets december 31 2004 follows thousands 5 acquisitionrelated costs liabilities years ended december 31 2004 2003 2002 company recorded charge operations 14 million 04 million 37 million respectively acquisitionrelated integration costs primarily related voyant picturetel acquisitions charges include outside financial advisory legal accounting services charges include cost actions designed improve company’s combined competitiveness productivity future profitability primarily relate elimination redundant excess facilities workforce company’s combined businesses elimination redundant assets following table summarizes status company’s acquisitionrelated liabilities restructuring integration costs thousands company approximately 35 million 216 million december 31 2004 december 31 2003 respectively acquisitionrelated reserves classified longterm liabilities approximately 56 million 46 million december 31 2004 december 31 2003 respectively acquisitionrelated reserves classified current liabilities facility closings november 2003 company entered lease amendment one facilities previously provided restructuring reserve original term lease ended 2014 amended allow company exit facility various stages 2008 exchange certain cash payments result november 2003 amendment company estimated 72 million restructuring reserve would longer required therefore december 2003 amount released restructuring reserve recorded reduction goodwill june 2004 company entered termination agreement related payment agreement facility terminated lease unoccupied space december 28 2004 agreement resulted overall reduction company’s obligations acceleration termination payments previously scheduled 2008 addition december 31 2004 outstanding letter credit secured line credit amount 31 million security remaining termination payments paid january 2005 result agreements company estimated approximately 39 million restructuring reserve would longer required therefore june 2004 amount released restructuring reserve recorded reduction goodwill severance related benefits company assumed liabilities related severance totaling 144 million acquisitions picturetel aspi meetu fully paid end 2004 result voyant acquisition company assumed additional liabilities related severance totaling 04 million severance payments made march 2005 integration costs merger fees expenses mergerrelated transaction period expenses years ended december 31 2004 2003 2002 14 million 04 million 37 million respectively principally consisted financial advisory accounting legal consulting fees direct mergerrelated expenses incurred period 6 restructure costs 2002 company’s management approved restructuring actions response global economic uncertainty continued downturn technology spending improve company’s overall cost structure prioritizing resources strategic areas business reducing operating expenses company recorded restructuring charge 17 million 2002 result actions charge consisted severance employee termination benefits related workforce reduction approximately six percent company’s employees worldwide december 31 2003 company paid charge 2003 management approved restructuring actions primarily connection sale network access product line verilink response global economic uncertainty continued downturn technology spending actions meant improve company’s overall cost structure prioritizing resources strategic areas business reducing operating expenses company recorded restructuring charge 50 million 2003 result actions charge consisted severance employee termination benefits related workforce reduction approximately 12 percent company’s employees worldwide restructuring charge related communications services network systems segments amounted 08 million 03 million 01 million respectively balance restructuring charge related operating activities separately managed corporate level allocated segments december 31 2004 company paid 50 million charge year ended december 31 2004 management approved restructuring plan network systems segment resulting actions intended improve overall cost structure network systems segment focusing resources strategic areas business streamlining certain engineering efforts reducing operating expenses accordance sfas 146 “accounting costs associated exit disposal activities” company recorded charge approximately 14 million year ended december 31 2004 charges consist severance employee termination benefits related workforce reductions comprise less 3 percent company’s employees worldwide final payments related charges completed march 2005 following table summarizes status company’s restructure reserves thousands 7 investments company investments debt securities also strategic investments private public companies classification investments follows thousands following table summarizes fair value gross unrealized losses short longterm investments unrealized losses thousands aggregated type investments instrument length time individual securities continuous unrealized loss position december 31 2004 2003 debt securities company’s shortterm longterm investments comprised us state municipal government obligations foreign domestic public corporate debt securities investments classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held company’s name limited number major financial institutions december 31 2004 2003 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period exception nontransferable warrants identified unrealized gains losses recorded separate component cumulative comprehensive income stockholder’s equity investments sold loss considered temporarily declined value charge operations recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net 2004 2003 company recorded gross realized gains less 01 million gross realized losses less 01 million respectively disposal investments 2002 company recorded gross realized gains gross realized losses 01 million less 01 million respectively disposal investments unrealized loss balances government obligations public corporate debt securities december 31 2004 primarily caused interest rate increases company ability intent hold debt securities recovery fair value may maturity consider debt securities otherthantemporarily impaired december 31 2004 company’s investment policy limits concentration investments debt securities unlimited amount us government us government agencies maximum 4 single issuer corporate debt securities maximum 10 single money market fund policy also limits percent portfolio held instruments minimum 20 us government us government agencies 25 75 corporate debt instruments depending debt classification company’s debt securities must rated standard poor’s moody’s must high quality credit rating nature company’s investment policy company monitor industry classification investments commercial bank issues company compliance investment policy december 31 2004 nontransferable warrants public company also included longterm investments less 01 million december 31 2004 2003 related nontransferable warrants purchase common stock publicly traded company warrants readily available fair market value exercised would represent less 1 outstanding common stock public company adjust carrying value warrants fair value period using black scholes option pricing model gains losses warrants recorded consolidated statements operations “loss strategic investments” 2004 2003 2002 company recorded losses totaling 01 million 01 million 04 million respectively related warrants private company investments strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2004 2003 investments carrying value 74 million 09 million respectively 2004 company made investments one private company totaling 65 million 2003 company made investments two private companies totaling 14 million 2003 2002 company determined value certain investments private companies impaired reduced carrying amount 05 million 30 million respectively company determined impairment 2004 investments recorded “other assets” condensed consolidated balance sheets 8 inventories valued lower cost market cost computed firstin firstout “fifo” basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value inventories consist following thousands 9 property equipment net property equipment net consist following thousands 10 accrued liabilities accrued liabilities consist following thousands 11 business risks credit concentration company sells limited number products services serve communications equipment market substantial majority company’s revenues derived sales video voice network systems products related services factor adversely affecting demand supply products services could materially adversely affect company’s business financial performance currently subcontract manufacture voice video product lines celestica thirdparty contract manufacturer use celestica’s thailand china singapore facilities company believes number alternative contract manufacturers could produce products event reduction interruption supply could take significant period time qualify alternative subcontractor commence manufacturing disruption services due natural disaster quarantines restrictions associated infectious diseases similar events economic political difficulties thailand asia reason would harm business results operations also celestica currently primary source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints would experience delay shipping products would immediate negative impact revenues result may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes us certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations certain key components used products currently available one source others available limited number sources network systems products manufactured israel currently experiencing internal external conflicts include terrorist acts military action also military action iraq war middle eastern countries perceived threat united states government could cause us experience manufacturing disruption due acts associated conflicts could harm business addition certain technology used network systems products developed grants office chief scientist israel israeli law prohibited transfer technology developed pursuant grants person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer technology third parties manufacture products outside israel may adversely affect operating results significantly reduce value technology developed grants process developing implementing disaster recovery plan could call manufacturing performed outside israel limited basis extended basis event disaster implementation disaster recovery plan could subject us additional payments office chief scientist could adversely affect operating results cash flows company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses expansion polycom’s product offerings may increase company’s credit risk customers place larger orders initial stocking orders assurance company’s credit loss experience remain near historic levels december 31 2004 2003 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows 12 commitments contingencies litigation time company involved various legal proceedings arising normal course business activities addition time third parties assert patent trademark infringement claims company form letters forms communication believe legal proceedings claims likely material adverse effect consolidated results operations financial condition cash flows september 23 2002 suit captioned collaboration properties inc v polycom inc filed united states court northern district california complaint alleged polycom’s viewstation viavideo ipower weboffice mgc products infringe four us patents owned plaintiff complaint sought unspecified compensatory exemplary damages past present infringement permanently enjoin polycom infringing patents future november 12 2004 company entered settlement agreement “settlement agreement” avistar communications inc “avistar” collaboration properties inc whollyowned subsidiary avistar “cpi” pursuant polycom cpi settled following patent infringement litigation matter collaboration properties inc v polycom inc case 02cv04591 nd cal terms settlement agreement polycom agreed pay avistar onetime amount 275 million cpi agreed dismiss claims litigation prejudice addition settlement agreement avistar cpi entered patent crosslicense agreement whereby nonexclusive fully paidup worldwide patent licenses respective patent portfolios party subsidiaries granted us subsidiaries avistar subsidiaries including cpi avistar subsidiaries us subsidiaries incurred onetime charge 208 million 2004 recorded 67 million prepaid license expect amortize prepaid license third quarter 2013 expiration date patentsinsuit first quarter 2002 reached settlement former picturetel customer dispute involved certain services provided picturetel 2001 amounts owed us providing services amount received net legal fees incurred litigate settle case standby letters credit company several standby letters credit totaling approximately 45 million issued guarantee certain company’s office lease obligations contractual obligations license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2005 2017 december 31 2004 following future minimum lease payments net estimated sublease income due current lease obligations example company approximately 152000 square foot building fully subleased third party sublease runs concurrent lease obligation result company currently showing lease obligation related facility sublease terminated tenant defaulted payment company would incur additional lease payments would negatively impact operating results overall cash flows addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2004 thousands company currently headquartered approximately 50000 square foot facility pleasant california pursuant lease expires may 2012 facility accommodates executive administrative operations company’s facility milpitas california houses research development manufacturing marketing sales customer support operations primarily voice business facility approximately 102000 square feet leased january 2007 majority company’s video service operations located approximately 183000 square feet andover massachusetts pursuant lease expires september 2014 approximately 62000 square feet austin texas pursuant lease expires november 2011 network systems operations occupy approximately 40000 square feet petach tikva israel 32000 square feet atlanta georgia also shared installed voice business company’s audio network systems operations located approximately 84000 square foot leased facility located westminster colorado addition company leases space north vancouver canada voip development operation burlington massachusetts advanced voice development operations see note 5 discussion lease amendment signed december 2003 termination payment agreements signed june 2004 related andover massachusetts facility company leases approximately 55000 square foot facility tracy california used north american latin american distribution center company utilizes space manufacturing contractor thailand company’s european distribution contractor united kingdom netherlands provide asian european distribution repair centers included noncancelable operating leases assumed part acquisition picturetel company identified vacated redundant picturetel leased facilities company intends terminate sublease recognized liability assumed purchase combination liability valued estimated net present value lease commitments estimated net present value cost terminating leases net estimated sublease rent 91 million 56 million classified current liability 35 million classified long term liability consolidated balance sheets rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease rent expense years ended december 31 2004 2003 2002 178 million 165 million 146 million respectively shortterm deferred lease obligation included accrued liabilities 03 million 02 million december 31 2004 2003 respectively longterm deferred lease obligation included longterm liabilities 13 million 10 million december 31 2004 2003 respectively event company exercise option extend term leases expire company likely incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs determined end lease term times based landlord’s discretion subsequent negotiations landlord company 13 credit arrangements company available 25 million revolving line credit bank agreement dated november 11 2003 borrowings line unsecured bear interest bank’s prime rate 515 december 31 2004 london interbank offered rate libor plus 065 approximately 304 315 depending term borrowings december 31 2004 borrowings line subject certain financial covenants restrictions liquidity indebtedness financial guarantees business combinations profitability levels related items line credit expires december 3 2005 december 31 2004 balances outstanding line credit however company outstanding letters credit total approximately 45 million december 31 2004 44 million secured line credit company compliance applicable financial covenants restrictions periods presented 14 stockholders’ equity public stock offering february 2002 company completed public offering sold 8050000 shares common stock including overallotment option 1050000 shares exercised underwriters price 3120 per share net proceeds company approximately 2375 million underwriting discounts commissions expenses company used net proceeds sale primarily general corporate purposes including working capital expenditures well acquisitions complementary businesses technologies treasury stock result acquisition picturetel company acquired 363557 shares treasury stock aggregate value 112 million based market value company’s common stock date acquisition 2002 shares retired reclassified authorized unissued share repurchase program june 2002 august 2004 board directors approved plans purchase 35 million shares 10 million shares respectively company’s common stock open market december 31 2004 company purchased approximately 50 million shares open market cash 754 million shares common stock retired reclassified authorized unissued years ended december 31 2004 2003 2002 company purchased 28 million 08 million 15 million shares common stock open market cash 525 million 69 million 159 million respectively company may continue purchase shares open market december 31 2004 company purchased approved shares june 2002 repurchase plan authorized purchase additional 85 million shares august 2004 repurchase plan stock option exchange program may 28 2003 company commenced voluntary stock option exchange program certain eligible employees members board directors executive officers eligible participate exchange program eligible employees given option cancel outstanding stock option previously granted exercise price greater equal 1348 per share exchange 08 new options purchase shares company’s common stock granted december 29 2003 six months three days june 25 2003 date old options cancelled exercise price new options equal fair market value company’s common stock date grant new options term equal lesser remaining term exchanged options 5½ years generally new option vesting schedule exchanged option replaced new option vest cancellation date exchanged option new option grant date beginning new option grant date options immediately vested extent vested cancellation date vesting continues accordance vesting schedule exchanged option subject continued employment relevant vesting date however employees restricted exercising new options period six months following new option grant date total 41 million stock options cancelled result program approximately 33 million stock options granted exchange program result additional compensation charges variable option plan accounting stock option plan 2001 board directors reserved 750000 shares common stock 2001 nonstatutory stock option plan “the nonstatutory plan” issuance nonqualified stock options employees acquired companies foreignbased employees ineligible incentive stock options february 2005 board directors terminated 2001 nonstatutory stock option plan date termination 573405 options outstanding nonstatutory plan options canceled forfeited expired nonstatutory plan available grant plan june 2 2004 shareholders approved 2004 equity incentive plan “2004 plan” reserved issuance plan 12500000 shares plus remaining available options terminated 1996 stock option plan “1996 plan” extent shares would returned 1996 plan result expiration cancellation forfeiture shares instead go reserve shares available 2004 plan addition 1354099 shares added shares reserved 2004 plan following completion voyant acquisition january 2004 see note 3 terms 2004 plan options may granted prices lower fair market value date grant determined board directors 2004 plan prior terminated plans options granted expire seven ten years date grant generally exercisable upon vesting options granted 2004 plan unvested shares outstanding prior terminated plans generally vest 25 completing one year service company remaining amount equally 36 months fully vested four years activity plans follows thousands except share per share data december 31 2004 2003 2002 7228429 4692969 6626657 outstanding options exercisable aggregate average exercise price 1923 1718 2339 respectively options outstanding currently exercisable exercise price december 31 2004 follows weighted average fair value options granted pursuant plans 966 695 752 2004 2003 2002 respectively fair value option grant estimated date grant using multiple options approach blackscholes option pricing model following weighted average assumptions company also estimated fair value purchase rights issued employee stock purchase plan rights plan also valued using blackscholes optionpricing model purchase periods occur twice yearly contains four options range 2 years 6 months weighted average fair value purchase rights granted pursuant employee stock purchase plan 2004 2003 2002 1004 1725 1473 respectively fair value purchase right estimated using blackscholes option pricing model following weighted average assumptions unearned stockbased compensation connection acquisitions circa aspi company recorded unearned stockbased compensation costs unvested stock options assumed company totaling 15 million recognized vesting period options connection certain stock option grants 1999 company recorded unearned stockbased compensation cost totaling 24 million recognized vesting period related options three years amortization expense associated unearned stock compensation totaled 214000 320000 544000 2004 2003 2002 respectively approximately 4000 127000 2003 2002 respectively unearned stock based compensation reversed upon cancellation unvested stock option grants resulting termination certain employees adjustments required 2004 preferred share rights purchase plan july 1998 board directors approved preferred shares rights agreement board amended march 2001 “rights agreement” rights agreement intended protect stockholders’ rights event unsolicited takeover attempt interfere transaction approved board directors upon becoming exercisable right entitles stockholders buy 11000 share series preferred stock company exercise price 40000 subject adjustment rights exercisable person group “acquiring person” acquires announces tender exchange offer acquire 20 company’s common stock event acquiring person acquires 20 company’s common stock “triggering event” right held acquiring person entitle holder purchase exercise price number shares common stock market value equal two times exercise price addition event following triggering event company acquired merger sells 50 assets right held acquiring person entitle holder purchase exercise price number shares common stock acquiring company market value equal two times exercise price rights redeemable company’s option price 0005 per right company may also exchange rights shares common stock certain circumstances rights expire earlier july 15 2008 date redemption exchange 15 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions 20 compensation subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 3 compensation employees contribute polycom 401k plan certain maximum per participating employee per year fiscal years 2004 2003 2002 maximum company cash match 1500 per participating employee per year company’s contributions polycom 401k plan totaled approximately 1113000 861000 956000 fiscal 2004 2003 2002 respectively employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees offering periods maximum 24 months purchase dates approximately every six months january july company reserved 2500000 shares common stock issuance plan shares purchased employees’ payroll deductions maximum 15 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 3000 shares 25000 worth common stock one calendar year 2004 2003 2002 291040 271524 283858 shares purchased average per share prices 1791 1062 1431 respectively december 31 2004 640522 shares available issued plan benefit plans israeli labor laws agreements company required pay severance pay upon dismissal employee company’s israeli subsidiaries upon termination employment specified circumstances company’s severance pay employees israel based upon length service latest monthly salary one month’s salary year worked mainly covered purchased managerial insurance policies value policies recorded asset consolidated balance sheets net amount severance pay charged income totaled approximately 1172000 983000 1124000 2004 2003 2002 respectively december 31 2004 2003 severance pay funded included assets approximately 3062000 2547000 respectively accrued severance pay included longterm liabilities approximately 5122000 4229000 respectively company also contributing funds behalf israeli employees individual insurance policy provides combination savings plan insurance severance pay benefits insured employee provides payments employee upon retirement death secures substantial portion severance pay employee legally entitled upon termination employment participating employee contributes amount equal 50 employee’s base salary subject social contributions employer contributes 50 75 employee’s base salary subject social contributions company’s fulltime israeli employees participate benefit package net amount insurance expense charged income totaled approximately 516000 440000 383000 2004 2003 2002 respectively company also provides employees education fund participating employee contributes amount equal 25 employee’s base salary subject social contributions statutory cap employer contributes amount equal 75 employee’s base salary subject social contributions statutory cap education fund expenses charged income totaled approximately 543000 459000 439000 2004 2003 2002 respectively 16 income taxes income tax expense consists following thousands sources income loss provision income taxes follows thousands company’s tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2004 company tax net operating loss carryforwards tax credit carryovers capital loss carryovers approximately 819 million 127 million 83 million respectively net operating loss carryforwards tax credit carryforwards capital loss carryforwards begin expire 2013 2007 respectively portion future utilization company’s carryforwards subject certain limitations due change ownership occurred 1998 2001 2004 deferred tax assets approximately 329 million december 31 2004 pertain certain net operating loss carryforwards credit carryforwards resulting exercise employee stock options company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2004 cumulative amount earnings upon us income tax provided approximately 879 million practicable determine income tax liability might incurred earnings distributed october 22 2004 american jobs creation act “act” signed law act includes deduction 85 certain foreign earnings repatriated defined act company may elect apply provision qualifying earnings repatriations 2005 company started evaluation effects repatriation provision however company expect able complete evaluation congress department treasury provides additional clarifying language key elements provision company expects complete evaluation effects repatriation provision within reasonable period time following publications additional clarifying language time company make changes current intention indefinitely reinvest accumulated earnings foreign subsidiaries range possible amounts unremitted earnings company considering repatriation provision zero 120 million related potential range income tax zero 13 million tax benefits 65 million 2004 18 million 2003 associated exercise employee stock plans allocated stockholders equity company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions several years following first year company israeli taxable income consideration tax losses carried forward company date realized tax savings approximately 131 million reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 failure comply conditions may result cancellation benefits whole part 17 business segment information polycom leading global provider line highquality easytouse communications equipment enables businesses telecommunications service providers governmental educational institutions effectively conduct video voice data web communications polycom’s offerings organized along four product lines video communications voice communications network systems services reporting purposes company aggregates video communications voice communications one segment named communications reports network systems services separate segments prior 2004 service revenues allocated communications network systems segments determined accordance management views evaluates polycom’s business based aggregation criteria outlined sfas 131 segment financial data years ended december 31 2003 2002 adjusted reflect segments software revenue reported video revenue prior periods reclassified network systems revenue result organizational changes occurred second quarter 2003 future changes organizational structure business may result changes reportable segments disclosed description types products services provided reportable segment follows communications segment communications products include videoconferencing collaboration products desktop conference analog digital ip voice communications products enhance business communication company offers family videoconferencing collaboration products facilitate highquality video communications viewstation product family recently announced vsx product family v500 comprise line group videoconferencing systems ipower products utilize pcbased architecture optimized intensive collaboration conjunction videoconferencing viavideo ii desktop video communications appliance integrates multimedia processor camera polycom’s patented fullduplex acoustic clarity technology twoway video voice data transmission single device pvx software application enables video collaboration standardsbased video conference systems remotely located offices conference rooms visual concert family peripherals allows users group conferencing video products incorporate data documents audiovisual effects videoconferencing sessions company’s voice communications products consist desktop conference room meeting room products majority voice products feature polycom’s patented acoustic clarity technology allows simultaneous conversations full duplex minimizes background noise echoes word clipping distortion soundstation vtx 1000™ automatically adapts meeting environment providing high fidelity voice quality participants whether 2feet 20feet away microphone wideband conference phone delivers twice bandwidth normal telephone ordinary telephone line lifelike sound quality recently introduced soundstation 2w polycom’s first wireless conference phone soundstation 2w voice encryption technology 24 hours talk time ability dial cell phone company offers soundstation ip soundpoint ip products applications conference room desktop voice ip technology solutions vortex series rackmounted voice conferencing products provide solutions larger highend conference rooms training rooms courtrooms classrooms permanent installations solutions used stand alone audio system used combination video system enhance audio quality microphone pick network systems segment network systems products provide broad range network infrastructure facilitate video voice data conferencing collaboration capabilities businesses telecommunications service providers governmental educational institutions company’s mgc media servers provide seamless network connectivity across packetbased broadband networks traditional circuitswitched networks video voice multipoint conferencing gateways move translate traffic effectively securely one network type another company’s readivoice product highcapacity automated audio conferencing system enables endusers initiate conference calls 24 hours day 7 days week without need make reservations contact operators line network systems products also includes host software products manage company’s video network systems products seamlessly pathnavigator call processing server provides support intelligent call routing easy system deployment management global management system software enables webbased system management enterprisewide video communications network polycom conference suite enables easy scheduling conferences microsoft outlook web interface encompasses tools proactively monitor control track adjust network enables control conference room equipment remote location addition weboffice company’s webconferencing software application virtual office allows users conduct online meetings share information files applications documents secure interactive environment using web browser services segment service comprised wide range service support offerings resellers directly enduser customers service offerings include maintenance programs integration services consisting consulting education design project management services consulting services consisting planning needs analysis endusers design services room design custom solutions project management installation training segment revenue profit accounting policies used derive reportable segments described note 1 consolidated financial statements significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin asset data exception inventory reviewed management segment level products services within respective segments generally considered similar nature therefore separate disclosure similar classes products services segment level presented financial information reportable segment follows fiscal years ended december 31 2004 2003 2002 thousands segment contribution margin includes product line segment revenues less related cost sales audio network systems sales expenses direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing general administrative costs legal accounting acquisitionrelated costs amortization purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income net loss strategic investments income expense net provision income taxes reconciliation segment information polycom consolidated totals follows thousands company’s revenues substantially denominated us dollars summarized geographically follows thousands percentage total revenues communications network systems services segments follows customer accounted 10 company’s revenues 2004 2003 2002 company’s fixed assets net accumulated depreciation located following geographical areas thousands 18 net income per share disclosures reconciliation numerator denominator basic diluted net income per share continuing operations provided follows thousands except per share amounts 2004 2003 2002 3999591 7013990 10949063 respectively potentially dilutive securities stock options stock subject repurchase excluded denominator computation diluted net income per share continuing operations option exercise price greater average market price common stock polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2005 2004 three years period ended december 31 2005 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits immediately following signature page form 10k c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc robert c hagerty robert c hagerty chairman board directors chief executive officer president date march 10 2006 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint robert c hagerty michael r kourey either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated polycom inc index consolidated financial statements page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may change time management assessed effectiveness internal control financial reporting december 31 2005 making assessment management used criteria set forth internal controlintegrated framework issued committee sponsoring organizations treadway commission coso based assessment internal controls financial reporting management concluded december 31 2005 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles assessment effectiveness company’s internal control financial reporting december 31 2005 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors stockholders polycom inc completed integrated audits polycom inc’s 2005 2004 consolidated financial statements internal control financial reporting december 31 2005 audit 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15 2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included management’s report internal control financial reporting appearing page company maintained effective internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable report independent registered public accounting firm continued assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp san jose california march 8 2006 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business summary significant accounting policies description business polycom leading global provider line highquality easytouse communications equipment enables enterprise users effectively conduct video voice data web communications principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates reclassifications certain previously reported amounts reclassified conform current year’s presentation cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition company’s customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances writtenoff management determined likelihood collection probable investments company’s shortterm longterm investments comprised us state municipal government obligations foreign domestic public corporate debt securities investments classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held company’s name limited number major financial institutions december 31 2005 2004 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period unrealized gains losses recorded separate component cumulative comprehensive income loss stockholder’s equity investments sold loss considered temporarily declined value charge operations recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecasted earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives three thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill amortized regularly reviewed potential impairment identification measurement goodwill impairment involves estimation fair value company’s reporting units estimates fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years purchased intangible assets determined indefinite useful lives amortized longlived assets including intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset eventual disposition measurement impairment loss longlived assets management expects hold use based fair value asset longlived assets disposed reported lower carrying amount fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured company warranties generally start delivery date continue one three years depending product purchased software products generally carry 90day warranty date shipment company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary changes warranty obligation included component “other accrued liabilities” consolidated balance sheets period follows thousands deferred maintenance revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company recognizes maintenance revenue contracts life service contract changes deferred maintenance revenue 267 million 208 million shortterm included component “deferred revenue” december 31 2005 2004 respectively 121 million 52 million longterm included component “longterm deferred revenue” december 31 2005 2004 respectively consolidated balance sheets follows thousands cost providing maintenance services years ended december 31 2005 2004 373 million 347 million respectively indemnifications verilink corporation “verilink” connection sale network access product line verilink company agreed indemnify verilink certain contingent liabilities company believes estimated fair value indemnification material officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity indemnification obligations valid long director officer acted good faith manner person reasonably believed opposed best interests corporation respect criminal action proceeding reasonable cause believe conduct unlawful maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations minimal indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use it’s products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liability environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company recognizes extended service revenue hardware software products service performed generally one five years company’s video communications network systems products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts accordingly company accounts revenue products accordance statement position 972 “software revenue recognition” related interpretations company uses residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement company defers revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements company defers revenue sufficient evidence exists elements delivered company accrues sales returns allowances reduction revenues upon shipment based upon contractual obligations historical experience coop marketing funds accounted accordance eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” guidelines company accrues coop marketing funds marketing expense receives identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues research development expenditures research development expenditures charged operations incurred consist primarily compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2005 2004 2003 261 million 138 million 129 million respectively commencing january 2005 company made change coop marketing program provided channel partners resulted coop marketing funds generally treated marketing expense rather revenue reduction previous years income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities determined based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized foreign currency translation financial statements company’s foreign subsidiaries operate functional currency us dollar translated us dollars yearend exchange rates monetary assets liabilities nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations functional currency dstmedia technology co ltd dstmedia whollyowned subsidiary china chinese yuan cny adjustments resulting translating foreign currency financial statements dstmedia us dollar included separate component “cumulative comprehensive income loss” derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated accounting hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk computation net income per share continuing operations basic net income per share continuing operations computed dividing net income continuing operations weighted average number common shares outstanding period less common stock subject repurchase diluted net income per share continuing operations reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding shares common stock subject repurchase potentially dilutive shares including shares common stock subject repurchase excluded computation fully diluted net income per share continuing operations effect antidilutive fair value financial instruments carrying amounts certain company’s financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm longterm investments based quoted market prices similar instruments stockbased compensation accordance sfas 123 sfas 123 “accounting stockbased compensation” company accounts employee stockbased compensation accordance accounting principles board opinion 25 apb 25 “accounting stock issued employees” financial accounting standards board fasb interpretation 44 fin 44 “accounting certain transactions involving stockbased compensation interpretation apb opinion 25” related interpretations accounting stockbased compensation plans accordance eitf 9618 “accounting equity instruments issued employees acquiring conjunction selling goods services” stockbased compensation related nonemployees based fair value related stock options accordance sfas 123 interpretations expense associated stockbased compensation amortized vesting period individual award consistent disclosure provisions sfas 123 company’s net income basic diluted net income per share would adjusted pro forma amounts indicated thousands except per share amounts impact pro forma net income per share net income table may indicative effect future years options vest several years company continues grant stock options new current employees recent pronouncements november 2004 fasb issued fasb statement 151 “inventory costsan amendment arb 43” “sfas 151” result efforts converge us accounting standards inventories international accounting standards sfas 151 requires abnormal amounts idle facility expenses freight handling costs wasted material spoilage costs recognized currentperiod charges regardless whether meet criterion “so abnormal” stated arb 43 also requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 company anticipate implementation standard significant impact consolidated results operations financial condition cash flows december 2004 fasb issued fasb statement 123 revised 2004 “sharebased payment” “sfas 123r” revision sfas 123 sfas 123r supersedes apb opinion 25 amends fasb statement 95 “statement cash flows” sfas 123r addresses forms sharebased payment “sbp” awards including shares issued certain employee stock purchase plans stock options restricted stock appreciation rights sfas 123r require company expense sbp awards compensation cost sbp transactions measured fair value march 2005 securities exchange commission issued staff accounting bulletin 107 “sab 107” relating adoption sfas 123r beginning first quarter 2006 company adopt provisions sfas 123r modified prospective transition method using blackscholes option pricing model modified prospective method requires compensation expense recorded unvested sbp’s beginning effective date adoption awards granted employees effective date adoption accordingly company recognize sbp compensation expense awards issued december 31 2005 straightline basis vesting period award awards issued prior january 1 2006 company recognize sbp compensation expense based fasb interpretation 28 “accounting stock appreciation rights variable stock option award plansan interpretation apb opinions 15 25” provides accelerated expensing company continuing evaluate impact sfas 123r results operations financial condition actual effects adopting sfas 123r depend numerous factors including stock price volatility employee exercise patterns expected life options future forfeitures amount sbp’s granted future valuation model company uses value future sbp’s employees related tax effects company expects sfas 123r material impact results operations upon adoption first quarter 2006 june 2005 fasb issued fsp fas 1431 accounting electronic equipment waste obligations “fsp 1431” fsp 1431 provides guidance accounting obligations associated directive 200296ec “directive” waste electrical electronic equipment adopted european union fas 1431 required applied later first reporting period ending june 6 2005 date directive’s adoption law applicable eu member countries company significant operations directive distinguishes “new” “historical” waste new waste relates products put market august 13 2005 fsp 1431 directs commercial users apply provisions fasb statement 143 accounting asset retirement obligations related fasb interpretation 47 accounting conditional asset retirement obligations measurement recognition liability asset retirement obligation associated historical waste management requirements directive additionally fsp 1431 provides guidance accounting producers financing obligations historical waste held private households company adopted fas 1431 first quarter fiscal 2006 concluded significant liability incurred december 31 2005 company continuing analyze impact directive fsp 1431 financial position results operations additional eu member countries adopt directive separate requirements fsp 1431 company believes internal cost compliance directive liability associated new waste obligations according directive borne solely producers new equipment significant year ended december 31 2005 could significant future november 2005 fasb issued fsp fas 1151 fas 1241 “the meaning otherthantemporary impairment application certain investments” “fsp 1151 1241” clarifies investment considered impaired whether impairment temporary measurement impairment loss also includes accounting considerations subsequent recognition otherthantemporary impairment requires certain disclosures unrealized losses recognized otherthantemporary impairments fsp 1151 1241 effective reporting periods beginning december 15 2005 december 31 2005 none company’s unrealized investment losses recognized otherthantemporary impairments availableforsale securities company believe fsp fas 1151 fas 1241 material effect consolidated financial position results operations cash flow 2 discontinued operations january 2003 company sold verilink corporation “verilink” certain fixed assets intellectual property rights relating polycom’s network access product line including polycom’s line netengine integrated devices total 30 million cash 10 million paid polycom closing ii 025 million paid polycom first anniversary closing january 2004 iii 175 million paid polycom based ten percent verilink’s revenues related sale netengine products verilink also agreed purchase polycom’s existing netenginerelated inventories book value approximately 19 million closing date asneeded basis december 31 2004 verilink purchased remaining netenginerelated inventories approximately 23 million concurrent closing certain employees joined verilink additionally connection sale polycom entered license agreement verilink pursuant verilink granted polycom license use develop network access technology related netengine product line company agreed compete verilink network access market period three years closing date ends january 28 2006 accordance sfas 144 results operations company’s network access product line presented discontinued prior periods reclassified including reallocation general overhead charges company’s three remaining reporting segments company recorded net income 03 million net loss 07 million years ended december 31 2004 2003 respectively related results operations company’s network access product line primarily related sale netenginerelated inventories included “income loss discontinued operations” consolidated statements operations activity year ended december 31 2005 verilink paid company 06 million 07 million 04 million related ten percent verilink’s revenues sale netengine products years ended december 31 2005 2004 2003 respectively company recorded aftertax gain 04 million 05 million 06 million result transactions years ended december 31 2005 2004 2003 respectively included “gain sale discontinued operations” consolidated statements operations cumulative basis verilink paid 175 million post closing commitment december 31 2005 3 business combinations august 25 2005 company acquired dstmedia technology co ltd “dstmedia” january 5 2004 company acquired voyant technologies inc “voyant” details acquisitions presented following table summarizes company’s purchase price allocations related purchase business combination transactions time acquisition thousands additionally company completed acquisition meetucom inc “meetu” year ended december 31 2002 company also completed acquisitions picturetel corporation “picturetel” atlanta signal processors inc “aspi” circa communications ltd “circa” accord networks ltd “accord” year ended december 31 2001 changes goodwill purchased intangibles fair value net tangible assets unearned stockbased compensation summarized follows thousands dstmedia technology august 25 2005 company acquired dstmedia privately held video solutions company headquartered beijing china aggregate consideration transaction 103 million comprised 76 million cash 27 million direct acquisition costs purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date assistance independent appraisal company recorded approximately 67 million goodwill 22 million identifiable intangible assets 11 million net tangible assets 03 million inprocess research development costs connection acquisition primary reason acquisition factors contributed recognition goodwill relate dstmedia’s ability enhance company’s position china japan asian countries deliver video networking low end video solutions 03 million allocated inprocess research development recorded “purchased inprocess research development” consolidated statements operations accordance sfas 142 goodwill originating dstmedia acquisition amortized general goodwill deductible tax purposes purchased intangible assets amortized straightline basis period two five years see note 4 notes consolidated financial statements additional information goodwill purchased intangibles dstmedia shareholders may receive additional 200 million consideration 2008 payable cash based achievement certain financial milestones relating operating results dstmedia additional consideration paid dstmedia shareholders would result increase goodwill dstmedia’s results operations included results operations since august 25 2005 communications network systems segments pro forma results operations presented effects acquisition material individual basis voyant technologies january 5 2004 company completed acquisition voyant technologies inc “voyant” pursuant terms agreement plan merger dated november 21 2003 “merger agreement” voyant designs delivers group voice communication solutions primary reason acquisition factors contributed recognition goodwill relate voyant’s ability deliver audio bridging capabilities network systems space pursuant merger agreement voyant shareholders received 1089 million cash approximately 129 million cash placed escrow held security losses incurred company event certain breaches representations warranties covered merger agreement certain events second quarter 2004 company received 01 million escrow account related certain working capital adjustments reducing purchase consideration 1255 million 1254 million third quarter 2004 company authorized release approximately 14 million escrow fund voyant shareholders certain prior sales tax liabilities resolved second quarter 2005 company received approximately 02 million escrow account related certain losses incurred reducing purchase consideration 1254 million 1252 million also second quarter 2005 company instructed escrow agent release approximately 107 million escrow fund voyant shareholders remaining 04 million escrow amount remain escrow security sales tax liabilities resolved additional consideration paid voyant shareholders would result increase goodwill addition upon completion merger options acquire shares voyant common stock outstanding terms voyant stock plans assumed converted approximately 14 million options acquire shares polycom common stock upon acquisition purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date based upon independent appraisal voyant reported part company’s network systems services segments accompanying consolidated financial statements reflect purchase price approximately 1252 million consisting cash fair value options granted polycom acquisition costs directly related acquisition follows thousands purposes computing estimated fair value options granted blackscholes option pricing model used following assumptions fair value polycom’s stock 1969 expected life 32 years risk free interest rate 237 expected dividend yield 0 volatility 82 following summary allocation purchase price thousands amount allocated inprocess research development determined management using independent appraisal based established valuation techniques hightechnology industry expensed upon acquisition technological feasibility established future alternative uses existed income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing inprocess research development estimated net free cash flows generated inprocess research development projects discounted rates ranging 35 40 percent relation stage completion technical risks associated achieving technology feasibility 46 million allocated inprocess research development recorded “purchased inprocess research development” consolidated statements operations accordance sfas 142 goodwill originating voyant acquisition amortized general goodwill deductible tax purposes purchased intangible assets amortized straightline basis period three months eight years see note 4 notes consolidated financial statements additional information goodwill purchased intangibles purchase price allocation presented table final january 5 2005 except resolution certain earnout contingency payments would result increase total consideration paid period earnout achieved corresponding adjustment goodwill since january 5 2004 results operations voyant included company’s consolidated statements operations following unaudited pro forma financial information reflects results operations year ended december 31 2003 acquisition occurred january 1 2003 pro forma results prepared comparative purposes purport indicative operating results would acquisition actually taken place january 1 2003 may indicative future operating results unaudited thousands except per share amounts 4 goodwill purchased intangibles following table presents details company’s goodwill segment thousands increase goodwill 2005 2004 due acquisitions dstmedia voyant respectively fair value adjustments assets acquired liabilities assumed years ended december 31 2005 2004 resulted primarily revisions net cost estimates associated elimination redundant facilities resolution certain preacquisition contingencies changes estimates fair value certain picturetel voyant dstmedia assets recorded initial purchase price allocation see note 5 notes consolidated financial statements regarding reduction facility closings liability following table presents details company’s total purchased intangible assets december 31 thousands 2005 2004 2003 company recorded amortization expense related purchased intangibles 69 million 205 million 176 million respectively included “amortization impairment purchased intangibles” consolidated statement operations upon adoption sfas 142 company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances unamortized balance acquired workforce totaling 05 million recorded part purchase price allocation circa acquisition reclassified purchased intangibles goodwill meet criteria outlined sfas 142 recorded separately goodwill fourth quarters 2005 2004 company completed annual goodwill impairment test outlined sfas 142 requires assessment goodwill impairment annual basis assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date fair value determined using income approach whereby fair value asset based value cash flows asset expected generate future estimated future cash flows discounted rates ranging 14 17 percent arrive respective fair values based results impairment test company determined goodwill assets impaired 2005 2004 fourth quarters 2005 2004 company completed annual purchased intangibles impairment tests assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment existed future cash flows discounted rates ranging 30 32 percent compared carrying amounts purchased intangibles determine amount impairment based results 2005 impairment test company recorded impairment charge 19 million write certain intangible assets acquired part voyant acquisition result decline projected future cash flows oci product line due announced discontinuance related core developed technology trade name non competition agreement intangibles written fair values december 31 2005 impairment charge recorded “amortization impairment purchased intangibles” consolidated statements operations amortization impairment intangibles allocated segments impairment 2004 company plans conduct annual impairment tests fourth quarter every year unless impairment indicators exist sooner estimated future amortization expense purchased intangible assets december 31 2005 follows thousands 5 acquisitionrelated costs liabilities years ended december 31 2005 2004 2003 company recorded charge operations 04 million 14 million 04 million respectively acquisitionrelated integration costs primarily related dstmedia voyant picturetel acquisitions charges include outside financial advisory legal accounting services charges include cost actions designed improve company’s combined competitiveness productivity future profitability primarily relate elimination redundant excess facilities workforce company’s combined businesses elimination redundant assets following table summarizes status company’s acquisitionrelated liabilities integration costs thousands company approximately 22 million 35 million december 31 2005 december 31 2004 respectively acquisitionrelated reserves classified longterm liabilities approximately 19 million 56 million december 31 2005 december 31 2004 respectively acquisitionrelated reserves classified current liabilities facility closings november 2003 company entered lease amendment one facilities previously provided restructuring reserve original term lease ended 2014 amended allow company exit facility various stages 2008 exchange certain cash payments result november 2003 amendment company estimated 72 million restructuring reserve would longer required therefore december 2003 amount released restructuring reserve recorded reduction goodwill june 2004 company entered termination agreement related payment agreement facility terminated lease unoccupied space december 28 2004 agreement resulted overall reduction company’s obligations acceleration termination payments previously scheduled 2008 result agreements company estimated approximately 39 million restructuring reserve would longer required therefore june 2004 amount released restructuring reserve recorded reduction goodwill severance related benefits company assumed liabilities related severance totaling 144 million acquisitions picturetel aspi meetu fully paid end 2004 result voyant acquisition company assumed additional liabilities related severance totaling 04 million paid released june 30 2005 integration costs merger fees expenses mergerrelated transaction period expenses years ended december 31 2005 2004 2003 04 million 14 million 04 million respectively principally consisted financial advisory accounting legal consulting fees direct mergerrelated expenses incurred period 6 restructure costs 2003 management approved restructuring actions primarily connection sale network access product line verilink response global economic uncertainty continued downturn technology spending actions meant improve company’s overall cost structure prioritizing resources strategic areas business reducing operating expenses company recorded restructuring charge 50 million 2003 result actions charge consisted severance employee termination benefits related workforce reduction approximately 12 percent company’s employees worldwide restructuring charge related communications services network systems segments amounted 08 million 03 million 01 million respectively balance restructuring charge related operating activities separately managed corporate level allocated segments payments related actions made 2004 management approved restructuring plan network systems segment resulting actions intended improve overall cost structure network systems segment focusing resources strategic areas business streamlining certain engineering efforts reducing operating expenses accordance sfas 146 “accounting costs associated exit disposal activities” sfas 146 company recorded charge approximately 14 million year ended december 31 2004 charge consisted severance employee termination benefits related workforce reductions comprised less 3 percent company’s employees worldwide payments related actions made 2005 management approved restructuring plan eliminating relocating certain positions throughout company focused sales general administrative functions resulting actions intended streamline focus company’s efforts properly align cost structure projected revenue streams accordance sfas 146 company recorded charge approximately 07 million year ended december 31 2005 charge consisted severance employee termination benefits related workforce reductions comprised less 1 percent employees worldwide obligations related charges paid released december 31 2005 charge partially offset release remaining reserve recorded 2004 related restructuring network systems segment discussed resulting net restructuring charges year 06 million restructure charges recorded “restructure costs” consolidated statements operations following table summarizes status company’s restructure reserves thousands 7 investments company investments debt securities also strategic investments private companies classification investments follows thousands following table summarizes fair value gross unrealized losses short longterm investments unrealized losses thousands aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2005 2004 debt securities company’s shortterm longterm investments comprised us state municipal government obligations foreign domestic public corporate debt securities investments auction rate securities classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held company’s name limited number major financial institutions december 31 2005 2004 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period unrealized gains losses recorded separate component cumulative comprehensive income stockholder’s equity investments sold loss considered temporarily declined value charge operations recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net 2005 company recorded gross realized gains 11 million gross realized losses 05 million disposal investments 2003 2004 company recorded gross realized gains gross realized losses less 01 million disposal investments unrealized loss balances government obligations public corporate debt securities december 31 2005 primarily caused interest rate increases company ability intent hold debt securities recovery fair value may maturity consider debt securities otherthantemporarily impaired december 31 2005 company’s investment policy limits concentration investments debt securities unlimited amount us government us government agencies maximum 4 single issuer corporate debt securities maximum 10 single money market fund policy also limits percent portfolio held instruments minimum 20 us government us government agencies 25 75 corporate debt instruments depending debt classification company’s debt securities must rated standard poor’s moody’s must high quality credit rating nature company’s investment policy company monitor industry classification investments commercial bank issues company compliance investment policy december 31 2005 private company investments strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2005 2004 investments carrying value 59 million 74 million respectively recorded “other assets” consolidated balance sheets 2005 2004 company made investments two privately held companies totaling 05 million 65 million respectively year ended december 31 2005 privately held company held investment carrying value 04 million sold resulting gain 45 million recorded consolidated statements operations “gain loss strategic investments” 2005 2003 company determined value investment private companies impaired reduced carrying amount 16 million 05 million respectively recorded consolidated statements operations “gain loss strategic investments” company determined impairment 2004 8 inventories valued lower cost market cost computed firstin firstout “fifo” basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value inventories consist following thousands 9 property equipment net property equipment net consist following thousands 10 accrued liabilities accrued liabilities consist following thousands 11 business risks credit concentration company sells products services serve communications equipment market substantially company’s revenues derived sales video voice network systems products related services factor adversely affecting demand supply products services could materially adversely affect company’s business financial performance company subcontracts manufacture voice video product lines celestica thirdparty contract manufacturer company uses celestica’s facilities thailand china singapore disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases similar events economic political difficulties countries asia reason disruption would harm business results operations also celestica’s facilities currently primary source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints company would experience delay shipping products would immediate negative impact revenues result company may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes company certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations technology used develop company’s current network systems products developed part grants israeli office chief scientist israeli law technology developed pursuant grants office chief scientist cannot transferred person without prior written consent office chief scientist grants also contain restrictions ability manufacture products developed grants outside israel approval manufacture products outside israel granted generally subject increase total amount repaid office chief scientist 120 300 amount granted depending extent manufacturing conducted outside israel restrictions ability transfer certain company’s technology third parties manufacture products outside israel may adversely affect company’s operating results development additional network systems products significantly reduce value technology company process developing implementing disaster recovery plan could provide manufacturing performed outside israel limited basis today extended basis event disaster today company performing final test assembly limited basis atlanta georgia implementation disaster recovery plan could subject company additional payments office chief scientist could adversely affect company’s operating results company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses expansion polycom’s product offerings may increase company’s credit risk customers place larger orders initial stocking orders assurance company’s credit loss experience remain near historic levels december 31 2005 2004 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows 12 commitments contingencies litigation time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company expects face increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality video voice data web conferencing products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s financial position liquidity results operations period unfavorable outcome occurs becomes probable potentially future periods standby letters credit company several standby letters credit totaling approximately 13 million issued guarantee certain company’s office lease obligations contractual obligations license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant contingent consideration acquisitions see note 3 notes consolidated financial statements regarding contingent consideration acquisitions leases company leases certain office facilities equipment noncancelable operating leases expiring 2006 2018 december 31 2005 following future minimum lease payments net estimated sublease income due current lease obligations example company approximately 152000 square foot building fully subleased third party sublease runs concurrent lease obligation result company currently showing lease obligation related facility sublease terminated tenant defaulted payment company would incur additional lease payments would negatively impact operating results overall cash flows addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2005 thousands company currently headquartered approximately 50000 square foot facility pleasanton california pursuant lease expires may 2012 facility accommodates executive administrative operations company’s facility milpitas california houses research development manufacturing marketing sales customer support operations primarily voice business facility approximately 102000 square feet leased january 2007 majority company’s video service operations located approximately 107000 square feet andover massachusetts pursuant lease expires august 2014 approximately 62000 square feet austin texas pursuant lease expires november 2011 network systems operations occupy approximately 47000 square feet petach tikva israel 32000 square feet atlanta georgia also shared installed voice business company’s audio network systems operations located approximately 84000 square foot leased facility located westminster colorado addition company leases space vancouver canada voip development operation burlington massachusetts advanced voice development operations see note 5 discussion lease amendment signed december 2003 termination payment agreements signed june 2004 related andover massachusetts facility company leases approximately 55000 square foot facility tracy california used north american latin american distribution center company utilizes space manufacturing contractor thailand company’s european distribution contractor united kingdom netherlands provide asian european distribution repair centers respectively included noncancelable operating leases assumed part acquisition picturetel company identified vacated redundant picturetel leased facilities company intends terminate sublease recognized liability assumed purchase combination liability valued estimated net present value lease commitments estimated net present value cost terminating leases net estimated sublease rent 41 million 19 million classified current liability 22 million classified long term liability consolidated balance sheets rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2005 2004 2003 174 million 178 million 165 million respectively shortterm deferred lease obligation included accrued liabilities 05 million december 31 2005 2004 longterm deferred lease obligation included longterm liabilities 22 million 19 million december 31 2005 2004 respectively event company exercise option extend term leases expire company likely incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs cannot determined end lease term times based landlord’s discretion subsequent negotiations landlord company 13 credit arrangements company available 25 million revolving line credit bank agreement dated december 3 2005 borrowings line unsecured bear interest bank’s prime rate 715 december 31 2005 london interbank offered rate libor plus 065 approximately 501 514 depending term borrowings december 31 2005 borrowings line subject certain financial covenants restrictions liquidity indebtedness financial guarantees business combinations profitability levels related items line credit expires december 3 2007 december 31 2005 balances outstanding line credit however company outstanding letters credit total approximately 13 million december 31 2005 12 million secured line credit company compliance applicable financial covenants restrictions periods presented 14 stockholders’ equity share repurchase program june 2002 august 2004 board directors approved plans purchase 35 million shares 10 million shares respectively company’s common stock open market december 31 2005 prior plans company purchased approximately 48 million shares open market cash 818 million shares common stock retired reclassified authorized unissued august 9 2005 company announced board directors approved share repurchase plan superseded prior share repurchase plans would purchase shares aggregate value 250 million open market time years ended december 31 2005 2004 2003 plans company purchased 114 million 28 million 08 million shares common stock open market cash 1840 million 525 million 69 million respectively december 31 2005 company authorized purchase additional 1194 million shares open market 2005 share repurchase plan stock option exchange program may 28 2003 company commenced voluntary stock option exchange program certain eligible employees members board directors executive officers eligible participate exchange program eligible employees given option cancel outstanding stock option previously granted exercise price greater equal 1348 per share exchange 08 new options purchase shares company’s common stock granted december 29 2003 six months three days june 25 2003 date old options cancelled exercise price new options equal fair market value company’s common stock date grant new options term equal lesser remaining term exchanged options 5 12 years generally new option vesting schedule exchanged option replaced new option vest cancellation date exchanged option new option grant date beginning new option grant date options immediately vested extent vested cancellation date vesting continues accordance vesting schedule exchanged option subject continued employment relevant vesting date however employees restricted exercising new options period six months following new option grant date total 41 million stock options cancelled result program approximately 33 million stock options granted exchange program result additional compensation charges variable option plan accounting stock option plan 2001 board directors reserved 750000 shares common stock 2001 nonstatutory stock option plan “the nonstatutory plan” issuance nonqualified stock options employees acquired companies foreignbased employees ineligible incentive stock options february 2005 board directors terminated 2001 nonstatutory stock option plan date termination 573405 options outstanding nonstatutory plan options canceled forfeited expired nonstatutory plan available grant plan june 2 2004 shareholders approved 2004 equity incentive plan “2004 plan” reserved issuance plan 12500000 shares plus remaining available options terminated 1996 stock option plan “1996 plan” extent shares would returned 1996 plan result expiration cancellation forfeiture shares instead went reserve shares available 2004 plan addition 1354099 shares added shares reserved 2004 plan following completion voyant acquisition january 2004 see note 3 terms 2004 plan options may granted prices lower fair market value date grant determined board directors 2004 plan prior terminated plans options granted expire seven ten years date grant generally exercisable upon vesting options granted 2004 plan unvested shares outstanding prior terminated plans generally vest 25 completing one year service company remaining amount equally 36 months fully vested four years also available grant 2004 plan performancebased restricted shares issuance officers key employees plan december 31 2005 performancebased restricted shares granted activity plans follows december 31 2005 2004 2003 9001494 7228429 4692969 outstanding options exercisable aggregate average exercise price 1876 1923 1718 respectively options outstanding currently exercisable exercise price december 31 2005 follows weighted average fair value options granted pursuant plans 693 966 695 2005 2004 2003 respectively fair value option grant estimated date grant using multiple option approach blackscholes option pricing model following weighted average assumptions company also estimated fair value purchase rights issued employee stock purchase plan rights plan also valued using blackscholes optionpricing model purchase periods occur twice yearly contains four options range 2 years 6 months weighted average fair value purchase rights granted pursuant employee stock purchase plan 2005 2004 2003 674 1004 1725 respectively fair value purchase right estimated using blackscholes option pricing model following weighted average assumptions unearned stockbased compensation connection acquisitions circa aspi company recorded unearned stockbased compensation costs unvested stock options assumed company totaling 15 million recognized vesting period options connection certain stock option grants 1999 company recorded unearned stockbased compensation cost totaling 24 million recognized vesting period related options three years amortization expense associated unearned stock compensation totaled less 01 million 02 million 03 million 2005 2004 2003 respectively amortization unearned stock based compensation complete march 31 2005 preferred share rights purchase plan july 1998 board directors approved preferred shares rights agreement board amended march 2001 “rights agreement” rights agreement intended protect stockholders’ rights event unsolicited takeover attempt interfere transaction approved board directors upon becoming exercisable right entitles stockholders buy 11000 share series preferred stock company exercise price 40000 subject adjustment rights exercisable person group “acquiring person” acquires announces tender exchange offer acquire 20 company’s common stock event acquiring person acquires 20 company’s common stock “triggering event” subject certain exceptions right held acquiring person entitle holder purchase exercise price number shares common stock current market value equal two times exercise price addition event following triggering event company acquired merger sells 50 assets right held acquiring person entitle holder purchase exercise price number shares common stock acquiring company current market value equal two times exercise price rights redeemable company’s option price 00025 per right company may also exchange rights whole part shares common stock certain circumstances rights expire earlier july 15 2008 date redemption exchange consummation merger consolidation asset sale resulting expiration rights 15 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions lesser 60 eligible compensation 14000 subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year fiscal years 2005 2004 2003 maximum company cash match 1500 per participating employee per year company’s contributions polycom 401k plan totaled approximately 11 million 11 million 09 million 2005 2004 2003 respectively employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees 6 month offering periods purchase dates end offering period january july company reserved 7500000 shares common stock issuance plan shares purchased employees’ payroll deductions maximum 20 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 5000 shares per offering 25000 worth common stock one calendar year 2005 2004 2003 412509 291040 271524 shares purchased average per share prices 1439 1791 1062 respectively december 31 2005 5228013 shares available issued plan benefit plans israeli labor laws agreements company required pay severance pay upon dismissal employee company’s israeli subsidiaries upon termination employment specified circumstances company’s severance pay employees israel based upon length service latest monthly salary one month’s salary year worked mainly covered purchased managerial insurance policies value policies recorded asset consolidated balance sheets net amount severance pay charged income totaled approximately 11 million 12 million 10 million 2005 2004 2003 respectively december 31 2005 2004 severance pay funded included assets approximately 35 million 31 million respectively accrued severance pay included “other longterm liabilities” approximately 57 million 51 million respectively company also contributing funds behalf israeli employees individual insurance policy provides combination savings plan insurance severance pay benefits insured employee provides payments employee upon retirement death secures substantial portion severance pay employee legally entitled upon termination employment participating employee contributes amount equal 50 employee’s base salary subject social contributions employer contributes 50 75 employee’s base salary subject social contributions company’s fulltime israeli employees participate benefit package net amount insurance expense charged income totaled approximately 06 million 05 million 04 million 2005 2004 2003 respectively company also provides employees education fund participating employee contributes amount equal 25 employee’s base salary subject social contributions statutory cap employer contributes amount equal 75 employee’s base salary subject social contributions statutory cap education fund expenses charged income totaled approximately 06 million 05 million 05 million 2005 2004 2003 respectively 16 income taxes income tax expense consists following thousands sources income loss provision income taxes follows thousands company’s tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2005 company tax net operating loss carryforwards tax credit carryovers capital loss carryovers approximately 248 million 133 million 54 million respectively net operating loss carryforwards tax credit carryforwards capital loss carryovers begin expire 2013 2007 2006 respectively portion future utilization company’s carryforwards subject certain limitations due change ownership occurred 1998 2001 2004 deferred tax assets approximately 219 million december 31 2005 pertain certain net operating loss carryforwards credit carryforwards resulting exercise employee stock options company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2005 cumulative amount earnings upon us income tax provided approximately 55 million practicable determine income tax liability might incurred earnings distributed october 22 2004 american jobs creation act “act” signed law act creates temporary incentive us corporations repatriate accumulated income earned abroad providing dividends received deduction 85 certain dividends defined act fourth quarter 2005 company distributed 1375 million cash foreign subsidiary provided associated income tax expense 75 million tax benefits 14 million 2005 65 million 2004 associated exercise employee stock plans allocated stockholders equity company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions several years following first year company israeli taxable income consideration tax losses carried forward company date realized tax savings approximately 161 million reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 failure comply conditions may result cancellation benefits whole part 17 business segment information polycom leading global provider line highquality easytouse communications equipment enables businesses telecommunications service providers governmental educational institutions effectively conduct video voice data web communications company’s offerings organized along four product lines video communications voice communications network systems services reporting purposes company aggregates video communications voice communications one segment named communications reports network systems services separate segments determined accordance management views evaluates company’s business based aggregation criteria outlined sfas 131 description types products services provided reportable segment follows communications segment communications products include wide range videoconferencing collaboration products voice communications products network systems segment network systems products provide broad range network infrastructure hardware software facilitate video voice data conferencing collaboration businesses telecommunications service providers governmental educational institutions services segment service comprised wide range service support offerings resellers directly enduser customers company’s service offerings include maintenance programs integration services consisting consulting education design project management services consulting services consisting planning needs analysis endusers design services room design custom solutions project management installation training segment revenue profit accounting policies used derive reportable segments described note 1 consolidated financial statements significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin asset data exception inventory reviewed management segment level products services within respective segments generally considered similar nature therefore separate disclosure similar classes products services segment level presented financial information reportable segment follows fiscal years ended december 31 2005 2004 2003 thousands segment contribution margin includes product line segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing general administrative costs legal accounting acquisitionrelated costs amortization impairment purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income net gain loss strategic investments expense net provision income taxes reconciliation segment information polycom consolidated totals follows thousands company’s revenues substantially denominated us dollars summarized geographically follows thousands individual country outside united states accounted 10 company’s revenues 2005 2004 2003 percentage total revenues communications network systems services segments follows one customer accounted 10 company’s revenues 2005 2004 2003 company’s fixed assets net accumulated depreciation located following geographical areas thousands 18 net income per share disclosures reconciliation numerator denominator basic diluted net income per share continuing operations provided follows thousands except per share amounts 2005 2004 2003 11800156 3999591 7013990 respectively potentially dilutive securities stock options stock subject repurchase excluded denominator computation “diluted net income per share continuing operations” option exercise price greater average market price common stock polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2006 2005 three years period ended december 31 2006 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits immediately following signature page form 10k c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc robert c hagerty robert c hagerty chairman board directors chief executive officer president date february 28 2007 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint robert c hagerty michael r kourey either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated polycom inc index consolidated financial statements page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may change time management assessed effectiveness internal control financial reporting december 31 2006 making assessment management used criteria set forth internal controlintegrated framework issued committee sponsoring organizations treadway commission coso based assessment internal controls financial reporting management concluded december 31 2006 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles assessment effectiveness company’s internal control financial reporting december 31 2006 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors stockholders polycom inc completed integrated audits polycom inc’s consolidated financial statements internal control financial reporting december 31 2006 accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing page presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 14 consolidated financial statements accordance adoption sfas 123r company changed manner accounts sharebased compensation year ended december 31 2006 internal control financial reporting also opinion management’s assessment included management’s report internal control financial reporting appearing page company maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes report independent registered public accounting firm continued accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp san jose california february 26 2007 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business summary significant accounting policies description business polycom leading global provider line highquality easytouse communications equipment enables enterprise users effectively conduct video voice data web communications principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates reclassifications certain previously reported amounts reclassified conform current year’s presentation cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition company’s customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances writtenoff management determined likelihood collection probable investments company’s shortterm longterm investments comprised us state municipal government obligations foreign domestic public corporate debt securities investments classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held limited number major financial institutions company’s name december 31 2006 2005 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period unrealized gains losses recorded separate component cumulative comprehensive income loss stockholder’s equity investments sold loss considered temporarily declined value charge operations recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecasted earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives three thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill amortized regularly reviewed potential impairment identification measurement goodwill impairment involves estimation fair value company’s reporting units estimates fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years purchased intangible assets determined indefinite useful lives amortized longlived assets including intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset eventual disposition measurement impairment loss longlived assets management expects hold use based fair value asset longlived assets disposed reported lower carrying amount fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured company warranties generally start date purchase continue one three years depending product purchased software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary changes warranty obligation included component “other accrued liabilities” consolidated balance sheets period follows thousands deferred maintenance revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company recognizes maintenance revenue contracts life service contract changes deferred maintenance revenue 340 million 267 million shortterm included component “deferred revenue” december 31 2006 2005 respectively 183 million 121 million longterm included component “longterm deferred revenue” december 31 2006 2005 respectively consolidated balance sheets follows thousands cost providing maintenance services years ended december 31 2006 2005 2004 404 million 373 million 347 million respectively officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity indemnification obligations valid long director officer acted good faith manner person reasonably believed opposed best interests corporation respect criminal action proceeding reasonable cause believe conduct unlawful maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations minimal indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liability environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company recognizes extended service revenue hardware software products service performed generally one five years company’s video communications network systems products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts accordingly company accounts revenue products accordance statement position 972 “software revenue recognition” related interpretations company uses residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement company defers revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements company defers revenue sufficient evidence exists elements delivered company accrues sales returns allowances reduction revenues upon shipment based upon contractual obligations historical experience research development expenditures research development expenditures charged operations incurred consist primarily compensation costs including stock compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2006 2005 2004 261 million 261 million 138 million respectively commencing january 2005 company made change coop marketing program provided channel partners resulted coop marketing funds generally treated marketing expense rather revenue reduction previous years income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities determined based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized foreign currency translation financial statements company’s foreign subsidiaries operate functional currency us dollar translated us dollars yearend exchange rates monetary assets liabilities nonmonetary items translated historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations functional currency dstmedia technology co ltd dstmedia whollyowned subsidiary china chinese yuan cny adjustments resulting translating foreign currency financial statements dstmedia us dollar included separate component “cumulative comprehensive income loss” derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instruments designated fair value hedge gain loss recognized earnings period change together offsetting loss gain hedged item attributed risk hedged derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported separate component cumulative comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated accounting hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk computation net income per share continuing operations basic net income per share continuing operations computed dividing net income continuing operations weighted average number common shares outstanding period less common stock subject repurchase diluted net income per share continuing operations reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding shares common stock subject repurchase potentially dilutive shares including shares common stock subject repurchase excluded computation diluted net income per share continuing operations effect antidilutive fair value financial instruments carrying amounts certain company’s financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm longterm investments based quoted market prices similar instruments stock based compensation january 1 2006 company adopted statement financial accounting standards 123 revised 2004 “sharebased payment” “sfas 123r” requires measurement recognition compensation expense sharebased payment awards made employees directors including equity awards related 2004 equity incentive plan “employee equity awards” employee stock purchases related employee stock purchase plan “employee stock purchases” based estimated fair values sfas 123r supersedes company’s previous accounting principles board opinion 25 “accounting stock issued employees” “apb 25” periods beginning fiscal 2006 march 2005 securities exchange commission issued staff accounting bulletin 107 “sab 107” relating sfas 123r company applied provisions sab 107 adoption sfas 123r sfas 123r requires companies estimate fair value sharebased payment awards date grant using optionpricing model value portion award ultimately expected vest recognized expense requisite service period company’s consolidated statements operations prior adoption sfas 123r company accounted employee equity awards employee stock purchases using intrinsic value method accordance apb 25 allowed statement financial accounting standards 123 “accounting stockbased compensation” “sfas 123” intrinsic value method stockbased compensation expense recognized company’s consolidated statements operations related acquisitions exercise price company’s stock options granted employees directors equaled fair market value underlying stock date grant stockbased compensation expense related acquisitions less 01 million 02 million years ended december 31 2005 2004 respectively company adopted sfas 123r using modified prospective transition method requires application accounting standard january 1 2006 first day company’s fiscal year 2006 company’s consolidated financial statements year ended december 31 2006 reflect impact sfas 123r accordance modified prospective transition method company’s consolidated financial statements prior periods restated reflect include impact sfas 123r stockbased compensation expense recognized sfas 123r year ended december 31 2006 233 million consisted stockbased compensation expense related employee equity awards employee stock purchases stockbased compensation expense recognized period based value portion sharebased payment awards ultimately expected vest period stockbased compensation expense recognized company’s consolidated statements operations year ended december 31 2006 included compensation expense sharebased payment awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance pro forma provisions sfas 123 compensation expense sharebased payment awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions sfas 123r conjunction adoption sfas 123r company changed method attributing value stockbased compensation costs expense accelerated approach straightline method compensation expense sharebased payment awards granted prior december 31 2005 continue recognized using accelerated approach compensation expense sharebased payment awards related stock options employee stock purchase rights granted subsequent december 31 2005 recognized using straightline method compensation expense sharebased payment awards related performance shares granted subsequent december 31 2005 recognized using graded vesting method stockbased compensation expense recognized consolidated statements operations year ended december 31 2006 based awards ultimately expected vest reduced estimated forfeitures sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates company’s pro forma information required sfas 123 periods prior fiscal 2006 company accounted forfeitures occurred fair value sharebased payment awards estimated grant date using blackscholes option valuation model company’s determination fair value sharebased payment awards date grant using optionpricing model affected company’s stock price well assumptions regarding number highly complex subjective variables include limited company’s expected stock price volatility term awards actual projected employee stock option exercise behaviors november 10 2005 financial accounting standards board “fasb” issued fasb staff position fas 123r3 “transition election related accounting tax effects sharebased payment awards” company elected adopt alternative transition method provided fasb staff position calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establish beginning balance additional paidin capital pool “apic pool” related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r recent pronouncements july 2006 fasb issued fasb interpretation 48 fin 48 “accounting uncertainty income taxes” prescribes recognition threshold measurement process recording financial statements uncertain tax positions taken expected taken tax return additionally fin 48 provides guidance derecognition classification accounting interim periods disclosure requirements uncertain tax positions accounting provisions fin 48 effective first quarter company’s 2007 fiscal year company process determining effect adoption fin 48 financial statements september 2006 fasb issued statement financial accounting standards 157 sfas 157 “fair value measurements” clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions standard fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective first quarter company’s 2008 fiscal year early adoption permitted company yet determined impact implementation sfas 157 financial statements september 2006 staff sec issued staff accounting bulletin sab 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 provides guidance consideration effects prior year misstatements quantifying current year misstatements purpose determining whether current year’s financial statements materially misstated sab 108 effective fiscal years ending november 15 2006 adoption sab 108 impact company’s consolidated financial position results operations cash flows 2 discontinued operations january 2003 company sold verilink corporation “verilink” certain fixed assets intellectual property rights relating polycom’s network access product line including polycom’s line netengine integrated devices total 30 million cash accordance sfas 144 results operations company’s network access product line presented discontinued prior periods reclassified including reallocation general overhead charges company’s three remaining reporting segments company recorded net income 03 million year ended december 31 2004 related results operations company’s network access product line primarily related sale netenginerelated inventories included “income loss discontinued operations” consolidated statements operations activity years ended december 31 2006 2005 accordance sale verilink paid company 06 million 07 million related ten percent verilink’s revenues sale netengine products years ended december 31 2005 2004 respectively company recorded aftertax gain 04 million 05 million result transactions years ended december 31 2005 2004 respectively included “gain sale discontinued operations” consolidated statements operations 3 business combinations august 25 2005 company acquired dstmedia technology co ltd “dstmedia” january 5 2004 company acquired voyant technologies inc “voyant” details acquisitions presented following table summarizes company’s purchase price allocations related purchase business combination transactions time acquisition thousands additionally company completed acquisition meetucom inc “meetu” year ended december 31 2002 company also completed acquisitions picturetel corporation “picturetel” atlanta signal processors inc “aspi” circa communications ltd “circa” accord networks ltd “accord” year ended december 31 2001 changes goodwill purchased intangibles fair value net tangible assets unearned stockbased compensation summarized follows thousands dstmedia technology august 25 2005 company acquired dstmedia privately held video solutions company headquartered beijing china aggregate consideration transaction 105 million comprised 78 million cash 27 million direct acquisition costs purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date assistance independent appraisal company recorded approximately 69 million goodwill 22 million identifiable intangible assets 11 million net tangible assets 03 million inprocess research development costs connection acquisition primary reason acquisition factors contributed recognition goodwill relate dstmedia’s ability enhance company’s position china japan asian countries deliver video networking low end video solutions 03 million allocated inprocess research development recorded “purchased inprocess research development” consolidated statements operations accordance sfas 142 goodwill originating dstmedia acquisition amortized general goodwill deductible tax purposes purchased intangible assets amortized straightline basis period two five years see note 4 notes consolidated financial statements additional information goodwill purchased intangibles dstmedia shareholders may receive additional 200 million consideration 2008 payable cash based achievement certain financial milestones relating operating results dstmedia addition dstmedia shareholders eligible receive additional 04 million consideration one year following closing acquisition certain conditions met year ended december 31 2006 company paid 02 million additional consideration related obligation additional consideration paid dstmedia shareholders would result increase goodwill dstmedia’s results operations included results operations since august 25 2005 company’s video communications network systems segments pro forma results operations presented effects acquisition material individual basis voyant technologies january 5 2004 company completed acquisition voyant technologies inc “voyant” pursuant terms agreement plan merger dated november 21 2003 “merger agreement” voyant designs delivers group voice communication solutions primary reason acquisition factors contributed recognition goodwill relate voyant’s ability deliver audio bridging capabilities network systems space pursuant merger agreement voyant shareholders received 1089 million cash approximately 129 million cash placed escrow held security losses incurred company event certain breaches representations warranties covered merger agreement certain events second quarter 2004 company received 01 million escrow account related certain working capital adjustments reducing purchase consideration 1255 million 1254 million third quarter 2004 company authorized release approximately 14 million escrow fund voyant shareholders certain prior sales tax liabilities resolved second quarter 2005 company received approximately 02 million escrow account related certain losses incurred reducing purchase consideration 1254 million 1252 million also second quarter 2005 company instructed escrow agent release approximately 107 million escrow fund voyant shareholders remaining 04 million escrow amount remain escrow security sales tax liabilities resolved additional consideration paid voyant shareholders would result increase goodwill addition upon completion merger options acquire shares voyant common stock outstanding terms voyant stock plans assumed converted approximately 14 million options acquire shares polycom common stock upon acquisition purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date based upon independent appraisal voyant reported part company’s network systems services segments accompanying consolidated financial statements reflect purchase price approximately 1252 million consisting cash fair value options granted polycom acquisition costs directly related acquisition follows thousands purposes computing estimated fair value options granted blackscholes option pricing model used following assumptions fair value polycom’s stock 1969 expected life 32 years risk free interest rate 237 expected dividend yield 0 volatility 82 following summary allocation purchase price thousands amount allocated inprocess research development determined management using independent appraisal based established valuation techniques hightechnology industry expensed upon acquisition technological feasibility established future alternative uses existed income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing inprocess research development estimated net free cash flows generated inprocess research development projects discounted rates ranging 35 40 percent relation stage completion technical risks associated achieving technology feasibility 46 million allocated inprocess research development recorded “purchased inprocess research development” consolidated statements operations accordance sfas 142 goodwill originating voyant acquisition amortized general goodwill deductible tax purposes purchased intangible assets amortized straightline basis period three months eight years see note 4 notes consolidated financial statements additional information goodwill purchased intangibles purchase price allocation presented table final january 5 2005 except resolution certain earnout contingency payments would result increase total consideration paid period earnout achieved corresponding adjustment goodwill voyant’s results operations included results operations since january 5 2004 company’s network systems services segments 4 goodwill purchased intangibles following table presents details company’s goodwill segment thousands fair value adjustments assets acquired liabilities assumed year ended december 31 2006 resulted primarily revisions net cost estimates associated elimination redundant facilities release certain preacquisition tax contingencies upon settlement underlying tax matter changes estimates fair value certain picturetel dstmedia assets liability recorded initial purchase price allocation increase 2005 primarily due acquisitions dstmedia following table presents details company’s total purchased intangible assets december 31 thousands 2006 2005 2004 company recorded amortization expense related purchased intangibles 61 million 69 million 205 million respectively included “amortization impairment purchased intangibles” consolidated statement operations upon adoption sfas 142 company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances fourth quarters 2006 2005 company completed annual goodwill impairment test outlined sfas 142 requires assessment goodwill impairment annual basis assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date fair value determined using income approach whereby fair value asset based value cash flows asset expected generate future estimated future cash flows discounted rates ranging 14 17 percent arrive respective fair values based results impairment test company determined goodwill assets impaired 2006 2005 company evaluates purchased intangibles possible impairment ongoing basis impairment indicators exist company performs assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment fourth quarter 2006 determined decline projected future cash flows future products utilize technology acquired acquisition performed formal assessment purchased intangibles acquired voyant acquisition based results impairment test company recorded impairment charge 14 million related core technologies patents part intangible assets acquired part voyant acquisition result decline projected future cash flows oci product line due announced discontinuance fourth quarter 2005 related core developed technology trade name non competition agreement intangibles acquired part voyant acquisition written fair values december 31 2005 resulted impairment charge 19 million 2005 impairment charges recorded “amortization impairment purchased intangibles” consolidated statements operations amortization impairment intangibles allocated company’s segments estimated future amortization expense purchased intangible assets december 31 2006 follows thousands 5 acquisitionrelated costs liabilities years ended december 31 2006 2005 2004 company recorded charge operations 02 million 04 million 14 million respectively acquisitionrelated integration costs primarily related dstmedia voyant picturetel acquisitions charges include outside financial advisory legal accounting services charges include cost actions designed improve company’s combined competitiveness productivity future profitability primarily relate elimination redundant excess facilities workforce company’s combined businesses elimination redundant assets following table summarizes status company’s acquisitionrelated liabilities integration costs thousands company approximately 22 million acquisitionrelated reserves classified longterm liabilities december 31 2005 acquisitionrelated reserves classified longterm liabilities december 31 2006 approximately 20 million 19 million december 31 2006 2005 respectively acquisitionrelated reserves classified current liabilities facility closings october 2006 company entered lease amendment one facilities previously provided restructuring reserve amended lease reduced term reduced net future operating expenses related idle space addition company able negotiate reduced local municipal taxes well decrease amount unoccupied space remainder lease term reduced net operating expenses related idle space result amended agreement company estimated approximately 09 million restructuring reserve would longer required therefore october 2006 amount released restructuring reserve recorded reduction goodwill june 2004 company entered termination agreement related payment agreement one leases previously provided restructuring reserve terminated lease unoccupied space december 28 2004 agreement resulted overall reduction company’s obligations acceleration termination payments previously scheduled 2008 result agreements company estimated approximately 39 million restructuring reserve would longer required therefore june 2004 amount released restructuring reserve recorded reduction goodwill severance related benefits company assumed liabilities related severance totaling 144 million acquisitions picturetel aspi meetu fully paid end 2004 result voyant acquisition company assumed additional liabilities related severance totaling 04 million paid released june 30 2005 integration costs merger fees expenses mergerrelated transaction period expenses years ended december 31 2006 2005 2004 02 million 04 million 14 million respectively principally consisted financial advisory accounting legal consulting fees direct mergerrelated expenses incurred period 6 restructure costs third quarter 2006 management approved restructuring plan eliminating relocating certain positions throughout company order consolidate certain functions one location well relocate asia pacific headquarters hong kong singapore accordance sfas 146 “accounting costs associated exit disposal activities” company recorded charge approximately 19 million 2006 related workforce reductions relocations events communicated impacted employees incurred period charge comprised severance employee termination benefits related workforce reductions impacts less 3 percent company’s employees worldwide costs related relocations incurred december 31 2006 december 31 2006 approximately 08 million charge remains paid expected paid march 31 2007 employees terminate first quarter 2007 accordance fas 146 exceed minimum retention period generally 60 days well remaining costs associated employee relocation facilities closures moving related expenses recognized company cease use facility incurred remaining charge approximately 03 million recognized first quarter 2007 total charge 22 million first quarter 2006 management approved restructuring plan eliminating certain positions throughout company focused sales general administrative functions resulting actions intended streamline focus company’s efforts properly align cost structure projected revenue streams accordance sfas 146 “accounting costs associated exit disposal activities” company recorded charge approximately 06 million 2006 related workforce reductions communicated impacted employees period total charge 06 million consisted severance employee termination benefits related workforce reductions comprised less 1 percent company’s employees worldwide remaining payments related charges made end september 30 2006 2005 management approved restructuring plan eliminating relocating certain positions throughout company focused sales general administrative functions resulting actions intended streamline focus company’s efforts properly align cost structure projected revenue streams accordance sfas 146 company recorded charge approximately 07 million year ended december 31 2005 charge consisted severance employee termination benefits related workforce reductions comprised less 1 percent employees worldwide obligations related charges paid released december 31 2005 charge partially offset release remaining reserve recorded 2004 related restructuring network systems segment discussed resulting net restructuring charges year 06 million 2004 management approved restructuring plan network systems segment resulting actions intended improve overall cost structure network systems segment focusing resources strategic areas business streamlining certain engineering efforts reducing operating expenses accordance sfas 146 “accounting costs associated exit disposal activities” sfas 146 company recorded charge approximately 14 million year ended december 31 2004 charge consisted severance employee termination benefits related workforce reductions comprised less 3 percent company’s employees worldwide payments related actions made restructure charges recorded “restructure costs” consolidated statements operations following table summarizes status company’s restructure reserves thousands 7 investments company investments debt securities also strategic investments private companies classification investments follows thousands following table summarizes fair value gross unrealized losses short longterm investments unrealized losses thousands aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2006 2005 debt securities company’s shortterm longterm investments comprised us state municipal government obligations foreign domestic public corporate debt securities investments auction rate securities classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held limited number major financial institutions company’s name december 31 2006 2005 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period unrealized gains losses recorded separate component cumulative comprehensive income stockholder’s equity investments sold loss considered temporarily declined value charge operations recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net 2006 2005 company recorded gross realized gains 29 million 11 million gross realized losses 02 million 05 million disposal investments 2004 company recorded gross realized gains gross realized losses less 01 million disposal investments respectively unrealized loss balances government obligations public corporate debt securities december 31 2006 primarily caused interest rate increases company ability intent hold debt securities recovery fair value may maturity consider debt securities otherthantemporarily impaired december 31 2006 company’s investment policy limits concentration investments debt securities unlimited amount us government us government agencies maximum 4 single issuer corporate debt securities maximum 10 single money market fund policy also limits percent portfolio held instruments minimum 20 us government us government agencies 25 75 corporate debt instruments depending debt classification company’s debt securities must rated standard poor’s moody’s must high quality credit rating nature company’s investment policy company monitor industry classification investments commercial bank issues company compliance investment policy december 31 2006 private company investments strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2006 2005 investments carrying value 89 million 59 million respectively recorded “other assets” consolidated balance sheets 2006 2005 company made investments two privately held companies totaling 30 million 05 million respectively privately held company held investment carrying value 04 million sold resulting gain 45 million 2005 gain 02 million 2006 final escrow settled gain recorded consolidated statements operations “gain loss strategic investments” 2005 company determined value investment private companies impaired reduced carrying amount 16 million recorded consolidated statements operations “gain loss strategic investments” company determined impairment 2006 2004 8 inventories valued lower cost market cost computed firstin firstout “fifo” basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value inventories consist following thousands 9 property equipment net property equipment net consist following thousands 10 accrued liabilities accrued liabilities consist following thousands 11 business risks credit concentration company sells products services serve communications equipment market substantially company’s revenues derived sales video voice network systems products related services factor adversely affecting demand supply products services could materially adversely affect company’s business financial performance company subcontracts manufacture voice video product lines celestica thirdparty contract manufacturer company uses celestica’s facilities thailand china singapore disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases similar events economic political difficulties countries asia reason disruption would harm business results operations also celestica’s facilities currently primary source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints company would experience delay shipping products would immediate negative impact revenues result company may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes company certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses expansion polycom’s product offerings may increase company’s credit risk customers place larger orders initial stocking orders assurance company’s credit loss experience remain near historic levels december 31 2006 2005 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows 12 commitments contingencies litigation time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company expects face increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality video voice data web conferencing products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s financial position liquidity results operations period unfavorable outcome occurs becomes probable potentially future periods standby letters credit company standby letters credit totaling approximately 15 million issued guarantee certain company’s office lease obligations contractual obligations license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant contingent consideration acquisitions see note 3 notes consolidated financial statements regarding contingent consideration acquisitions leases company leases certain office facilities equipment noncancelable operating leases expiring 2007 2017 december 31 2006 following future minimum lease payments net estimated sublease income due current lease obligations addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2006 thousands company currently headquartered approximately 50000 square foot leased facility pleasanton california facility accommodates executive administrative operations approximately 102000 square foot leased facility milpitas california houses research development manufacturing marketing sales customer support operations voice communications business majority video communications service operations located approximately 107000 square foot leased facility andover massachusetts approximately 62000 square foot leased facility austin texas network systems operations occupy approximately 47000 square feet petach tikva israel 32000 square feet atlanta georgia also shared company’s installed voice business audio network systems operations located approximately 64000 square foot leased facility located westminster colorado addition company leases space burnaby canada voip development operation burlington massachusetts advanced voice development operations company leases approximately 55000 square foot facility tracy california north american latin american distribution center company utilizes space company’s manufacturing contractor thailand european distribution contractors united kingdom netherlands provide asian european distribution repair centers respectively within us company leases office space primarily sales offices various metropolitan locations including atlanta georgia chicago illinois herndon virginia irvine california new york new york dallas texas outside us company leases offices several countries including australia canada china france germany hong kong india israel japan korea mexico netherlands peru singapore spain thailand united kingdom facilities leased pursuant agreements expire beginning 2007 extend 2017 rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2006 2005 2004 183 million 174 million 178 million respectively shortterm deferred lease obligation included accrued liabilities 04 million 05 million december 31 2006 2005 respectively longterm deferred lease obligation included longterm liabilities 21 million 22 million december 31 2006 2005 respectively event company exercise option extend term leases expire company likely incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs cannot determined end lease term times based landlord’s discretion subsequent negotiations landlord company 13 credit arrangements company available 25 million revolving line credit bank agreement dated december 3 2005 borrowings line unsecured bear interest bank’s prime rate 825 december 31 2006 london interbank offered rate libor plus 065 approximately 532 536 depending term borrowings december 31 2006 borrowings line subject certain financial covenants restrictions liquidity indebtedness financial guarantees business combinations profitability levels related items line credit expires december 3 2007 december 31 2006 balances outstanding line credit however company outstanding letters credit total approximately 15 million december 31 2006 13 million secured line credit company compliance applicable financial covenants restrictions periods presented 14 stockholders’ equity january 1 2006 company adopted sfas 123r requires measurement recognition compensation expense sharebased payment awards made employees directors based upon estimated fair values result adopting sfas 123r income taxes net income year ended december 31 2006 233 million lower 163 million lower respectively impact basic diluted earnings per share year ended december 31 2006 reduction 018 per share following table summarizes stockbased compensation expense recorded sfas 123r year ended december 31 2006 allocation within consolidated statements operations thousands prior adopting fas 123r company presented tax benefits resulting exercise stock options operating cash flows statements cash flows fas 123r requires cash flows resulting excess tax benefits classified part cash flows financing activities excess tax benefits realized tax benefits tax deductions exercised options excess deferred tax asset attributable stock compensation costs options result adopting fas 123r 102 million excess tax benefits year ended december 31 2006 classified financing cash inflow stockbased compensation expense recognized years ended december 31 2005 2004 except related acquisitions stockbased compensation expense related acquisitions less 01 million 02 million years ended december 31 2005 2004 respectively stockbased compensation expense allocated segments separately maintained corporate level stockbased compensation expense net tax table includes effects new us tax regulations effective fiscal 2005 require intercompany reimbursement certain stockbased compensation expenses company elected capitalize stockbased compensation year ended december 31 2006 due amounts immaterial valuation assumptions connection adoption sfas 123r company reassessed valuation technique related assumptions company estimates fair value stock options using blackscholes valuation model consistent provisions sfas 123r sab 107 company’s prior period pro forma disclosures net earnings including stockbased compensation expense determined fair value method prescribed sfas 123 total estimated fair value options vested 2006 589 million weightedaverage estimated fair value employee stock options granted year ended december 31 2006 705 weightedaverage estimated fair value employee stock purchase rights granted pursuant employee stock purchase plan year ended december 31 2006 544 per share fair value option employee stock purchase right grant estimated date grant using blackscholes option valuation model recognized expense using straightline attribution approach following weightedaverage assumptions 2006 company used implied volatility oneyear traded options company’s stock expected volatility assumption required blackscholes model consistent sfas 123r sab 107 prior fiscal 2006 company used historical stock price volatility accordance sfas 123 purposes calculating pro forma information selection implied volatility assumption 2006 based upon availability actively traded options company’s stock company’s assessment implied volatility representative future stock price trends historical volatility riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock options employee stock purchases dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock options represents weightedaverage period stock options expected remain outstanding determined based historical experience similar awards giving consideration contractual terms stockbased awards vesting schedules expectations future employee behavior influenced changes terms stockbased awards stockbased compensation expense recognized consolidated statements operations based awards ultimately expected vest amounts reduced estimated forfeitures sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based company’s historical experience stock option plans june 2 2004 shareholders approved 2004 equity incentive plan “2004 plan” reserved issuance plan 12500000 shares plus remaining available options terminated 1996 stock option plan “1996 plan” extent shares would returned 1996 plan result expiration cancellation forfeiture shares instead added reserve shares available 2004 plan addition company assumed 1354099 shares voyant’s 2000 equity incentive plan following completion voyant acquisition january 2004 terms 2004 plan options may granted prices lower fair market value date grant 2004 plan prior terminated plans options granted expire seven ten years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares options granted 2004 plan unvested shares outstanding prior terminated plans generally vest 25 completing one year service company remaining amount equally 36 months fully vested four years also available grant 2004 plan performance shares compensation committee board directors approved issuance performance shares 2004 plan officers certain employees february 2006 component company’s broadbased equity compensation program performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria number performance shares subject vesting determined end given performance period performance criteria deemed achieved 50 performance shares vest second anniversary grant date remaining 50 performance shares vest third anniversary grant date performance shares year ended december 31 2006 company’s compensation committee board directors granted 558000 target performance shares year ended december 31 2006 32390 target performance shares forfeited resulting balance 525610 target performance shares grants performance period january 1 2006 december 31 2006 based upon company’s actual achievement certain predefined revenue nongaap operating income andor nongaap net income targets performance period actual number performance shares subject vesting year ended december 31 2006 determined 608474 shares performance shares vest two equal annual installments 50 vesting second anniversary grant date additional 50 vesting third anniversary grant date value target performance shares based closing market price company’s common stock date award total grant date fair value performance shares granted year december 31 2006 98 million estimated forfeitures stockbased compensation cost performance shares year ended december 31 2006 35 million december 31 2006 63 million total unrecognized stockbased compensation costs estimated forfeitures related nonvested performance shares granted 2004 plan cost expected recognized estimated weighted average amortization period 2 years estimated stock compensation expense related target performance shares based upon outcome probable assessed quarterly based upon actual year date performance factors final measurement compensation expense based upon grant date fair value actual outcome performance period performance shares vested year ended december 31 2006 stockbased compensation expense performance shares recognized using graded vesting method activity plans follows 1 options expected vest result applying prevesting forfeiture rate assumption total outstanding options total pretax intrinsic value options exercised years ended december 31 2006 2005 2004 352 million 47 million 206 million respectively december 31 2006 2005 2004 6943985 9001494 7228429 outstanding options exercisable aggregate average exercise price 1939 1876 1923 respectively options outstanding currently exercisable exercise price december 31 2006 follows december 31 2006 total compensation cost related nonvested stock options yet recognized 283 million expected recognized next 24 months weightedaverage basis prior adoption fas 123r prior adoption sfas 123r company provided disclosures required sfas 123 “accounting stockbased compensation” amended sfas 148 “accounting stockbased compensationtransition disclosures” consistent disclosure provisions sfas 148 company’s net income basic diluted net income per share years ended december 31 2005 2004 would adjusted pro forma amounts indicated thousands except per share amounts weighted average fair value options granted pursuant option plans years ended december 31 2005 2004 691 965 per share respectively weighted average fair value employee stock purchase rights granted pursuant employee stock purchase plan years ended december 31 2005 2004 390 416 per share respectively total fair value shares vested years ended december 31 2005 2004 248 million 222 million respectively performance shares issued prior 2006 fair value option grant estimated date grant using multiple option approach blackscholes option pricing model following weighted average assumptions prior fiscal 2006 expected life expected volatility stock options based upon historical economic data trended future forfeitures employee stock options accounted asincurred basis unearned stockbased compensation connection acquisitions circa aspi company recorded unearned stockbased compensation costs unvested stock options assumed company totaling 15 million recognized vesting period options connection certain stock option grants 1999 company recorded unearned stockbased compensation cost totaling 24 million recognized vesting period related options three years amortization expense associated unearned stock compensation totaled less 01 million 02 million 2005 2004 respectively amortization unearned stock based compensation complete march 31 2005 preferred share rights purchase plan july 1998 board directors approved preferred shares rights agreement board amended march 2001 “rights agreement” rights agreement intended protect stockholders’ rights event unsolicited takeover attempt interfere transaction approved board directors upon becoming exercisable right entitles stockholders buy 11000 share series preferred stock company exercise price 40000 subject adjustment rights exercisable person group “acquiring person” acquires announces tender exchange offer acquire 20 company’s common stock event acquiring person acquires 20 company’s common stock “triggering event” subject certain exceptions right held acquiring person entitle holder purchase exercise price number shares common stock current market value equal two times exercise price addition event following triggering event company acquired merger sells 50 assets right held acquiring person entitle holder purchase exercise price number shares common stock acquiring company current market value equal two times exercise price rights redeemable company’s option price 00025 per right company may also exchange rights whole part shares common stock certain circumstances rights expire earlier july 15 2008 date redemption exchange consummation merger consolidation asset sale resulting expiration rights share repurchase program august 2004 board directors approved plans purchase 10 million shares company’s common stock open market december 31 2005 prior plan company purchased approximately 48 million shares open market cash 818 million shares common stock retired reclassified authorized unissued august 9 2005 company announced board directors approved share repurchase plan superseded prior share repurchase plan would purchase shares aggregate value 250 million open market time years ended december 31 2006 2005 plans company purchased 48 million 114 million shares common stock open market cash 1036 million 1840 million respectively december 31 2006 company authorized purchase additional 157 million shares open market 2005 share repurchase plan 15 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions lesser 60 eligible compensation 15000 2006 subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year fiscal years 2006 2005 2004 maximum company cash match 1500 per participating employee per year polycom 401k plan provides employees projected age 50 older december 31 2006 elected contribute polycom 401k plan may also make catchup contribution 5000 company’s contributions polycom 401k plan totaled approximately 12 million 11 million 11 million 2006 2005 2004 respectively employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees 6 month offering periods purchase dates end offering period january july company reserved 7500000 shares common stock issuance plan shares purchased employees’ payroll deductions maximum 20 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 5000 shares per offering 25000 worth common stock one calendar year 2006 2005 2004 407513 412509 291040 shares purchased average per share prices 1528 1439 1791 respectively december 31 2006 4820500 shares available issued plan benefit plans israeli labor laws agreements company required pay severance pay upon dismissal employee company’s israeli subsidiaries upon termination employment specified circumstances commencing may 2006 israeli law established two periods april 30 2006 initial period may 1 2006 remaining period company’s severance pay employees israel based upon length service initial period amounts deposited remaining period initial period severance liability based employee’s latest monthly salary multiplied number years employment initial period remaining period company liable funds deposited remaining period company funds it’s obligation initial remaining periods investments insurance company pension funds deposited periods initial period recorded asset consolidated balance sheets funds deposited periods remaining period owned employee recorded asset consolidated balance sheets net amount severance pay charged income totaled approximately 13 million 11 million 12 million 2006 2005 2004 respectively december 31 2006 2005 severance pay funded included assets approximately 40 million 35 million respectively accrued severance pay included “other longterm liabilities” approximately 65 million 57 million respectively company also contributing funds behalf israeli employees individual insurance policy provides combination savings plan insurance severance pay benefits insured employee provides payments employee upon retirement death secures substantial portion severance pay employee legally entitled upon termination employment participating employee contributes amount 50 70 employee’s base salary subject social contributions employer contributes 50 75 employee’s base salary subject social contributions company’s fulltime israeli employees participate benefit package net amount insurance expense charged income totaled approximately 07 million 06 million 05 million 2006 2005 2004 respectively company also provides employees education fund participating employee contributes amount equal 25 employee’s base salary subject social contributions statutory cap employer contributes amount equal 75 employee’s base salary subject social contributions statutory cap education fund expenses charged income totaled approximately 06 million 06 million 05 million 2006 2005 2004 respectively 16 income taxes income tax expense consists following thousands sources income provision income taxes follows thousands company’s tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2006 company tax credit carryovers capital loss carryovers approximately 86 million 22 million respectively tax credit carryforwards capital loss carryovers begin expire 2007 portion future utilization company’s carryforwards subject certain limitations due change ownership occurred 1998 2001 2004 deferred tax assets approximately 84 million december 31 2006 pertain credit carryforwards resulting exercise employee stock options company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2005 cumulative amount earnings upon us income tax provided approximately 292 million practicable determine income tax liability might incurred earnings distributed october 22 2004 american jobs creation act “act” signed law act creates temporary incentive us corporations repatriate accumulated income earned abroad providing dividends received deduction 85 certain dividends defined act fourth quarter 2005 company distributed 1375 million cash foreign subsidiary provided associated income tax expense 75 million accordance sfas123r company adopted january 1 2006 tax savings expected future deductions based expense attributable various stock option plans reflected federal state tax provisions 2006 reflected provisions 2005 2004 reduction income taxes payable resulting exercise employee stock options employee stock programs credited stockholders’ equity 102 million 2006 14 million 2005 65 million 2004 company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions several years following first year company israeli taxable income consideration tax losses carried forward company date realized tax savings approximately 154 million reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 failure comply conditions may result cancellation benefits whole part december 2006 company resolved certain tax uncertainties foreign tax jurisdictions resulted release previously accrued taxes totaling 18 million 17 business segment information polycom leading global provider line highquality easytouse communications equipment enables businesses telecommunications service providers governmental educational institutions effectively conduct video voice data web communications company’s offerings organized along four product lines video communications voice communications network systems services also considered segments reporting purposes segments determined accordance management views evaluates company’s business based criteria outlined fasb statement 131 “disclosures segments enterprise related information” company previously aggregated video communications voice communications one segment called communications fourth quarter 2006 underlying economic characteristics segments longer met aggregation criteria accordingly periods reclassified conform current period presentation description types products services provided reportable segment follows video communications segment video communications includes wide range video conferencing collaboration products entry level professional high definition products meet needs meeting room small offices large boardrooms auditoriums voice communications segment voice communications includes wide range voice communications products enhance business communications conference room desktop mobile applications network systems segment network systems products provide broad range network infrastructure hardware software facilitate video voice data conferencing collaboration businesses telecommunications service providers governmental educational institutions services segment service comprised wide range service support offerings resellers directly enduser customers company’s service offerings include maintenance programs integration services consisting consulting education design project management services consulting services consisting planning needs analysis endusers design services room design custom solutions project management installation training segment revenue profit significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin defined asset data exception inventory reviewed management segment level products services within respective segments generally considered similar nature therefore separate disclosure similar classes products services segment level presented financial information reportable segment follows fiscal years ended december 31 2006 2005 2004 thousands segment contribution margin includes product line segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing general administrative costs legal accounting stockbased compensation costs acquisitionrelated costs amortization impairment purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income net gain loss strategic investments expense net reconciliation segment information polycom consolidated totals follows thousands company’s revenues substantially denominated us dollars summarized geographically follows thousands individual country outside united states accounted 10 company’s revenues 2006 2005 2004 percentage total revenues segment follows one customer accounted 10 company’s revenues 2006 one customer accounted 10 company’s revenues 2005 2004 company’s fixed assets net accumulated depreciation located following geographical areas thousands 18 net income per share disclosures reconciliation numerator denominator basic diluted net income per share continuing operations provided follows thousands except per share amounts 2006 2005 2004 3751089 11180156 3999591 respectively potentially dilutive securities stock options stock subject repurchase excluded denominator computation “diluted net income per share continuing operations” option exercise price greater average market price common stock 19 hedging company maintains foreign currency risk management strategy protects economic value company possible effects currency fluctuations exposure monitored managed company integral part overall riskmanagement program company’s foreign exchange risk management program focuses unpredictability foreign exchange markets seeks reduce potentially adverse effect currency volatility could operating results nondesignated hedges company hedges net recognized foreign currency assets liabilities foreign exchange forward contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates derivative instruments hedge assets liabilities denominated foreign currencies carried fair value changes fair value recorded income expense net derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset gains losses assets liabilities hedged commencing third quarter 2006 company entered foreign exchange forward contracts denominated euros british pounds israeli shekels hedges require special hedge accounting sfas 133 “accounting derivative instruments hedging activities” sfas 133 reporting period fair value company’s forward contracts recorded balance sheet fair value adjustments recorded income expense net offset corresponding gains losses foreign currency denominated assets liabilities fair values foreign exchange forward contracts determined using quoted market forward rates company enter foreign currency forward contracts trading speculative purposes following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2006 outstanding nondesignated hedges mature 40 days less original purchase date foreign currency dollar amounts thousands foreign currency transactions net effect hedging activity forward contracts resulted net gains less 08 million 02 million years ended december 31 2006 2005 respectively net loss 07 year ended december 31 2004 cash flow hedges third quarter 2006 company commenced use foreign exchange forward contracts hedge certain operational “cash flow” exposures resulting changes foreign currency exchange rates foreign exchange contracts carried fair value maximum duration foreign exchange forward contracts exceed thirteen months cash flow exposures result portions company’s forecasted revenues operating expenses denominated currencies us dollar primarily euro british pound israeli shekel company’s policy enter foreign exchange contracts hedge portion forecasted revenue operating expenses confidently quantified arise normal course business accordingly speculative nature receive hedge accounting treatment sfas 133 hedging relationships formally documented inception hedge hedges must highly effective offsetting changes future cash flows hedged transactions company records effective spot changes cash flow hedges cumulative comprehensive income loss forecasted transaction occurs december 31 2006 company estimated existing gains less 01 million reclassified revenue operating expenses accumulated comprehensive income loss within next twelve months following table summarizes derivativerelated activity cumulative comprehensive loss amounts thousands tax effected forecasted transaction occurs company reclassifies related gain loss cash flow hedge revenue operating expense depending upon transaction hedged year ended december 31 2006 net losses 03 million net gains 02 million reclassified cumulative comprehensive income loss revenue operating expense respectively event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would reclassified cumulative comprehensive income loss income expense consolidated statement operations time year ended december 31 2006 net gains losses recognized income expense relating hedges forecasted transactions occur company evaluates hedging effectiveness prospectively retrospectively records ineffective portion hedging instruments income expense consolidated statement operations company incur net gains losses cash flow hedges due hedge ineffectiveness year ended december 31 2006 time value derivative instruments excluded effectiveness testing recorded income expense period life contract income expense year ended december 31 2006 included less 01 million net gains representing excluded time value component purchased forward contracts following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2006 outstanding cash flow hedges carried fair value maturities less 180 days foreign currency dollar amounts thousands december 31 2006 company derivative asset 02 million included “prepaid expenses current assets” derivative liability 03 million included “other accrued liabilities” consolidated balance sheets 20 subsequent event january 5 2007 company completed acquisition destiny conferencing corporation destiny privately held telepresence solutions company headquartered dayton ohio pursuant terms agreement plan reorganization agreement dated january 5 2007 destiny designs manufactures immersive telepresence solutions destiny’s telepresence solution already incorporates company’s videoconferencing products basis rpx™ telepresence offering pursuant reorganization agreement destiny shareholders debtholders received 476 million cash approximately 52 million cash placed escrow held security losses incurred us event certain breaches representations warranties covered reorganization agreement certain events destiny shareholders may receive additional 10 million consideration twoyear period based achievement certain financial milestones destiny reported part company’s video communications services segments february 7 2007 company entered definitive agreement pursuant plans acquire spectralink corporation spectralink designs manufactures sells onpremises wireless telephone systems customers worldwide complement existing telephone systems providing mobile communications building campus environment spectralink wireless telephone systems increase efficiency employees enabling remain telephone contact moving throughout workplace spectralink reported part company’s voice communications services segments terms agreement company commenced cash tender offer purchase outstanding shares spectralink 1175 per share represents enterprise value approximately 220 million net existing cash debt acquisition approved boards directors companies also subject number customary closing conditions including obtaining applicable regulatory approvals board directors spectralink unanimously recommended stockholders spectralink accept offer acquisition expected close first second quarter calendar year 2007 polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2007 2006 three years period ended december 31 2007 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc robert c hagerty robert c hagerty chairman board directors chief executive officer president date february 29 2008 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint robert c hagerty michael r kourey either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated polycom inc index consolidated financial statements page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may change time management assessed effectiveness internal control financial reporting december 31 2007 making assessment management used criteria set forth internal controlintegrated framework issued committee sponsoring organizations treadway commission coso management excluded assessment internal control financial reporting december 31 2007 certain elements internal control financial reporting spectralink corporation “spectralink” spectralink acquired company purchase business combination 2007 subsequent acquisition certain elements acquired businesses’ internal control financial reporting related processes integrated company’s existing systems internal control financial reporting controls integrated excluded management’s assessment effectiveness internal control financial reporting december 31 2007 excluded elements represent controls accounts approximately 1 company’s consolidated assets december 31 2007 3 consolidated revenue year ended based assessment internal controls financial reporting management concluded december 31 2007 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles effectiveness company’s internal control financial reporting december 31 2007 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors stockholders polycom inc opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing page presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing page responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 11 consolidated financial statements accordance adoption sfas 123r company changed manner accounts sharebased compensation year ended december 31 2006 discussed note 13 consolidated financial statements accordance adoption financial accounting standards board interpretation 48 “accounting uncertainty income taxes” company changed manner accounts uncertainty income taxes year ended december 31 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described management’s report internal control financial reporting appearing page management excluded assessment internal control financial reporting december 31 2007 certain elements internal control financial reporting spectralink corporation “spectralink” spectralink acquired company purchase business combination 2007 subsequent acquisition certain elements acquired businesses’ internal control financial reporting related processes integrated company’s existing systems internal control financial reporting controls integrated excluded management’s assessment effectiveness internal control financial reporting december 31 2007 also excluded elements internal control financial reporting acquired business audit company’s internal control financial reporting excluded elements represent controls accounts approximately 1 company’s consolidated assets december 31 2007 3 consolidated revenue year ended pricewaterhousecoopers llp san jose california february 28 2008 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data net income years ended december 31 2007 2006 included sharebased compensation expense statement financial accounting standards 123 revised 2004 “sharebased payment” “sfas 123r” see note 11 consolidated financial statements additional information accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business summary significant accounting policies description business polycom leading global provider highquality easytouse communications solutions enable enterprise public sector customers effectively collaborate distance time zones organizational boundaries solutions built architectures enable unified voice video content communications principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates reclassifications certain previously reported amounts reclassified conform current year’s presentation basis presentation year ended december 31 2007 company determined additional equity consideration earned former shareholders circa communications ltd acquired company april 2001 recorded 2005 2006 earn outs achieved additional shares earned resulted cumulative understatement goodwill shareholder’s equity december 31 2006 2005 55 million 27 million respectively company concluded errors material years ended december 31 2006 2005 therefore corrections recorded year ended december 31 2007 presentation accompanying december 31 2007 consolidated balance sheet related goodwill shareholder’s equity differs presentation balance sheet included fourth quarter earnings report furnished form 8k filed january 23 2008 subsequent earnings report recorded approximately 90 million goodwill shareholder’s equity related additional equity consideration 2005 2006 noted well final earnout fourth quarter 2007 adjustment impact company’s results operations cash flows cash equivalents company considers highly liquid investments original remaining maturities 90 days less time purchase cash equivalents allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition company’s customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances writtenoff management determined likelihood collection probable investments company’s shortterm longterm investments comprised us state municipal government obligations foreign domestic public corporate debt securities investments classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held limited number major financial institutions company’s name december 31 2007 2006 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period unrealized gains losses recorded separate component cumulative comprehensive income loss stockholder’s equity investments sold loss considered temporarily declined value charge operations recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecasted earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives three thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill amortized regularly reviewed potential impairment identification measurement goodwill impairment involves estimation fair value company’s reporting units estimates fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years purchased intangible assets determined indefinite useful lives amortized longlived assets including intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset eventual disposition measurement impairment loss longlived assets management expects hold use based fair value asset longlived assets disposed reported lower carrying amount fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured company warranties generally start date purchase continue one three years depending product purchased software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary changes warranty obligation included component “other accrued liabilities” consolidated balance sheets period follows thousands deferred maintenance revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company recognizes maintenance revenue contracts life service contract deferred maintenance revenue 526 million 340 million shortterm included component “deferred revenue” december 31 2007 2006 respectively 245 million 183 million longterm included component “longterm deferred revenue” december 31 2007 2006 respectively consolidated balance sheets follows thousands cost providing maintenance services years ended december 31 2007 2006 2005 586 million 404 million 373 million respectively officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity indemnification obligations valid long director officer acted good faith manner person reasonably believed opposed best interests corporation respect criminal action proceeding reasonable cause believe conduct unlawful maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations minimal indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liability environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company recognizes extended service revenue hardware software products ratably service period generally one five years company’s video solutions products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts accordingly company accounts revenue products accordance statement position 972 “software revenue recognition” related interpretations company uses residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement company defers revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements company defers revenue sufficient evidence exists elements delivered company accrues sales returns allowances channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives reduction revenues upon shipment based upon contractual obligations historical experience coop marketing funds accounted accordance eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” guidelines company accrues coop marketing funds marketing expense receives identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues research development expenditures research development expenditures charged operations incurred consist primarily compensation costs including stock compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2007 2006 2005 279 million 261 million 261 million respectively income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities determined based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized january 1 2007 company adopted provisions fasb interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” clarifies accounting uncertainty income tax positions interpretation requires company recognize consolidated financial statements tax positions determined likely sustained upon adoption company decreased reserves uncertain tax positions 126 million 34 million decrease relation interest penalties various tax reserves accounted cumulative adjustment beginning balance retained earnings 92 million decrease related preacquisition tax reserves accounted adjustment goodwill addition company recognized certain net operating loss carryovers picturetel recognized previously resulted establishment deferred tax asset 404 million corresponding reduction goodwill company continues follow practice recognizing interest penalties related income tax matters part provision income taxes foreign currency translation financial statements company’s foreign subsidiaries operate functional currency us dollar remeasured us dollars yearend exchange rates monetary assets liabilities nonmonetary items remeasured historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations functional currency dstmedia technology co ltd dstmedia whollyowned subsidiary china chinese yuan cny functional currency kirk telecom kirk scantel wholly owned subsidiaries denmark danish krone dkk adjustments resulting translating foreign currency financial statements dstmedia kirk telecom kirk scantel us dollar included separate component “cumulative comprehensive income loss” derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported separate component cumulative comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated accounting hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk computation net income per share continuing operations basic net income per share continuing operations computed dividing net income continuing operations weighted average number common shares outstanding period less common stock subject repurchase diluted net income per share continuing operations reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding shares common stock subject repurchase potentially dilutive shares including shares common stock subject repurchase excluded computation diluted net income per share continuing operations effect antidilutive fair value financial instruments carrying amounts certain company’s financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due short maturities estimated fair values shortterm longterm investments based quoted market prices similar instruments stock based compensation january 1 2006 company adopted statement financial accounting standards 123 revised 2004 “sharebased payment” “sfas 123r” requires measurement recognition compensation expense sharebased payment awards made employees directors including equity awards related 2004 equity incentive plan “employee equity awards” employee stock purchases related employee stock purchase plan “employee stock purchases” based estimated fair values sfas 123r supersedes company’s previous accounting principles board opinion 25 “accounting stock issued employees” “apb 25” periods beginning fiscal 2006 march 2005 securities exchange commission issued staff accounting bulletin 107 “sab 107” relating sfas 123r company applied provisions sab 107 adoption sfas 123r sfas 123r requires companies estimate fair value sharebased payment awards date grant using optionpricing model value portion award ultimately expected vest recognized expense requisite service period company’s consolidated statements operations prior adoption sfas 123r company accounted employee equity awards employee stock purchases using intrinsic value method accordance apb 25 allowed statement financial accounting standards 123 “accounting stockbased compensation” “sfas 123” intrinsic value method stockbased compensation expense recognized company’s consolidated statements operations related acquisitions exercise price company’s stock options granted employees directors equaled fair market value underlying stock date grant stockbased compensation expense related acquisitions less 01 million year ended december 31 2005 company adopted sfas 123r using modified prospective transition method requires application accounting standard january 1 2006 first day company’s fiscal year 2006 company’s consolidated financial statements years ended december 31 2007 2006 reflect impact sfas 123r accordance modified prospective transition method company’s consolidated financial statements prior periods restated reflect include impact sfas 123r stockbased compensation expense recognized sfas 123r years ended december 31 2007 2006 417 million 233 million respectively consisted stockbased compensation expense related employee equity awards employee stock purchases stockbased compensation expense recognized period based value portion sharebased payment awards ultimately expected vest period stockbased compensation expense recognized company’s consolidated statements operations years ended december 31 2007 2006 included compensation expense sharebased payment awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance pro forma provisions sfas 123 compensation expense sharebased payment awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions sfas 123r compensation expense sharebased payment awards recognized using graded vesting method stockbased compensation expense recognized consolidated statements operations years ended december 31 2007 2006 based awards ultimately expected vest reduced estimated forfeitures sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates company’s pro forma information required sfas 123 periods prior fiscal 2006 company accounted forfeitures occurred fair value stock option awards estimated grant date using blackscholes option valuation model company’s determination fair value stock option awards date grant using optionpricing model affected company’s stock price well assumptions regarding number highly complex subjective variables include limited company’s expected stock price volatility term awards actual projected employee stock option exercise behaviors november 10 2005 financial accounting standards board “fasb” issued fasb staff position fas 123r3 “transition election related accounting tax effects sharebased payment awards” company elected adopt alternative transition method provided fasb staff position calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establish beginning balance additional paidin capital pool “apic pool” related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r recent pronouncements september 2006 fasb issued statement financial accounting standards 157 sfas 157 “fair value measurements” clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions sfas 157 fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective first quarter fiscal year 2008 company yet determined impact implementation sfas 157 financial statements february 2007 financial accounting standards board issued statement financial accounting standards 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” effective fiscal years beginning november 15 2007 statement permits entity choose measure many financial instruments certain items fair value specified election dates subsequent unrealized gains losses items fair value option elected reported earnings company currently evaluating potential impact statement december 2007 fasb issued statement financial accounting standards 141 revised 2007 “business combinations” “sfas 141r” sfas 141r changes requirements acquirer’s recognition measurement assets acquired liabilities assumed business combination sfas 141r effective annual periods beginning december 15 2008 applied prospectively business combinations entered date adoption december 2007 fasb issued statement financial accounting standards 160 “noncontrolling interests consolidated financial statementsan amendment arb 51” “sfas 160” sfas 160 requires noncontrolling minority interests reported component shareholders’ equity ii net income attributable parent noncontrolling interest separately identified consolidated statement operations iii changes parent’s ownership interest parent retains controlling interest accounted equity transactions iv retained noncontrolling equity investment upon deconsolidation subsidiary initially measured fair value v sufficient disclosures provided clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective annual periods beginning december 15 2008 applied prospectively however presentation disclosure requirements statement shall applied retrospectively periods presented adoption provisions sfas 160 anticipated materially impact company’s consolidated financial position results operations 2 business combinations march 26 2007 company acquired outstanding shares spectralink corporation “spectralink” january 5 2007 company completed acquisition outstanding shares destiny conferencing corporation “destiny” privately held telepresence solutions company year ended december 31 2005 company acquired dstmedia technology co ltd “dstmedia” details acquisitions presented following table summarizes company’s purchase price allocations related purchase business combination transactions thousands additionally year ended december 31 2004 company acquired voyant technologies inc “voyant” company also completed acquisition meetucom inc “meetu” year ended december 31 2002 company completed acquisitions picturetel corporation “picturetel” atlanta signal processors inc “aspi” circa communications ltd “circa” accord networks ltd “accord” year ended december 31 2001 changes goodwill purchased intangibles fair value net tangible assets summarized follows thousands fair value adjustments assets acquired year ended december 31 2007 primarily resulted adoption fin 48 january 1 2007 elimination 92 million preacquisition tax reserves related picturetel acquisition recognition 404 million net operating loss carryovers recognized previously adjustments reserves deferred tax assets resulted corresponding reduction goodwill see note 13 notes consolidated financial statements information regarding adoption fin 48 adjustments partially offset 90 million increase goodwill related circa acquisition whereby shares previously held escrow subject certain earnout provisions released shares earned december 31 2007 fair value adjustments assets acquired liabilities assumed year ended december 31 2006 resulted primarily revisions net cost estimates associated elimination redundant facilities release certain preacquisition tax contingencies upon settlement underlying tax matter changes estimates fair value certain picturetel dstmedia assets liabilities recorded initial purchase price allocation spectralink corporation march 26 2007 company acquired outstanding shares spectralink corporation “spectralink” spectralink designs manufactures sells onpremises wireless telephone products customers worldwide complement existing telephone systems providing mobile communications building campus environment spectralink wireless telephone products increase efficiency employees enabling remain telephone contact moving throughout workplace aggregate consideration transaction including direct acquisition costs approximately 2373 million management allocated purchase price assets acquired liabilities assumed based estimated fair values acquisition date accompanying condensed consolidated financial statements reflect purchase price approximately 2373 million consisting cash costs directly related acquisition follows thousands following summary allocation purchase price thousands primary reason acquisition factors contributed recognition goodwill 1484 million relate spectralink’s technology products combined company’s existing product offerings provide polycom ability provide fixed mobile solutions encompass voice video content collaboration solutions desktop meeting room mobile individual general goodwill deductible tax purposes see note 3 notes consolidated financial statements additional information goodwill purchased intangibles 94 million allocated inprocess research development related primarily projects associated software enhancements upgrades functionality performance link netlink dect products recorded “purchased inprocess research development” consolidated statements operations amount determined management based established valuation techniques hightechnology industry expensed upon acquisition technological feasibility established future alternative uses existed acquisition date income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing intangibles inprocess research development estimated net free cash flows generated inprocess research development projects discounted rates ranging 15 16 percent relation stage completion technical risks associated achieving technology feasibility reasonably possible development technology could fail either prohibitive cost inability perform required efforts complete technology factors outside company’s control change market resulting developed products addition time projects completed reasonably possible completed products receive market acceptance company unable produce market product cost effectively spectralink’s results included company’s voice communications services segments date acquisition financial information table summarizes combined results operations polycom spectralink pro forma basis though companies combined beginning period presented pro forma financial information combines historical results operations polycom spectralink years ended december 31 2007 2006 unaudited pro forma financial information prepared comparative purposes purport indicative actual operating results would recorded acquisition actually taken place january 1 2007 2006 taken indicative future consolidated operating results unaudited thousands except per share amounts unaudited pro forma net income includes amortization purchased intangibles 157 million years ended december 31 2007 2006 unaudited pro forma financial information year ended december 31 2007 2006 also includes following nonrecurring charges inprocess research development 94 million acquisitionrelated charges fair market value adjustment inventory 24 million acquisitionrelated expenses incurred spectralink 37 million pro forma amounts reflect reduction interest expense related debt paid part acquisition well reduction interest income cash paid part purchase price assuming acquisition occurred january 1 2006 2007 interest income calculated company’s average rate return respective periods pro forma net income assumes income tax provision company’s consolidated tax rate respective year destiny conferencing corporation january 5 2007 company completed acquisition outstanding shares destiny conferencing corporation “destiny” privately held telepresence solutions company headquartered dayton ohio pursuant terms agreement plan reorganization agreement dated january 5 2007 destiny designs manufactures immersive telepresence solutions polycom incorporated destiny’s products rpx™ telepresence offering prior acquisition terms oem distribution agreement companies result acquisition company owns several patents core telepresence rapidlyemerging market driven need dispersed people communicate room pursuant reorganization agreement destiny shareholders debtholders received 476 million cash approximately 52 million cash placed escrow held security losses incurred company event certain breaches representations warranties covered reorganization agreement certain events december 2007 approximately 50 million escrow released destiny shareholders destiny shareholders may receive additional 10 million cash consideration twoyear period based achievement certain financial milestones recorded additional goodwill earned destiny’s results included company’s video solutions services segments date acquisition pro forma results operations presented effects acquisition material individual basis accompanying condensed consolidated financial statements reflect purchase price approximately 481 million consisting cash costs directly related acquisition follows thousands following summary allocation purchase price thousands management allocated purchase price assets acquired liabilities assumed based estimated fair values acquisition date primary reason acquisition factors contributed recognition goodwill 379 million relate destiny’s telepresense technology underlying patents general goodwill deductible tax purposes see note 3 notes consolidated financial statements additional information goodwill purchased intangibles dstmedia technology august 25 2005 company acquired dstmedia privately held video solutions company headquartered beijing china aggregate consideration transaction 105 million comprised 78 million cash 27 million direct acquisition costs purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date company recorded approximately 66 million goodwill 22 million identifiable intangible assets weighted average useful lives 38 years 14 million net tangible assets 03 million inprocess research development costs connection acquisition primary reason acquisition factors contributed recognition goodwill relate dstmedia’s ability enhance company’s position china japan asian countries deliver video networking low end video solutions well establish chinese research development operations general goodwill deductible tax purposes 03 million allocated inprocess research development recorded “purchased inprocess research development” consolidated statements operations see note 3 notes consolidated financial statements additional information goodwill purchased intangibles dstmedia shareholders may receive additional 200 million consideration 2008 payable cash based achievement certain financial milestones relating operating results dstmedia additional consideration paid dstmedia shareholders would result increase goodwill dstmedia’s results operations included results operations since august 25 2005 video solutions services segments pro forma results operations presented effects acquisition material individual basis 3 goodwill purchased intangibles following table presents details company’s goodwill segment thousands fourth quarters 2007 2006 company completed annual goodwill impairment test outlined sfas 142 requires assessment goodwill impairment annual basis assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date fair value determined using income approach whereby fair value asset based value cash flows asset expected generate future estimated future cash flows discounted rates ranging 14 17 percent arrive respective fair values based results impairment test company determined goodwill assets impaired 2007 2006 following table presents details company’s total purchased intangible assets december 31 thousands 2007 2006 2005 company recorded amortization expense related purchased intangibles 80 million 61 million 69 million respectively included “amortization impairment purchased intangibles” consolidated statement operations 2007 company recorded approximately 109 million amortization purchased intangibles “cost product revenues” consolidated statements operations amortization impairment intangibles allocated company’s segments upon adoption sfas 142 company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances company evaluates purchased intangibles possible impairment ongoing basis impairment indicators exist company performs assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment fourth quarter 2007 company determined decline projected future cash flows future products utilize technology acquired voyant acquisition formal assessment purchased intangibles performed based results impairment test company recorded impairment charge 36 million related existing technologies trade names part intangible assets acquired part voyant acquisition year ended december 31 2006 company recorded impairment charge 14 million related core technologies patents part intangible assets acquired part voyant acquisition impairment charges recorded “amortization impairment purchased intangibles” consolidated statements operations estimated future amortization expense purchased intangible assets december 31 2007 follows thousands 4 acquisitionrelated costs liabilities following table summarizes activity company’s acquisitionrelated liabilities integration costs thousands company approximately 23 million acquisitionrelated reserves classified longterm liabilities december 31 2007 acquisitionrelated reserves classified longterm liabilities december 31 2006 approximately 11 million 20 million december 31 2007 2006 respectively acquisitionrelated reserves classified current liabilities facility closings company’s facility closings liability primarily attributable consolidation facilities related spectralink acquisition lesser extent picturetel acquisition balance december 31 2007 relates liabilities 24 million associated spectralink acquisition result plans vacate three facilities within next 12 months well one vacant facility picturetel acquisition year ended december 31 2007 company recorded payments totaling 13 million restructuring related facility closings year ended december 31 2007 company released reserve 02 million facility related picturetel acquisition severance related benefits company recorded liability 70 million severance related benefits part liabilities assumed acquisition spectralink result establishing plan involuntarily terminate relocate certain general administrative manufacturing positions next 12 months year ended december 31 2007 company made payments totaling 66 million restructuring severance related benefits remaining 04 million expected paid released march 31 2008 integration costs merger fees expenses mergerrelated transaction period expenses years ended december 31 2007 2006 2005 43 million 02 million 04 million respectively principally consisted financial advisory accounting legal consulting fees direct integrationrelated expenses incurred period primarily related spectralink destiny 2007 dstmedia 2006 2005 5 balance sheet details inventories consist following thousands property equipment net consist following thousands accrued liabilities consist following thousands 6 restructure costs 2007 2006 2005 company recorded restructuring charges accordance sfas 146 “accounting costs associated exit disposal activities” totaling 04 million 24 million 06 million respectively restructure charges recorded “restructure costs” consolidated statements operations following table summarizes activity company’s restructure reserves thousands 2007 management announced reorganization video network systems divisions one combined business unit video solutions group result reorganization two executive positions eliminated actions taken better align company’s product development product marketing gotomarket strategy december 31 2007 total charge expected incurred related actions 04 million 02 million recorded 2007 2006 management approved restructuring plan third quarter eliminating relocating certain positions throughout company order consolidate certain functions one location well relocate asia pacific headquarters hong kong singapore management also approved restructuring plan first quarter eliminating certain positions throughout company focused primarily sales general administrative functions resulting actions intended streamline focus company’s efforts properly align cost structure projected revenue streams total charges actions 24 million 2006 02 million 2007 charges comprised severance employee termination benefits related workforce reductions impacted less 3 percent company’s employees worldwide costs related relocations incurred december 31 2006 amounts related actions paid december 31 2007 2005 management approved restructuring plan eliminating relocating certain positions throughout company focused sales general administrative functions resulting actions intended streamline focus company’s efforts properly align cost structure projected revenue streams charge consisted severance employee termination benefits related workforce reductions comprised less 1 percent employees worldwide obligations related charges paid released december 31 2005 7 investments company investments debt securities also strategic investments private companies classification investments follows thousands following table summarizes fair value gross unrealized losses investments including securities categorized cash equivalents unrealized losses thousands aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2007 2006 debt securities company’s shortterm longterm investments comprised us state municipal government obligations foreign domestic public corporate debt securities investments auction rate securities accounted approximately 05 million december 31 2007 classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations december 31 2007 longterm investments contractual maturities 1 2 years nearly investments held limited number major financial institutions company’s name december 31 2007 2006 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period unrealized gains losses recorded separate component cumulative comprehensive income stockholder’s equity investments sold loss considered temporarily declined value charge operations recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net 2007 2006 2005 company recorded gross realized gains 40 million 29 million 11 million gross realized losses 11 million 02 million 05 million disposal investments unrealized loss balances corporate debt securities december 31 2007 primarily caused unfavorable pricing market securities relative us government obligations company ability intent hold debt securities recovery fair value may maturity consider debt securities otherthantemporarily impaired december 31 2007 company’s investment policy limits concentration investments debt securities unlimited amount us government us government agencies maximum 4 single issuer corporate debt securities maximum 10 single money market fund policy also limits percent portfolio held instruments minimum 20 us government us government agencies 25 75 corporate debt instruments depending debt classification company’s debt securities must rated standard poor’s moody’s must high quality credit rating company compliance investment policy december 31 2007 private company investments strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecast earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired december 31 2007 december 31 2006 investments carrying value 17 million 89 million respectively year ended december 31 2007 company made additional investment 02 million year ended december 31 2007 company wrote investment privately held company 74 million writedown 74 million based upon company’s evaluation investee’s financial position including cash usage status investee’s business prospects june 30 2007 rights privileges associated investment based evaluation company’s intent june 30 2007 participate additional funding investee process determined based upon preferences including liquidation preferences held senior securities write carrying value zero necessary subsequently company participate additional funding closed year ended december 31 2006 company made 30 million investment privately held company record writedowns existing investments privately held companies investments recorded “other assets” consolidated balance sheets 8 business risks credit concentration company sells products services serve communications equipment market substantially company’s revenues derived sales video voice network systems products related services factor adversely affecting demand supply products services could materially adversely affect company’s business financial performance company subcontracts manufacture voice video product lines celestica thirdparty contract manufacturer company uses celestica’s facilities thailand china singapore disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases similar events economic political difficulties countries asia reason disruption would harm business results operations also celestica’s facilities currently primary source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints company would experience delay shipping products would immediate negative impact revenues result company may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes company certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses expansion polycom’s product offerings may increase company’s credit risk customers place larger orders initial stocking orders assurance company’s credit loss experience remain near historic levels december 31 2007 2006 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows 9 commitments contingencies litigation time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company expects face increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality video voice data web conferencing products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s financial position liquidity results operations period unfavorable outcome occurs becomes probable potentially future periods standby letters credit company standby letters credit totaling approximately 20 million december 31 2007 license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant contingent consideration acquisitions see note 2 notes consolidated financial statements regarding contingent consideration acquisitions leases company leases certain office facilities equipment noncancelable operating leases expiring 2008 2016 december 31 2007 following future minimum lease payments net estimated sublease income due current lease obligations addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2007 thousands rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2007 2006 2005 216 million 183 million 174 million respectively shortterm deferred lease obligation included accrued liabilities 04 million 04 million december 31 2007 2006 respectively long term deferred lease obligation included longterm liabilities 52 million 21 million december 31 2007 2006 respectively event company exercise option extend term leases expire company may incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs cannot determined end lease term times based landlord’s discretion subsequent negotiations landlord company 10 hedging company maintains foreign currency risk management strategy protects economic value company possible effects currency fluctuations exposure monitored managed company integral part overall riskmanagement program company’s foreign exchange risk management program focuses unpredictability foreign exchange markets seeks reduce potentially adverse effect currency volatility could operating results nondesignated hedges company hedges net recognized foreign currency assets liabilities forward foreign exchange contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates derivative instruments hedge assets liabilities denominated foreign currencies carried fair value changes fair value recorded income expense net derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset gains losses assets liabilities hedged company enters foreign exchange forward contracts denominated euros british pounds israeli shekels hedges require special hedge accounting sfas 133 “accounting derivative instruments hedging activities” sfas 133 reporting period fair value company’s forward contracts recorded balance sheet fair value adjustments recorded income expense net offset corresponding gains losses foreign currency denominated assets liabilities fair values foreign exchange forward contracts determined using quoted market spot interest rates company enter foreign currency forward contracts trading speculative purposes following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2007 outstanding nondesignated hedges mature 60 days less original purchase date foreign currency dollar amounts thousands foreign currency transactions net effect hedging activity forward contracts resulted net gains less 02 million 08 million 02 million years ended december 31 2007 2006 2005 respectively cash flow hedges company’s policy managing foreign exchange risk management program protect economic value company foreign currency fluctuations result company purchases forward foreign exchange contracts hedge certain operational “cash flow” exposures resulting changes foreign currency exchange rates foreign exchange contracts carried fair value maximum duration foreign exchange forward contracts exceed thirteen months cash flow exposures result portions company’s forecasted revenues operating expenses denominated currencies us dollar primarily euro british pound israeli shekel company enters foreign exchange contracts hedge forecasted revenue operating expenses normal course business accordingly speculative nature receive hedge accounting treatment sfas 133 hedging relationships formally documented inception hedge hedges must highly effective offsetting changes future cash flows hedged transactions company records effective spot changes cash flow hedges cumulative comprehensive income loss forecasted transaction occurs december 31 2007 company estimated existing gains less 01 million reclassified revenue operating expenses accumulated comprehensive income loss within next twelve months following table summarizes derivativerelated activity cumulative comprehensive income loss thousands tax effected forecasted transaction occurs company reclassifies related gain loss cash flow hedge revenue operating expense depending upon transaction hedged years ended december 31 2007 2006 net losses 33 million 03 million net gains 19 million 02 million reclassified cumulative comprehensive income loss revenue operating expense respectively event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would reclassified cumulative comprehensive income loss income expense consolidated statement operations time years ended december 31 2007 2006 net gains losses recognized income expense relating hedges forecasted transactions occur company evaluates hedging effectiveness prospectively retrospectively records ineffective portion hedging instruments income expense consolidated statement operations company incur net gains losses cash flow hedges due hedge ineffectiveness years ended december 31 2007 2006 time value purchased derivative instruments excluded effectiveness testing recorded income expense period life contract income expense years ended december 31 2007 2006 included net gains 01 million less 01 million respectively representing excluded time value component purchased forward contracts following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2007 outstanding cash flow hedges carried fair value maturities less 360 days foreign currency dollar amounts thousands following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2007 outstanding cash flow hedges carried fair value maturities greater 360 days foreign currency dollar amounts thousands december 31 2007 2006 company derivative asset 14 million 02 million respectively included “prepaid expenses current assets” derivative liability 19 million 03 million respectively included “other accrued liabilities” consolidated balance sheets 11 stockholders’ equity stock option plans june 2 2004 shareholders approved 2004 equity incentive plan “2004 plan” reserved issuance 2004 plan 12500000 shares plus remaining available options terminated 1996 stock option plan “1996 plan” extent shares would returned 1996 plan result expiration cancellation forfeiture shares instead added reserve shares available 2004 plan addition company assumed 1354099 shares voyant’s 2000 equity incentive plan following completion voyant acquisition january 2004 terms 2004 plan options may granted prices lower fair market value date grant 2004 plan prior terminated plans options granted expire seven ten years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares options granted 2004 plan unvested shares outstanding prior terminated plans generally vest 25 completing one year service company remaining amount equally 36 months fully vested four years performance shares restricted stock compensation committee board directors may also grant performance shares 2004 plan officers certain employees component company’s broadbased equity compensation program performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria number performance shares subject vesting determined end given performance period generally performance criteria deemed achieved performance shares vest one three years anniversary grant date fair value performance share award based closing market price company’s common stock date award awards earned performance goals performance periods established direction compensation committee met performance goals periods may vary participanttoparticipant grouptogroup timetotime performance shares delivered common stock end vesting period based company’s actual performance compared target metric may equal zero percent 0 two hundred fifty percent 250 initial award stockbased compensation expense performance shares recognized using graded vesting method service period generally three years adjusted period performance period based current estimate performance compared target metric nonemployee directors currently receive annual awards restricted stock restricted stock vests quarterly one year date grant fair value awards fair market value company’s common stock date grant stockbased compensation expense awards generally amortized six months date grant due retirement provisions contained underlying agreements activity plans year ended december 31 2007 follows 1 options expected vest result applying prevesting forfeiture rate assumption total outstanding options total pretax intrinsic value options exercised years ended december 31 2007 2006 2005 498 million 352 million 47 million respectively december 31 2007 2006 2005 5889930 6943985 9001494 outstanding options exercisable aggregate average exercise price 2004 1939 1876 respectively options outstanding currently exercisable exercise price december 31 2007 follows aggregate intrinsic value stock options outstanding stock options exercisable december 31 2007 716 million 506 million respectively december 31 2007 total compensation cost related nonvested stock options yet recognized 483 million expected recognized next 24 months weightedaverage basis following information summarizes changes unvested performance shares nonemployee director restricted stock awards 2007 december 31 2007 151 million total unrecognized compensation cost related unvested shares expected recognized weightedaverage period 17 years total fair value shares vested 2007 10 million valuation expense information sfas 123r january 1 2006 company adopted sfas 123r requires measurement recognition compensation expense sharebased payment awards made employees directors based upon estimated fair values following table summarizes stockbased compensation expense recorded sfas 123r years ended december 31 2007 2006 allocation within consolidated statements operations thousands stockbased compensation expense recognized year ended december 31 2005 except related acquisitions stockbased compensation expense related acquisitions less 01 million year ended december 31 2005 stockbased compensation expense allocated segments separately maintained corporate level company elected capitalize stockbased compensation years ended december 31 2007 2006 due amounts immaterial valuation assumptions company estimates fair value stock options using blackscholes valuation model consistent provisions sfas 123r sab 107 company’s prior period pro forma disclosures net earnings including stockbased compensation expense determined fair value method prescribed sfas 123 weightedaverage estimated fair value employee stock options granted years ended december 31 2007 2006 1086 per share 705 per share respectively weightedaverage estimated fair value employee stock purchase rights granted pursuant employee stock purchase plan years ended december 31 2007 2006 821 per share 544 per share fair value option employee stock purchase right grant estimated date grant using blackscholes option valuation model recognized expense using graded vesting attribution approach following weightedaverage assumptions prior fiscal 2006 company used historical stock price volatility accordance sfas 123 purposes calculating pro forma information 2007 2006 company used implied volatility oneyear traded options company’s stock expected volatility assumption required blackscholes model consistent sfas 123r sab 107 selection implied volatility assumption 2007 2006 based upon availability actively traded options company’s stock company’s assessment implied volatility representative future stock price trends historical volatility riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock options employee stock purchase rights dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock options represents weightedaverage period stock options expected remain outstanding determined based historical experience similar awards giving consideration contractual terms stockbased awards vesting schedules expectations future employee behavior influenced changes terms stockbased awards stockbased compensation expense recognized consolidated statements operations based awards ultimately expected vest amounts reduced estimated forfeitures sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based company’s historical experience prior adoption fas 123r prior adoption sfas 123r company provided disclosures required sfas 123 “accounting stockbased compensation” amended sfas 148 “accounting stockbased compensationtransition disclosures” consistent disclosure provisions sfas 148 company’s net income basic diluted net income per share year ended december 31 2005 would adjusted pro forma amounts indicated thousands except per share amounts weighted average fair value options granted pursuant option plans year ended december 31 2005 691 per share weighted average fair value employee stock purchase rights granted pursuant employee stock purchase plan year ended december 31 2005 390 per share total fair value shares vested year ended december 31 2005 248 million performance shares issued prior 2006 fair value option grant estimated date grant using multiple option approach blackscholes option pricing model following weighted average assumptions prior fiscal 2006 expected life expected volatility stock options based upon historical economic data trended future forfeitures employee stock options accounted asincurred basis preferred share rights purchase plan july 1998 board directors approved preferred shares rights agreement board amended march 2001 “rights agreement” rights agreement intended protect stockholders’ rights event unsolicited takeover attempt interfere transaction approved board directors upon becoming exercisable right entitles stockholders buy 11000 share series preferred stock company exercise price 40000 subject adjustment rights exercisable person group “acquiring person” acquires announces tender exchange offer acquire 20 company’s common stock event acquiring person acquires 20 company’s common stock “triggering event” subject certain exceptions right held acquiring person entitle holder purchase exercise price number shares common stock current market value equal two times exercise price addition event following triggering event company acquired merger sells 50 assets right held acquiring person entitle holder purchase exercise price number shares common stock acquiring company current market value equal two times exercise price rights redeemable company’s option price 00025 per right company may also exchange rights whole part shares common stock certain circumstances rights expire earlier july 15 2008 date redemption exchange consummation merger consolidation asset sale resulting expiration rights share repurchase program august 9 2005 company announced board directors approved share repurchase plan pursuant would purchase shares company’s common stock aggregate value 250 million open market time “2005 share repurchase plan” addition may 7 2007 company announced board directors extended existing program approving additional share repurchase program purchase 250 million common stock “2007 share repurchase plan” year ended december 31 2007 company repurchased 43 million shares common stock open market cash 1257 million december 31 2007 share repurchases authorized 2005 share repurchase plan completed company authorized purchase additional 1400 million shares open market 2007 share repurchase plan 12 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions lesser 60 eligible compensation 15000 2007 subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year fiscal years 2007 2006 2005 maximum company cash match 1500 per participating employee per year polycom 401k plan provides employees projected age 50 older december 31 2007 elected contribute polycom 401k plan may also make catchup contribution 5000 company’s contributions polycom 401k plan totaled approximately 14 million 12 million 11 million 2007 2006 2005 respectively employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees 6 month offering periods purchase dates end offering period january july company reserved 7500000 shares common stock issuance plan shares purchased employees’ payroll deductions maximum 20 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 5000 shares per offering 25000 worth common stock one calendar year 2007 2006 2005 374915 407513 412509 shares purchased average per share prices 2171 1528 1439 respectively december 31 2007 4217572 shares available issued plan 13 income taxes income tax expense consists following thousands sources income provision income taxes follows thousands company’s tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2007 company net operating loss carryovers tax credit carryovers approximately 118 million 170 million respectively net operating loss carryforwards tax credit carryforwards begin expire 2013 2008 respectively portion future utilization company’s carryforwards subject certain limitations due change ownership occurred 2001 2004 company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2007 cumulative amount earnings upon us income tax provided approximately 756 million practicable determine income tax liability might incurred earnings distributed october 22 2004 american jobs creation act “act” signed law act created temporary incentive us corporations repatriate accumulated income earned abroad providing dividends received deduction 85 certain dividends defined act fourth quarter 2005 company distributed 1375 million cash foreign subsidiary provided associated income tax expense 75 million accordance sfas123r company adopted january 1 2006 tax savings expected future deductions based expense attributable various stock option plans reflected federal state tax provisions 2006 2007 reflected provisions 2005 reduction income taxes payable resulting exercise employee stock options employee stock programs credited stockholders’ equity 142 million 2007 102 million 2006 14 million 2005 company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions several years following first year company israeli taxable income consideration tax losses carried forward company date realized tax savings approximately 147 million reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 failure comply conditions may result cancellation benefits whole part december 2006 company resolved certain tax uncertainties foreign tax jurisdictions resulted release previously accrued taxes totaling 18 million 2007 settlement certain audit years issues israeli tax authorities resulted additional release accrued taxes totaling 19 million january 1 2007 company adopted fasb interpretation 48 accounting uncertainty income taxes fin 48 fin 48 impact uncertain income tax position income tax expense must recognized largest amount likely sustained uncertain income tax position recognized less 50 likelihood sustained result company decreased reserves uncertain tax positions 126 million 34 million decrease relation interest penalties various tax reserves accounted cumulative adjustment beginning balance retained earnings 92 million decrease related preacquisition tax reserves accounted adjustment goodwill adoption date january 1 2007 company 615 million unrecognized tax benefits 266 million would affect income tax expense recognized remaining balance unrecognized tax benefits 349 million would adjustment goodwill stockholders’ equity addition company recognized certain net operating loss carryovers picturetel recognized previously resulted establishment deferred tax asset 404 million corresponding reduction goodwill reconciliation beginning ending amount unrecognized tax benefits follows thousands included balance december 31 2007 245 million unrecognized tax benefits would affect income tax expense recognized remaining balance unrecognized tax benefits 344 million would adjustment goodwill stockholders’ equity company’s continuing practice recognize interest andor penalties related income tax matters income tax expense december 31 2007 company approximately 30 million accrued interest penalties related uncertain tax positions 07 million recorded 2007 end 2008 uncertain tax positions related nonus exposures may reduced result lapse applicable statute limitations company anticipate adjustments would result material change financial position estimates reduction would approximate 12 million company files income tax returns us federal jurisdiction various states foreign jurisdictions company longer subject us federal state income tax examinations tax authorities years prior 1998 foreign income tax matters foreign jurisdictions concluded years 2001 except netherlands hong kong singapore concluded years 2000 united kingdom germany concluded years 2005 2002 respectively france switzerland concluded years 2004 israel concluded years 2003 14 business segment information polycom leading global provider line highquality easytouse communications equipment enables businesses telecommunications service providers governmental educational institutions effectively conduct video voice data web communications company’s offerings organized along three product categories video solutions voice communications services also considered segments reporting purposes segments determined accordance management views evaluates company’s business based criteria outlined fasb statement 131 “disclosures segments enterprise related information” company previously four segments video communications voice communications network systems services 2007 company reorganized video network systems divisions previously reported separate segments formed video solutions group order better align company’s development product management efforts gotomarket strategy provide unified solution result change management determined operates three segments video solutions voice communications services accordingly periods reclassified conform current period presentation description types products services provided reportable segment follows video solutions segment video solutions includes wide range video conferencing collaboration products entry level professional high definition products meet needs meeting room small offices large boardrooms auditoriums segment also includes products provide broad range network infrastructure hardware software facilitate video voice data conferencing collaboration businesses telecommunications service providers governmental educational institutions voice communications segment voice communications includes wide range voice communications products enhance business communications conference room desktop mobile applications services segment service comprised wide range service support offerings resellers directly enduser customers company’s service offerings include maintenance programs integration services consisting consulting education design project management services consulting services consisting planning needs analysis endusers design services room design custom solutions project management installation training segment revenue profit significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin defined asset data exception inventory reviewed management segment level products services within respective segments generally considered similar nature therefore separate disclosure similar classes products services segment level presented financial information reportable segment follows fiscal years ended december 31 2007 2006 2005 thousands segment contribution margin includes product line segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing general administrative costs legal accounting stockbased compensation costs acquisitionrelated costs amortization impairment purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income net gain loss strategic investments expense net reconciliation segment information polycom consolidated totals follows thousands company’s revenues substantially denominated us dollars summarized geographically follows thousands individual country outside united states accounted 10 company’s revenues 2007 2006 2005 percentage total revenues segment follows one customer accounted 10 company’s revenues 2007 2005 one customer accounted 10 company’s revenues 2006 company’s fixed assets net accumulated depreciation located following geographical areas thousands 15 net income per share disclosures reconciliation numerator denominator basic diluted net income per share continuing operations provided follows thousands except per share amounts 2007 2006 2005 3870456 3751089 11180156 respectively potentially dilutive securities stock options stock subject repurchase excluded denominator computation “diluted net income per share continuing operations” option exercise price greater average market price common stock 16 subsequent event february 13 2008 company tandberg asa “tandberg” codian ltd “codian” certain respective affiliates entered settlement agreement dismiss litigation parties terms agreement company received lumpsum payment 14 million february 15 2008 well receive future patent royalties codian mcu 4200 product shipped united states parties also exchanged broad crosslicenses covering respective business lines polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2008 2007 three years period ended december 31 2008 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc robert c hagerty robert c hagerty chairman board directors chief executive officer president date february 24 2009 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint robert c hagerty michael r kourey either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated polycom inc index consolidated financial statements page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate conducted evaluation effectiveness internal control financial reporting based framework internal controlintegrated framework issued committee sponsoring organizations treadway commission based results evaluation management concluded december 31 2008 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles effectiveness company’s internal control financial reporting december 31 2008 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors stockholders polycom inc opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing page presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing page responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 13 consolidated financial statements accordance adoption financial accounting standards board interpretation 48 “accounting uncertainty income taxes” company changed manner accounts uncertainty income taxes year ended december 31 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california february 24 2009 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business summary significant accounting policies description business polycom leading global provider highquality easytouse communications solutions enable enterprise public sector customers effectively collaborate distance time zones organizational boundaries solutions built architectures enable unified voice video content communications principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates reclassifications certain previously reported amounts reclassified conform current year’s presentation cash equivalents company considers highly liquid investments original maturities 90 days less time purchase cash equivalents allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition company’s customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances writtenoff management determined likelihood collection probable investments company’s shortterm longterm investments comprised us government agency securities corporate debt securities corporate preferred equity securities investments classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held limited number major financial institutions company’s name december 31 2008 2007 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period unrealized gains losses recorded separate component cumulative comprehensive income loss stockholder’s equity investments sold loss considered temporarily declined value charge earnings recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecasted earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives three thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill amortized regularly reviewed potential impairment identification measurement goodwill impairment involves estimation fair value company’s reporting units estimates fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years purchased intangible assets determined indefinite useful lives amortized longlived assets including intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset group assets eventual disposition measurement impairment loss longlived assets management expects hold use based fair value asset longlived assets disposed reported lower carrying amount fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured company warranties generally start date purchase continue one three years depending product purchased software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary changes warranty obligation included component “other accrued liabilities” consolidated balance sheets period follows thousands deferred maintenance revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company recognizes maintenance revenue contracts life service contract deferred maintenance revenue 627 million 526 million shortterm included component “deferred revenue” december 31 2008 2007 respectively 292 million 245 million longterm included component “longterm deferred revenue” december 31 2008 2007 respectively consolidated balance sheets follows thousands cost providing maintenance services years ended december 31 2008 2007 2006 729 million 586 million 404 million respectively officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity indemnification obligations valid long director officer acted good faith manner person reasonably believed opposed best interests corporation respect criminal action proceeding reasonable cause believe conduct unlawful maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations minimal indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liability environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title transferred product payment contingent upon performance installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company recognizes extended service revenue hardware software products ratably service period generally one five years company’s video solutions products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts accordingly company accounts revenue products accordance statement position 972 “software revenue recognition” related interpretations company uses residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement company defers revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements company defers revenue sufficient evidence exists elements delivered company accrues sales returns allowances channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives reduction revenues upon shipment based upon contractual obligations historical experience coop marketing funds accounted accordance eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” guidelines company accrues coop marketing funds marketing expense receives identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues research development expenditures research development expenditures charged operations incurred consist primarily compensation costs including stock compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2008 2007 2006 281 million 279 million 261 million respectively income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized january 1 2007 company adopted provisions fasb interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” clarifies accounting uncertainty income tax positions interpretation requires company recognize consolidated financial statements tax positions determined likely sustained upon adoption company decreased reserves uncertain tax positions 126 million 34 million decrease relation interest penalties various tax reserves accounted cumulative adjustment beginning balance retained earnings 92 million decrease related preacquisition tax reserves accounted adjustment goodwill addition company recognized certain net operating loss carryovers picturetel recognized previously resulted establishment deferred tax asset 404 million corresponding reduction goodwill company continues follow practice recognizing interest penalties related income tax matters part provision income taxes foreign currency translation financial statements company’s foreign subsidiaries operate functional currency us dollar remeasured us dollars yearend exchange rates monetary assets liabilities nonmonetary items remeasured historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations functional currency dstmedia technology co ltd dstmedia whollyowned subsidiary china chinese yuan cny functional currency kirk telecom kirk scantel wholly owned subsidiaries denmark danish krone dkk adjustments resulting translating foreign currency financial statements dstmedia kirk telecom kirk scantel us dollar included separate component “cumulative comprehensive income loss” following table sets forth components foreign currency translation adjustments december 31 derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported separate component cumulative comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings ineffective portion gain loss reported earnings immediately derivative instruments designated accounting hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk computation net income per share basic net income per share computed dividing net income weighted average number common shares outstanding period less common stock subject repurchase diluted net income per share reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding shares common stock subject repurchase potentially dilutive shares including shares common stock subject repurchase excluded computation diluted net income per share effect antidilutive fair value measurements effective january 1 2008 company implemented statement financial accounting standard 157 fair value measurement “sfas 157” financial assets liabilities remeasured reported fair value reporting period nonfinancial assets liabilities remeasured reported fair value least annually adoption sfas 157 financial assets liabilities nonfinancial assets liabilities remeasured reported fair value least annually impact financial results company certain financial assets liabilities recorded fair value classified level 1 2 3 within fair value hierarchy described sfas 157 fair values determined level 1 inputs utilize quoted prices unadjusted active markets identical assets liabilities ability access fair values determined level 2 inputs utilize data points observable quoted prices interest rates yield curves fair values determined level 3 inputs utilize unobservable data points asset liability carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due shortterm maturities stock based compensation company’s sharebased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock performance shares well employee stock purchase plan accounted statement financial accounting standards 123 revised 2004 sharebased payments sfas 123r methodology estimated fair value awards charged income requisite service period generally vesting period fair value stock option awards estimated grant date using blackscholes option valuation model fair value restricted stock based market value company’s common stock date grant compensation expense restricted stock including effect forfeitures recognized applicable service period fair value performance shares based market price stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes outcome performancerelated conditions award vests recent pronouncements april 2008 financial accounting standards board released fasb staff position fsp fas 1423 determination useful life intangible assets fsp amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” sfas 142 objective fsp improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r principles gaap fsp applies intangible assets whether acquired business combination otherwise shall effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years applied prospectively intangible assets acquired effective date early adoption prohibited since guidance applied prospectively adoption impact company’s current consolidated financial statements march 2008 financial accounting standards board issued statement financial accounting standards 161 “sfas 161” “disclosures derivative instruments hedging activities” sfas 161 requires companies derivative instruments disclose information enable financialstatement users understand company uses derivative instruments derivative instruments related hedged items affect company’s financial position financial performance cash flows sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 sfas 161 requires additional disclosure adoption impact company’s consolidated financial position results operations cash flows december 2007 financial accounting standards board issued statement financial accounting standards 141 revised 2007 “sfas 141r” “business combinations” sfas 141r change business acquisitions accounted impact financial statements acquisition date subsequent periods provisions sfas 141r effective beginning 2009 exception adjustments made acquired tax contingencies future adjustments made acquired tax contingencies associated acquisitions closed prior beginning 2009 would apply provisions sfas 141r evaluated based outcome matters expect adoption sfas 141r material impact company’s consolidated financial statements december 2007 financial accounting standards board issued statement financial accounting standards 160 “sfas 160” “noncontrolling interests consolidated financial statements” amendment accounting research bulletin 51” sfas 160 change accounting reporting minority interests recharacterized noncontrolling interests classified component equity sfas 160 effective financial statements issued fiscal years beginning december 15 2008 early adoption permitted since guidance applied prospectively adoption impact company’s current consolidated financial statements september 2006 financial accounting standards board issued statement financial accounting standards 157 “sfas 157” “fair value measurements” sfas 157 defines fair value establishes framework gives guidance regarding methods used measuring fair value expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods fiscal years february 2008 fasb released fasb staff position fsp fas 1572effective date fasb statement 157 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fiscal years beginning november 15 2008 nonfinancial items include assets liabilities reporting units measured fair value goodwill impairment test nonfinancial assets acquired liabilities assumed business combination partial adoption sfas 157 january 1 2008 financial assets liabilities material impact company’s consolidated financial position results operations cash flows see note 7 notes consolidated financial statements 2 business combinations march 26 2007 company acquired outstanding shares spectralink corporation “spectralink” january 5 2007 company completed acquisition outstanding shares destiny conferencing corporation “destiny” privately held telepresence solutions company details acquisitions presented following table summarizes company’s purchase price allocations related purchase business combination transactions thousands additionally year ended december 31 2005 company acquired dstmedia technology “dstmedia year ended december 31 2004 company acquired voyant technologies inc “voyant” company also completed acquisition meetucom inc “meetu” year ended december 31 2002 company completed acquisitions picturetel corporation “picturetel” atlanta signal processors inc “aspi” circa communications ltd “circa” accord networks ltd “accord” year ended december 31 2001 changes goodwill purchased intangibles fair value net tangible assets summarized follows thousands fair value adjustments assets acquired year ended december 31 2008 primarily resulted elimination preacquisition tax reserves related spectralink picturetel acquisitions adjustments reserves deferred tax assets resulted corresponding reduction goodwill fair value adjustments assets acquired year ended december 31 2007 primarily resulted adoption fin 48 january 1 2007 elimination 92 million preacquisition tax reserves related picturetel acquisition recognition 404 million net operating loss carryovers recognized previously adjustments reserves deferred tax assets resulted corresponding reduction goodwill see note 13 notes consolidated financial statements information regarding adoption fin 48 adjustments partially offset 90 million increase goodwill related circa acquisition whereby shares previously held escrow subject certain earnout provisions released shares earned december 31 2007 spectralink corporation march 26 2007 company acquired outstanding shares spectralink corporation “spectralink” spectralink designs manufactures sells onpremises wireless telephone products customers worldwide complement existing telephone systems providing mobile communications building campus environment spectralink wireless telephone products increase efficiency employees enabling remain telephone contact moving throughout workplace aggregate consideration transaction including direct acquisition costs approximately 2373 million management allocated purchase price assets acquired liabilities assumed based estimated fair values acquisition date 94 million allocated inprocess research development related primarily projects associated software enhancements upgrades functionality performance link netlink dect products recorded “purchased inprocess research development” consolidated statements operations amount determined management based established valuation techniques hightechnology industry expensed upon acquisition technological feasibility established future alternative uses existed acquisition date income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing intangibles inprocess research development estimated net free cash flows generated inprocess research development projects discounted rates ranging 15 16 percent relation stage completion technical risks associated achieving technology feasibility significant process research development projects completed december 31 2007 spectralink’s results included company’s voice communications solutions services segments date acquisition financial information table summarizes combined results operations polycom spectralink pro forma basis though companies combined beginning period presented pro forma financial information combines historical results operations polycom spectralink years ended december 31 2007 2006 unaudited pro forma financial information prepared comparative purposes purport indicative actual operating results would recorded acquisition actually taken place january 1 2007 2006 taken indicative future consolidated operating results unaudited thousands except per share amounts unaudited pro forma net income includes amortization purchased intangibles 157 million years ended december 31 2007 2006 unaudited pro forma financial information year ended december 31 2007 2006 also includes following nonrecurring charges inprocess research development 94 million acquisitionrelated charges fair market value adjustment inventory 24 million acquisitionrelated expenses incurred spectralink 37 million pro forma amounts reflect reduction interest expense related debt paid part acquisition well reduction interest income cash paid part purchase price assuming acquisition occurred january 1 2006 2007 interest income calculated company’s average rate return respective periods pro forma net income assumes income tax provision company’s consolidated tax rate respective year destiny conferencing corporation january 5 2007 company completed acquisition outstanding shares destiny conferencing corporation “destiny” privately held telepresence solutions company headquartered dayton ohio pursuant terms agreement plan reorganization agreement dated january 5 2007 destiny designs manufactures immersive telepresence solutions polycom incorporated destiny’s products rpx™ telepresence offering prior acquisition terms oem distribution agreement companies result acquisition company owns several patents core telepresence pursuant reorganization agreement destiny shareholders debtholders received 476 million cash approximately 52 million cash placed escrow held security losses incurred company event certain breaches representations warranties covered reorganization agreement certain events december 2007 approximately 50 million escrow released destiny shareholders destiny’s results included company’s video solutions services segments date acquisition pro forma results operations presented effects acquisition material individual basis 3 goodwill purchased intangibles following table presents details company’s goodwill segment thousands fourth quarters 2008 2007 company completed annual goodwill impairment test outlined sfas 142 requires assessment goodwill impairment annual basis assessment goodwill impairment conducted determining comparing fair value reporting units defined sfas 142 reporting unit’s carrying value date fair value determined using income approach market approach income approach fair value asset based value estimated cash flows asset expected generate future estimated future cash flows discounted rates ranging 13 16 percent arrive respective fair values market approach fair value unit based analysis financial data publicly traded companies engaged similar lines business based results impairment test company determined goodwill assets impaired 2008 2007 following table presents details company’s total purchased intangible assets december 31 thousands 2008 2007 2006 company recorded amortization expense related purchased intangibles 71 million 80 million 61 million respectively included “amortization impairment purchased intangibles” consolidated statement operations 2008 2007 company recorded approximately 137 million 109 million respectively amortization purchased intangibles “cost product revenues” consolidated statements operations amortization impairment intangibles allocated company’s segments upon adoption sfas 142 company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances company evaluates purchased intangibles possible impairment ongoing basis impairment indicators exist company performs assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment indicator impairment year ended december 31 2008 fourth quarter 2007 company determined decline projected future cash flows future products utilize technology acquired voyant acquisition formal assessment purchased intangibles performed based results impairment test company recorded impairment charge 36 million related existing technologies trade names part intangible assets acquired part voyant acquisition year ended december 31 2006 company recorded impairment charge 14 million related core technologies patents part intangible assets acquired part voyant acquisition impairment charges recorded “amortization impairment purchased intangibles” consolidated statements operations estimated future amortization expense purchased intangible assets december 31 2008 follows thousands 4 acquisitionrelated costs liabilities following table summarizes activity company’s acquisitionrelated liabilities integration costs thousands company approximately 15 million 23 million acquisitionrelated reserves classified longterm liabilities december 31 2008 2007 respectively approximately 06 million 11 million december 31 2008 2007 respectively acquisitionrelated reserves classified current liabilities facility closings company’s facility closings liability primarily attributable consolidation facilities related spectralink acquisition lesser extent picturetel acquisition balance december 31 2008 relates liabilities 14 million associated spectralink acquisition result plans vacate three vacant facilities well one vacant facility picturetel acquisition year ended december 31 2008 company recorded payments totaling 10 million restructuring related facility closings severance related benefits 2007 company recorded liability 70 million severance related benefits part liabilities assumed acquisition spectralink result establishing plan involuntarily terminate relocate certain general administrative manufacturing positions within 12 months following acquisition 2008 company made payments totaling 03 million restructuring reserve severance related benefits remaining 01 million expected paid writtenoff march 31 2009 integration costs merger fees expenses mergerrelated transaction period expenses years ended december 31 2008 2007 2006 02 million 43 million 02 million respectively principally consisted financial advisory accounting legal consulting fees direct integrationrelated expenses incurred period primarily related spectralink 2008 spectralink destiny 2007 dstmedia 2006 5 balance sheet details inventories consist following thousands property equipment net consist following thousands accrued liabilities consist following thousands 6 restructure costs 2008 2007 2006 company recorded restructuring charges accordance sfas 146 “accounting costs associated exit disposal activities” totaling 103 million 04 million 24 million respectively restructure charges recorded “restructure costs” consolidated statements operations following table summarizes activity company’s restructure reserves thousands 2008 management approved plans eliminate certain positions worldwide across organizations well plans consolidate facilities located israel denmark actions intended optimize company’s cost structure order accelerate improvement overall profitability addition 2008 severance packages executives impacted 2007 restructuring actions renegotiated employment terminated january 9 2008 connection actions company recorded charges totaling 94 million severance employee termination benefits well certain charges totaling 09 million related facility closures 2007 management announced reorganization video infrastructure divisions one combined business unit video solutions group result reorganization two executive positions eliminated actions taken better align company’s product development product marketing gotomarket strategy december 31 2007 total charge expected incurred related actions 04 million 02 million recorded 2007 2006 management approved plans eliminating relocating certain positions throughout company order consolidate certain functions one location eliminating certain positions throughout company focused primarily sales general administrative functions company also decided relocate asia pacific headquarters hong kong singapore resulting actions intended streamline focus company’s efforts properly align cost structure projected revenue streams total charges actions 24 million 2006 02 million 2007 charges comprised severance employee termination benefits related workforce reductions impacted less 3 percent company’s employees worldwide costs related relocations incurred december 31 2006 amounts related actions paid december 31 2007 7 investments fair value measurements company cash equivalents 1657 million 2796 million december 31 2008 december 31 2007 respectively cash equivalents consist cash banks well highly liquid investments money market funds time deposits savings accounts commercial paper us government securities corporate debt securities december 31 2008 company’s longterm investments contractual maturities one two years addition company shortterm longterm investments debt equity securities also strategic investments private public companies summarized follows thousands december 31 2008 company’s total cash equivalents investments held united states totaled 1561 million remaining 1684 million held outside united states various foreign subsidiaries us government securities company’s us government agency securities comprised direct us treasury obligations us government agency instruments including mortgage backed securities guaranteed us government ensure investment portfolio sufficiently diversified investment policy requires certain percentage portfolio invested types securities corporate debt securities company’s corporate debt securities comprised publiclytraded domestic foreign corporate debt securities company purchase auction rate securities cash investments instruments meet high quality credit rating standards specified investment policy guidelines also limit amount credit exposure one issuer type instrument corporate preferred equity securities company’s corporate preferred equity securities primarily comprised investmentgrade nonconvertible utility preferred stocks generally rated equivalent bbb better least one major credit rating agencies corporate preferred equity securities part dividend capture program also permits purchase put options us treasury bond futures interest rate hedge active market exists securities preferred equity securities actively traded common stock equity securities following table summarizes fair value gross unrealized losses investments including securities categorized cash equivalents unrealized losses thousands aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2008 2007 accordance fas 115 “accounting certain investments debt equity securities” company reviews individual securities portfolio determine whether decline security’s fair value amortized cost basis temporary decline fair value considered temporary cost basis individual security written fair value new cost basis amount writedown accounted realized loss included earnings year ended december 31 2008 company determined certain corporate preferred equities portfolio otherthan temporarily impaired resulted write approximately 10 million included “other income loss net” accompanying consolidated statement operations private company investments strategic reasons company made various investments private companies private company investments carried cost written estimated net realizable value indications exist investments impaired investments recorded “other assets” condensed consolidated balance sheets fair value measurements sfas 157 clarifies fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions sfas 157 establishes threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires us use observable market data available minimize use unobservable inputs determining fair value recurring basis measure certain financial assets liabilities fair value including marketable securities foreign currency contracts company’s cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include united states treasury securities government agencies corporate bonds commercial paper preferred stocks puts treasury bond futures instruments generally classified within level 2 fair value hierarchy fixed income availableforsale securities include us treasury obligations government agency instruments 82 corporate bonds 8 commercial paper 6 money market funds 4 included availableforsale securities approximately 277 million cash equivalents consist investments maturities three months less include money market funds nonfixed income availableforsale securities represent preferred stocks puts treasury bond futures part dividend recapture program generates capital gains offset capital losses principal market execute foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants company’s counterparties large money center banks regional banks company’s foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources involve management judgment contracts typically classified within level 2 fair value hierarchy fair value company’s marketable securities foreign currency contracts determined using following inputs december 31 2008 thousands included cash equivalents short longterm investments consolidated balance sheet b included prepaid expenses current assets consolidated balance sheet c included accrued liabilities consolidated balance sheet 8 business risks credit concentration company sells products services serve communications equipment market substantially company’s revenues derived sales video solutions voice communication products related services factors adversely affecting demand supply products services could materially adversely affect company’s business financial performance particular economic conditions worldwide contributed time slowdowns communications networking industries caused negative impact specific segments markets operate business grown become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition current recession continuing credit crisis affected worldwide financial markets extraordinary volatility stock markets negative macroeconomic global recessionary factors negatively impacted business expected continue negatively impact technology spending products services offer may materially adversely affect business operating results financial condition company subcontracts manufacture voice video endpoints celestica thirdparty contract manufacturer company uses celestica’s facilities thailand china singapore disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases similar events economic political difficulties countries asia reason disruption would harm business results operations also celestica’s facilities currently primary source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints company would experience delay shipping products would immediate negative impact revenues result company may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes company certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts time deposits savings accounts money market accounts corporate debt securities government securities deposits institutions may exceed amount insurance provided deposits company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses expansion polycom’s product offerings may increase company’s credit risk customers place larger orders initial stocking orders assurance company’s credit loss experience remain near historic levels december 31 2008 2007 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows 9 commitments contingencies litigation settlement agreements june 2008 company entered settlement agreement recorded 12 million charge “litigation reserves payments” consolidated statement operations year ended december 31 2008 february 2008 company tandberg asa “tandberg” codian ltd “codian” certain respective affiliates entered settlement agreement dismiss litigation parties terms agreement company received lumpsum payment 140 million well right receive future patent royalties codian mcu 4200 product shipped united states parties also exchanged broad crosslicenses covering respective business lines 140 million amortized revenue license period 10 years balance 128 million december 31 2008 included “deferred revenue” consolidated balance sheets 2008 company recorded charges totaling 62 million result trial preparation costs fee arrangement outside legal counsel represented us litigation codian pursuant owed additional legal fees based upon favorable outcome achieved first quarter 2008 time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company expects face increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality video voice data web conferencing products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company management believes loss arising matters probable reasonably estimated company record amount loss additional information becomes available potential liability related matters assessed estimates revised based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s financial position liquidity results operations period unfavorable outcome occurs becomes probable potentially future periods standby letters credit company standby letters credit totaling approximately 12 million december 31 2008 license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2009 2017 december 31 2008 following future minimum lease payments net estimated sublease income due current lease obligations addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2008 thousands rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2008 2007 2006 243 million 216 million 183 million respectively shortterm deferred lease obligation included accrued liabilities 06 million 04 million december 31 2008 2007 respectively long term deferred lease obligation included longterm liabilities 55 million 52 million december 31 2008 2007 respectively event company exercise option extend term leases expire company may incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs cannot determined end lease term times based landlord’s discretion subsequent negotiations landlord company however company believe costs would significant 10 hedging company maintains foreign currency risk management strategy protects economic value company possible effects currency fluctuations exposure monitored managed company integral part overall riskmanagement program company’s foreign exchange risk management program focuses unpredictability foreign exchange markets seeks reduce potentially adverse effect currency volatility could operating results nondesignated hedges company hedges net recognized foreign currency assets liabilities forward foreign exchange contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates derivative instruments hedge assets liabilities denominated foreign currencies carried fair value changes fair value recorded income expense net derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset gains losses assets liabilities hedged company enters foreign exchange forward contracts denominated euros british pounds israeli shekels hedges require special hedge accounting sfas 133 “accounting derivative instruments hedging activities” sfas 133 reporting period fair value company’s forward contracts recorded balance sheet fair value adjustments recorded income expense net offset corresponding gains losses foreign currency denominated assets liabilities fair values foreign exchange forward contracts determined using quoted market spot interest rates company enter foreign currency forward contracts trading speculative purposes following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2008 outstanding nondesignated hedges foreign currency dollar amounts thousands foreign currency transactions net effect hedging activity forward contracts resulted net losses 27 million less 02 million 08 million years ended december 31 2008 2007 2006 respectively cash flow hedges company’s policy managing foreign exchange risk management program protect economic value company foreign currency fluctuations result company purchases forward foreign exchange contracts hedge certain operational “cash flow” exposures resulting changes foreign currency exchange rates foreign exchange contracts carried fair value maximum duration foreign exchange forward contracts exceed thirteen months cash flow exposures result portions company’s forecasted revenues operating expenses denominated currencies us dollar primarily euro british pound israeli shekel company enters foreign exchange contracts hedge forecasted revenue operating expenses normal course business accordingly speculative nature receive hedge accounting treatment sfas 133 hedging relationships formally documented inception hedge hedges must highly effective offsetting changes future cash flows hedged transactions company records effective spot changes cash flow hedges cumulative comprehensive income loss forecasted transaction occurs december 31 2008 company estimated existing losses less 01 million reclassified revenue operating expenses accumulated comprehensive income loss within next twelve months following table summarizes derivativerelated activity cumulative comprehensive income loss thousands tax effected forecasted transaction occurs company reclassifies related gain loss cash flow hedge revenue operating expense depending upon transaction hedged year ended december 31 2008 net gains 42 million net losses 14 million reclassified cumulative comprehensive income loss revenue operating expense respectively year ended december 31 2007 net losses 33 million net gains 19 million reclassified cumulative comprehensive income loss revenue operating expense respectively event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would reclassified cumulative comprehensive income loss income expense consolidated statement operations time years ended december 31 2008 2007 net gains losses recognized income expense relating hedges forecasted transactions occur company evaluates hedge effectiveness prospectively retrospectively records ineffective portion hedging instruments income expense consolidated statement operations company incurred loss 01 million cash flow hedges due hedge ineffectiveness year ended december 31 2008 company incur net gains losses cash flow hedges due hedge ineffectiveness year ended december 31 2007 time value purchased derivative instruments excluded effectiveness testing recorded income expense period life contract income expense years ended december 31 2008 2007 included net gains 01 million 01 million respectively representing excluded time value component purchased forward contracts following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2008 outstanding cash flow hedges foreign currency dollar amounts thousands december 31 2008 2007 company derivative asset 145 million 14 million respectively included “prepaid expenses current assets” derivative liability 108 million 19 million respectively included “other accrued liabilities” consolidated balance sheets 11 stockholders’ equity stock option plans june 2 2004 shareholders approved 2004 equity incentive plan “2004 plan” reserved issuance 2004 plan 12500000 shares plus remaining available options terminated 1996 stock option plan “1996 plan” extent shares would returned 1996 plan result expiration cancellation forfeiture shares instead added reserve shares available 2004 plan addition company assumed 1354099 shares voyant’s 2000 equity incentive plan following completion voyant acquisition january 2004 terms 2004 plan options may granted prices lower fair market value date grant 2004 plan prior terminated plans options granted expire seven ten years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares options granted 2004 plan unvested shares outstanding prior terminated plans generally vest 25 completing one year service company remaining amount equally 36 months fully vested four years performance shares restricted stock units restricted stock compensation committee board directors may also grant performance shares restricted stock units 2004 plan officers certain employees component company’s broadbased equity compensation program performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria number performance shares subject vesting determined end given performance period generally performance criteria deemed achieved performance shares vest one three years anniversary grant date restricted stock units timebased awards generally vest period two three years date grant case performance shares fair value performance share award based closing market price company’s common stock date award awards earned performance goals performance periods established direction compensation committee met performance goals periods may vary participanttoparticipant grouptogroup timetotime performance shares delivered common stock end vesting period based company’s actual performance compared target metric may equal zero percent 0 two hundred fifty percent 250 initial award stockbased compensation expense performance shares recognized using graded vesting method service period generally three years adjusted period performance period based current estimate performance compared target metric nonemployee directors currently receive annual awards restricted stock restricted stock vests quarterly one year date grant fair value awards fair market value company’s common stock date grant stockbased compensation expense awards generally amortized six months date grant due retirement provisions contained underlying agreements activity plans year ended december 31 2008 follows 1 options expected vest result applying prevesting forfeiture rate assumption total outstanding options total pretax intrinsic value options exercised years ended december 31 2008 2007 2006 144 million 498 million 352 million respectively december 31 2008 2007 2006 6488150 5889930 6943985 outstanding options exercisable weighted average exercise price 2356 2004 1939 respectively options outstanding currently exercisable exercise price december 31 2008 follows aggregate intrinsic value stock options outstanding stock options exercisable december 31 2008 06 million 06 million respectively december 31 2008 total compensation cost related nonvested stock options yet recognized 259 million expected recognized next 24 months weightedaverage basis following information summarizes changes unvested performance shares nonemployee director restricted stock awards 2008 december 31 2008 89 million total unrecognized compensation cost related unvested shares expected recognized weightedaverage period 16 years total fair value shares vested 2008 2007 82 million 10 million respectively shares vested 2006 valuation expense information sfas 123r following table summarizes stockbased compensation expense recorded sfas 123r allocation within consolidated statements operations thousands stockbased compensation expense allocated segments separately maintained corporate level company elected capitalize stockbased compensation years ended december 31 2008 2007 due amounts immaterial valuation assumptions company estimates fair value stock options using blackscholes valuation model consistent provisions sfas 123r sab 107 company’s prior period pro forma disclosures net earnings including stockbased compensation expense determined fair value method prescribed sfas 123 weightedaverage estimated fair value employee stock options granted years ended december 31 2008 2007 2006 803 per share 1086 per share 705 per share respectively weightedaverage estimated fair value employee stock purchase rights granted pursuant employee stock purchase plan years ended december 31 2008 2007 2006 677 per share 821 per share 544 per share respectively fair value option employee stock purchase right grant estimated date grant using blackscholes option valuation model recognized expense using graded vesting attribution approach following weightedaverage assumptions company used implied volatility oneyear traded options company’s stock expected volatility assumption required blackscholes model consistent sfas 123r sab 107 selection implied volatility assumption based upon availability actively traded options company’s stock company’s assessment implied volatility representative future stock price trends historical volatility riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock options employee stock purchase rights dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock options represents weightedaverage period stock options expected remain outstanding determined based historical experience similar awards giving consideration contractual terms stockbased awards vesting schedules expectations future employee behavior influenced changes terms stockbased awards stockbased compensation expense recognized consolidated statements operations based awards ultimately expected vest amounts reduced estimated forfeitures sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based company’s historical experience share repurchase program august 9 2005 company announced board directors approved share repurchase plan pursuant would purchase shares company’s common stock aggregate value 2500 million open market time “2005 share repurchase plan” addition may 2007 company announced board directors extended existing program approving additional share repurchase program purchase 2500 million common stock “2007 share repurchase plan” may 2008 company’s board directors approved new share repurchase plan company discretion may purchase shares open market time aggregate value 3000 million “2008 share repurchase plan” year ended december 31 2008 company repurchased 89 million shares common stock open market cash 2200 million december 31 2008 share repurchases authorized 2005 share repurchase plan completed company authorized purchase additional 2200 million shares open market 2008 share repurchase plan purchase price shares company’s common stock repurchased recorded reduction stockholders’ equity accordance accounting principles board opinion 6 “status accounting research bulletins” company required allocate purchase price repurchased shares reduction retained earnings ii reduction common stock additional paidin capital issuance common stock tax benefit related employee stock option plans recorded increase common stock additional paidin capital result repurchases company may continue report accumulated deficit included stockholders’ equity consolidated balance sheets 12 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions lesser 60 eligible compensation 15500 2008 subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year 2008 fiscal year maximum company cash match 2000 per participating employee per year fiscal years 2007 2006 maximum company cash match 1500 per participating employee per year polycom 401k plan provides employees projected age 50 older december 31 2008 elected contribute polycom 401k plan may also make catchup contribution 5000 company’s contributions polycom 401k plan totaled approximately 21 million 14 million 12 million 2008 2007 2006 respectively employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees 6 month offering periods purchase dates end offering period january july company reserved 7500000 shares common stock issuance plan shares purchased employees’ payroll deductions maximum 20 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 5000 shares per offering 25000 worth common stock one calendar year 2008 2007 2006 575603 374915 407513 shares purchased average per share prices 2077 2171 1528 respectively december 31 2008 3641969 shares available issued plan 13 income taxes income tax expense consists following thousands sources income provision income taxes follows thousands company’s tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2008 company net operating loss carryfoward assets approximately 37 million tax credit carryforwards approximately 157 million net operating loss carryforward assets tax credit carryforwards begin expire 2013 2009 respectively portion future utilization company’s carryforwards subject certain limitations due change ownership occurred 2001 2004 included net deferred tax asset balance 11 million valuation allowance recorded 2008 related net operating losses generated certain foreign jurisdictions company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2008 cumulative amount earnings upon us income tax provided approximately 1239 million practicable determine income tax liability might incurred earnings repatriated us accordance sfas123r company adopted january 1 2006 tax savings expected future deductions based expense attributable various stock option plans reflected federal state tax provisions 2006 2007 2008 reduction income taxes payable resulting exercise employee stock options employee stock programs prior adoption sfas 123r credited stockholders’ equity 38 million 2008 142 million 2007 102 million 2006 company resolved certain tax uncertainties foreign tax jurisdictions resulted release previously accrued taxes totaling 18 million 2007 settlement certain audit years issues israeli tax authorities resulted additional release accrued taxes totaling 19 million january 1 2007 company adopted fasb interpretation 48 accounting uncertainty income taxes fin 48 fin 48 impact uncertain income tax position income tax expense must recognized largest amount likely sustained uncertain income tax position recognized less 50 likelihood sustained upon adoption company decreased reserves uncertain tax positions 126 million amount 34 million decrease relation interest penalties various tax reserves accounted cumulative adjustment beginning balance retained earnings 92 million decrease related preacquisition tax reserves accounted adjustment goodwill adoption company recognized certain net operating loss carryovers picturetel recognized previously resulted establishment deferred tax asset 404 million corresponding reduction goodwill reconciliation beginning ending amounts unrecognized tax benefits follows thousands included balance december 31 2008 214 million unrecognized tax benefits would affect income tax expense recognized remaining balance unrecognized tax benefits 344 million december 31 2008 would adjustment goodwill stockholders’ equity company’s practice recognize interest andor penalties related income tax matters income tax expense december 31 2008 december 31 2007 respectively company approximately 36 million 30 million accrued interest penalties related uncertain tax positions 08 million recorded 2008 07 million recorded 2007 end 2009 uncertain tax positions may reduced result lapse applicable statutes limitations company anticipates reduction would approximate 67 million reserve releases would recorded adjustments goodwill amount 08 million 59 million would adjustment tax expense company files income tax returns us federal jurisdiction various states foreign jurisdictions company longer subject us federal state income tax examinations tax authorities years prior 1998 foreign income tax matters foreign jurisdictions concluded years 2002 except hong kong singapore concluded years 2001 united kingdom germany concluded years 2006 2003 respectively france switzerland concluded years 2005 2004 respectively israel concluded years 2004 14 business segment information polycom leading global provider line highquality easytouse communications equipment enables businesses telecommunications service providers governmental educational institutions effectively conduct video voice data web communications company’s offerings organized along three product categories video solutions voice communications solutions services also considered segments reporting purposes segments determined accordance management views evaluates company’s business based criteria outlined fasb statement 131 “disclosures segments enterprise related information” description types products services provided reportable segment follows video solutions segment video solutions includes wide range video conferencing collaboration products entry level professional high definition products meet needs meeting room small offices large boardrooms auditoriums segment also includes products provide broad range network infrastructure hardware software facilitate video voice data conferencing collaboration businesses telecommunications service providers governmental educational institutions voice communications solutions segment voice communications solutions includes wide range voice communications products enhance business communications conference room desktop mobile applications services segment service comprised wide range service support offerings resellers directly enduser customers company’s service offerings include maintenance programs integration services consisting consulting education design project management services consulting services consisting planning needs analysis endusers design services room design custom solutions project management installation training segment revenue profit significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin defined asset data exception inventory reviewed management segment level products services within respective segments generally considered similar nature therefore separate disclosure similar classes products services segment level presented financial information reportable segment follows fiscal years ended december 31 2008 2007 2006 thousands segment contribution margin includes product line segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing general administrative costs legal accounting stockbased compensation costs acquisitionrelated costs amortization impairment purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income net gain loss strategic investments expense net reconciliation segment information polycom consolidated totals follows thousands company’s revenues substantially denominated us dollars summarized geographically follows thousands individual country outside united states accounted 10 company’s revenues 2008 2007 2006 percentage total revenues segment follows one customer accounted 10 company’s revenues 2008 2007 one customer accounted 10 company’s revenues 2006 company’s fixed assets net accumulated depreciation located following geographical areas thousands 15 net income per share disclosures reconciliation numerator denominator basic diluted net income per share provided follows thousands except per share amounts 2008 2007 2006 5024817 3870456 3751089 respectively potentially dilutive securities stock options stock subject repurchase excluded denominator computation “diluted net income per share” option exercise price greater average market price common stock 16 subsequent event january 6 2009 company announced implementation workforce reduction designed reduce cost structure maintaining flexibility invest strategic growth areas business plan includes elimination approximately 150 positions six percent global workforce reductions taking effect immediately company expects record restructuring charges make cash expenditures totaling approximately 67 million first quarter 2009 resulting actions primarily related severance employee termination benefits polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2009 2008 three years period ended december 31 2009 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc robert c hagerty robert c hagerty chairman board directors chief executive officer president date february 19 2010 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint robert c hagerty michael r kourey either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated polycom inc index consolidated financial statements page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate conducted evaluation effectiveness internal control financial reporting based framework internal controlintegrated framework issued committee sponsoring organizations treadway commission based results evaluation management concluded december 31 2009 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles effectiveness company’s internal control financial reporting december 31 2009 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors stockholders polycom inc opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2009 december 31 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing page presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing page responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california february 19 2010 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business summary significant accounting policies description business polycom leading global provider highquality easytouse communications solutions enable enterprise government education healthcare customers effectively collaborate distance time zones organizational boundaries solutions built architectures enable unified voice video content communications principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated company performed evaluation subsequent events february 19 2010 date financial statements issued use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates reclassifications certain previously reported amounts reclassified conform current year’s presentation cash equivalents company considers highly liquid investments original maturities 90 days less time purchase cash equivalents allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition company’s customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances written management determined likelihood collection probable investments company’s shortterm longterm investments comprised us government agency securities corporate debt securities corporate preferred equity securities investments classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held company’s name limited number major financial institutions december 31 2009 2008 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period unrealized gains losses recorded separate component cumulative comprehensive income loss stockholder’s equity investments sold loss considered temporarily declined value charge earnings recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income net strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecasted earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives three thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill amortized regularly reviewed potential impairment identification measurement goodwill impairment involves estimation fair value company’s reporting units estimates fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years purchased intangible assets determined indefinite useful lives amortized longlived assets including intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset group assets eventual disposition measurement impairment loss longlived assets management expects hold use based estimated fair value asset longlived assets disposed reported lower carrying amount estimated fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured company warranties generally start date purchase continue one three years depending product purchased software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary changes warranty obligation included component “other accrued liabilities” consolidated balance sheets period follows thousands deferred maintenance revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company recognizes maintenance revenue contracts life service contract deferred maintenance revenue 741 million 627 million shortterm included component “deferred revenue” december 31 2009 2008 respectively 354 million 292 million longterm included component “longterm deferred revenue” december 31 2009 2008 respectively consolidated balance sheets follows thousands cost providing maintenance services years ended december 31 2009 2008 2007 786 million 729 million 586 million respectively officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations minimal indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liability environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title transferred product payment contingent upon installation service obligations price fixed determinable collectibility reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company recognizes extended service revenue hardware software products ratably service period generally one five years company’s video communications products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts company uses residual method recognize revenue agreement includes one elements delivered future date undelivered element arrangement company defers revenue based vendorspecific objective evidence fair value undelivered element determined price charged element sold separately vendorspecific objective evidence fair value exist undelivered elements company defers revenue sufficient evidence exists elements delivered company accrues sales returns allowances channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives reduction revenues upon shipment based upon contractual obligations historical experience company accrues coop marketing funds marketing expense receives identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues research development expenditures research development expenditures charged operations incurred consist primarily compensation costs including stock compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2009 2008 2007 173 million 281 million 279 million respectively income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized company recognizes measures benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions company evaluates uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period change made could material impact company’s effective tax rate operating results foreign currency translation financial statements company’s foreign subsidiaries operate functional currency us dollar remeasured us dollars yearend exchange rates monetary assets liabilities nonmonetary items remeasured historical rates income expense accounts translated average rates effect year except depreciation translated historical rates foreign exchange gains losses significant date recorded results operations functional currency dstmedia technology co ltd dstmedia whollyowned subsidiary china chinese yuan cny functional currency kirk telecom kirk scantel wholly owned subsidiaries denmark danish krone dkk adjustments resulting translating foreign currency financial statements dstmedia kirk telecom kirk scantel us dollar included separate component “cumulative comprehensive income loss” following table sets forth components foreign currency translation adjustments december 31 derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated cash flow hedge effective portion derivative’s gain loss initially reported separate component cumulative comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings excluded ineffective portions gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk computation net income per share basic net income per share computed dividing net income weighted average number common shares outstanding period less common stock subject repurchase diluted net income per share reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding shares common stock subject repurchase potentially dilutive shares including shares common stock subject repurchase excluded computation diluted net income per share effect antidilutive fair value measurements company certain financial assets liabilities recorded fair value classified level 1 2 3 within fair value hierarchy fair values determined level 1 inputs utilize quoted prices unadjusted active markets identical assets liabilities ability access fair values determined level 2 inputs utilize data points observable quoted prices interest rates yield curves fair values determined level 3 inputs utilize unobservable data points asset liability carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due shortterm maturities stock based compensation company’s sharebased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock restricted stock units performance shares well employee stock purchase plan estimated fair value awards charged income requisite service period generally vesting period fair value stock option awards estimated grant date using blackscholes option valuation model fair value restricted stock units based market value company’s common stock date grant compensation expense restricted stock units including effect forfeitures recognized applicable service period fair value performance shares based market price stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among russell 2000 index companies performance period recent pronouncements october 2009 fasb issued authoritative guidance revenue recognition become effective company beginning january 1 2011 earlier adoption permitted new guidance arrangements include software elements tangible products software components essential functionality tangible product longer within scope software revenue recognition guidance softwareenabled products subject relevant revenue recognition guidance additionally fasb issued authoritative guidance revenue arrangements multiple deliverables outside scope software revenue recognition guidance new guidance vendor specific objective evidence third party evidence deliverables arrangement cannot determined best estimate selling price required separate deliverables allocate arrangement consideration using relative selling price method new guidance includes new disclosure requirements application relative selling price method affects timing amount revenue recognition company currently assessing potential effect financial statements june 2009 fasb issued authoritative guidance consolidation variable interest entities effective company beginning january 1 2010 new guidance requires revised evaluations whether entities represent variable interest entities ongoing assessments control entities additional disclosures variable interests company believes adoption new guidance material impact financial statements 2 business combinations march 26 2007 company acquired outstanding shares spectralink corporation “spectralink” january 5 2007 company completed acquisition outstanding shares destiny conferencing corporation “destiny” privately held telepresence solutions company details acquisitions presented following table summarizes company’s purchase price allocations related purchase business combination transactions thousands additionally year ended december 31 2005 company acquired dstmedia technology “dstmedia year ended december 31 2004 company acquired voyant technologies inc “voyant” company also completed acquisition meetucom inc “meetu” year ended december 31 2002 company completed acquisitions picturetel corporation “picturetel” atlanta signal processors inc “aspi” circa communications ltd “circa” accord networks ltd “accord” year ended december 31 2001 changes goodwill purchased intangibles fair value net tangible assets summarized follows thousands fair value adjustments assets acquired year ended december 31 2009 2008 primarily resulted elimination preacquisition tax reserves related spectralink picturetel acquisitions adjustments reserves deferred tax assets resulted corresponding reduction goodwill spectralink corporation march 26 2007 company acquired outstanding shares spectralink corporation “spectralink” spectralink designs manufactures sells onpremises wireless telephone products customers worldwide complement existing telephone systems providing mobile communications building campus environment spectralink wireless telephone products increase efficiency employees enabling remain telephone contact moving throughout workplace aggregate consideration transaction including direct acquisition costs approximately 2373 million management allocated purchase price assets acquired liabilities assumed based estimated fair values acquisition date 94 million allocated inprocess research development related primarily projects associated software enhancements upgrades functionality performance link netlink dect products recorded “purchased inprocess research development” consolidated statements operations amount determined management based established valuation techniques hightechnology industry expensed upon acquisition technological feasibility established future alternative uses existed acquisition date income approach includes analysis markets cash flows risks associated achieving cash flows primary technique utilized valuing intangibles inprocess research development estimated net free cash flows generated inprocess research development projects discounted rates ranging 15 16 percent relation stage completion technical risks associated achieving technology feasibility significant process research development projects completed december 31 2007 spectralink’s results included company’s voice communications solutions services segments date acquisition financial information table summarizes combined results operations polycom spectralink pro forma basis though companies combined beginning period presented pro forma financial information combines historical results operations polycom spectralink year ended december 31 2007 unaudited pro forma financial information prepared comparative purposes purport indicative actual operating results would recorded acquisition actually taken place january 1 2007 taken indicative future consolidated operating results unaudited thousands except per share amounts unaudited pro forma net income includes amortization purchased intangibles 157 million year ended december 31 2007 unaudited pro forma financial information year ended december 31 2007 also includes following nonrecurring charges inprocess research development 94 million acquisitionrelated charges fair market value adjustment inventory 24 million acquisitionrelated expenses incurred spectralink 37 million pro forma amounts reflect reduction interest expense related debt paid part acquisition well reduction interest income cash paid part purchase price assuming acquisition occurred january 1 2007 interest income calculated company’s average rate return period pro forma net income assumes income tax provision company’s consolidated tax rate year destiny conferencing corporation january 5 2007 company completed acquisition outstanding shares destiny conferencing corporation “destiny” privately held telepresence solutions company headquartered dayton ohio pursuant terms agreement plan reorganization agreement dated january 5 2007 destiny designs manufactures immersive telepresence solutions polycom incorporated destiny’s products rpx™ telepresence offering prior acquisition terms oem distribution agreement companies pursuant reorganization agreement destiny shareholders debtholders received 476 million cash approximately 52 million cash placed escrow held security losses incurred company event certain breaches representations warranties covered reorganization agreement certain events december 2007 approximately 50 million escrow released destiny shareholders destiny’s results included company’s video communications solutions services segments date acquisition pro forma results operations presented effects acquisition material individual basis 3 goodwill purchased intangibles following table presents details company’s goodwill segment thousands fourth quarters 2009 2008 company completed annual goodwill impairment test assessment goodwill impairment conducted determining comparing fair value reporting units reporting unit’s carrying value date fair value determined using income approach market approach weighted equally income approach fair value asset based value estimated cash flows asset expected generate future estimated future cash flows discounted rates ranging 13 16 percent arrive respective fair values market approach fair value unit based analysis financial data publicly traded companies engaged similar lines business based results impairment tests company determined goodwill assets impaired 2009 2008 date goodwill impairment charges recorded company following table presents details company’s total purchased intangible assets december 31 thousands 2009 2008 2007 company recorded amortization expense related purchased intangibles 58 million 71 million 80 million respectively included “amortization impairment purchased intangibles” consolidated statement operations 2009 2008 2007 company recorded approximately 135 million 137 million 109 million respectively amortization purchased intangibles “cost product revenues” consolidated statements operations amortization impairment intangibles allocated company’s segments company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances company evaluates purchased intangibles possible impairment ongoing basis impairment indicators exist company performs assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment indicators impairment years ended december 31 2009 2008 fourth quarter 2007 company determined decline projected future cash flows future products utilize technology acquired voyant acquisition formal assessment purchased intangibles performed based results impairment test company recorded impairment charge 36 million related existing technologies trade names part intangible assets acquired part voyant acquisition impairment charges recorded “amortization impairment purchased intangibles” consolidated statements operations estimated future amortization expense purchased intangible assets december 31 2009 follows thousands 4 acquisitionrelated costs liabilities following table summarizes activity company’s acquisitionrelated liabilities integration costs thousands company approximately 09 million 15 million acquisitionrelated reserves classified longterm liabilities december 31 2009 2008 respectively approximately 06 million december 31 2009 2008 respectively acquisitionrelated reserves classified current liabilities facility closings company’s facility closings liability primarily attributable consolidation facilities related spectralink acquisition lesser extent picturetel acquisition balance december 31 2009 relates liabilities 15 million associated spectralink acquisition result plans vacate three vacant facilities well one vacant facility picturetel acquisition year ended december 31 2009 company recorded payments totaling 03 million restructuring related facility closings expects remaining balance paid released end 2012 severance related benefits 2007 company recorded liability 70 million severance related benefits part liabilities assumed acquisition spectralink result establishing plan involuntarily terminate relocate certain general administrative manufacturing positions within 12 months following acquisition december 31 2009 amounts paid released integration costs merger fees expenses mergerrelated transaction period expenses years ended december 31 2008 2007 02 million 43 million respectively principally consisted financial advisory accounting legal consulting fees direct integrationrelated expenses incurred period primarily related spectralink 2008 spectralink destiny 2007 costs recorded 2009 5 balance sheet details inventories consist following thousands property equipment net consist following thousands accrued liabilities consist following thousands 6 restructure costs 2009 2008 2007 company recorded 159 million 103 million 04 million respectively related restructuring actions resulted elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus efforts properly align cost structure projected revenue streams following table summarizes activity company’s restructure reserves thousands third quarter 2009 company committed restructuring plan realign reinvest resources strategic growth areas business company eliminated positions aligned gotomarket structure new sales leadership reallocate resources growth areas plan included elimination approximately four percent company’s global workforce company expects record additional charges approximately 12 million first quarter 2010 result final notifications related actions addition actions taken third quarter 2009 company eliminated certain positions first second quarters 2009 related eliminating approximately six percent workforce beginning year well consolidating certain functions shared services center beijing china result actions taken 2009 company recorded restructuring charges 159 million 2009 primarily related severance employee termination benefits amounts expected paid second quarter 2010 2008 management approved plans eliminate certain positions worldwide across organizations well plans consolidate facilities located israel denmark actions intended optimize company’s cost structure order accelerate improvement overall profitability addition 2008 severance packages executives impacted 2007 restructuring actions renegotiated employment terminated january 9 2008 connection actions company recorded charges totaling 94 million severance employee termination benefits well certain charges totaling 09 million related facility closures 2007 management announced reorganization video network systems divisions one combined business unit video communications solutions group result reorganization two executive positions eliminated actions taken better align company’s product development product marketing gotomarket strategy total incurred related actions 04 million 7 investments fair value measurements company cash equivalents 3311 million 1657 million december 31 2009 december 31 2008 respectively cash equivalents consist cash banks well highly liquid investments money market funds time deposits savings accounts commercial paper us government securities municipal securities corporate debt securities december 31 2009 company’s longterm investments contractual maturities one two years addition company shortterm longterm investments debt equity securities also strategic investments private public companies summarized follows thousands december 31 2009 company’s total cash equivalents investments held united states totaled 1881 million remaining 2794 million held outside united states various foreign subsidiaries private company investments strategic reasons company made various investments private companies private company investments carried cost written estimated net realizable value indications exist investments impaired investments recorded “other assets” consolidated balance sheets us government securities company’s us government agency securities comprised direct us treasury obligations us government agency instruments including mortgage backed securities guaranteed us government ensure investment portfolio sufficiently diversified investment policy requires certain percentage portfolio invested types securities corporate debt securities company’s corporate debt securities comprised publiclytraded domestic foreign corporate debt securities company purchase auction rate securities cash investments instruments meet high quality credit rating standards specified investment policy guidelines also limit amount credit exposure one issuer type instrument corporate preferred equity securities company’s corporate preferred equity securities primarily comprised investmentgrade nonconvertible utility preferred stocks generally rated equivalent bbb better least one major credit rating agencies corporate preferred equity securities part capital gains capture program also permits purchase put options us treasury bond futures interest rate hedge active market exists securities preferred equity securities actively traded common stock equity securities following table summarizes fair value gross unrealized losses investments including securities categorized cash equivalents unrealized losses thousands aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2009 2008 company reviews individual securities portfolio determine whether decline security’s fair value amortized cost basis temporary decline fair value considered temporary cost basis individual security written fair value new cost basis amount writedown accounted realized loss included earnings year ended december 31 2008 company determined certain corporate preferred equities portfolio otherthan temporarily impaired resulted write approximately 10 million included “other income loss net” accompanying consolidated statement operations impairments 2009 fair value measurements fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require us develop assumptions hierarchy requires us use observable market data available minimize use unobservable inputs determining fair value recurring basis measure certain financial assets liabilities fair value including marketable securities foreign currency contracts company’s cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper preferred stocks puts treasury bond futures instruments generally classified within level 2 fair value hierarchy december 31 2009 fixed income availableforsale securities include us treasury obligations government agency instruments 67 corporate bonds 7 commercial paper 20 municipal securities 2 money market funds 4 included availableforsale securities approximately 1014 million cash equivalents consist investments maturities three months less include money market funds nonfixed income availableforsale securities represent preferred stocks puts treasury bond futures part capital gains program designed generate capital gains offset capital losses principal market execute foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants company’s counterparties large money center banks regional banks company’s foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy fair value company’s marketable securities foreign currency contracts determined using following inputs december 31 2009 thousands included cash equivalents short longterm investments consolidated balance sheet b included short term derivative asset consolidated balance sheet c included short term derivative liability consolidated balance sheet 8 business risks credit concentration company sells products services serve communications equipment market substantially company’s revenues derived sales video communications solutions voice communication solutions products related services factors adversely affecting demand supply products services could materially adversely affect company’s business financial performance particular economic conditions worldwide contributed time slowdowns communications networking industries caused negative impact specific segments markets operate business grown become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition current recession continuing credit crisis affected worldwide financial markets extraordinary volatility stock markets negative macroeconomic global recessionary factors negatively impacted business expected continue negatively impact technology spending products services offer may materially adversely affect business operating results financial condition company subcontracts manufacture voice video endpoints celestica thirdparty contract manufacturer company uses celestica’s facilities thailand china singapore disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases similar events economic political difficulties countries asia reason disruption would harm business results operations also celestica’s facilities currently primary source manufacturer products celestica experiences interruption operations otherwise suffers capacity constraints company would experience delay shipping products would immediate negative impact revenues result company may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes company certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts time deposits savings accounts money market accounts corporate debt securities preferred stocks government securities municipal securities deposits one financial institution may exceed amount insurance provided deposits investments covered insurance company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses expansion polycom’s product offerings may increase company’s credit risk customers place larger orders initial stocking orders assurance company’s credit loss experience remain near historic levels december 31 2009 2008 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows 9 commitments contingencies litigation settlement agreements 2009 company recorded 07 million reserve litigation reserves payments condensed consolidated statement operations related ongoing legal matter june 2008 company entered settlement agreement recorded 12 million charge “litigation reserves payments” consolidated statement operations year ended december 31 2008 february 2008 company tandberg asa “tandberg” codian ltd “codian” certain respective affiliates entered settlement agreement dismiss litigation parties terms agreement company received lumpsum payment 140 million well right receive future patent royalties codian mcu 4200 product shipped united states parties also exchanged broad crosslicenses covering respective business lines 140 million amortized revenue license period 10 years balance 114 million 128 million december 31 2009 2008 included “deferred revenue” consolidated balance sheets 2008 company recorded charges totaling 62 million result trial preparation costs fee arrangement outside legal counsel represented us litigation codian pursuant owed additional legal fees based upon favorable outcome achieved first quarter 2008 time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company expects face increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality video voice data web conferencing products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company management believes loss arising matters probable reasonably estimated company record amount loss additional information becomes available potential liability related matters assessed estimates revised based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s financial position liquidity results operations period unfavorable outcome occurs becomes probable potentially future periods standby letters credit company standby letters credit totaling approximately 15 million december 31 2009 license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2010 2017 december 31 2009 following future minimum lease payments net estimated sublease income due current lease obligations addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2009 thousands rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2009 2008 2007 210 million 243 million 216 million respectively shortterm deferred lease obligation included accrued liabilities 10 million 06 million december 31 2009 2008 respectively long term deferred lease obligation included longterm liabilities 56 million 55 million december 31 2009 2008 respectively event company exercise option extend term leases expire company may incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs cannot determined end lease term times based landlord’s discretion subsequent negotiations landlord company however company believe costs would significant 10 foreign currency derivatives company maintains foreign currency risk management program designed reduce volatility company’s economic value effects unanticipated currency fluctuations international operations generate revenues costs denominated foreign currencies company’s policy hedge significant foreign currency revenues costs improve margin visibility reduce earnings volatility associated unexpected changes currency nondesignated hedges company hedges net foreign currency monetary assets liabilities monthly primarily resulting foreign currency denominated receivables payables foreign exchange forward contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates derivative instruments carried fair value changes fair value recorded interest income expense net derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset remeasurement gains losses hedged assets liabilities company executes nondesignated foreign exchange forward contracts primarily denominated euros british pounds israeli shekels following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2009 outstanding nondesignated hedges foreign currency dollar amounts thousands outstanding nondesignated hedges original maturities greater 360 days december 31 2009 following table shows effect company’s nondesignated hedges condensed consolidated statement operations twelve months ended december 31 2009 thousands cash flow hedges company’s foreign exchange risk management program objective reduce volatility company’s economic value unanticipated foreign currency fluctuations company designates forward contracts cash flow hedges foreign currency revenues expenses primarily euro british pound israeli shekel foreign exchange contracts carried fair value balance sheet maximum duration foreign exchange forward contracts exceed thirteen months speculation prohibited policy receive hedge accounting treatment cash flow hedging relationships formally designated hedge inception tested prospectively retrospectively ensure forward contracts highly effective offsetting changes future cash flows hedged transactions company records effective spot changes cash flow hedges cumulative comprehensive income loss reclassified revenue cost goods sold operating expenses together hedged transaction time value forward contracts excluded effectiveness testing recorded interest income expense life contract together ineffective portion hedge following tables show effect company’s derivative instruments designated cash flow condensed consolidated statements operations twelve months ended december 31 2009 thousands year ended december 31 2009 03 million loss recorded excluded portion 04 million gain recorded ineffective portion hedge december 31 2009 company estimated values reported accumulated comprehensive income loss reclassified income within next twelve months following table summarizes derivativerelated activity cumulative comprehensive income loss thousands tax effected event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would immediately reclassified interest income expense consolidated statement operations year ended december 31 2009 net gains 04 million recognized interest income expense relating hedges forecasted transactions occur following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2009 outstanding cash flow hedges carried fair value balance sheet foreign currency dollar amounts thousands estimates fair value based applicable commonly quoted prices prevailing financial market information december 31 2009 see note 7 additional information fair value measurements financial assets liabilities including derivative assets derivative liabilities measured fair value condensed consolidated financial statements recurring basis following table shows company’s derivative instruments measured gross fair value reflected condensed consolidated balance sheet december 31 2009 thousands derivative assets recorded prepaid current assets condensed consolidated balance sheets b derivative liabilities recorded accrued liabilities condensed consolidated balance sheets 11 stockholders’ equity stock option plans june 2 2004 stockholders approved 2004 equity incentive plan “2004 plan” reserved issuance 2004 plan 12500000 shares plus remaining available options terminated 1996 stock option plan “1996 plan” extent shares would returned 1996 plan result expiration cancellation forfeiture shares instead added reserve shares available 2004 plan addition company assumed 1354099 shares voyant’s 2000 equity incentive plan following completion voyant acquisition january 2004 may 2009 stockholders approved amendments 2004 plan among making clarifying amendments permit polycom undertake onetime stock option exchange program ii increase number shares common stock reserved issuance 2004 plan 3600000 shares iii implement flexible share counting 2004 plan terms 2004 plan options may granted prices lower fair market value date grant 2004 plan prior terminated plans options granted expire seven ten years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares options granted 2004 plan unvested shares outstanding prior terminated plans generally vest 25 completing one year service company remaining amount equally 36 months fully vested four years stock option exchange program august 21 2009 company completed onetime stock option exchange program approved stockholders may 2009 pursuant eligible employees able exchange certain outstanding options whether vested unvested new restricted stock units rsus eligible employees able exchange eligible outstanding options exercise price greater 2894 per share certain stock plans granted july 27 2008 total 2340994 options ranging exercise price 3019 5013 exchanged surrendered options cancelled immediately thereafter company issued total 445007 rsus vesting schedule rsus generally 50 shares vest oneyear anniversary new rsu grant date remaining 50 shares vest second anniversary new rsu grant date subject employee’s continued employment company relevant dates exchange considered modification original equity award addition continuing amortize remaining stock compensation associated exchanged options exchange resulted incremental 14 million stock compensation expense expensed twoyear service period rsus performance shares restricted stock units restricted stock compensation committee board directors may also grant performance shares restricted stock units 2004 plan officers certain employees component company’s broadbased equity compensation program performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria number performance shares subject vesting determined end given performance period generally performance criteria deemed achieved performance shares vest one three years anniversary grant date restricted stock units timebased awards generally vest period two three years date grant 2009 company granted performance shares contain market condition based total shareholder return tsr measure company’s relative performance russell 2000 index awards earned performance goals performance periods established direction compensation committee met performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 two hundred 200 target award fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among russell 2000 index companies performance period stockbased compensation expense performance shares recognized using graded vesting method three year service period addition 2009 company also granted 125000 target performance shares subject fulfillment company certain predefined performance criteria multiple performance periods actual number performance shares determined end given performance period company also granted restricted stock units year ended december 31 2009 fair value restricted stock units based closing market price company’s common stock date award awards generally vest one three years equal annual installments anniversary date grant delivered common stock end vesting period stockbased compensation expense restricted stock units recognized using graded vesting method commencing 2009 nonemployee directors receive annual awards restricted stock units 2008 nonemployee directors granted awards restricted stock awards vest quarterly one year date grant fair value awards fair market value company’s common stock date grant stockbased compensation expense awards generally amortized six months date grant due voluntary termination provisions contained underlying agreements activity plans year ended december 31 2009 follows 1 may 27 2009 stockholders approved amendment 2004 plan providing flexible share accounting meaning full value awards adjust shares available grant 15 shares every one share subject award effective award activity may 27 2009 awards granted option exchange program excluded treatment accounted 1for1 basis 2 options expected vest result applying prevesting forfeiture rate assumption total outstanding options total pretax intrinsic value options exercised years ended december 31 2009 2008 2007 74 million 144 million 498 million respectively december 31 2009 2008 2007 4336332 6488150 5889930 outstanding options exercisable weighted average exercise price 2236 2356 2004 respectively options outstanding currently exercisable exercise price december 31 2009 follows aggregate intrinsic value stock options outstanding stock options exercisable december 31 2009 217 million 213 million respectively december 31 2009 total compensation cost related nonvested stock options yet recognized 114 million expected recognized next nine months weightedaverage basis following information summarizes changes unvested performance shares restricted stock units nonemployee director restricted stock awards units 2009 december 31 2009 262 million total unrecognized compensation cost related unvested shares expected recognized weightedaverage period 11 years total fair value shares vested 2009 2008 2007 157 million 82 million 10 million respectively employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees six month offering periods purchase dates end offering period january july company reserved 7500000 shares common stock issuance plan shares purchased employees’ payroll deductions maximum 20 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 5000 shares per offering 25000 worth common stock one calendar year 2009 2008 2007 898464 575603 374915 shares purchased average per share prices 1200 2077 2171 respectively december 31 2009 2743505 shares available issued plan valuation expense information following table summarizes stockbased compensation expense recorded allocation within consolidated statements operations thousands stockbased compensation expense allocated segments separately maintained corporate level company elected capitalize stockbased compensation years ended december 31 2009 2008 2007 due amounts immaterial valuation assumptions company estimates fair value stock options using blackscholes valuation model consistent company’s prior period pro forma disclosures net earnings including stockbased compensation expense weightedaverage estimated fair value employee stock options granted years ended december 31 2009 2008 2007 830 per share 803 per share 1086 per share respectively weightedaverage estimated fair value employee stock purchase rights granted pursuant employee stock purchase plan years ended december 31 2009 2008 2007 517 per share 677 per share 821 per share respectively fair value option employee stock purchase right grant estimated date grant using blackscholes option valuation model recognized expense using graded vesting attribution approach following weightedaverage assumptions company used implied volatility oneyear traded options company’s stock expected volatility assumption required blackscholes model selection implied volatility assumption based upon availability actively traded options company’s stock company’s assessment implied volatility representative future stock price trends historical volatility riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock options employee stock purchases dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock options represents weightedaverage period stock options expected remain outstanding determined based historical experience similar awards giving consideration contractual terms stockbased awards vesting schedules expectations future employee behavior influenced changes terms stockbased awards stockbased compensation expense recognized consolidated statements operations based awards ultimately expected vest amounts reduced estimated forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based company’s historical experience share repurchase program time company’s board directors approved plans company may discretion purchase shares common stock open market years ended december 31 2009 2008 company purchased 16 million shares 89 million shares respectively common stock open market cash 328 million 2200 million respectively purchase price shares company’s stock repurchased recorded reduction stockholders’ equity december 31 2009 company authorized purchase additional 1872 million shares open market current share repurchase plan comprehensive income components comprehensive income net tax included component stockholder’s equity follows thousands activity cumulative comprehensive income net tax summarized thousands 12 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions lesser 60 eligible compensation 16500 2009 subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year 2009 2008 fiscal years maximum company cash match 2000 per participating employee per year fiscal year 2007 maximum company cash match 1500 per participating employee per year polycom 401k plan provides employees projected age 50 older december 31 2008 elected contribute polycom 401k plan may also make catchup contribution 5500 company’s contributions polycom 401k plan totaled approximately 20 million 21 million 14 million 2009 2008 2007 respectively 13 income taxes income tax expense consists following thousands sources income provision income taxes follows thousands company’s tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2009 company capital net operating loss carryforward assets approximately 48 million tax credit carryforwards approximately 80 million capital net operating loss carryforward assets tax credit carryforwards begin expire 2012 2016 respectively included net deferred tax asset balance 14 million valuation allowance recorded related net operating losses generated denmark 2008 2009 company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2009 cumulative amount earnings upon us income tax provided approximately 1636 million practicable determine income tax liability might incurred earnings repatriated us excess tax benefits associated stock option exercises credited stockholders’ equity reductions income taxes payable resulting exercise employee stock options employee stock programs credited stockholders’ equity approximately 01 million 40 million 150 million twelve months ended december 31 2009 2008 2007 company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions several years following first year company israeli taxable income consideration tax losses carried forward company realized tax savings 09 million 2009 05 million 2007 savings 2008 due net local statutory losses reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 addition beginning 2008 company’s subsidiary china granted highnew technology enterprise “hnte” recognition company’s tax rate reduced 25 15 tax savings realized 06 million 2009 01 million 2008 2007 settlement certain audit years issues israeli tax authorities resulted release accrued taxes totaling 19 million 2009 additional settlement 03 million paid years 2005 2007 aggregate changes balance company’s gross unrecognized tax benefits follows periods indicated included balance december 31 2009 410 million unrecognized tax benefits would affect income tax expense recognized remaining balance unrecognized tax benefits 34 million december 31 2009 would adjustment stockholders’ equity company’s practice recognize interest andor penalties related income tax matters income tax expense december 31 2009 december 31 2008 respectively company approximately 35 million 36 million accrued interest penalties related uncertain tax positions end 2010 uncertain tax positions may reduced result lapse applicable statutes limitations company anticipates reduction would approximate 53 million reserve releases would recorded adjustments stockholders’ equity amount 16 million 37 million would adjustment tax expense company files income tax returns us federal jurisdiction various states foreign jurisdictions company longer subject us federal state income tax examinations tax authorities years prior 1999 foreign income tax matters foreign jurisdictions concluded years 2003 except hong kong singapore concluded years 2002 united kingdom germany concluded years 2008 2006 respectively france switzerland concluded years 2007 2005 respectively israel concluded years 2007 14 business segment information polycom leading global provider line highquality easytouse communications equipment enables businesses telecommunications service providers governmental educational institutions effectively conduct video voice data web communications company’s offerings organized along three product categories video communications solutions voice communications solutions services also considered segments reporting purposes segments determined accordance management views evaluates company’s business based criteria outlined authoritative guidance description types products services provided reportable segment follows video communications solutions segment video communications solutions includes wide range video conferencing collaboration products entry level professional high definition products meet needs meeting room small offices large boardrooms auditoriums segment also includes products provide broad range network infrastructure hardware software facilitate video voice data conferencing collaboration businesses telecommunications service providers governmental educational institutions voice communications solutions segment voice communications solutions includes wide range voice communications products enhance business communications conference room desktop mobile applications services segment service comprised wide range service support offerings resellers directly enduser customers company’s service offerings include maintenance programs integration services consisting consulting education design project management services consulting services consisting planning needs analysis endusers design services room design custom solutions project management installation training segment revenue profit significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin defined asset data exception inventory reviewed management segment level products services within respective segments generally considered similar nature therefore separate disclosure similar classes products services segment level presented financial information reportable segment follows fiscal years ended december 31 2009 2008 2007 thousands segment contribution margin includes product line segment revenues less related cost sales direct marketing direct engineering expenses management allocates corporate manufacturing costs infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include sales costs marketing costs direct marketing general administrative costs legal accounting stockbased compensation costs acquisitionrelated costs amortization impairment purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income net gain loss strategic investments expense net reconciliation segment information polycom consolidated totals follows thousands company’s revenues substantially denominated us dollars summarized geographically follows thousands individual country outside united states accounted 10 company’s revenues 2009 2008 2007 percentage total revenues segment follows 2009 one customer accounted 10 company’s revenues one customer accounted 10 company’s revenues 2008 2007 company’s fixed assets net accumulated depreciation located following geographical areas thousands 15 net income per share disclosures reconciliation numerator denominator basic diluted net income per share provided follows thousands except per share amounts 2009 2008 2007 4183896 5024817 3870456 respectively potentially dilutive securities stock options stock subject repurchase excluded denominator computation “diluted net income per share” option exercise price greater average market price common stock polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2010 2009 three years period ended december 31 2010 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc andrew miller andrew miller chief executive officer president director date february 18 2011 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint andrew miller michael r kourey either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated polycom inc index consolidated financial statements page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate conducted evaluation effectiveness internal control financial reporting based framework internal controlintegrated framework issued committee sponsoring organizations treadway commission based results evaluation management concluded december 31 2010 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles effectiveness company’s internal control financial reporting december 31 2010 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors stockholders polycom inc opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2010 december 31 2009 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing page presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing page responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company adopted new accounting rules revenue recognition 2010 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california february 18 2011 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business summary significant accounting policies description business polycom leading global provider highquality easytouse communications solutions enable enterprise government education healthcare customers effectively collaborate distance time zones organizational boundaries solutions built architectures enable unified voice video content communications principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates reclassifications certain previously reported amounts regarding business segments disclosed note 11 reclassified conform current year’s presentation cash equivalents company considers highly liquid investments original maturities 90 days less time purchase cash equivalents allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial condition company’s customers deteriorate adversely affecting ability make payments additional allowances would required delinquent account balances written management determined likelihood collection probable investments company’s shortterm longterm investments december 31 2010 comprised us government agency securities corporate debt securities 2010 company fully liquidated investment corporate preferred equity securities investments classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held company’s name limited number major financial institutions december 31 2010 2009 company’s investments classified availableforsale carried fair value based quoted market prices end reporting period unrealized gains losses recorded separate component cumulative comprehensive income loss stockholder’s equity investments sold loss considered temporarily declined value charge earnings recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income expense net strategic reasons company made various investments private companies private company investments carried cost written fair market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecasted earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records write downs excess obsolete inventory equal difference cost inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives three thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill amortized regularly reviewed potential impairment identification measurement goodwill impairment involves estimation fair value company’s reporting units estimates fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years purchased intangible assets determined indefinite useful lives amortized longlived assets including intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset group assets eventual disposition measurement impairment loss longlived assets management expects hold use based estimated fair value asset longlived assets disposed reported lower carrying amount estimated fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured company warranties generally start date purchase continue one three years depending product purchased software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary changes warranty obligation period included component “other accrued liabilities” consolidated balance sheets follows thousands deferred maintenance revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company recognizes maintenance revenue contracts life service contract deferred maintenance revenue 1004 million 741 million shortterm included component “deferred revenue” december 31 2010 2009 respectively 464 million 354 million longterm included component “longterm deferred revenue” december 31 2010 2009 respectively consolidated balance sheets follows thousands cost providing maintenance services years ended december 31 2010 2009 2008 971 million 786 million 729 million respectively officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations material indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liability environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title transferred product payment contingent upon installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company recognizes maintenance service revenue hardware software products ratably service period generally one five years company’s products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts october 2009 financial accounting standards board “fasb” amended accounting standards revenue recognition remove tangible products containing software components nonsoftware components function together deliver product’s essential functionality scope software revenue recognition guidance october 2009 fasb also amended accounting standards multiple deliverable revenue arrangements • provide updated guidance whether multiple deliverables exist deliverables arrangement separated consideration allocated • require entity allocate revenue arrangement using estimated selling price “esp” deliverables vendor first vendorspecific objective evidence “vsoe” selling price secondly thirdparty evidence “tpe” selling price • eliminate use residual method require entity allocate revenue using relative selling price method company elected early adopt accounting guidance beginning first quarter fiscal year 2010 prospective basis applicable transactions originating materially modified december 31 2009 result substantially company’s products longer within scope software revenue recognition guidance multipleelement arrangements multipleelement arrangement includes sale one tangible product offerings one associated services offerings individually considered separate units accounting determination company’s units accounting change adoption new revenue recognition guidance beginning new materially modified arrangements january 1 2010 company allocates revenue element multipleelement arrangement based upon relative selling price deliverable applying relative selling price method company determines selling price deliverable using vsoe selling price exists tpe selling price neither vsoe tpe selling price exist deliverable company uses best estimate selling price deliverable revenue allocated element recognized revenue recognition criteria met element vsoe established based company’s standard pricing discounting practices specific product service sold separately determining vsoe company requires substantial majority selling prices product service fall within reasonably narrow pricing range vsoe cannot established company attempts establish selling price element based tpe determined based competitor prices similar deliverables sold separately company unable establish selling price using vsoe tpe company uses esp allocation arrangement consideration esp represents price company would transact sale element sold standalone basis company determines esp product considering multiple factors including limited geographies market conditions competitive landscape pricing practices determination esp made based review historical sales price taking consideration gotomarket strategy generally company uses historical net selling prices establish esp company regularly reviews basis establishing vsoe tpe esp company expect material impact near term changes vsoe tpe esp adoption new revenue accounting guidance material impact revenues results operations year ended december 31 2010 total net revenues reported unaudited pro forma total net revenues would reported year ended december 31 2010 transactions entered materially modified december 31 2009 subject previous accounting guidance shown following table thousands impact total net revenues year ended december 31 2010 due adoption accounting guidance primarily attributable net product revenues since use residual method eliminated new accounting standards discounts offered company allocated deliverables rather concentrated delivered element arrangement generally result increase amount upfront product revenue recognized decrease services revenue recognized new accounting standards revenue recognition applied manner year ended december 31 2009 would material impact total net revenues fiscal year new accounting guidance revenue recognition expected significant effect total net revenues initial period adoption applied multipleelement arrangements based current gotomarket strategies channel partner programs incentives company records estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives company also accrues coop marketing funds marketing expense company receives identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues research development expenditures research development expenditures charged operations incurred consist primarily compensation costs including stock compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows online media magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2010 2009 2008 210 million 173 million 281 million respectively income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized company recognizes measures benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions company evaluates uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period change made could material impact company’s effective tax rate operating results foreign currency translation assets liabilities nonus subsidiaries operate local currency environment local currency functional currency translated us dollars exchange rates effect balance sheet date resulting translation adjustments directly recorded separate component “cumulative comprehensive income loss” income expense accounts translated average exchange rates effect period foreign exchange gains losses significant date included company’s results operations part “interest income expense net” following table sets forth components foreign currency translation adjustments december 31 derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated qualifying cash flow hedge effective portion derivative’s gain loss initially reported separate component cumulative comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings excluded ineffective portions gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk computation net income per share basic net income per share computed dividing net income weighted average number common shares outstanding period less common stock subject repurchase diluted net income per share reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding shares common stock subject repurchase potentially dilutive shares including shares common stock subject repurchase excluded computation diluted net income per share effect antidilutive fair value measurements company certain financial assets liabilities recorded fair value classified level 1 2 3 within fair value hierarchy fair values determined level 1 inputs utilize quoted prices unadjusted active markets identical assets liabilities company ability access fair values determined level 2 inputs utilize data points observable quoted prices interest rates yield curves fair values determined level 3 inputs utilize unobservable data points asset liability carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due shortterm maturities stock based compensation company’s sharebased compensation programs consist grants sharebased awards employees nonemployee directors including stock options restricted stock restricted stock units performance shares well company’s employee stock purchase plan estimated fair value awards charged income requisite service period generally vesting period fair value stock option awards estimated grant date using blackscholes option valuation model fair value restricted stock units based market value company’s common stock date grant compensation expense restricted stock units including effect forfeitures recognized applicable service period fair value performance shares based market price company’s stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock relation target index companies performance period recent pronouncements july 2010 fasb issued accounting update provide guidance enhance disclosures related credit quality company’s financing receivables portfolio associated allowance credit losses pursuant accounting update company required provide greater level disaggregated information allowance credit loss objective facilitating users evaluation nature credit risk inherent portfolio financing receivables risk analyzed assessed arriving allowance credit losses changes reasons changes allowance credit losses revised disclosures end reporting period effective company’s 2010 annual financial statements upon adoption application revised disclosures material impact company’s consolidated financial statements disclosures activity occurs reporting period effective interim annual reporting periods beginning december 15 2010 company expect adoption disclosures material impact consolidated financial statements 2 goodwill purchased intangibles fourth quarter 2010 company reorganized reporting structure resulted changes segment reporting product linebased reporting video communications solutions voice communications solutions services geographicalbased americas emea apac see note 12 additional information regarding change segment reporting new reportable segments also determined new reporting units fourth quarters 2010 2009 company completed annual goodwill impairment test 2010 testing assessment goodwill impairment conducted determining fair value new reporting units goodwill reallocated new reporting units based relative fair values company compared fair value new reporting units reporting unit’s carrying value date fair value determined using income approach market approach weighted equally income approach fair value asset based value estimated cash flows asset expected generate future estimated future cash flows discounted rates ranging 12 13 percent arrive respective fair values market approach fair value unit based analysis financial data publicly traded companies engaged similar lines business valuation approach used determine fair value company’s reporting units 2009 similar 2010 except company need reallocate goodwill change segment reporting period based results impairment tests indicated estimated fair values company’s reporting units substantially exceed carrying value company determined goodwill assets impaired december 31 2010 2009 following table presents changes carrying amount goodwill company’s recast segments december 31 2010 thousands following table presents details company’s total purchased intangible assets december 31 thousands 2010 2009 2008 company recorded amortization expense related purchased intangibles 57 million 58 million 71 million respectively included “amortization purchased intangibles” consolidated statements operations 2010 2009 2008 company recorded approximately 133 million 135 million 137 million respectively amortization purchased intangibles “cost product revenues” consolidated statements operations amortization intangibles allocated company’s segments company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances company evaluates purchased intangibles possible impairment ongoing basis impairment indicators exist company performs assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment indicators impairment years ended december 31 2010 2009 2008 estimated future amortization expense purchased intangible assets december 31 2010 follows thousands 3 balance sheet details inventories consist following thousands prepaid expenses current assets consist following thousands property equipment net consist following thousands accrued liabilities consist following thousands 4 restructure costs 2010 2009 2008 company recorded 81 million 159 million 103 million respectively related restructuring actions resulted elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus company’s efforts properly align company’s cost structure projected revenue streams following table summarizes activity company’s restructure reserves thousands 2010 company committed several restructuring plans eliminate relocate positions enable hiring additional positions better align execution strategic initiatives restructuring plans included elimination approximately two percent global workforce result actions taken 2010 company recorded restructuring charges 81 million 2010 also included 18 million restructuring costs associated actions taken third quarter 2009 restructuring costs primarily related severance employee termination benefits third quarter 2009 company committed restructuring plan realign reinvest resources strategic growth areas business company eliminated positions aligned gotomarket structure company’s new sales leadership reallocate resources growth areas plan included elimination approximately four percent company’s global workforce addition actions taken third quarter 2009 company eliminated certain positions first second quarters 2009 related eliminating approximately six percent workforce beginning year well consolidating certain functions shared services center beijing china result actions taken 2009 company recorded restructuring charges 159 million 2009 primarily related severance employee termination benefits 2008 management approved plans eliminate certain positions worldwide across organizations well plans consolidate facilities located israel denmark actions intended optimize company’s cost structure order accelerate improvement overall profitability addition 2008 severance packages executives impacted 2007 restructuring actions renegotiated employment terminated january 9 2008 connection actions company recorded charges totaling 94 million severance employee termination benefits well certain charges totaling 09 million related facility closures majority remaining severancerelated cash expenditures december 31 2010 expected paid second quarter 2011 balance also includes approximately 07 million related vacant facilities paid next two years unless facility subleased disposed earlier february 2011 company’s management committed restructuring plan designed align various organizations new executive leadership reallocate resources strategic growth areas business restructuring plan result elimination approximately 2 global workforce reductions taking effect immediately enabling hiring new positions better align execution company’s strategic initiatives company currently expects record restructuring charges make cash expenditures approximately 30 million 40 million first quarter 2011 resulting action primarily related severance employee termination benefits additional charges approximately 16 million related consolidation colorado development facilities recorded second quarter 2011 upon vacating existing site 5 investments fair value measurements company cash equivalents 3242 million 3311 million december 31 2010 december 31 2009 respectively cash equivalents consist cash banks well highly liquid investments money market funds time deposits savings accounts commercial paper us government agency securities municipal securities corporate debt securities december 31 2010 company’s longterm investments contractual maturities one two years addition company shortterm longterm investments debt equity securities summarized follows thousands december 31 2010 company’s total cash equivalents investments held united states totaled 1938 million remaining 3419 million held various foreign subsidiaries outside united states us government securities company’s us government securities comprised direct us treasury obligations us government agency instruments including mortgage backed securities guaranteed us government ensure company’s investment portfolio sufficiently diversified investment policy requires certain percentage company’s portfolio invested types securities corporate debt securities company’s corporate debt securities comprised publiclytraded domestic foreign corporate debt securities company purchase auction rate securities cash investments instruments meet high quality credit rating standards specified company’s investment policy guidelines also limit amount credit exposure one issuer type instrument corporate preferred equity securities company’s corporate preferred equity securities primarily comprised investmentgrade nonconvertible utility preferred stocks generally rated equivalent bbb better least one major credit rating agencies corporate preferred equity securities purchased part capital gains capture program also permitted purchase put options us treasury bond futures interest rate hedge company changed strategy respect capital gains capture program fully liquidated investments loss 2010 private company investments strategic reasons company made various investments private companies private company investments carried cost written estimated net realizable value indications exist investments impaired investments recorded “other assets” company’s consolidated balance sheets balances 25 million 22 million december 31 2010 2009 respectively unrealized losses following table summarizes fair value gross unrealized losses company’s investments including securities categorized cash equivalents unrealized losses thousands aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2010 2009 company reviews individual securities portfolio determine whether decline security’s fair value amortized cost basis temporary decline fair value considered temporary cost basis individual security written fair value new cost basis amount writedown accounted realized loss included earnings year ended december 31 2010 result change strategy respect capital gains program company determined certain corporate preferred equity securities otherthan temporarily impaired resulted writedown approximately 65 million company concluded impairment otherthan temporary based upon company’s decision liquidate securities relatively short period time assessment individual holdings company fully liquidated investments 2010 actual loss 57 million original cost resulting realized gain 08 million new cost basis investments december 31 2010 company determined investments portfolio otherthan temporarily impaired impairments 2009 fair value measurements fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require company develop assumptions hierarchy requires company use observable market data available minimize use unobservable inputs determining fair value recurring basis company measures certain financial assets liabilities fair value including marketable securities foreign currency contracts company’s cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy december 31 2010 company’s fixed income availableforsale securities include us treasury obligations government agency instruments 55 corporate bonds 19 commercial paper 24 money market funds 2 included availableforsale securities approximately 1413 million cash equivalents consist investments original maturities three months less include money market funds company used invest nonfixed income availableforsale securities represented preferred equity securities part capital gains capture program generated capital gains offset capital losses 2010 company changed strategy respect capital gains capture program fully liquidated investments loss 2010 principal market company executes foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants company’s counterparties large money center banks regional banks company’s foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy fair value company’s marketable securities foreign currency contracts determined using following inputs december 31 2010 thousands included cash equivalents short longterm investments company’s consolidated balance sheets b included short term derivative asset company’s consolidated balance sheets c included short term derivative liability company’s consolidated balance sheets 6 business risks credit concentration company sells products services serve communications equipment market globally substantially company’s revenues derived sales products related services substantial majority revenue valueadded resellers distributors service providers 2010 2009 one channel partner scansource communications accounted 10 total net revenues one channel partner accounted 10 total net revenues 2008 factors adversely affecting demand supply products services could materially adversely affect company’s business financial performance particular economic conditions worldwide contributed time slowdowns communications networking industries caused negative impact specific segments markets company operates business grown company become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition factors adversely impacted company’s operating results prior periods including recently fiscal year ended december 31 2009 despite recent signs stabilization company’s growth revenues 2010 global economic concerns varying pace global economic recovery recent sovereign debt crisis continue create uncertainty unpredictability cause company continue cautious future outlook global economic downturn would negatively impact technology spending company’s products services could materially adversely affect business operating results financial condition company subcontracts manufacturing products celestica askey flextronics vtech companies thirdparty electronic manufacturing service providers company uses celestica’s facilities thailand china flextronics mexico askey vtech china disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases similar events economic political difficulties countries asia reason disruption would harm business results operations also celestica askey flextronics vtech currently primary source manufacturers products companies experience interruptions operations otherwise suffer capacity constraints company would experience delay shipping products would immediate negative impact revenues result company may able meet demand products could negatively affect revenues quarter disruption harm reputation addition operating international environment exposes company certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm business results operations company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts time deposits savings accounts money market accounts corporate debt securities government securities municipal securities deposits one financial institution may exceed amount insurance provided deposits investments covered insurance company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses expansion polycom’s product offerings may increase company’s credit risk customers place larger orders initial stocking orders assurance company’s credit loss experience remain near historic levels december 31 2010 2009 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows 7 commitments contingencies litigation settlement agreements 2010 company recorded 12 million litigation reserves payments consolidated statements operations related settlement legal matter period 2009 company recorded 07 million litigation reserves payments consolidated statements operations related legal matter subsequently settled time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company expects face increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company management believes loss arising matters probable reasonably estimated company record amount loss additional information becomes available potential liability related matters assessed estimates revised based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s financial position liquidity results operations period unfavorable outcome occurs becomes probable potentially future periods standby letters credit company standby letters credit totaling approximately 21 million december 31 2010 license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2011 2021 december 31 2010 following future minimum lease payments net estimated sublease income due current lease obligations addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2010 thousands rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2010 2009 2008 233 million 210 million 243 million respectively shortterm deferred lease obligation included accrued liabilities 18 million 10 million december 31 2010 2009 respectively long term deferred lease obligation included longterm liabilities 48 million 56 million december 31 2010 2009 respectively event company exercise option extend term leases expire company may incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs cannot determined end lease term times based landlord’s discretion subsequent negotiations landlord company however company believe costs would significant 8 foreign currency derivatives company maintains foreign currency risk management program designed reduce volatility company’s economic value effects unanticipated currency fluctuations international operations generate revenues costs denominated foreign currencies company’s policy hedge significant foreign currency revenues costs improve margin visibility reduce earnings volatility associated unexpected changes currency nondesignated hedges company hedges net foreign currency monetary assets liabilities monthly primarily resulting foreign currency denominated receivables payables foreign exchange forward contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates derivative instruments carried fair value changes fair value recorded interest income expense net derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset remeasurement gains losses hedged assets liabilities company executes nondesignated foreign exchange forward contracts primarily denominated euros british pounds israeli shekels following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2010 outstanding nondesignated hedges foreign currency dollar amounts thousands following table shows effect company’s nondesignated hedges consolidated statement operations twelve months ended december 31 2010 thousands cash flow hedges company’s foreign exchange risk management program objective reduce volatility company’s economic value unanticipated foreign currency fluctuations company designates forward contracts cash flow hedges foreign currency revenues expenses primarily euro british pound israeli shekel foreign exchange contracts carried fair value balance sheet maximum duration foreign exchange forward contracts exceed thirteen months speculation prohibited policy receive hedge accounting treatment cash flow hedging relationships formally designated hedge inception tested prospectively retrospectively ensure forward contracts highly effective offsetting changes future cash flows hedged transactions company records effective spot changes cash flow hedges cumulative comprehensive income loss reclassified revenue cost goods sold operating expenses together hedged transaction time value forward contracts excluded effectiveness testing recorded interest income expense net life contract together ineffective portion hedge following tables show effect company’s derivative instruments designated cash flow hedges consolidated statements operations twelve months ended december 31 2010 2009 thousands year ended december 31 2010 gainloss recorded ineffective portion 01 million gain recorded excluded time value portion hedge year ended december 31 2009 03 million loss recorded excluded time value portion 04 million gain recorded ineffective portion hedge december 31 2010 company estimated values reported cumulative comprehensive income loss reclassified income within next twelve months following table summarizes derivativerelated activity cumulative comprehensive income loss thousands taxeffected event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would immediately reclassified interest income expense net consolidated statement operations year ended december 31 2010 net gainslosses recognized interest income expense net relating hedges forecasted transactions occur period 2009 net gains 04 million following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2010 outstanding cash flow hedges carried fair value balance sheet foreign currency dollar amounts thousands estimates fair value based applicable commonly quoted prices prevailing financial market information december 31 2010 see note 5 additional information fair value measurements financial assets liabilities including derivative assets derivative liabilities measured fair value consolidated financial statements recurring basis following table shows company’s derivative instruments measured gross fair value reflected consolidated balance sheets december 31 2010 2009 thousands derivative assets recorded prepaid current assets consolidated balance sheets b derivative liabilities recorded accrued liabilities consolidated balance sheets 9 stockholders’ equity stock option plans june 2 2004 stockholders approved 2004 equity incentive plan “2004 plan” reserved issuance 2004 plan 12500000 shares plus remaining available options terminated 1996 stock option plan “1996 plan” extent shares would returned 1996 plan result expiration cancellation forfeiture shares instead added reserve shares available 2004 plan addition company assumed 1354099 shares voyant’s 2000 equity incentive plan following completion voyant acquisition january 2004 may 2009 stockholders approved amendments 2004 plan among making clarifying amendments permit polycom undertake onetime stock option exchange program ii increase number shares common stock reserved issuance 2004 plan 3600000 shares iii implement flexible share counting 2004 plan terms 2004 plan options may granted prices lower fair market value date grant 2004 plan prior terminated plans options granted expire seven ten years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares options granted 2004 plan unvested shares outstanding prior terminated plans generally vest 25 completing one year service company remaining amount equally 36 months fully vested four years stock option exchange program august 21 2009 company completed onetime stock option exchange program approved stockholders may 2009 pursuant eligible employees able exchange certain outstanding options whether vested unvested new restricted stock units eligible employees able exchange eligible outstanding options exercise price greater 2894 per share certain stock plans granted july 27 2008 total 2340994 options ranging exercise price 3019 5013 exchanged surrendered options cancelled immediately thereafter company issued total 445007 restricted stock units first 50 restricted stock units vested oneyear anniversary new restricted stock unit grant date august 21 2010 remaining 50 shares vest second anniversary new restricted stock unit grant date subject employee’s continued employment company relevant dates exchange considered modification original equity award addition continuing amortize remaining stock compensation associated exchanged options exchange resulted incremental 14 million stock compensation expense expensed twoyear service period restricted stock units performance shares restricted stock units compensation committee board directors may also grant performance shares restricted stock units 2004 plan officers certain employees component company’s broadbased equity compensation program performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria awards earned performance targets performance periods established direction compensation committee met number performance shares subject vesting determined end given performance period generally performance criteria deemed achieved performance shares vest one three years anniversary grant date restricted stock units timebased awards generally vest period one three years date grant 2009 2010 company granted performance shares contain market condition based total shareholder return tsr measure company’s relative performance russell 2000 index awards earned performance targets performance periods established direction compensation committee met performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 two hundred 200 target award fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among russell 2000 index companies performance period stockbased compensation expense performance shares recognized using graded vesting method three year service period 2009 company also granted 125000 target performance shares executive fair value 2359 per share subject fulfillment company certain predefined market share performance criteria additionally portion awards attainment predefined revenue targets multiple performance periods june 9 2010 independent members board directors approved amendments equity awards remaining performance periods commence july 1 2010 remaining performance periods performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 two hundred 200 target award fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among russell 2000 index companies performance period result amendments incremental stock compensation expense totaling 34 million prospectively recognized using graded vesting method remaining requisite service period 2010 company granted 94500 performance shares weighted average fair value 2274 per share based closing market price company’s common stock date award performance shares contain performance condition based attaining predefined gross margin dollar goals calendar 2010 year ended december 31 2010 approximately 50500 performance shares forfeited based company’s actual performance 2010 compared target performance criteria approximately 108 remaining outstanding shares 47520 performance shares delivered upon vesting 2011 company also granted restricted stock units year ended december 31 2010 2009 fair value restricted stock units based closing market price company’s common stock date award awards generally vest one three years equal annual installments anniversary date grant delivered common stock end vesting period stockbased compensation expense restricted stock units recognized using graded vesting method 2010 2009 company granted nonemployee directors annual awards restricted stock units awards vest quarterly one year date grant fair value awards fair market value company’s common stock date grant stockbased compensation expense awards generally amortized six months date grant due voluntary termination provisions contained underlying agreements activity plans year ended december 31 2010 follows 1 based amendment 2004 plan approved stockholders 2009 full value awards adjust shares available grant 15 shares every one share subject award effective award activities may 27 2009 awards granted option exchange program excluded treatment accounted 1for1 basis 2 options expected vest result applying prevesting forfeiture rate assumption total outstanding options total pretax intrinsic value options exercised years ended december 31 2010 2009 2008 317 million 74 million 144 million respectively december 31 2010 2009 2008 1652775 4336332 6488150 outstanding options exercisable weighted average exercise price 2463 2236 2356 respectively options outstanding currently exercisable exercise price december 31 2010 follows company grant stock options year ended december 31 2010 aggregate intrinsic value stock options outstanding stock options exercisable december 31 2010 258 million 237 million respectively december 31 2010 total compensation cost related nonvested stock options yet recognized 27 million expected recognized next 11 years weightedaverage basis following information summarizes changes unvested performance shares restricted stock units nonemployee director restricted stock units 2010 1 includes 35168 additional shares resulting overachievement 2009 performance shares december 31 2010 450 million total unrecognized compensation cost related unvested shares expected recognized weightedaverage period 18 years total fair value shares vested 2010 2009 2008 325 million 157 million 82 million respectively employee stock purchase plan employee stock purchase plan company grant stock purchase rights eligible employees six month offering periods purchase dates end offering period january july company reserved 7500000 shares common stock issuance plan shares purchased employees’ payroll deductions maximum 20 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 5000 shares per offering 25000 worth common stock one calendar year 2010 2009 2008 656145 898464 575603 shares purchased average per share prices 1931 1200 2077 respectively december 31 2010 2087360 shares available issued plan valuation expense information following table summarizes stockbased compensation expense recorded allocation within consolidated statements operations thousands stockbased compensation expense allocated segments separately maintained corporate level company elected capitalize stockbased compensation years ended december 31 2010 2009 2008 due amounts immaterial valuation assumptions company grant stock options fiscal year ended december 31 2010 fiscal years ended december 31 2009 2008 company granted 100000 228195 stock options respectively weightedaverage estimated fair value employee stock options granted years ended december 31 2009 2008 830 per share 803 per share respectively fair values options estimated date grant using blackscholes option valuation model years ended december 31 2009 2008 using following assumptions weightedaverage estimated fair value employee stock purchase rights granted pursuant employee stock purchase plan years ended december 31 2010 2009 2008 684 per share 517 per share 677 per share respectively fair value employee stock purchase right grant estimated date grant using blackscholes option valuation model recognized expense using graded vesting attribution approach following weightedaverage assumptions company used implied volatility oneyear traded options company’s stock expected volatility assumption required blackscholes model selection implied volatility assumption based upon availability actively traded options company’s stock company’s assessment implied volatility representative future stock price trends historical volatility riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock options employee stock purchases dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock options represents weightedaverage period stock options expected remain outstanding determined based historical experience similar awards giving consideration contractual terms stockbased awards vesting schedules expectations future employee behavior influenced changes terms stockbased awards stockbased compensation expense recognized consolidated statements operations based awards ultimately expected vest amounts reduced estimated forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based company’s historical experience share repurchase program time company’s board directors approved plans company may discretion purchase shares common stock open market years ended december 31 2010 2009 company purchased 24 million shares 16 million shares respectively common stock open market cash 692 million 328 million respectively purchase price shares company’s stock repurchased recorded reduction stockholders’ equity december 31 2010 company authorized purchase additional 1180 million shares open market current share repurchase plan preferred stock 2010 company’s one outstanding share preferred stock exchanged cancelled outstanding preferred stock december 31 2010 comprehensive income components comprehensive income net tax included component stockholder’s equity follows thousands activity cumulative comprehensive income net tax summarized thousands 10 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions lesser 60 eligible compensation 16500 2010 subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year 2010 2009 2008 fiscal years maximum company cash match 2000 per participating employee per year polycom 401k plan provides employees projected age 50 older end year elected contribute polycom 401k plan may also make catchup contribution 5500 company’s contributions polycom 401k plan totaled approximately 24 million 20 million 21 million 2010 2009 2008 respectively 11 income taxes income tax expense consists following thousands sources income provision income taxes follows thousands company’s tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2010 company approximately 31 million tax effected nonus net operating losses 58 million tax effected us capital loss carryforwards 74 million tax effected us tax credit carryovers capital net operating loss carryforward assets tax credit carryforwards begin expire 2011 2019 respectively company expects fully utilize assets expire included net deferred tax asset balance 34 million valuation allowance recorded primarily related net operating losses generated denmark currently realizable company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2010 cumulative amount earnings upon us income tax provided approximately 1975 million practicable determine income tax liability might incurred earnings repatriated us excess tax benefits associated stock option exercises credited stockholders’ equity reductions income taxes payable resulting exercise employee stock options employee stock programs credited stockholders’ equity approximately 104 million 01 million 40 million twelve months ended december 31 2010 2009 2008 respectively company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions following first year company israeli taxable income consideration tax losses carried forward tax rate reduction currently effective 2014 company expects reapply subsequent periods expiration company realized tax savings 03 million 2010 09 million 2009 savings 2008 due net local statutory losses tax holiday israel material impact earnings per share reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 addition beginning 2008 company’s subsidiary china granted highnew technology enterprise “hnte” recognition company’s tax rate reduced 25 15 tax savings realized 04 million 2010 06 million 2009 01 million 2008 also 2008 company’s subsidiary thailand granted regional headquarters status “rhs” tax rate reduced 30 10 associated tax savings 06 million 2010 03 million 2009 2008 beneficial tax status china thailand remain effect long company meets statutory requirements qualification tax holidays china thailand material impact earnings per share company also subject periodic examination income tax returns internal revenue service “irs” tax authorities cases company received additional tax assessments currently certain tax years audit relevant tax authorities including examination company’s us federal tax returns calendar years 2006 2007 limited review us federal tax returns calendar years 2008 2009 company anticipates irs audit 2006 2007 limited review 2008 2009 concluded next twelve months 2010 california franchise tax board completed audit 2005 2006 tax years audit resulted payment 08 million certain audit issues also settled year resulting release accrued taxes 15 million additionally 34 million tax reserves related cost sharing stock based compensation released adjustment stockholders’ equity 07 million tax reserves released due changes foreign exchange rates year aggregate changes balance company’s gross unrecognized tax benefits follows periods indicated included balance december 31 2010 369 million unrecognized tax benefits would affect income tax expense recognized company’s practice recognize interest andor penalties related income tax matters income tax expense december 31 2010 2009 respectively company approximately 25 million 35 million accrued interest penalties related uncertain tax positions end 2011 uncertain tax positions may reduced result lapse applicable statutes limitations resolutions ongoing audits various jurisdictions company anticipates reduction 2011 approximate 76 million reserve releases would recorded adjustments tax expense period released company files income tax returns us federal jurisdiction various states foreign jurisdictions company longer subject us federal state income tax examinations tax authorities years prior 2000 foreign income tax matters foreign jurisdictions concluded years 2004 except hong kong singapore concluded years 2003 germany switzerland concluded years 2005 france israel concluded years 2007 united kingdom concluded years 2008 12 business segment information polycom leading global provider line highquality easytouse communications equipment enables businesses telecommunications service providers governmental educational institutions effectively conduct video voice data web communications historically company organized offerings along three product categories video communications solutions voice communication solutions services also considered operating segments reporting purposes beginning fourth quarter 2010 company’s management reorganized management allocation resources product based geographic based resulted revision operating segments americas europe middle east africa “emea” asia pacific “apac” segments determined accordance management views evaluates company’s business allocates resources based criteria outlined authoritative guidance result change presentation revenue operating results prior periods revised conform current period presentation change segment reporting impact company’s consolidated balance sheets income statements cash flows changes shareholders’ equity periods segment revenue profit segment revenues attributed theater based ordering location customer significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting reported conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin defined asset data exception gross accounts receivable reviewed management segment level financial information reportable geographical segment fiscal years ended december 31 2010 2009 2008 based company’s internal management system utilized company’s chief operating decision maker codm follows thousands net revenues united states 5687 million 4606 5121 million years ended december 31 2010 2009 2008 respectively individual country outside united states accounted 10 company’s revenues 2010 2009 2008 segment contribution margin includes geographic segment revenues less related cost sales direct sales marketing expenses management allocates infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing expenses research development expense general administrative costs legal accounting stockbased compensation costs acquisitionrelated costs amortization purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income expense net reconciliation segment information polycom consolidated totals follows thousands following table summarizes company’s revenues groups similar products services follows thousands 2010 2009 one customer americas segment accounted 10 company’s revenues one customer accounted 10 company’s revenues 2008 company’s fixed assets net accumulated depreciation located following geographical areas thousands certain reclassifications made amounts prior year conform current year’s presentation one country outside united states 10 total net fixed assets december 31 2010 2009 13 net income per share disclosures reconciliation numerator denominator basic diluted net income per share provided follows thousands except per share amounts 2010 2009 2008 approximately 782695 4183896 5024817 respectively relating potentially dilutive securities primarily stock options excluded denominator computation diluted net income per share inclusion would antidilutive polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits indicates management contract compensatory plan arrangement xbrl information furnished filed part registration statement prospectus purposes sections 11 12 securities exchange act 1933 amended deemed filed purposes section 18 securities exchange act 1934 amended otherwise subject liability sections 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2011 2010 three years period ended december 31 2011 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc andrew miller andrew miller chief executive officer president director date february 17 2012 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint andrew miller michael r kourey either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated polycom inc index consolidated financial statements page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements comprehensive income consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate conducted evaluation effectiveness internal control financial reporting based framework internal controlintegrated framework issued committee sponsoring organizations treadway commission based results evaluation management concluded december 31 2011 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles effectiveness company’s internal control financial reporting december 31 2011 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors stockholders polycom inc opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2011 december 31 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing page presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing page responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company adopted new accounting rules revenue recognition 2010 adopted new guidance presentation comprehensive income 2011 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california february 17 2012 polycom inc consolidated balance sheets thousands except share per share data shares retrospectively adjusted reflect twoforone split effective july 1 2011 see note 1 notes consolidated financial statements accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data shares retrospectively adjusted reflect twoforone split effective july 1 2011 see note 1 notes consolidated financial statements accompanying notes integral part consolidated financial statements polycom inc consolidated statements comprehensive income thousands except per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data shares retrospectively adjusted reflect twoforone split effective july 1 2011 see note 1 notes consolidated financial statements accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business summary significant accounting policies description business polycom leading global provider highquality easytouse communications solutions enable enterprise government education healthcare customers effectively collaborate distance time zones organizational boundaries solutions built architectures enable unified video voice content communications principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates cash equivalents company considers highly liquid investments original maturities 90 days less time purchase cash equivalents allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial conditions company’s customers deteriorate adversely affecting abilities make payments additional allowances would required delinquent account balances written management determined likelihood collection probable investments company’s shortterm longterm investments december 31 2011 comprised us nonus government securities us agency securities corporate debt securities company’s investment corporate preferred equity securities fully liquidated 2010 investments classified shortterm longterm based original remaining maturities whether securities represent investment funds available current operations nearly investments held company’s name limited number major financial institutions december 31 2011 2010 company’s investments classified availableforsale carried fair value based quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency end reporting period unrealized gains losses recorded separate component accumulated comprehensive income loss consolidated statements stockholders’ equity investments sold loss considered temporarily declined value charge earnings recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income expense net strategic reasons company made various investments private companies private company investments carried cost written estimated market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecasted earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment impaired inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records writedowns excess obsolete inventory equal difference carrying value inventory estimated fair value based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives one thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful life related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill amortized regularly reviewed potential impairment september 2011 fasb issued authoritative guidance goodwill impairment testing provides entities option perform qualitative assessment determine whether impairment testing necessary company elected early adopt guidance 2011 adoption impact company’s consolidated financial statements identification measurement goodwill impairment involves estimation fair value company’s reporting units estimates fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months eight years purchased intangible assets determined indefinite useful lives amortized longlived assets including intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset group assets eventual disposition measurement impairment loss longlived assets management expects hold use based estimated fair value asset longlived assets disposed reported lower carrying amount estimated fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured company warranties generally start date purchase continue one three years depending product purchased software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary changes warranty obligation period included component “other accrued liabilities” consolidated balance sheets follows thousands deferred maintenance revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company recognizes maintenance revenue contracts life service contract deferred maintenance revenue 1411 million 1004 million shortterm included component “deferred revenue” december 31 2011 2010 respectively 759 million 464 million longterm included component “longterm deferred revenue” december 31 2011 2010 respectively consolidated balance sheets follows thousands cost providing maintenance services years ended december 31 2011 2010 2009 1138 million 971 million 786 million respectively officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations material indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liabilities environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company generally recognizes maintenance service revenues hardware software products ratably service periods one five years services upon completion installation professional services provided company’s products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts october 2009 financial accounting standards board “fasb” amended accounting standards revenue recognition remove tangible products containing software components nonsoftware components function together deliver product’s essential functionality scope software revenue recognition guidance october 2009 fasb also amended accounting standards multiple deliverable revenue arrangements • provide updated guidance whether multiple deliverables exist deliverables arrangement separated consideration allocated • require entity allocate revenue arrangement using estimated selling price “esp” deliverables vendor first vendorspecific objective evidence “vsoe” selling price secondly thirdparty evidence “tpe” selling price • eliminate use residual method require entity allocate revenue using relative selling price method company elected early adopt accounting guidance beginning first quarter fiscal year 2010 prospective basis applicable transactions originating materially modified beginning january 1 2010 multipleelement arrangement includes sale one tangible product offerings one associated services offerings individually considered separate units accounting determination company’s units accounting change early adoption revenue recognition guidance beginning new materially modified arrangements january 1 2010 company allocates revenue element multipleelement arrangement based upon relative selling price deliverable applying relative selling price method company determines selling price deliverable using vsoe selling price exists tpe selling price neither vsoe tpe selling price exist deliverable company uses best estimate selling price deliverable revenue allocated element recognized revenue recognition criteria met element vsoe established based company’s standard pricing discounting practices specific product service sold separately determining vsoe company requires substantial majority selling prices product service fall within reasonably narrow pricing range vsoe cannot established company attempts establish selling price element based tpe determined based competitor prices similar deliverables sold separately company unable establish selling price using vsoe tpe company uses esp allocation arrangement consideration esp represents price company would transact sale element sold standalone basis company determines esp product considering multiple factors including limited geographies market conditions competitive landscape pricing practices determination esp made based review historical sales price taking consideration gotomarket strategy generally company uses historical net selling prices establish esp company regularly reviews basis establishing vsoe tpe esp company expect material impact near term changes vsoe tpe esp channel partner programs incentives company records estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives company also accrues coop marketing funds marketing expense company receives identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues research development expenditures research development expenditures charged operations incurred consist primarily compensation costs including stock compensation costs outside services expensed materials depreciation allocation overhead expenses including facilities costs software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows online media magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2011 2010 2009 214 million 210 million 173 million respectively income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized company recognizes measures benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions company evaluates uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period change made could material impact company’s effective tax rate operating results foreign currency translation assets liabilities nonus subsidiaries operate local currency environment local currency functional currency translated us dollars exchange rates effect balance sheet date resulting translation adjustments directly recorded separate component “accumulated comprehensive income loss” income expense accounts translated average exchange rates effect period foreign exchange gains losses significant date included company’s results operations part “interest income expense net” following table sets forth components foreign currency translation adjustments december 31 thousands derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated qualifying cash flow hedge effective portion derivative’s gain loss initially reported separate component accumulated comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings excluded ineffective portions gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk computation net income per share basic net income per share computed dividing net income weighted average number common shares outstanding period less common stock subject repurchase diluted net income per share reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding shares common stock subject repurchase potentially dilutive shares including shares common stock subject repurchase excluded computation diluted net income per share effect antidilutive june 1 2011 company announced board directors approved twoforone stock split company’s outstanding shares common stock effected form 100 stock dividend “the stock split” stock split entitled stockholder record close business june 15 2011 receive one additional share common stock every one share common stock owned date payable company’s transfer agent july 1 2011 par value company’s common stock maintained presplit amount 00005 per share consolidated financial statements notes thereto including share per share data restated stock split occurred earliest period presented fair value measurements company certain financial assets liabilities recorded fair value classified level 1 2 3 within fair value hierarchy fair values determined level 1 inputs utilize quoted prices unadjusted active markets identical assets liabilities company ability access fair values determined level 2 inputs utilize data points observable quoted prices interest rates yield curves fair values determined level 3 inputs utilize unobservable data points asset liability carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due shortterm maturities stockbased compensation company’s stockbased compensation programs consist grants stockbased awards employees nonemployee directors including stock options restricted stock restricted stock units performance shares well company’s employee stock purchase plan estimated fair value awards charged income requisite service period generally vesting period fair value stock option employee stock purchase plan “espp” awards estimated grant date using blackscholes option valuation model fair value restricted stock units based market value company’s common stock date grant compensation expense restricted stock units including effect forfeitures recognized applicable service period fair value performance shares based market price company’s stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock relation target index companies performance period compensation cost performance shares market condition adjusted subsequent changes regardless level ultimate vesting business combinations company recognizes separately goodwill fair value assets acquired liabilities assumed goodwill acquisition date measured excess consideration transferred net acquisition date fair values assets acquired liabilities assumed company uses best estimates assumptions part purchase price allocation process accurately value assets acquired liabilities assumed acquisition date company’s estimates inherently uncertain subject refinement result measurement period may one year acquisition date company may record adjustments retrospectively fair value assets acquired liabilities assumed corresponding offset goodwill upon conclusion measurement period final determination fair value assets acquired liabilities assumed whichever comes first subsequent adjustments recorded company’s consolidated statements operations addition uncertain tax positions taxrelated valuation allowances assumed connection business combination initially estimated acquisition date company reevaluates items quarterly records adjustments company’s preliminary estimates goodwill provided company within measurement period company continues collect information order determine estimated fair values date acquisition subsequent measurement period company’s final determination tax allowance’s estimated value changes uncertain tax positions tax related valuation allowances affect company’s provision income taxes company’s consolidated statements operations recent pronouncements june 2011 fasb issued authoritative guidance presentation comprehensive income become effective company beginning january 1 2012 earlier adoption permitted standard eliminates current option report comprehensive income components statement changes equity company elected early adopt guidance 2011 adoption material impact company’s consolidated financial statements 2 business combinations 2011 completed three business combinations march 21 2011 completed acquisition outstanding shares accordent technologies inc “accordent” privatelyheld video content management delivery solutions company july 27 2011 acquired assets hewlettpackard visual collaboration “hpvc” business including halo products managed services business october 14 2011 acquired vivu inc “vivu” privatelyheld video collaboration software company total net cash paid 2011 business combinations 1636 million plus noncash consideration 02 million included financial results accordent hpvc vivu consolidated financial statements respective dates acquisition pro forma results operations acquisitions completed year presented effects acquisitions individually aggregate material company’s financial results following table summarizes allocation total purchase consideration assets liabilities assumed acquisition dates thousands goodwill deductible tax purposes goodwill generated company’s business combinations completed year ended december 31 2011 primarily attributable expected synergies fair values intangible assets calculated based income cost approaches amortized 8 months 6 years acquisitionrelated costs expensed incurred company may adjust preliminary purchase price allocation giving consideration final valuation reports obtaining information regarding among things asset valuations liabilities assumed revisions preliminary estimates 3 goodwill purchased intangibles company completed annual goodwill impairment test october 1 2011 2010 september 2011 fasb issued authoritative guidance goodwill impairment testing provides entities option perform qualitative assessment determine whether impairment testing necessary company elected early adopt guidance 2011 impairment test resulted company performing qualitative assessment determine whether existence events circumstances leads determination likely fair values company’s reporting units less carrying amounts based qualitative assessment company determined likely fair values less carrying amounts therefore impairment testing performed following table presents changes carrying amount goodwill company’s segments december 31 2011 thousands following table presents details company’s total purchased intangible assets december 31 thousands 2011 2010 2009 company recorded amortization expense related purchased intangibles 98 million 57 million 58 million respectively included “amortization purchased intangibles” consolidated statements operations 2011 2010 2009 company recorded approximately 119 million 133 million 135 million respectively amortization purchased intangibles “cost product revenues” consolidated statements operations amortization intangibles allocated company’s segments company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name longer amortized reviewed impairment annually sooner certain circumstances company evaluates purchased intangibles possible impairment ongoing basis impairment indicators exist company performs assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment indicators impairment years ended december 31 2011 2010 2009 estimated future amortization expense purchased intangible assets december 31 2011 follows thousands 4 balance sheet details inventories consist following thousands prepaid expenses current assets consist following thousands property equipment net consist following thousands deferred revenues consist following thousands accrued liabilities consist following thousands 5 restructuring costs 2011 2010 2009 company recorded 94 million 81 million 159 million respectively related restructuring actions resulted elimination relocation various positions part restructuring plans approved management actions generally intended streamline focus company’s efforts properly align company’s cost structure projected revenue streams following table summarizes activity company’s restructure reserves thousands 2011 management also completed consolidation colorado facilities began transition certain engineering product management related support functions andover massachusetts facility locations order achieve efficiencies restructuring charges relating actions primarily included costs idle facilities lesser extent severance relocation costs impacted individuals october 2011 management committed restructuring plan designed better align allocate resources strategic growth areas business actions primarily related reorganization global gotomarket organizations restructuring plan result elimination approximately seven percent global workforce majority reductions taking effect fourth quarter 2011 first quarter 2012 enabling creation new positions better align strategic initiatives fourth quarter 2011 company recorded charges totaling 50 million related actions company currently expect record additional restructuring charges make cash expenditures approximately 60 million 70 million third quarter 2012 resulting action primarily related severance employee termination benefits addition company approved plans consolidate eliminate certain facilities order gain efficiencies including combination headquarters san jose santa clara california operations one new location san jose california result company expects record approximately 120 million additional restructuring charges related idle facilities upon vacating facilities second quarter 2012 2010 company committed several restructuring plans eliminate relocate positions enable hiring additional positions better align execution strategic initiatives restructuring plans included elimination approximately two percent global workforce result actions taken 2010 company recorded restructuring charges 81 million 2010 also included 18 million restructuring costs associated actions taken third quarter 2009 restructuring costs primarily related severance employee termination benefits third quarter 2009 company committed restructuring plan realign reinvest resources strategic growth areas business company eliminated positions aligned gotomarket structure company’s new sales leadership reallocate resources growth areas plan included elimination approximately four percent company’s global workforce addition actions taken third quarter 2009 company eliminated certain positions first second quarters 2009 related eliminating approximately six percent workforce beginning year well consolidating certain functions shared services center beijing china result actions taken 2009 company recorded restructuring charges 159 million 2009 primarily related severance employee termination benefits 6 investments fair value measurements company cash equivalents 3754 million 3242 million december 31 2011 2010 respectively cash equivalents consist cash banks well highly liquid investments money market funds time deposits savings accounts commercial paper us government agency securities municipal securities corporate debt securities december 31 2011 company’s longterm investments contractual maturities one two years addition company shortterm longterm investments debt equity securities summarized follows thousands december 31 2011 company’s total cash equivalents investments held united states totaled 1514 million remaining 4402 million held various foreign subsidiaries outside united states us government securities company’s us government securities mostly comprised direct us treasury obligations guaranteed us government ensure investment portfolio sufficiently diversified company’s investment policy requires certain percentage company’s portfolio invested types securities us government agency securities company’s us government agency securities mostly comprised us government agency instruments including mortgagebacked securities ensure investment portfolio sufficiently diversified company’s investment policy requires certain percentage company’s portfolio invested types securities nonus government securities company’s nonus government securities mostly comprised nonus government instruments including state municipal foreign government securities ensure investment portfolio sufficiently diversified company’s investment policy allows certain percentage company’s portfolio invested types securities corporate debt securities company’s corporate debt securities comprised publiclytraded domestic foreign corporate debt securities company purchase auction rate securities investments instruments meet high quality credit rating standards specified company’s investment policy guidelines also limit amount credit exposure one issuer type instrument unrealized losses following table summarizes fair value gross unrealized losses company’s investments including securities categorized cash equivalents unrealized losses thousands aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2011 2010 company reviews individual securities portfolio determine whether decline security’s fair value amortized cost basis otherthantemporary decline fair value considered otherthantemporary cost basis individual security written fair value new cost basis amount writedown accounted realized loss included earnings year ended december 31 2010 result change strategy respect capital gains program company determined certain corporate preferred equity securities otherthan temporarily impaired resulted writedown approximately 65 million company concluded impairment otherthantemporary based upon company’s decision liquidate securities relatively short period time assessment individual holdings company fully liquidated investments 2010 actual loss 57 million original cost resulting realized gain 08 million new cost basis investments impairments 2011 december 31 2011 2010 company determined investments portfolio otherthan temporarily impaired private company investments strategic reasons company made various investments private companies cost method accounting used account investments hold nonmaterial ownership percentage written estimated net realizable value indications exist investments impaired investments recorded “other assets” company’s consolidated balance sheets balances 20 million 25 million december 31 2011 2010 respectively fair value measurements fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require company develop assumptions hierarchy requires company use observable market data available minimize use unobservable inputs determining fair value recurring basis company measures certain financial assets liabilities fair value including marketable securities foreign currency contracts company’s cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy december 31 2011 company’s fixed income availableforsale securities include us treasury securities government agencies 54 corporate bonds 29 commercial paper 7 nonus government securities 3 money market funds 7 included availableforsale securities approximately 414 million cash equivalents consist investments original maturities three months less include money market funds company used invest nonfixed income availableforsale securities represented preferred equity securities part capital gains capture program generated capital gains offset capital losses 2010 company changed strategy respect capital gains capture program fully liquidated investments loss principal market company executes foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants company’s counterparties large money center banks regional banks company’s foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy fair value company’s marketable securities foreign currency contracts determined using following inputs december 31 2011 thousands included cash equivalents short longterm investments company’s consolidated balance sheets b included noncurrent assets company’s consolidated balance sheets c included short term derivative asset prepaid expenses current assets company’s consolidated balance sheets included short term derivative liability accrued liabilities company’s consolidated balance sheets 7 business risks credit concentration company sells products services serve communications equipment market globally substantially company’s revenues derived sales products related services substantial majority company’s revenue valueadded resellers distributors service providers 2011 2010 2009 one channel partner scansource communications accounted 10 total net revenues factors adversely affecting demand supply products services could materially adversely affect company’s business financial performance particular economic conditions worldwide contributed time slowdowns communications networking industries caused negative impact specific segments markets company operates business grown company become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition factors adversely impacted company’s operating results prior periods including recently fiscal year ended december 31 2009 despite recent signs stabilization company’s growth revenues 2011 global economic concerns varying pace global economic recovery recent sovereign debt crisis continue create uncertainty unpredictability cause company continue cautious future outlook global economic downturn would negatively impact technology spending company’s products services could materially adversely affect business operating results financial condition company subcontracts manufacture products celestica askey flextronics foxconn vtech thirdparty contract manufacturers company uses celestica’s facilities thailand china flextronics’ facilities mexico askey’s foxconn’s vtech’s facilities china disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases economic political difficulties countries asia reason disruption would harm business results operations company begun develop secondary manufacturing sources certain products celestica’s facilities currently manufacturer substantially products means company essentially solesourced manufacturing products celestica experiences interruption operations suffers capacity constraints may include constraints based production demands company grows business otherwise unable meet company’s current future production requirements company would experience delay inability ship products would immediate negative impact revenues moreover incapacitation company’s subcontractors’ manufacturing sites due destruction natural disaster similar events could result loss product inventory result foregoing company may able meet demand products could negatively affect revenues quarter disruption longer depending upon magnitude event could harm reputation addition operating international environment exposes us certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm company’s business results operations company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts time deposits savings accounts money market accounts corporate debt securities government securities municipal securities deposits one financial institution may exceed amount insurance provided deposits investments covered insurance company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses company’s credit risk may increase expansion polycom’s product offerings customers place larger orders initial stocking orders growth emerging markets assurance company’s credit loss experience remain near historic levels december 31 2011 2010 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows charges 2011 2010 2009 8 commitments contingencies litigation settlement agreements 2010 company recorded 12 million litigation reserves payments consolidated statements operations related settlement legal matter period 2011 company record reserves payments consolidated statements operations time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company expects face increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company management believes loss arising matters probable reasonably estimated company record amount loss additional information becomes available potential liability related matters assessed estimates revised based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s financial position liquidity results operations period unfavorable outcome occurs becomes probable potentially future periods standby letters credit company standby letters credit totaling approximately 23 million 21 million december 31 2011 2010 respectively license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2012 2021 december 31 2011 following future minimum lease payments due current lease obligations sublease assumptions included future minimum lease payments addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance table excludes leases expiring subject cancellation within twelve months subsequent december 31 2011 thousands rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2011 2010 2009 285 million 233 million 210 million respectively shortterm deferred lease obligation included accrued liabilities 10 million 18 million december 31 2011 2010 respectively longterm deferred lease obligation included longterm liabilities 53 million 48 million december 31 2011 2010 respectively event company exercise option extend term leases expire company may incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs cannot determined end lease term times based landlord’s discretion subsequent negotiations landlord company however company believe costs would significant 9 foreign currency derivatives company maintains foreign currency risk management program designed reduce volatility company’s economic value effects unanticipated currency fluctuations international operations generate revenues costs denominated foreign currencies company’s policy hedge significant foreign currency revenues costs improve margin visibility reduce earnings volatility associated unexpected changes currency nondesignated hedges company hedges net foreign currency monetary assets liabilities monthly primarily resulting foreign currency denominated receivables payables foreign exchange forward contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates derivative instruments carried fair value changes fair value recorded interest income expense net derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset remeasurement gains losses hedged assets liabilities company executes nondesignated foreign exchange forward contracts primarily denominated euros british pounds israeli shekels brazilian reais mexican pesos following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2011 outstanding nondesignated hedges foreign currency dollar amounts thousands following table shows effect company’s nondesignated hedges consolidated statement operations twelve months ended december 31 2011 thousands cash flow hedges company’s foreign exchange risk management program objective reduce volatility company’s economic value unanticipated foreign currency fluctuations company designates forward contracts cash flow hedges foreign currency revenues expenses primarily euro british pound israeli shekel foreign exchange contracts carried fair value balance sheet maximum duration foreign exchange forward contracts exceed thirteen months speculation prohibited policy receive hedge accounting treatment cash flow hedging relationships formally designated hedge inception tested prospectively retrospectively ensure forward contracts highly effective offsetting changes future cash flows hedged transactions company records effective spot changes cash flow hedges accumulated comprehensive income loss reclassified revenue cost goods sold operating expenses together hedged transaction time value forward contracts excluded effectiveness testing recorded interest income expense net life contract together ineffective portion hedge following tables show effect company’s derivative instruments designated cash flow hedges consolidated statements operations twelve months ended december 31 2011 2010 thousands year ended december 31 2011 gainloss recorded ineffective portion 04 million loss recorded excluded time value portion hedge year ended december 31 2010 gainloss recorded ineffective portion 01 million gain recorded excluded time value portion hedge december 31 2011 company estimated values reported accumulated comprehensive income loss reclassified income within next twelve months following table summarizes derivativerelated activity accumulated comprehensive income loss thousands taxeffected event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would immediately reclassified interest income expense net consolidated statements operations years ended december 31 2011 2010 gains losses following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2011 outstanding cash flow hedges carried fair value balance sheet foreign currency dollar amounts thousands estimates fair value based applicable commonly quoted prices prevailing financial market information december 31 2011 see note 6 notes consolidated financial statements additional information fair value measurements financial assets liabilities including derivative assets derivative liabilities measured fair value consolidated financial statements recurring basis following table shows company’s derivative instruments measured gross fair value reflected consolidated balance sheets december 31 2011 2010 thousands derivative assets recorded prepaid expenses current assets consolidated balance sheets b derivative liabilities recorded accrued liabilities consolidated balance sheets 10 stockholders’ equity stock option plans may 26 2011 stockholders approved 2011 equity incentive plan “2011 plan” reserved issuance 2011 plan 19800000 shares adjusted twoforone stock split effective july 1 2011 terminating remaining shares available grant 2004 equity incentive plan “2004 plan” date extent shares exceed 13636548 shares adjusted stock split would returned 2004 plan 1996 stock incentive plan “1996 plan” result expiration cancellation forfeiture shares instead added reserve shares available 2011 plan addition company assumed 2708198 shares adjusted stock split voyant’s 2000 equity incentive plan following completion voyant acquisition january 2004 may 2009 stockholders approved amendments 2004 plan among making clarifying amendments permit polycom undertake onetime stock option exchange program ii increase number shares common stock reserved issuance 2004 plan 7200000 shares adjusted stock split iii implement flexible share counting 2004 plan terms 2004 plan 2011 plan options may granted prices lower fair market value date grant 2004 plan prior terminated plans options granted expire seven ten years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares options granted 2011 plan unvested shares outstanding prior terminated plans generally vest 25 completing one year service company remaining amount equally 36 months fully vested four years stock option exchange program august 21 2009 company completed onetime stock option exchange program approved stockholders may 2009 pursuant eligible employees able exchange certain outstanding options whether vested unvested new restricted stock units eligible employees able exchange eligible outstanding options exercise price greater 1447 per share adjusted stock split certain stock plans granted july 27 2008 total 4681988 options ranging exercise price 1510 2507 exchanged adjusted stock split surrendered options cancelled immediately thereafter company issued total 890014 restricted stock units adjusted stock split first 50 restricted stock units vested oneyear anniversary new restricted stock unit grant date august 21 2010 remaining 50 shares vested second anniversary new restricted stock unit grant date august 21 2011 subject employee’s continued employment company relevant dates exchange considered modification original equity award addition continuing amortize remaining stock compensation associated exchanged options exchange resulted incremental 14 million stock compensation expense expensed twoyear service period restricted stock units performance shares restricted stock units compensation committee board directors may also grant performance shares restricted stock units 2011 plan officers nonemployee directors certain employees component company’s broadbased equity compensation program prior may 2011 compensation committee granted performance shares restricted stock units 2004 plan performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria awards earned performance targets performance periods established direction compensation committee met number performance shares subject vesting determined end given performance period generally performance criteria deemed achieved performance shares vest one three years anniversary grant date restricted stock units timebased awards generally vest period one three years date grant commencing 2011 company granted performance shares contain market condition based total shareholder return tsr measure company’s relative performance nasdaq composite index performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 one hundred fifty percent 150 target award prior 2011 company granted performance shares contain market condition based total shareholder return tsr measure company’s relative performance russell 2000 index performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 two hundred percent 200 target award fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among nasdaq composite index russell 2000 index companies applicable performance period 2009 company also granted 250000 target performance shares executive fair value 1180 per share adjusted stock split subject fulfillment company certain predefined market share performance criteria additionally portion awards attainment predefined revenue targets multiple performance periods june 9 2010 independent members board directors approved amendments equity awards remaining performance periods commence july 1 2010 remaining performance periods performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 two hundred 200 target award fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among russell 2000 index companies performance period result amendments incremental stock compensation expense totaling 34 million prospectively recognized using graded vesting method remaining requisite service period 2010 company granted 189000 performance shares weighted average fair value 1137 per share adjusted stock split based closing market price company’s common stock date award performance shares contain performance condition based attaining predefined gross margin dollar goals calendar 2010 performance shares adjusted actual forfeitures fully vested issued first quarter 2011 company issue similar performance shares periods 2011 company also granted restricted stock units year ended december 31 2011 2010 fair value restricted stock units based closing market price company’s common stock date award awards generally vest one three years equal annual installments anniversary date grant delivered common stock end vesting period stockbased compensation expense restricted stock units recognized using graded vesting method 2011 2010 company granted nonemployee directors annual awards restricted stock units awards vest quarterly one year date grant fair value awards fair market value company’s common stock date grant stockbased compensation expense awards generally amortized six months date grant due voluntary termination provisions contained underlying agreements activity plans year ended december 31 2011 follows adjusted stock split 1 based amendment 2004 plan approved stockholders 2009 full value awards adjust shares available grant 15 shares every one share subject award effective award activities may 27 2009 awards granted option exchange program excluded treatment accounted 1for1 basis upon approval 2011 plan may 26 2011 full value awards adjust shares available grant 183 shares every one share subject award effective award activities may 26 2011 adjustments full value shares also referred “fungible share counting” 2 includes grants including related business acquisitions 3 options expected vest result applying prevesting forfeiture rate assumption total outstanding options total pretax intrinsic value options exercised years ended december 31 2011 2010 2009 193 million 317 million 74 million respectively december 31 2011 2010 2009 1644733 3305550 8672664 outstanding options exercisable weighted average exercise price 1137 1232 1118 respectively adjusted stock split options outstanding currently exercisable exercise price december 31 2011 adjusted stock split follows company grant stock options year ended december 31 2011 aggregate intrinsic value stock options outstanding stock options exercisable december 31 2011 89 million 84 million respectively december 31 2011 total compensation cost related nonvested stock options yet recognized 04 million expected recognized next 19 months weightedaverage basis following information summarizes changes unvested performance shares restricted stock units nonemployee director restricted stock units 2011 adjusted stock split 1 purposes table shares counted oneforone basis fungible share counting basis 2 includes 424338 additional shares resulting target performance 2010 december 31 2011 612 million total unrecognized compensation cost related unvested shares expected recognized weightedaverage period 21 years total fair value shares vested 2011 2010 2009 366 million 325 million 157 million respectively employee stock purchase plan third quarter 2011 company revised administration employee stock purchase plan sixmonth offering purchase period twenty fourmonth offering period four 6month purchase periods current employee stock purchase plan company grant stock purchase rights eligible employees twoyear offering period purchase dates end sixmonth purchase period january july shares purchased employees’ payroll deductions maximum 20 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 25000 worth common stock 10000 shares common stock one calendar year period company reserved 22 million shares common stock issuance plan including 7 million shares approved shareholders may 2011 adjusted twoforone stock split 2011 2010 2009 1143614 shares 1312290 shares 1796928 shares purchased average per share prices 1519 965 600 respectively adjusted twoforone stock split valuation expense information following table summarizes stockbased compensation expense recorded allocation within consolidated statements operations thousands stockbased compensation expense allocated segments separately maintained corporate level company elected capitalize stockbased compensation years ended december 31 2011 2010 2009 due amounts immaterial valuation assumptions company grant stock options fiscal year ended december 31 2011 2010 fiscal year ended december 31 2009 company granted 200000 stock options weightedaverage estimated fair value 415 per share adjusted stock split fair values options estimated date grant using blackscholes option valuation model year ended december 31 2009 using following assumptions weightedaverage estimated fair value employee stock purchase rights granted pursuant employee stock purchase plan years ended december 31 2011 2010 2009 782 per share 342 per share 258 per share respectively adjusted stock split fair value employee stock purchase right grant estimated date grant using blackscholes option valuation model recognized expense using graded vesting attribution approach following weightedaverage assumptions starting third quarter 2011 company computed expected volatility assumption based blended volatility 50 historical volatility50 implied volatility selection blended volatility assumption based upon company’s assessment blended volatility representative company’s future stock price trends weighs longer term historical volatility near term future implied volatility prior third quarter 2011 company used implied volatility oneyear traded options company’s stock riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock options employee stock purchases dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock options represents weightedaverage period stock options expected remain outstanding determined based historical experience similar awards giving consideration contractual terms stockbased awards vesting schedules expectations future employee behavior influenced changes terms stockbased awards stockbased compensation expense recognized consolidated statements operations based awards ultimately expected vest amounts reduced estimated forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based company’s historical experience share repurchase program time company’s board directors approved plans company may discretion purchase shares common stock open market years ended december 31 2011 2010 company purchased 20 million shares 48 million shares respectively adjusted stock split common stock open market cash 400 million 692 million respectively purchase price shares company’s stock repurchased recorded reduction stockholders’ equity december 31 2011 company authorized purchase additional 780 million shares open market current share repurchase plan preferred stock 2010 company’s one outstanding share preferred stock exchanged cancelled outstanding preferred stock december 31 2011 2010 accumulated comprehensive income net tax thousands tax effects shown separately impacts material 11 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions lesser 60 eligible compensation 16500 2011 subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year 2011 2010 2009 fiscal years maximum company cash match 2000 per participating employee per year polycom 401k plan provides employees projected age 50 older end year elected contribute polycom 401k plan may also make catchup contribution 5500 company’s contributions polycom 401k plan totaled approximately 30 million 24 million 20 million 2011 2010 2009 respectively 12 income taxes income tax expense consists following thousands sources income provision income taxes follows thousands company’s tax provision differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2011 company approximately 50 million tax effected net operating losses 39 million tax effected capital loss carryforwards 120 million tax effected credit carryforwards capital net operating loss carryforward assets tax credit carryforwards begin expire 2012 2016 respectively included net deferred tax asset balance 67 million valuation allowance recorded related primarily net operating losses credits jurisdictions history credits excess taxable profits company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2011 cumulative amount earnings upon us income tax provided approximately 2931 million practicable determine income tax liability might incurred earnings repatriated us excess tax benefits associated stock option exercises credited stockholders’ equity reductions income taxes payable resulting exercise employee stock options employee stock programs credited stockholders’ equity approximately 137 million 104 million 01 million twelve months ended december 31 2011 2010 2009 respectively company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions following first year company israeli taxable income consideration tax losses carried forward tax rates 2011 2010 2009 38 66 10 respectively tax rate reduction currently effective 2014 company expects reapply subsequent periods expiration company realized tax savings 52 million 2011 003 per diluted share 03 million 2010 09 million 2009 tax holiday israel material impact earnings per share 2009 2010 reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 addition beginning 2008 company’s subsidiary china granted highnew technology enterprise “hnte” recognition company’s tax rate reduced 25 15 tax savings realized 07 million 2011 04 million 2010 06 million 2009 also 2008 company’s subsidiary thailand granted regional headquarters status “rhs” tax rate reduced 30 10 associated tax savings 05 million 2011 06 million 2010 03 million 2009 beneficial tax status china thailand remain effect long company meets statutory requirements qualification tax holidays china thailand material impact earnings per share 2011 company recorded reserve releases 81 million 69 million due resolution multiyear tax audits expiration statutes limitation us foreign jurisdictions resulted reserve releases 08 million 04 million reserve releases due changes foreign exchange rates 2010 california franchise tax board completed audit 2005 2006 tax years audit resulted payment 08 million certain audit issues also settled year resulting release accrued taxes 15 million additionally 34 million tax reserves related cost sharing stock based compensation released adjustment stockholders’ equity 07 million tax reserves released due changes foreign exchange rates year aggregate changes balance company’s gross unrecognized tax benefits follows periods indicated included balance december 31 2011 324 million unrecognized tax benefits would affect income tax expense recognized company’s practice recognize interest andor penalties related income tax matters income tax expense december 31 2011 2010 respectively company approximately 20 million 25 million accrued interest penalties related uncertain tax positions end 2012 uncertain tax positions may reduced result lapse applicable statutes limitations resolutions ongoing audits various jurisdictions company anticipates reduction 2012 approximate 34 million reserve releases would recorded adjustments tax expense period released company files income tax returns us federal jurisdiction various states foreign jurisdictions company longer subject us federal state income tax examinations tax authorities years prior 2007 foreign income tax matters foreign jurisdictions concluded years 2005 except hong kong singapore concluded years 2004 germany switzerland concluded years 2006 israel concluded years 2007 france united kingdom concluded years 2008 13 business segment information polycom leading global provider line highquality easytouse communications equipment enables businesses telecommunications service providers governmental educational institutions effectively conduct video voice data web communications polycom’s business organized around four major geographic theatres north america central americalatin america “cala” europe middle east africa “emea” asia pacific “apac” reporting purposes company aggregates north america cala one segment named americas reports emea apac separate segments determined accordance management views evaluates company’s business allocates resources based criteria outlined authoritative guidance prior fourth quarter 2010 company organized offerings along three product categories video communications solutions voice communications solutions services also considered operating segments reporting purposes result change presentation revenue operating results prior periods revised conform current period presentation change segment reporting impact company’s consolidated balance sheets income statements cash flows changes shareholders’ equity periods segment revenue profit segment revenues attributed theater based ordering location customer significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting reported conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin defined asset data exception gross accounts receivable reviewed management segment level financial information reportable geographical segment fiscal years ended december 31 2011 2010 2009 based company’s internal management system utilized company’s chief operating decision maker codm follows thousands net revenues united states 6542 million 5687 million 4606 million years ended december 31 2011 2010 2009 respectively united states china individually accounted 10 company’s revenue 2011 individual country outside united states accounted 10 company’s revenues 2010 2009 segment contribution margin includes geographic segment revenues less related cost sales direct sales marketing expenses management allocates infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing expenses research development expense general administrative costs legal accounting stockbased compensation costs acquisitionrelated costs amortization purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income expense net reconciliation segment information polycom consolidated totals follows thousands following table summarizes company’s revenues groups similar products services follows thousands 2011 2010 2009 one customer americas segment accounted 10 company’s revenues company’s fixed assets net accumulated depreciation located following geographical areas thousands one country outside united states 10 total net fixed assets december 31 2011 2010 14 net income per share disclosures reconciliation numerator denominator basic diluted net income per share provided follows thousands except per share amounts adjusted stock split 2011 2010 2009 approximately 0 1565390 8367792 shares adjusted stock split respectively relating potentially dilutive securities primarily stock options excluded denominator computation diluted net income per share inclusion would antidilutive polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits indicates management contract compensatory plan arrangement xbrl information furnished filed part registration statement prospectus purposes sections 11 12 securities exchange act 1933 amended deemed filed purposes section 18 securities exchange act 1934 amended otherwise subject liability sections 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2013 2012 three years period ended december 31 2013 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc peter leav peter leav chief executive officer president director date february 21 2014 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint peter leav eric f brown either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date peter leav chief executive officer president director february 21 2014 peter leav principal executive officer eric f brown chief operating officer chief financial officer february 21 2014 eric f brown executive vice president principal financial officer laura j durr senior vice president worldwide finance february 21 2014 laura j durr chief accounting officer principal accounting officer betsy atkins director february 21 2014 betsy atkins martha h bejar director february 21 2014 martha h bejar robert j frankenberg director february 21 2014 robert j frankenberg john kelley director february 21 2014 john kelley scott mercer director february 21 2014 scott mercer william owens director february 21 2014 william owens kevin parker chairman board director february 21 2014 kevin parker polycom inc index consolidated financial statements page management’s report internal control financial reporting f report independent registered public accounting firm f consolidated balance sheets f consolidated statements operations f consolidated statements comprehensive income f consolidated statements stockholders’ equity f consolidated statements cash flows f notes consolidated financial statements f supplementary financial data unaudited financial statement scheduleschedule ii management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures · pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate conducted evaluation effectiveness internal control financial reporting based framework internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission based results evaluation management concluded december 31 2013 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles effectiveness company’s internal control financial reporting december 31 2013 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page peter leav eric f brown peter leav president chief executive officer eric f brown chief operating officer chief financial officer executive vice president february 21 2014 february 21 2014 report independent registered public accounting firm board directors stockholders polycom inc opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2013 december 31 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing page presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing page responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california february 21 2014 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data note earnings per share amount continuing operations discontinued operations gain sale discontinued operations net income presented calculated individually may sum due rounding differences result net loss continuing operations 2013 2012 potentially issuable common shares excluded diluted shares used computation earnings per share effect antidilutive accompanying notes integral part consolidated financial statements polycom inc consolidated statements comprehensive income thousands accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data 1 preparing financial statements 2013 noted immaterial error calculation par value required reclassification common stock additional paidin capital accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands consolidated statements cash flows include combined cash flows continuing operations along discontinued operations accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business summary significant accounting policies description business polycom leading global provider highquality easytouse communications solutions enable enterprise government education healthcare customers effectively collaborate distance time zones organizational boundaries solutions built architectures enable unified video voice content communications principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany balances transactions eliminated certain prior year service costs reclassified among segments conform current year presentation order appropriately align costs associated revenues see note 17 revisions prior period financial statements quarter ended december 31 2013 company discovered error impacted company’s previously issued interim annual consolidated statements cash flows error related net amortization discounts premiums investments properly reported resulted understatements cash flows provided operating activities cash used investing activities first three quarters 2013 full fiscal years 2012 2011 additionally quarter ended june 30 2013 company discovered error impacted company’s previously issued interim annual consolidated financial statements fiscal years ended december 31 2010 2012 quarter ended march 31 2013 error related certain royalty related expenses properly allocated company’s us entity international subsidiary led understated income tax provision fiscal years 2010 2012 evaluating whether company’s previously issued consolidated financial statements materially misstated company considered guidance asc topic 250 accounting changes error corrections asc topic 25010s991 assessing materiality asc topic 25010s992 considering effects prior year misstatements quantifying misstatements current year financial statements company concluded errors material prior reporting periods therefore amendments previously filed reports required however entire correction recorded 2013 cumulative amount income tax provision error would material 2013 income tax provision error consolidated statements cash flows correction would impact comparisons prior periods revisions corrections reflected financial information applicable prior periods reflected future filings containing financial information following tables set forth summary revisions consolidated financial statements periods indicated use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates cash equivalents company considers highly liquid investments original maturities three months less time purchase cash equivalents allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial conditions company’s customers deteriorate adversely affecting abilities make payments additional allowances would required delinquent account balances written management determined likelihood collection remote investments company’s shortterm longterm investments december 31 2013 comprised us nonus government securities us agency securities corporate debt securities investments classified shortterm longterm based remaining maturities investments held company’s name limited number major financial institutions december 31 2013 2012 company’s investments classified availableforsale carried fair value based quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency end reporting period unrealized gains losses recorded separate component accumulated comprehensive income consolidated statements stockholders’ equity investments sold loss considered temporarily declined value charge earnings recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income expense net strategic reasons company made various investments private companies private company investments carried cost written estimated market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecasted earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment potentially impaired inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records writedowns excess obsolete inventory equal difference carrying value inventory estimated future selling price based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives one thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful lives related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill amortized regularly reviewed potential impairment september 2011 fasb issued authoritative guidance goodwill impairment testing provides entities option perform qualitative assessment determine whether impairment testing necessary company elected early adopt guidance 2011 adoption impact company’s consolidated financial statements identification measurement goodwill impairment involves estimation fair value company’s reporting units estimated fair value reporting units based best information available date assessment primarily incorporates management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months six years purchased intangible assets determined indefinite useful lives amortized longlived assets including intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset group assets eventual disposition company periodically assesses remaining useful lives longlived assets measurement impairment loss longlived assets management expects hold use based estimated fair value asset longlived assets disposed reported lower carrying amount estimated fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured company warranties generally start delivery date continue one year software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary changes warranty obligation period included component “other accrued liabilities” consolidated balance sheets follows thousands deferred services revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company also provides managed services customers contractual arrangements company recognizes maintenance managed services revenue contracts life service contract deferred services revenue 1707 million 1565 million shortterm included component deferred revenue december 31 2013 2012 respectively 831 million 853 million longterm included component longterm deferred revenue december 31 2013 2012 respectively consolidated balance sheets changes period follows thousands cost providing services years ended december 31 2013 2012 2011 1481 million 1378 million 984 million respectively officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations material indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liabilities environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company recognizes maintenance service revenues hardware software products ratably service periods one five years services upon completion installation professional services provided company’s products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts multipleelement arrangement includes sale one tangible product offerings one associated services offerings individually considered separate units accounting company allocates revenue element multipleelement arrangement based upon relative selling price deliverable applying relative selling price method company determines selling price deliverable using vendor specific objective evidence “vsoe” selling price exists third party evidence “tpe” selling price neither vsoe tpe selling price exist deliverable company uses best estimate selling price “esp” deliverable revenue allocated element recognized revenue recognition criteria met element vsoe established based company’s standard pricing discounting practices specific product service sold separately determining vsoe company requires substantial majority selling prices product service fall within reasonably narrow pricing range vsoe cannot established company attempts establish selling price element based tpe determined based competitor prices similar deliverables sold separately company unable establish selling price using vsoe tpe company uses esp allocation arrangement consideration esp represents price company would transact sale element sold standalone basis company determines esp product considering multiple factors including limited geographies market conditions competitive landscape pricing practices determination esp made based review historical sales price taking consideration company’s gotomarket strategy generally company uses historical net selling prices establish esp company regularly reviews basis establishing vsoe tpe esp sales returns channel partner programs incentives company records estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives company also accrues coop marketing funds marketing expense company receives identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues company’s contracts generally provide right return products however limited number contracts contain stock rotation rights company records estimate future returns based upon contractual rights historical returns experience research development expenditures software development costs research development expenditures charged operations incurred consist primarily compensation costs including stockbased compensation outside services expensed materials depreciation allocation overhead expenses including facilities costs software development costs incurred prior establishment technological feasibility included research development expenses incurred eligible material software development costs capitalized upon establishment technological feasibility general availability software products including direct labor related overhead costs well stockbased compensation company defined technological feasibility establishment working model typically occurs beta testing commences 2013 company capitalized approximately 24 million development costs software products marketed sold customers costs capitalized 2012 2011 software development costs qualifying capitalization insignificant capitalized costs amortized productbyproduct basis using straightline method estimated product life generally three years ratio current revenues total projected product revenues whichever greater management believes capitalized software costs recoverable future gross profits generated products advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows online media magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2013 2012 2011 149 million 223 million 213 million respectively income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized company recognizes measures benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions company evaluates uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period change made could material impact company’s effective tax rate operating results company recognizes interest andor penalties related income tax matters income tax expense foreign currency translation assets liabilities nonus subsidiaries local currency functional currency translated us dollars exchange rates effect balance sheet date income expense accounts translated average exchange rates effect period resulting translation adjustments directly recorded separate component accumulated comprehensive income foreign exchange transaction gains losses remeasurement nonfunctional currency denominated assets liabilities significant date included company’s consolidated statements operations part interest income expense net result sale company’s former enterprise wireless voice solutions “ews” business december 2012 see note 3 included wholly owned danish subsidiary danish krone functional currency company recognized associated currency translation adjustment balance 11 million effectively reduced gain sale discontinued operations following table sets forth change foreign currency translation adjustments reporting period balances december 31 thousands derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated qualifying cash flow hedge effective portion derivative’s gain loss initially reported separate component accumulated comprehensive income subsequently reclassified earnings hedged exposure affects earnings excluded ineffective portions gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk net income per share basic net income per share computed dividing net income weighted average number common shares outstanding period diluted net income per share reflects additional dilution potential issuance common stock issuable pursuant exercise stock options unvested restricted stock units performance shares potentially dilutive shares excluded computation diluted net income per share effect antidilutive june 1 2011 company announced board directors approved twoforone stock split company’s outstanding shares common stock effected form 100 stock dividend “the stock split” stock split entitled stockholder record close business june 15 2011 receive one additional share common stock every one share common stock owned date payable company’s transfer agent july 1 2011 par value company’s common stock maintained presplit amount 00005 per share consolidated financial statements notes thereto including share per share data restated stock split occurred earliest period presented fair value measurements company certain financial assets liabilities recorded fair value classified level 1 2 3 within fair value hierarchy fair values determined level 1 inputs utilize quoted prices unadjusted active markets identical assets liabilities company ability access fair values determined level 2 inputs utilize data points observable quoted prices similar assets active markets identical similar assets inactive markets interest rates yield curves fair values determined level 3 inputs utilize unobservable data points asset liability carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due shortterm maturities stockbased compensation company’s stockbased compensation programs consist grants stockbased awards employees nonemployee directors including stock options restricted stock units performance shares well purchase rights pursuant company’s employee stock purchase plan “espp” estimated fair value awards charged income requisite service period generally vesting period fair value stock option espp awards estimated grant date using blackscholes option valuation model fair value restricted stock units based market value company’s common stock date grant compensation expense restricted stock units including effect forfeitures recognized applicable service period fair value performance shares based market price company’s stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock relation target index companies performance period compensation cost performance shares market condition adjusted subsequent changes regardless level ultimate vesting business combinations company recognizes separately goodwill fair value assets acquired liabilities assumed goodwill acquisition date measured excess consideration transferred net acquisition date fair values assets acquired liabilities assumed company uses best estimates assumptions part purchase price allocation process value assets acquired liabilities assumed acquisition date company’s estimates inherently uncertain subject refinement result measurement period may one year acquisition date company may record adjustments retrospectively fair value assets acquired liabilities assumed corresponding offset goodwill upon conclusion measurement period final determination fair value assets acquired liabilities assumed whichever comes first subsequent adjustments recorded company’s consolidated statements operations addition uncertain tax positions taxrelated valuation allowances assumed connection business combination initially estimated acquisition date company reevaluates items quarterly records adjustments company’s preliminary estimates goodwill provided company within measurement period company continues collect information order determine estimated fair values date acquisition subsequent measurement period company’s final determination tax allowance’s estimated value changes uncertain tax positions tax related valuation allowances affect company’s provision income taxes company’s consolidated statements operations recent pronouncements july 2013 financial accounting standards board “fasb” issued accounting standard update clarifies unrecognized tax benefit presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward settlement required expected event uncertain tax position disallowed situations net operating loss carryforward similar tax loss tax credit carryforward available reporting date tax law applicable jurisdiction tax law jurisdiction require entity intend use deferred tax asset purpose unrecognized tax benefit presented financial statements liability combined deferred tax assets guidance effective prospectively reporting periods beginning december 15 2013 company currently assessing potential impact adoption guidance consolidated financial statements march 2013 fasb issued accounting standard update requires release cumulative translation adjustments net income entity ceases controlling financial interest resulting complete substantially complete liquidation subsidiary group assets within foreign entity guidance effective prospectively reporting periods beginning december 15 2013 company expect material impact adoption guidance consolidated financial statements february 2013 fasb issued accounting standard update requires entity expand disclosure reclassifications accumulated comprehensive income “aoci” update requires companies present reclassifications component reporting changes aoci balances report effect significant reclassifications respective line items net income guidance effective prospectively reporting periods beginning december 15 2012 company adopted guidance quarter ended march 31 2013 adoption material impact consolidated financial statements december 2011 fasb issued accounting standard update requires disclosure effect potential effect offsetting arrangements company’s financial position well enhanced disclosure rights setoff associated company’s recognized assets liabilities january 2013 fasb issued another accounting standard update clarify scope standard issued december 2011 company adopted guidance quarter ended march 31 2013 adoption material impact consolidated financial statements 2 business combinations 2013 acquisition march 1 2013 company completed acquisition certain assets sentri inc “sentri” privatelyheld services company expertise microsoft technologies approximately 80 million cash net approximately 04 million cash released escrow account result net working capital adjustment acquisition expands company’s advanced services offerings emphasis multivendor unified communications solutions encompass video voice data networking total purchase price allocated net tangible intangible assets based upon fair values march 1 2013 excess amount recorded goodwill primarily attributable expertise former sentri employees microsoft technologies expected synergies combined company 2011 acquisitions 2011 company completed three business combinations march 21 2011 company completed acquisition outstanding shares accordent technologies inc “accordent” privatelyheld video content management delivery solutions company july 27 2011 company acquired assets hewlettpackard visual collaboration “hpvc” business including halo products managed services business may 2012 company completed purchase certain additional equipment hp financing services approximately 50 million agreed conjunction hpvc acquisition october 14 2011 company acquired vivu inc “vivu” privatelyheld video collaboration software company total net cash paid 2011 business combinations 1636 million plus noncash consideration 02 million following table summarizes allocation total purchase consideration assets liabilities assumed 2011 acquisition dates thousands company included financial results sentri accordent hpvc vivu consolidated financial statements respective dates acquisition pro forma results operations acquisitions completed years presented effects acquisitions individually aggregate material company’s financial results goodwill generated acquisitions primarily attributable expected synergies goodwill sentri hpvc acquisitions deductible tax purposes goodwill accordent vivu acquisitions deductible tax purposes fair values intangible assets calculated based income cost approaches amortized eight months six years transactionrelated costs expensed incurred 3 discontinued operations december 4 2012 company completed disposition net assets ews business mobile devices holdings llc delaware limited liability corporation company received cash consideration approximately 507 million resulting gain sale discontinued operations net taxes 354 million reflected consolidated financial statements year ended december 31 2012 2013 company recorded additional gain sale discontinued operations net taxes approximately 05 million result final net working capital adjustment accordance purchase agreement additional cash consideration 570 million payable next four years subject certain conditions including meeting certain agreedupon ebitdabased milestones additional cash consideration accounted gain sale discontinued operations net taxes realized realizable accordance accounting guidance company included results operations ews discontinued operations within consolidated statements operations periods presented summarized results discontinued operations follows thousands carrying amounts net assets sold december 4 2012 follows thousands company recorded gain 354 million 2012 sale discontinued operations net taxes calculated follows thousands 2013 company recorded additional gain sale discontinued operations net taxes 05 million result final net working capital adjustment see note 15 notes consolidated financial statements discussion income tax benefit gain sale discontinued operations 4 accounts receivable financing 2012 company launched customer financing program entered financing agreement “financing agreement” unrelated third party financing company program offers channel partners distributors resellers direct indirect financing purchases company’s products services pursuant terms financing agreement company transfers accounts receivable customers without recourse financing company return company agrees pay financing company fee based predefined percentage transaction amount financed transaction meets applicable criteria asc 860 accounted sale financial assets accounts receivable excluded balance sheet upon third party financing company’s payment remittance company certain legal jurisdictions arrangement fees involve maintenance services products bundled maintenance one price qualify sale financial assets accordance authoritative guidance accordingly accounts receivable related arrangements accounted secured borrowing accordance asc 860 company records liability cash received maintaining associated accounts receivable balance endcustomer remits payment thirdparty financing company 2013 2012 total transactions entered pursuant terms financing agreement approximately 1234 million 283 million respectively 1094 million 229 million respectively related sale financial assets arrangement financing receivables accelerated collection company’s cash reduced credit exposure amount due financing company december 31 2013 2012 approximately 229 million 154 million respectively 216 million 124 million respectively related accounts receivable sold included trade receivables company’s consolidated balance sheets fees incurred pursuant financing agreement approximately 18 million 04 million year ended december 31 2013 2012 respectively recorded reduction revenues 5 goodwill purchased intangibles software development costs goodwill tested impairment reporting unit level one level operating segment company adopted amended accounting guidance permits company choose first assess qualitative factors determine whether likely fair value reporting unit less carrying amount based assessment company determines likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary polycom’s business organized around four major geographic theaters north america caribbean latin america “cala” europe middle east africa “emea” asia pacific “apac” considered reporting units fourth quarter 2013 2012 company completed annual goodwill impairment test four reporting units impairment charge required 2013 2012 2013 company determined based qualitative assessment testing necessary performed twostep goodwill impairment test assess potential impairment occurred measure impairment loss first step twostep test compares reporting unit’s fair value carrying amount fair value determined using income approach market approach weighted equally income approach fair value asset based value estimated cash flows asset expected generate future estimated future cash flows discounted rates ranging 12 14 percent arrive respective fair values market approach fair value unit based analysis financial data publicly traded companies engaged similar lines business carrying amount reporting unit determined assigning assets liabilities including goodwill reporting unit based first step test estimated fair value reporting unit exceeded respective carrying amount 30 therefore second step twostep goodwill impairment test deemed necessary based company’s recent goodwill impairment assessment reporting units segments understanding currently projected trends business economy management believe significant risk impairment reporting units reasonable period time although analysis regarding fair values goodwill indicates exceeded carrying value materially different assumptions regarding future performance company’s businesses significant declines company’s stock price could result goodwill impairment losses future 2012 company performed qualitative assessment four reporting units reporting unit estimated fair value excess carrying value 50 based valuation company’s reporting segments performed may 2012 connection announcement divestiture ews business reporting unit company weighed relative impact factors specific reporting unit well industry macroeconomic factors reporting unit specific factors considered included results recent impairment tests well financial performance changes reporting units’ carrying amounts since recent impairment tests industry reporting units operate company considered growth projections independent sources significant developments transactions within industry 2012 applicable company concluded reporting unit specific industry factors either positive neutral impact fair value reporting units company also determined macroeconomic factors 2012 significant impact discount rates growth rates used valuation performed following table sets forth changes carrying amount goodwill company’s segments 2013 thousands following table sets forth details company’s total purchased intangible assets capitalized software development costs following period thousands 2013 2012 2011 company recorded amortization expense related purchased intangibles 104 million 98 million 55 million respectively included “amortization purchased intangibles” consolidated statements operation recorded approximately 94 million 76 million 57 million respectively amortization purchased intangibles “cost product revenues” consolidated statements operations amortization intangibles allocated company’s segments company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name amortized reviewed impairment annually sooner indicators potential impairment exist development products associated inprocess research development “iprd” previously capitalized completed 2012 underlying products made available general release associated iprd 14 million reclassified core developed technology amortized estimated lives products commencing 2012 company evaluates purchased intangibles possible impairment ongoing basis impairment indicators exist company performs assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment impairments recorded years ended december 31 2013 2012 2011 estimated future amortization expense purchased intangible assets december 31 2013 follows thousands 2013 company capitalized approximately 24 million software development costs internally developed software products marketed sold customers point technological feasibility reached products available general release capitalized costs included assets company’s consolidated balance sheets amortized estimated product useful life generally three years beginning products available general release management expects capitalized software development costs recoverable future gross profits generated products services costs capitalized 2012 2011 development costs qualifying capitalization insignificant 6 balance sheet details inventories consist following thousands prepaid expenses current assets consist following thousands property equipment net consist following thousands deferred revenues consist following thousands accrued liabilities consist following thousands 7 restructuring costs 2013 2012 2011 company recorded 485 million 220 million 94 million respectively related restructuring actions included elimination relocation various positions consolidation elimination certain facilities actions generally intended streamline focus company’s efforts properly align company’s cost structure projected future revenue streams following table summarizes activity company’s restructuring reserves thousands 2013 management completed consolidation elimination certain facilities globally elimination approximately four percent company’s global workforce actions generally intended optimize organization manage expenses gain improve operating efficiencies profitability result company recorded approximately 382 million restructuring charges related idle facilities upon vacating facilities additions reserve include 28 million deferred rent expensed prior periods additionally 2013 recorded approximately 102 million restructuring charges related severance employee benefits approximately 29 million restructuring charges associated changes company’s product roadmap focuses products solutions greater revenue margin potential 2012 management completed consolidation elimination certain facilities order gain efficiencies including combination headquarters san jose santa clara california one new location san jose california result company recorded approximately 117 million restructuring charges related idle facilities 2012 additions reserve include 28 million deferred rent expensed prior periods additionally company recorded approximately 131 million charges primarily severance employee benefits related restructuring actions approved management october 2011 july 2012 action plan approved july 2012 resulted elimination approximately four percent global workforce enabling company focus resources product development product launch initiatives 2011 management completed consolidation colorado facilities began transition certain engineering product management related support functions andover massachusetts facility locations order achieve efficiencies restructuring charges relating actions primarily included costs idle facilities lesser extent severance relocation costs impacted individuals additionally october 2011 management committed restructuring plan designed better align allocate resources strategic growth areas business actions primarily related reorganization global gotomarket organizations restructuring plan resulted elimination approximately seven percent global workforce majority reductions taking effect fourth quarter 2011 first quarter 2012 enabling creation new positions better aligned strategic initiatives 2011 company recorded approximately 87 million restructuring expenses related severance employee benefits 07 million related idle facilities december 31 2013 restructuring reserve primarily comprised facilitiesrelated liabilities company calculated fair value facilitiesrelated liabilities based discounted future lease payments less sublease assumptions fair value measurement classified level 3 measurement asc 820 key assumptions used valuation model include discount rates cash flow projections estimated sublease income discount rates cash flow projections sublease assumptions involve significant judgment based management’s estimate current forecasted market conditions sensitive susceptible change january 22 2014 management announced take certain actions designed better align expenses company’s revenue gross margin profile position company improved operating performance actions result elimination approximately 6 company’s global workforce significant majority take effect first quarter 2014 management also approved plans reduce eliminate certain leased facilities charges expected incurred connection actions recorded third quarter 2014 8 debt september 2013 company entered credit agreement “credit agreement” among company certain subsidiaries time party thereto guarantors lenders time party thereto morgan stanley senior funding inc administrative agent collateral agent credit agreement provides 2500 million term loan “term loan” maturing september 13 2018 “maturity date” bears interest company’s option either base rate plus spread 050 100 reserve adjusted libor rate plus spread 150 200 based company’s consolidated leverage ratio preceding four fiscal quarters company entered credit agreement conjunction purposes funding purchases company’s common stock pursuant 2500 million modified “dutch auction” selftender offer announced september 2013 see note 13 details interest due payable arrears quarterly loans bearing interest base rate end interest period three month interval case loans interest periods greater three months case loans bearing interest reserve adjusted libor rate term loan payable quarterly installments principal equal approximately 16 million began december 31 2013 remaining outstanding principal amount term loan due payable maturity date company may prepay term loan whole part time without premium penalty amounts repaid prepaid may reborrowed term loan secured substantially assets certain domestic subsidiaries company subject certain exceptions limitations company also obligated pay customary closing fees arrangement fees administration fees credit facility size type total debt issuance costs incurred term loan approximately 27 million recorded prepaid expenses current assets consolidated balance sheets amortized life term loan credit agreement contains customary affirmative negative covenants including covenants limit restrict company’s subsidiaries’ ability among things grant liens make investments incur indebtedness merge consolidate dispose assets make acquisitions pay dividends make distributions repurchase stock enter transactions affiliates enter restrictive agreements case subject customary exceptions credit facility size type company also required maintain compliance consolidated fixed charge coverage ratio consolidated secured leverage ratio company compliance covenants december 31 2013 credit agreement includes customary events default include among things nonpayment defaults covenant defaults inaccuracy representations warranties cross default material indebtedness bankruptcy insolvency defaults material judgment defaults erisa defaults change control default occurrence event default could result acceleration obligations credit agreement certain circumstances default interest rate apply obligations existence event default credit agreement per annum rate equal 200 applicable interest rate overdue principal 200 rate applicable base rate loans overdue amounts december 31 2013 weighted average interest rate term loan 199 accrued interest term loan 02 million current noncurrent portion outstanding term loan 62 million 2422 million respectively following table sets forth total interest expense recognized related term loan thousands 9 investments fair value measurements company cash equivalents 3926 million 4771 million december 31 2013 2012 respectively cash equivalents consist cash banks well highly liquid investments money market funds time deposits savings accounts commercial paper us government agency securities municipal securities corporate debt securities december 31 2013 company’s longterm investments contractual maturities one two years addition company shortterm longterm investments debt equity securities summarized follows thousands december 31 2013 company’s total cash equivalents investments held united states totaled 1671 million remaining 4166 million held various foreign subsidiaries outside united states us government securities company’s us government securities mostly comprised direct us treasury obligations guaranteed us government ensure investment portfolio sufficiently diversified company’s investment policy requires certain percentage company’s portfolio invested types securities us government agency securities company’s us government agency securities mostly comprised us government agency instruments including mortgagebacked securities ensure investment portfolio sufficiently diversified company’s investment policy requires certain percentage company’s portfolio invested types securities nonus government securities company’s nonus government securities mostly comprised nonus government instruments including state municipal foreign government securities ensure investment portfolio sufficiently diversified company’s investment policy allows certain percentage company’s portfolio invested types securities corporate debt securities company’s corporate debt securities comprised publiclytraded domestic foreign corporate debt securities company purchase auction rate securities investments instruments meet high quality credit rating standards specified company’s investment policy guidelines also limit amount credit exposure one issuer type instrument unrealized losses following table summarizes fair value gross unrealized losses company’s investments including securities categorized cash equivalents unrealized losses aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2013 2012 thousands company reviews individual securities portfolio determine whether decline security’s fair value amortized cost basis otherthantemporary decline fair value considered otherthantemporary cost basis individual security written fair value new cost basis amount writedown accounted realized loss included earnings december 31 2013 2012 company determined investments portfolio otherthan temporarily impaired private company investments strategic reasons company made various investments private companies cost method accounting used account investments hold nonmaterial ownership percentage written estimated net realizable value indications exist investments impaired investments recorded assets company’s consolidated balance sheets totaled 20 million december 31 2013 2012 fair value measurements fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require company develop assumptions hierarchy requires company use observable market data available minimize use unobservable inputs determining fair value recurring basis company measures certain financial assets liabilities fair value including marketable securities foreign currency contracts company’s cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices identical assets active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy december 31 2013 company’s fixed income availableforsale securities include us treasury securities government agencies 48 corporate bonds 23 commercial paper 13 nonus government securities 8 money market funds 8 included availableforsale securities approximately 201 million cash equivalents consist investments original maturities three months less include money market funds principal market company executes foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants company’s counterparties large money center banks regional banks company’s foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy company’s term loan credit agreement classified within level 2 instruments borrowings actively traded variable interest rate structure based upon market rates currently available company debt similar terms maturities see note 8 company elected record term loan fair value measured fair value disclosure purpose december 31 2013 carrying amount term loan approximated estimated fair value based observable market inputs 2013 transfers different levels fair value measurements december 31 2013 fair value company’s marketable securities foreign currency contracts determined using following inputs thousands included cash equivalents short longterm investments company’s consolidated balance sheets b included shortterm derivative asset prepaid expenses current assets company’s consolidated balance sheets c included shortterm derivative liability accrued liabilities company’s consolidated balance sheets 10 business risks credit concentration company sells products services serve communications equipment market globally substantially company’s revenues derived sales products related services substantial majority company’s revenue valueadded resellers distributors service providers 2013 2012 2011 one channel partner scansource communications accounted 16 14 respectively company’s total net revenues factors adversely affecting demand supply products services could materially adversely affect company’s business financial performance particular economic conditions worldwide contributed time slowdowns communications networking industries caused negative impact specific segments markets company operates company become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition factors adversely impacted company’s operating results recent periods global economic concerns varying pace global economic recovery slowdown government spending softer demand certain regions continue create uncertainty unpredictability cause company continue cautious future outlook global economic downturn would negatively impact technology spending company’s products services could materially adversely affect business operating results financial condition company subcontracts manufacture products celestica askey foxconn vtech thirdparty contract manufacturers company uses celestica’s facilities thailand china askey’s foxconn’s vtech’s facilities china disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases economic political difficulties countries asia reason disruption would harm business results operations company begun develop secondary manufacturing sources certain products celestica’s facilities currently manufacturer substantially products means company essentially solesourced manufacturing products celestica experiences interruption operations suffers capacity constraints may include constraints based production demands company grows business otherwise unable meet company’s current future production requirements company would experience delay inability ship products would immediate negative impact revenues moreover incapacitation company’s subcontractors’ manufacturing sites due destruction natural disaster similar events could result loss product inventory result foregoing company may able meet demand products could negatively affect revenues quarter disruption longer depending upon magnitude event could harm reputation addition operating international environment exposes company certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm company’s business results operations company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts time deposits savings accounts money market accounts corporate debt securities government securities municipal securities deposits one financial institution may exceed amount insurance provided deposits investments covered insurance company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses company’s credit risk may increase expansion polycom’s product offerings customers place larger orders initial stocking orders growth emerging markets assurance company’s credit loss experience remain near historical levels december 31 2013 one customer americas segment scansource communications accounted 11 total gross accounts receivable december 31 2012 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows charges 2013 2012 2011 11 commitments contingencies litigation sec investigation time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase time particular company expects face increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality video voice data web conferencing products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require us enter royalty licensing agreements required may available terms favorable us management believes loss arising matters probable reasonably estimated company record reserve loss additional information becomes available potential liability related matters assessed estimates revised based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties view matters may change future unfavorable outcome occur exists possibility material adverse impact financial position results operations liquidity period unfavorable outcome occurs becomes probable potentially future periods following july 23 2013 announcement regarding departure company’s former ceo sec initiated investigation class action lawsuit filed two derivative lawsuits filed described sec investigation july 2013 company informed sec investigating audit committee’s review mr miller’s expenses resignation investigation ongoing sec requested information company cooperating investigation class action lawsuit july 26 2013 purported shareholder class action suit filed united states district court northern district california polycom certain current former officers directors lawsuit alleges july 24 2012 july 23 2013 polycom issued materially false misleading statements failed disclose information regarding polycom’s business operational compliance policies including respect former chief executive officer’s expense submissions company’s internal controls alleges company’s financial statements materially false misleading alleges violations federal securities laws seeks unspecified compensatory damages relief december 13 2013 court appointed lead plaintiff approved lead liaison counsel pursuant schedule entered court lead plaintiff file amended consolidated complaint february 24 2014 time company unable estimate range reasonably possible loss relating action derivative lawsuits august 21 2013 october 16 2013 two purported shareholder derivative suits filed united states district court northern district california certain polycom’s current former officers directors october 31 2013 two federal derivative actions consolidated one case plaintiffs designated operative complaint february 7 2014 company filed motions dismiss complaint november 22 2013 december 13 2013 two purported shareholder derivative suits filed superior court california county santa clara certain company’s current former officers directors january 31 2014 two california state derivative actions consolidated one case pursuant schedule entered court plaintiffs file designate operative complaint march 17 2014 federal california state consolidated derivative lawsuits purport assert claims behalf company named nominal defendant actions complaints allege claims breach fiduciary duty unjust enrichment corporate waste allege certain defendants failed maintain adequate internal controls issued authorized issuance materially false misleading statements including respect polycom’s former chief executive officer’s expense submissions company’s internal controls complaints allege certain defendants approved unjustified separation agreement caused polycom repurchase stock artificially inflated prices complaints seek unspecified compensatory damages corporate governance reforms relief time company unable estimate range reasonably possible loss relating actions standby letters credit company standby letters credit totaling approximately 73 million 76 million december 31 2013 2012 respectively license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2014 2023 december 31 2013 following future minimum lease payments due current lease obligations thousands sublease income assumptions included future minimum lease payments amounts material addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2013 2012 2011 322 million 328 million 285 million respectively difference monthly contractual rental payment straightline monthly lease obligation multiyear lease agreement accounted deferred lease obligation shortterm deferred lease obligation included accrued liabilities 10 million less 01 million december 31 2013 2012 respectively longterm deferred lease obligation included longterm liabilities 160 million 113 million december 31 2013 2012 respectively event company exercise option extend term leases expire company may incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs cannot determined end lease term times based landlord’s discretion subsequent negotiations landlord company however company believe costs would significant 12 foreign currency derivatives company maintains foreign currency risk management program designed reduce volatility company’s economic value effects unanticipated currency fluctuations international operations generate revenues costs denominated foreign currencies company’s policy hedge significant foreign currency revenues costs improve margin visibility reduce earnings volatility associated unexpected changes currency nondesignated hedges company hedges net foreign currency monetary assets liabilities monthly primarily resulting foreign currency denominated receivables payables foreign exchange forward contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates derivative instruments carried fair value changes fair value recorded interest income expense net derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset remeasurement gains losses hedged assets liabilities company executes nondesignated foreign exchange forward contracts primarily denominated euros british pounds israeli shekels brazilian reais japanese yen mexican pesos following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2013 outstanding nondesignated hedges foreign currency dollar amounts thousands following table shows effect company’s nondesignated hedges consolidated statement operations twelve months ended december 31 2013 thousands cash flow hedges company’s foreign exchange risk management program objective reduce volatility company’s economic value unanticipated foreign currency fluctuations company designates forward contracts cash flow hedges foreign currency revenues expenses primarily chinese yuan euro british pound israeli shekel foreign exchange contracts carried fair value consolidated balance sheets maximum duration foreign exchange forward contracts exceed thirteen months speculation prohibited policy receive hedge accounting treatment cash flow hedging relationships formally designated hedge inception tested prospectively retrospectively ensure forward contracts highly effective offsetting changes future cash flows hedged transactions company records effective spot changes cash flow hedges accumulated comprehensive income reclassified revenue cost revenues operating expenses together hedged transaction time value forward contracts excluded effectiveness testing recorded interest income expense net life contract together ineffective portion hedge following tables show effect company’s derivative instruments designated cash flow hedges consolidated statements operations thousands year ended december 31 2013 gains losses ineffective portion year ended december 31 2012 loss recorded ineffective portion immaterial december 31 2013 company estimated values reported accumulated comprehensive income reclassified income within next twelve months event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would immediately reclassified interest income expense net consolidated statements operations years ended december 31 2013 2012 gains losses following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2013 outstanding cash flow hedges carried fair value consolidated balance sheet foreign currency dollar amounts thousands estimates fair value based applicable commonly quoted prices prevailing financial market information december 31 2013 see note 9 notes consolidated financial statements additional information fair value measurements financial assets liabilities including derivative assets derivative liabilities measured fair value consolidated financial statements recurring basis following table sets forth company’s derivative instruments measured gross fair value reflected consolidated balance sheets december 31 2013 2012 thousands derivative assets recorded prepaid expenses current assets consolidated balance sheets b derivative liabilities recorded accrued liabilities consolidated balance sheets offsetting derivative assets liabilities company entered master netting arrangements derivative counterparties arrangements afford right net derivative assets liabilities counterparty certain default provisions company right setoff amounts payable payee whether arising agreement result netting provisions company’s maximum amount loss derivative transactions due credit risk limited net amounts due counterparties derivative contracts although netting permitted currently company’s policy practice record derivative assets liabilities gross basis consolidated balance sheets following table sets forth offsetting derivative assets december 31 2013 2012 thousands following table sets forth offsetting derivative liabilities december 31 2013 2012 thousands 13 stockholders’ equity stockbased employee benefit plans share repurchase programs time company’s board directors approved plans company may discretion purchase shares common stock open market privately negotiated transactions years ended december 31 2013 2012 company purchased 452 million shares 51 million shares respectively common stock cash 5023 million 550 million respectively purchase price shares company’s stock repurchased recorded reduction stockholders’ equity excess cost treasury stock retired fair value based calculated average price equity recorded charge retained earnings september 2013 company announced board directors authorized repurchase 4000 million approximately 20 percent company’s outstanding common stock “return capital program” 2500 million modified “dutch auction” selftender offer “tender offer” subsequent open market purchases privately negotiated transactions company funded program 1500 million cash 2500 million term loan see note 8 modified “dutch auction” selftender offer tender offer expired october 30 2013 company accepted payment aggregate 274 million shares common stock purchase price 1040 per share aggregate cost approximately 2854 million excluding fees expenses relating tender offer excess purchase price fair value date shares tendered material charge recorded company’s consolidated statements operations costs associated tender offer accounted adjustment stockholder’s equity accelerated share repurchase agreements december 4 2013 company entered separate accelerated share repurchase “asr” agreements two financial institutions repurchase aggregate 1146 million common stock part concluding phase company’s 4000 million return capital program terms asr agreements company paid aggregate 1146 million cash received initial delivery approximately 80 million shares december 5 2013 valued approximately 867 million based closing price company’s stock date delivery initially repurchased shares retired accounted reduction stockholder’s equity final number shares repurchased based company’s volumeweighted average stock price “vwap” less agreed upon discount term transactions purchase price shares settled pursuant holdback provision asr agreements approximately 279 million based closing price company’s stock december 5 2013 accounted forward contract indexed company’s common stock classified equity instrument recorded decrease additional paidin capital consolidated statements stockholders’ equity costs associated asr transactions recorded adjustment stockholder’s equity additionally company accounted asr transactions repurchases common stock purpose calculating earnings per share transactions expected completed june 30 2014 earlier option counterparties later certain circumstances terms asr agreements subject changes company enter announce certain types transactions company obligated make adjustment payment based vwap counterparties upon settlement company may elect satisfy obligation cash shares polycom’s common stock accumulated comprehensive income following table summarizes changes accumulated comprehensive income net tax component year ended december 31 2013 thousands tax effects shown separately impacts material see note 12 details gains losses net taxes reclassified accumulated comprehensive income net income related cash flow hedges line item net income affected reclassification gains losses related availableforsale securities reclassified interest income expense net consolidated statements operations net taxes stock option plans may 26 2011 stockholders approved 2011 equity incentive plan “2011 plan” reserved issuance 2011 plan 19800000 shares terminating remaining shares available grant 2004 equity incentive plan “2004 plan” date extent shares exceed 13636548 shares would returned 2004 plan 1996 stock incentive plan “1996 plan” result expiration cancellation forfeiture shares instead added reserve shares available 2011 plan terms 2004 plan 2011 plan options may granted prices lower fair market value date grant options granted expire seven years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares options granted 2013 2011 2012 company granted 479571 nonqualified stock option shares certain employees per terms option grant 50 options vest one year anniversary grant date remaining 50 vest second anniversary grant date weightedaverage estimated fair value nonqualified stock options granted 2012 445 per share performance shares restricted stock units compensation committee board directors may also grant performance shares restricted stock units “rsus” 2011 plan officers nonemployee directors certain employees component company’s broadbased equity compensation program performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria awards earned performance targets performance periods established direction compensation committee met number performance shares subject vesting determined end given performance period generally performance criteria deemed achieved performance shares vest one three years anniversary grant date rsus timebased awards generally vest period one three years date grant 2013 2012 2011 company granted performance shares certain employees executives contain market condition based total shareholder return tsr measure company’s relative performance nasdaq composite index performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 one hundred fifty percent 150 target award fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among nasdaq composite index companies performance period company also granted rsus 2013 2012 2011 fair value rsus based closing market price company’s common stock date award awards generally vest one three years equal annual installments anniversary date grant delivered common stock end vesting period stockbased compensation expense rsus recognized using graded vesting method 2013 2012 2011 company granted nonemployee directors annual awards rsus awards vest quarterly approximately one year date grant fair value awards closing market price company’s common stock date grant stockbased compensation expense awards amortized six months date grant due voluntary termination provisions contained underlying agreements activity plans year ended december 31 2013 follows 1 purposes table shares counted fungible basis full value award activity 2 approved stockholders june 5 2013 3 options expected vest result applying prevesting forfeiture rate assumption total outstanding options total pretax intrinsic value options exercised years ended december 31 2013 2012 2011 03 million 31 million 193 million respectively december 31 2013 2012 2011 525180 963873 1644733 outstanding options exercisable weighted average exercise price 1431 1322 1137 respectively options outstanding currently exercisable exercise price december 31 2013 follows aggregate intrinsic value stock options outstanding stock options exercisable december 31 2013 approximately 36000 32000 respectively december 31 2013 total compensation cost related nonvested stock options yet recognized 03 million expected recognized next 5 months weightedaverage basis following table summarizes changes unvested performance shares rsus nonemployee director rsus 2013 1 purposes table shares counted oneforone basis fungible share counting basis 2 includes 126666 restricted stock units granted nonemployee directors december 31 2013 approximately 651 million total unrecognized compensation cost related unvested awards expected recognized weightedaverage period 13 months total fair value shares vested 2013 2012 2011 442 million 434 million 366 million respectively employee stock purchase plan third quarter 2011 company revised administration employee stock purchase plan “espp” sixmonth offering purchase period twoyear offering period four sixmonth purchase periods current espp company grant stock purchase rights eligible employees twoyear offering period purchase dates end sixmonth purchase period january july participants lock purchase price per share beginning offering period upon plan enrollment stock price subsequent offering period enrollment date less lockin price espp reset feature automatically withdraws reenrolls participants new twoyear offering period espp permits participants increase decrease contribution elections end purchase period future purchase periods within offering period shares purchased employees’ payroll deductions currently maximum 15 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 25000 worth common stock one calendar year period 10000 shares common stock one purchase date december 31 2013 5259136 shares available issued espp 2013 2012 2011 2904287 shares 1867683 shares 1143614 shares respectively purchased average per share price 741 1124 1519 respectively company modified terms certain existing awards espp modifications occurred 2013 due increases contribution elections future purchase periods certain participants well result stock price new offering period date lower initial enrollment date triggered reset rollover feature espp resulted cumulative 14 million incremental expenses recognized vesting period approximately 79 million incremental expenses including modifications occurred 2012 recognized 2013 modifications occurred 2012 due stock price new offering period date lower initial enrollment date triggered reset rollover feature espp resulted cumulative 206 million incremental expenses 102 million recognized 2012 modifications 2011 valuation information stockbased compensation expense following table summarizes stockbased compensation expense recorded allocation within consolidated statements operations thousands stockbased compensation expense allocated segments separately maintained corporate level 2013 company capitalized approximately 02 million stockbased compensation costs accordance company’s accounting policy software development costs capitalized 2012 2011 valuation assumptions weightedaverage estimated fair value stock options granted 2012 445 per share company grant stock options 2013 2011 fair value employee stock option grant estimated date grant using blackscholes option valuation model based following assumptions estimated fair value per share employee stock purchase rights granted pursuant espp 2013 2012 2011 ranged 260 457 269 840 551 998 respectively estimated date grant using blackscholes option valuation model based following assumptions fair value stock options employee stock purchase rights recognized expense using graded vesting method company computed expected volatility assumption based blended volatility 50 historical volatility 50 implied volatility selection blended volatility assumption based upon company’s assessment blended volatility representative company’s future stock price trends weighs longer term historical volatility near term future implied volatility riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock options stock purchase rights dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock options represents weightedaverage period stock options expected remain outstanding determined based historical experience similar awards giving consideration contractual terms stockbased awards vesting schedules expectations future employee behavior influenced changes terms stockbased awards expected life employee stock purchase rights represents contractual terms underlying program stockbased compensation expense recognized consolidated statements operations based awards ultimately expected vest amounts reduced estimated forfeitures estimated time grant based company’s historical experience revised subsequent periods actual forfeitures differ estimates 14 employee benefits plans 401k plan company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions lesser 60 eligible compensation 17500 2013 subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year 2013 2012 2011 fiscal years maximum company cash match 2000 per participating employee per year polycom 401k plan provides employees projected age 50 older end year elected contribute polycom 401k plan may also make catchup contribution 5500 company’s contributions polycom 401k plan totaled approximately 30 million year 2013 2012 2011 15 income taxes income tax expense benefit consists following thousands included income tax benefit expense discontinued operations 2012 tax benefit 354 million recorded sale company’s ews business discussed note 3 income continuing operations income taxes categorized geographically follows thousands company’s tax provision continuing operations differs provision computed using statutory tax rates follows thousands 2012 company implemented global restructuring program designed accommodate trend toward software virtual based solutions versus traditional hardware distribution model part restructuring 388 million federal state taxes recorded 2012 financing global restructuring tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2013 company approximately 13 million tax effected net operating loss carryforwards 12 million tax effected capital loss carryforwards 165 million tax effected credit carryforwards net operating loss carryforwards 01 million credits relate acquisitions result limited amount recognized one year capital loss net operating loss carryforward assets tax credit carryforwards begin expire 2015 included net deferred tax asset balance 34 million valuation allowance 29 million relates research credits jurisdiction history credits excess taxable profits 05 million relates foreign tax credit carryforwards company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2013 cumulative amount earnings upon us income tax provided approximately 3044 million practicable determine income tax liability might incurred earnings repatriated us excess tax benefits associated stock option exercises credited stockholders’ equity reductions income taxes payable resulting exercise employee stock options employee stock programs credited stockholders’ equity approximately 51 million 137 million years ended december 31 2012 2011 respectively company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions following first year company israeli taxable income consideration tax losses carried forward tax rates 2013 2012 2011 91 50 38 respectively company successfully applied extension beneficial tax status 2012 granted tax rate reductions effective 2021 company realized tax savings 01 million 2013 48 million 2012 003 per diluted share 52 million 2011 003 per diluted share material impact earnings per share israel tax savings 2013 reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 effective 2008 company granted beneficial tax status singapore economic development board income earned singapore terms company eligible tax rate reduction 17 10 qualified income reduced tax rate conditional upon fulfillment terms stipulated singapore economic development board currently effective 2013 company granted extension beneficial tax status subsequent periods 2015 company expects reapply subsequent periods expiration tax savings realized 03 million 2013 06 million 2012 05 million 2011 tax holiday singapore material impact earnings per share addition beginning 2008 company’s subsidiary china granted highnew technology enterprise “hnte” recognition company’s tax rate reduced 25 15 tax savings realized 11 million 2013 001 per diluted share 07 million 2011 tax savings 2012 2014 company may qualify hnte status apply recognition total advisory services corporation “tasc” rate reduction would 25 15 tax holiday china material impact earnings per share unless noted also 2008 company’s subsidiary thailand granted regional headquarters status “rhs” rhs status statutory tax rate 20 reduced 10 2013 23 10 2012 30 10 2011 associated tax savings 02 million 2013 03 million 2012 05 million 2011 beneficial tax status thailand remain effect long company meets statutory requirements qualification tax holiday thailand material impact earnings per share year 2013 company recorded reserve reductions 24 million due expiration statutes limitation us foreign jurisdictions 2012 company recorded reserve reductions 100 million 08 million paid settlement multiyear state tax audit 57 million due reduction unrecognized tax benefits research credits acquired companies expiration statutes limitation us foreign jurisdictions also resulted reserve releases 35 million 2011 company recorded reserve releases 81 million 69 million due resolution multiyear tax audits expiration statutes limitation us foreign jurisdictions resulted reserve releases 08 million 04 million reserve releases due changes foreign exchange rates aggregate changes balance company’s gross unrecognized tax benefits follows periods indicated thousands included balance december 31 2013 220 million unrecognized tax benefits would affect income tax expense recognized company’s practice recognize interest andor penalties related income tax matters income tax expense december 31 2013 2012 company approximately 15 million accrued interest penalties related uncertain tax positions end 2014 uncertain tax positions may reduced result lapse applicable statutes limitations resolutions ongoing audits various jurisdictions company anticipates reduction 2014 approximate 09 million reserve releases would recorded adjustments tax expense period released company files income tax returns us federal jurisdiction various states foreign jurisdictions company longer subject us federal state income tax examinations tax authorities years prior 2010 foreign income tax matters foreign jurisdictions concluded years 2007 except hong kong singapore concluded years 2006 india closed years march 1 2004 brazil china israel concluded years 2008 france united kingdom concluded years 2009 16 net income per share following table sets forth computation basic diluted income loss per share thousands except pershare amounts basic diluted weighted average shares outstanding 2013 reflected 274 million shares common stock repurchased retired october 30 2013 pursuant tender offer program initial delivery 80 million shares common stock repurchased retired december 5 2013 pursuant asr agreements see note 13 information diluted shares outstanding include dilutive effect inthemoney employee equity share options unvested performance shares restricted stock units stock purchase rights espp dilutive effect equity awards calculated based average share price fiscal period using treasury stock method potentially dilutive shares excluded computation diluted net income loss per share effect antidilutive 17 business segment information company conducts business globally managed geographically three segments 1 americas consist north america cala reporting units 2 emea 3 apac segments determined accordance management views evaluates company’s business allocates resources based criteria outlined authoritative guidance effective january 1 2013 company began allocate certain service costs previously reported within americas segment emea apac segments order appropriately align costs among segments associated revenues prior periods reported also reclassified conform current year presentation segment revenue profit segment revenues attributed theater based ordering location customer significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting reported conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin defined internal reporting purposes determination segment contribution margins geographic segment revenues may differ slightly actual geographic revenues due internal revenue allocations company’s segments asset data exception gross accounts receivable reviewed management segment level financial information reportable geographical segment fiscal years ended december 31 2013 2012 2011 based company’s internal management system utilized company’s chief operating decision maker codm chief executive officer follows thousands united states china individually accounted 10 company’s revenues 2013 2012 2011 net revenues united states 5896 million 5830 million 5936 million years ended december 31 2013 2012 2011 respectively net revenues china 1473 million 1593 million 1615 million years ended december 31 2013 2012 2011 respectively 2013 2012 2011 one customer americas segment scansource communications accounted 16 14 respectively company’s revenues december 31 2013 scansource accounted 11 total gross accounts receivable single customer accounted 10 gross accounts receivable december 31 2012 2011 segment contribution margin includes geographic segment revenues less related cost sales direct sales marketing expenses management allocates infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing expenses research development expense general administrative costs legal accounting stockbased compensation costs transactionrelated costs amortization purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income expense net following tables set forth reconciliation segment information polycom consolidated totals thousands following table sets forth company’s revenues groups similar products services follows thousands company’s fixed assets net accumulated depreciation located following geographical areas thousands single country outside united states 10 total net fixed assets december 31 2013 2012 polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits exhibit description 21 purchase sale agreement registrant mobile devices holdings llc dated may 10 2012 incorporated herein reference exhibit 21 registrant’s quarterly report form 10q filed commission august 1 2012 22 amendment 1 purchase sale agreement registrant mobile devices holdings llc dated october 22 2012 incorporated herein reference exhibit 21 registrant’s quarterly report form 10q filed commission october 31 2012 31 restated certificate incorporation polycom inc incorporated herein reference exhibit 31 registrant’s current report form 8k filed commission june 2 2011 32 amended restated bylaws polycom inc amended effective december 2 2013 incorporated herein reference exhibit 31 registrant’s current report form 8k filed commission december 3 2013 41 reference made exhibits 31 32 42 specimen common stock certificate incorporated herein reference exhibit 42 registrant’s registration statement form s1 registration 33302296 filed commission march 12 1996 101 settlement agreement registrant mobile devices holdings llc dated october 22 2012 incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission october 31 2012 102 form indemnification agreement entered registrant directors officers incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission february 11 2008 103 polycom inc 2005 employee stock purchase plan amended incorporated herein reference exhibit 102 registrant’s current report form 8k filed commission june 2 2011 104 lease agreement registrant legacy iii sj america center llc dated august 4 2011 regarding space located 6001 america center drive san jose california incorporated herein reference exhibit 107 registrant’s quarterly report form 10q filed commission august 1 2011 105 summary arrangement registrant senior executive officers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission november 3 2003 106 polycom inc 2004 equity incentive plan may 27 2010 restatement incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission june 2 2010 107 form nonofficer employee stock option agreement incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission october 29 2004 108 form officer stock option agreement incorporated herein reference exhibit 103 registrant’s quarterly report form 10q filed commission october 29 2004 109 performance bonus plan amended incorporated reference exhibit 101 registrant’s annual report form 8k filed commission may 25 2012 1010 polycom inc management bonus plan amended incorporated reference exhibit 1021 registrant’s annual report form 10k filed commission february 29 2008 1011 offer letter andrew miller dated june 5 2009 incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission july 31 2009 1012 form amended change control severance agreement incorporated herein reference exhibit 103 registrant’s current report form 8k filed commission december 22 2008 exhibit description 1013 form performance share agreement officers incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission april 28 2011 1014 form performance share agreement nonofficers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission april 28 2011 1015 polycom inc 2011 equity incentive plan incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission june 7 2013 1016 form performance share agreement officers incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission october 31 2011 1017 form performance share agreement nonofficers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission october 31 2011 1018 form restricted stock unit agreement officers incorporated herein reference exhibit 103 registrant’s quarterly report form 10q filed commission october 31 2011 1019 form restricted stock unit agreement nonofficers incorporated herein reference exhibit 104 registrant’s quarterly report form 10q filed commission october 31 2011 1020 form restricted stock unit agreement nonemployee directors incorporated herein reference exhibit 105 registrant’s quarterly report form 10q filed commission october 31 2011 1021 offer letter tracey newell dated june 27 2011 incorporated herein reference exhibit 106 registrant’s quarterly report form 10q filed commission october 31 2011 1022 offer letter eric f brown dated january 19 2012 incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission may 1 2012 1023 vivu inc 2008 equity incentive plan amended incorporated herein reference exhibit 991 registrant’s registration statement form s8 registration 333177763 filed commission november 4 2011 1024 form performance share agreement officers incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission august 1 2012 1025 form performance share agreement nonofficers incorporated herein reference exhibit 102 registrant’s current report form 8k filed commission august 1 2012 1026 form restricted stock unit agreement officers incorporated herein reference exhibit 103 registrant’s current report form 8k filed commission august 1 2012 1027 form restricted stock unit agreement nonofficers incorporated herein reference exhibit 104 registrant’s current report form 8k filed commission august 1 2012 1028 form stock option agreement officers incorporated herein reference exhibit 105 registrant’s current report form 8k filed commission august 1 2012 1029 form stock option agreement nonofficers incorporated herein reference exhibit 106 registrant’s current report form 8k filed commission august 1 2012 1030 form restricted stock unit agreement nonemployee directors incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission april 30 2013 1031 separation agreement release sudhakar ramakrishna dated march 11 2013 incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission march 15 2013 1032 separation agreement release andrew miller dated july 22 2013 incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission july 23 2013 1033 offer letter kevin parker dated july 22 2013 incorporated herein reference exhibit 103 registrant’s quarterly report form 10q filed commission august 6 2013 exhibit description 1034 credit agreement dated september 13 2013 among registrant guarantors time party thereto morgan stanley senior funding inc administrative agent collateral agent incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission september 13 2013 1035 offer letter peter leav dated november 20 2013 incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission december 3 2013 10361 change control severance agreement peter leav effective december 2 2013 10371 issuer forward repurchase transaction agreement barclays bank plc acting agent barclays capital inc registrant dated december 4 2013 10381 issuer forward repurchase transaction agreement jp morgan securities llc agent jpmorgan chase bank national association london branch registrant dated december 4 2013 10391 letter dated january 21 2014 regarding additional relocation benefits peter leav 10401 polycom inc executive severance plan summary plan description amended restated effective december 2 2013 2111 subsidiaries registrant 2311 consent independent registered public accounting firm 2411 power attorney included pages 74 75 annual report form 10k 3111 certification president chief executive officer pursuant securities exchange act rules 13a14c 15d14a 3121 certification executive vice president finance administration chief financial officer pursuant securities exchange act rules 13a14c 15d14a 3211 certifications pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 101ins xbrl instance document 101sch xbrl taxonomy extension schema linkbase document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2014 2013 three years period ended december 31 2014 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc peter leav peter leav chief executive officer president director date february 20 2015 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint peter leav laura j durr either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date peter leav chief executive officer president director february 20 2015 peter leav principal executive officer laura j durr chief financial officer chief accounting officer executive vice president february 20 2015 laura j durr principal financial officer principal accounting officer betsy atkins director february 20 2015 betsy atkins martha h bejar director february 20 2015 martha h bejar robert j frankenberg director february 20 2015 robert j frankenberg john kelley director february 20 2015 john kelley scott mercer director february 20 2015 scott mercer william owens director february 20 2015 william owens kevin parker chairman board director february 20 2015 kevin parker polycom inc index consolidated financial statements page management’s report internal control financial reporting f report independent registered public accounting firm f consolidated balance sheets f consolidated statements operations f consolidated statements comprehensive income loss f consolidated statements stockholders’ equity f consolidated statements cash flows f notes consolidated financial statements f financial statement scheduleschedule ii management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures · pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company · provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company · provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate conducted evaluation effectiveness internal control financial reporting based framework internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission based results evaluation management concluded december 31 2014 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles effectiveness company’s internal control financial reporting december 31 2014 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page peter leav laura j durr peter leav president chief executive officer laura j durr chief financial officer chief accounting officer executive vice president february 20 2015 february 20 2015 report independent registered public accounting firm board directors stockholders polycom inc opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2014 december 31 2013 results operations cash flows three years period ended december 31 2014 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing page presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing page responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california february 20 2015 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data note result net loss continuing operations 2013 2012 potentially issuable common shares excluded diluted shares used computation earnings per share effect antidilutive accompanying notes integral part consolidated financial statements polycom inc consolidated statements comprehensive income loss thousands accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands consolidated statement cash flows 2012 includes combined cash flows continuing operations along discontinued operations accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business basis presentation description business polycom inc “polycom” “the company” leading global provider highquality easytouse communication solutions enable enterprise government education healthcare customers effectively collaborate distance time zones organizational boundaries company’s solutions built architectures enable unified video voice content communications polycom incorporated state delaware december 1990 trades nasdaq global select market ticker symbol “plcm” principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america “us gaap” consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity us gaap requires management make estimates assumptions affect amounts reported company’s consolidated financial statements accompanying notes consolidated financial statements actual results could differ estimates 2 summary significant accounting policies cash equivalents company considers highly liquid investments original maturities three months less time purchase cash equivalents investments classified shortterm longterm based remaining maturities company’s shortterm longterm investments december 31 2014 comprised us nonus government securities us agency securities corporate debt securities investments held company’s name limited number major financial institutions december 31 2014 2013 company’s investments classified availableforsale unrealized gains losses investments recorded separate component “accumulated comprehensive income” consolidated statements stockholders’ equity company reviews individual securities portfolio determine whether decline security’s fair value amortized cost basis otherthantemporary decline fair value considered otherthantemporary cost basis individual security written fair value new cost basis investments sold loss considered otherthantemporarily declined value amount loss writedown accounted realized loss included earnings specific identification method used determine cost securities disposed realized gains losses reflected “interest income expense net” consolidated statements operations allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability customers make required payments company regularly performs credit evaluations customers financial condition considers factors historical experience credit quality age accounts receivable balances geographic countryspecific risks economic conditions may affect customers ability pay allowance doubtful accounts reviewed quarterly adjusted necessary based companys assessment customers abilities pay financial conditions company’s customers deteriorate adversely affecting abilities make payments additional allowances would required inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records writedowns excess obsolete inventory equal difference carrying value inventory estimated future selling price based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets generally one seven years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful lives related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included “interest income expense net” consolidated statements operations goodwill represents excess purchase price fair value net tangible intangible assets acquired business combination goodwill amortized regularly reviewed potential impairment company reviews goodwill impairment annually fourth quarter calendar year whenever events changes circumstances indicate carrying amount goodwill may recoverable company performs initial qualitative assessment determine whether likely fair value reporting unit less carrying amount initial qualitative assessment company determines likely fair value reporting unit exceeds carrying value indication impairment testing performed however company concludes otherwise company required perform twostep impairment test assess potential impairment occurred measure impairment loss discussion goodwill impairment review see note 6 longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months six years purchased intangible assets determined indefinite useful lives amortized longlived assets including purchased intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset group assets eventual disposition company periodically assesses remaining useful lives longlived assets measurement impairment loss longlived assets management expects hold use based estimated fair value asset longlived assets disposed reported lower carrying amount estimated fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware products warranties generally start delivery date continue one year software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary deferred services revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company also provides managed services customers contractual arrangements company recognizes maintenance managed services revenues contracts life service contract officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations material indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liabilities environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company recognizes maintenance service revenues hardware software products ratably service periods one five years services upon completion installation professional services provided company’s products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts multipleelement arrangement includes sale one tangible product offerings one associated services offerings individually considered separate units accounting company allocates revenue element multipleelement arrangement based upon relative selling price deliverable applying relative selling price method company determines selling price deliverable using vendor specific objective evidence “vsoe” selling price exists third party evidence “tpe” selling price neither vsoe tpe selling price exist deliverable company uses best estimate selling price “esp” deliverable revenue allocated element recognized revenue recognition criteria met element vsoe established based company’s standard pricing discounting practices specific product service sold separately determining vsoe company requires substantial majority selling prices product service fall within reasonably narrow pricing range vsoe cannot established company attempts establish selling price element based tpe determined based competitor prices similar deliverables sold separately company unable establish selling price using vsoe tpe company uses esp allocation revenue arrangement esp represents price company would transact sale element sold standalone basis company determines esp product considering multiple factors including limited geographies market conditions competitive landscape pricing practices determination esp made based review historical sales price taking consideration company’s gotomarket strategy generally company uses historical net selling prices establish esp company regularly reviews basis establishing vsoe tpe esp sales returns channel partner programs incentives company’s contracts generally provide right return products however limited number contracts contain stock rotation rights company records estimate future returns based upon contractual rights historical returns experience company records estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives company also accrues coop marketing funds marketing expense company receives identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues research development software development costs company expenses research development costs incurred software development costs incurred prior establishment technological feasibility included research development costs incurred eligible material software development costs capitalized upon establishment technological feasibility general availability software products including direct labor related overhead costs well stockbased compensation company defined technological feasibility establishment working model typically occurs beta testing commences company capitalized approximately 51 million 24 million development costs 2014 2013 respectively software products marketed sold customers costs capitalized 2012 software development costs qualifying capitalization insignificant capitalized costs included “other assets” company’s consolidated balance sheets amortized productbyproduct basis using straightline method estimated product life generally three years ratio current revenues total projected product revenues whichever greater management believes capitalized software costs recoverable future gross profits generated products advertising company expenses advertising costs incurred advertising expense years ended december 31 2014 2013 2012 136 million 149 million 223 million respectively income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized company recognizes measures benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions company evaluates uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period change made could material impact company’s effective tax rate operating results company recognizes interest andor penalties related income tax matters income tax expense foreign currency translation assets liabilities nonus subsidiaries local currency functional currency translated us dollars exchange rates effect balance sheet date income expense accounts translated average exchange rates effect period resulting translation adjustments directly recorded separate component “accumulated comprehensive income” consolidated balance sheets foreign exchange transaction gains losses remeasurement nonfunctional currency denominated assets liabilities significant date included company’s consolidated statements operations part “interest income expense net” result sale company’s former enterprise wireless voice solutions “ews” business december 2012 see note 4 included wholly owned danish subsidiary danish krone functional currency company recognized associated currency translation adjustment balance 11 million effectively reduced gain sale discontinued operations following table sets forth change foreign currency translation adjustments reporting period balances december 31 thousands derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated qualifying cash flow hedge effective portion derivative’s gain loss initially reported separate component “accumulated comprehensive income” consolidated statements stockholders’ equity subsequently reclassified earnings hedged exposure affects earnings excluded ineffective portions gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk net income per share basic net income per share computed dividing net income weighted average number common shares outstanding period diluted net income per share reflects additional dilution potential issuance common stock issuable pursuant exercise stock options unvested restricted stock units performance shares potentially dilutive shares excluded computation diluted net income per share effect antidilutive fair value measurements company certain financial assets liabilities recorded fair value classified level 1 2 3 within fair value hierarchy fair values determined level 1 inputs utilize quoted prices unadjusted active markets identical assets liabilities company ability access fair values determined level 2 inputs utilize data points observable quoted prices similar assets active markets identical similar assets inactive markets interest rates yield curves fair values determined level 3 inputs utilize unobservable data points asset liability recurring basis company measures certain financial assets liabilities fair value including marketable securities foreign currency contracts company’s cash equivalents investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices identical assets active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy level 2 instruments priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data principal market company executes foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants company’s counterparties large money center banks regional banks company’s foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources spot rates interest rate differentials rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy addition company facilitiesrelated liabilities related restructuring calculated based discounted future lease payments less sublease assumptions nonrecurring fair value measurement classified level 3 measurement asc 820 key assumptions used valuation model include discount rates cash flow projections estimated sublease income assumptions involve significant judgment based management’s estimate current forecasted market conditions sensitive susceptible change carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due shortterm maturities stockbased compensation company’s stockbased compensation programs consist grants stockbased awards employees nonemployee directors including stock options restricted stock units performance shares well purchase rights pursuant company’s employee stock purchase plan “espp” stockbased compensation expense based estimated fair value awards charged operations requisite service period generally vesting period including effect forfeitures fair value stock option espp awards estimated grant date using blackscholes option valuation model fair value restricted stock units based market value company’s common stock date grant fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock relation target index companies performance period stockbased compensation cost performance shares market condition adjusted subsequent changes regardless level ultimate vesting recent pronouncements january 2015 financial accounting standards board “fasb” issued accounting standard update simplifies income statement classification removing concept extraordinary items us gaap result items unusual infrequent longer separately reported net tax continuing operations new standard effective fiscal years interim periods within fiscal years beginning december 15 2015 early adoption permitted company expect impact adoption standard consolidated financial statements august 2014 fasb issued accounting standard update related disclosures around going concern new standard provides guidance around management’s responsibility evaluate whether conditions events raise substantial doubt entity’s ability continue going concern within one year date financial statements issued new standard effective annual periods interim periods within annual periods beginning december 15 2016 early application permitted company expect impact adoption standard consolidated financial statements may 2014 fasb issued accounting standard update provides companies single model use accounting revenue arising contracts customers supersedes current revenue recognition guidance including industryspecific revenue guidance core principle model recognize revenue promised goods services transferred customers amount reflects consideration expected received goods services guidance effective annual reporting periods beginning december 15 2016 early adoption permitted guidance permits companies either apply requirements retrospectively prior periods presented apply requirements year adoption cumulative adjustment company yet selected transition method determined impact adoption consolidated financial statements july 2013 fasb issued accounting standard update clarifies unrecognized tax benefit presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward settlement required expected event uncertain tax position disallowed situations net operating loss carryforward similar tax loss tax credit carryforward available reporting date tax law applicable jurisdiction tax law jurisdiction require entity intend use deferred tax asset purpose unrecognized tax benefit presented financial statements liability combined deferred tax assets guidance effective prospectively reporting periods beginning december 15 2013 company adopted guidance 2014 adoption material impact consolidated financial statements 3 business combinations march 1 2013 company completed acquisition certain assets sentri inc “sentri” privatelyheld services company expertise microsoft technologies approximately 80 million cash net approximately 04 million cash released escrow account three months ended september 30 2013 result net working capital adjustment total purchase price allocated net tangible intangible assets based upon fair values march 1 2013 excess amount recorded goodwill financial results sentri included company’s consolidated financial statements date acquisition pro forma actual results operations acquisition material company’s consolidated financial statements 4 discontinued operations december 4 2012 company completed disposition net assets enterprise wireless voice solutions “ews” business mobile devices holdings llc delaware limited liability corporation company received cash consideration approximately 507 million resulting gain sale discontinued operations net taxes 354 million reflected consolidated financial statements year ended december 31 2012 2013 company recorded additional gain sale discontinued operations net taxes approximately 05 million result final net working capital adjustment accordance purchase agreement see note 18 discussion income tax benefit gain sale discontinued operations additional cash consideration 375 million payable next three years subject certain conditions including meeting certain agreedupon ebitdabased milestones fiscal 2014 2015 2016 conditions met fiscal year ended december 31 2013 additional cash consideration accounted gain sale discontinued operations net taxes realized realizable accordance accounting guidance company included results operations ews discontinued operations within consolidated statements operations periods presented summarized results discontinued operations follows thousands carrying amounts net assets sold december 4 2012 follows thousands company recorded gain 354 million 2012 sale discontinued operations net taxes calculated follows thousands 5 accounts receivable financing company financing agreement unrelated third party financing company “financing agreement” whereby offers distributors resellers direct indirect financing purchases company’s products services return company agrees pay financing company fee based predefined percentage transaction amount financed certain instances financing arrangements result transfer receivables without recourse financing company transaction meets applicable criteria accounting standards codification “asc” 860 accounted sale financial assets accounts receivable excluded balance sheet upon third party financing company’s payment remittance company certain legal jurisdictions arrangement fees involve maintenance services products bundled maintenance one price qualify sale financial assets accordance authoritative guidance accordingly accounts receivable related arrangements accounted secured borrowing accordance asc 860 company records liability cash received maintaining associated accounts receivable balance distributor reseller remits payment thirdparty financing company 2014 2013 2012 total transactions entered pursuant terms financing agreement approximately 1944 million 1234 million 283 million respectively 1360 million 1094 million 229 million respectively related transfer financial assets arrangement financing receivables accelerated collection company’s cash reduced credit exposure amount due financing company december 31 2014 2013 approximately 285 million 229 million respectively 202 million 216 million respectively related accounts receivable transferred included “trade receivables” company’s consolidated balance sheets fees incurred pursuant financing agreement approximately 26 million 18 million 04 million fiscal year ended december 31 2014 2013 2012 respectively fees recorded reduction revenues company’s consolidated statements operations 6 goodwill purchased intangibles software development costs polycom’s business organized around four major geographic theaters north america caribbean latin america “cala” europe middle east africa “emea” asia pacific “apac” considered reporting units fourth quarter 2014 company performed qualitative assessment four reporting units reporting unit company weighed relative impact factors specific reporting unit well industry macroeconomic factors reporting unit specific factors considered included results recent impairment tests well financial performance changes reporting units’ carrying amounts since recent impairment tests industry reporting units operate company considered growth projections independent sources significant developments transactions within industry 2014 applicable company concluded reporting unit specific industry factors either positive neutral impact fair value reporting units company also determined macroeconomic factors 2014 significant impact discount rates growth rates used valuation performed based qualitative assessment company concluded four reporting units likely fair value reporting unit exceeded carrying amount indication impairment result performing twostep impairment test unnecessary impairment charge required 2014 fourth quarter 2013 company determined based qualitative assessment testing necessary performed twostep goodwill impairment test assess potential impairment occurred measure impairment loss first step twostep test compares reporting unit’s fair value carrying amount fair value determined using income approach market approach weighted equally income approach fair value asset based value estimated cash flows asset expected generate future estimated future cash flows discounted rates ranging 12 14 percent arrive respective fair values market approach fair value unit based analysis financial data publicly traded companies engaged similar lines business carrying amount reporting unit determined assigning assets liabilities including goodwill reporting unit based first step test estimated fair value reporting unit exceeded respective carrying amount 30 therefore second step twostep goodwill impairment test deemed necessary impairment charge required 2013 following table summarizes changes carrying amount goodwill company’s segments periods presented thousands following table sets forth details company’s total purchased intangible assets capitalized software development costs following periods thousands company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely impairment charges related company’s purchased intangible assets recognized years ended december 31 2014 2013 2012 following table summarizes amortization expense recorded following periods thousands amortization expense purchased intangibles allocated company’s operating segments estimated future amortization expense purchased intangible assets december 31 2014 follows thousands 7 balance sheet details trade receivables net consist following thousands inventories consist following thousands prepaid expenses current assets consist following thousands property equipment net consist following thousands deferred revenues consist following thousands changes deferred service revenue follows thousands accrued liabilities consist following thousands changes warranty obligations follows thousands 8 restructuring costs 2014 2013 2012 company recorded 403 million 485 million 220 million respectively related restructuring actions included elimination relocation various positions consolidation elimination certain facilities actions generally intended streamline focus company’s efforts properly align company’s cost structure projected future revenue streams following table summarizes activity company’s restructuring reserves thousands 2014 management completed reduction elimination certain leased facilities elimination approximately six percent company’s global workforce actions designed better align expenses company’s revenue gross margin profile position company improved operating performance pursuant announcement january 2014 result company recorded approximately 286 million restructuring charges related idle facilities upon vacating facilities additions reserve include 23 million deferred rent expensed prior periods additionally company recorded approximately 118 million restructuring charges related severance employee benefits 2014 2013 management completed consolidation elimination certain facilities globally elimination approximately four percent company’s global workforce actions generally intended optimize organization manage expenses gain improve operating efficiencies profitability result company recorded approximately 382 million restructuring charges related idle facilities upon vacating facilities additions reserve include 28 million deferred rent expensed prior periods additionally 2013the company recorded approximately 102 million restructuring charges related severance employee benefits approximately 29 million restructuring charges associated changes company’s product roadmap focused products solutions greater revenue margin potential 2012 management completed consolidation elimination certain facilities order gain efficiencies including combination headquarters san jose santa clara california one new location san jose california result company recorded approximately 117 million restructuring charges related idle facilities 2012 additions reserve include 28 million deferred rent expensed prior periods additionally company recorded approximately 131 million charges primarily severance employee benefits related restructuring actions approved management october 2011 july 2012 action plan approved july 2012 resulted elimination approximately four percent global workforce enabling company focus resources product development product launch initiatives company expect remaining charges related actions material december 31 2014 restructuring reserve primarily comprised facilitiesrelated liabilities company calculated fair value facilitiesrelated liabilities based discounted future lease payments less sublease assumptions nonrecurring fair value measurement classified level 3 measurement asc 820 9 debt september 2013 company entered credit agreement “credit agreement” provides 2500 million term loan “term loan” maturing september 13 2018 “maturity date” bears interest company’s option either base rate plus spread 050 100 reserve adjusted libor rate plus spread 150 200 based company’s consolidated leverage ratio preceding four fiscal quarters company entered credit agreement conjunction purposes funding purchases company’s common stock pursuant 2500 million modified “dutch auction” selftender offer announced september 2013 see note 15 details term loan payable quarterly installments principal equal approximately 16 million began december 31 2013 remaining outstanding principal amount term loan due payable maturity date company may prepay term loan whole part time without premium penalty amounts repaid prepaid may reborrowed term loan secured substantially assets company certain domestic subsidiaries company guarantors credit agreement subject certain exceptions limitations credit agreement contains customary affirmative negative covenants financial covenants consisting consolidated fixed charge coverage ratio consolidated secured leverage ratio company compliance covenants december 31 2014 credit agreement also includes customary events default occurrence could result acceleration obligations credit agreement certain circumstances default interest rate apply obligations existence event default credit agreement per annum rate equal 200 applicable interest rate overdue principal 200 rate applicable base rate loans overdue amounts december 31 2014 weighted average interest rate term loan 204 accrued interest term loan 04 million current noncurrent portion outstanding term loan 63 million 2359 million respectively following table summarizes interest expense recognized related term loan periods presented thousands 10 investments company cash equivalents 4431 million 3926 million december 31 2014 2013 respectively cash equivalents generally consist cash banks well highly liquid investments money market funds time deposits savings accounts commercial paper corporate debt securities company’s us government securities mostly comprised direct us treasury obligations guaranteed us government us government agency securities mostly comprised us government agency instruments including mortgagebacked securities company’s nonus government securities mostly comprised nonus government instruments including state municipal foreign government securities ensure investment portfolio sufficiently diversified company’s investment policy requires certain percentage company’s portfolio invested types securities company’s corporate debt securities comprised publiclytraded domestic foreign corporate debt securities company purchase auction rate securities investments instruments meet high quality credit rating standards specified company’s investment policy guidelines also limit amount credit exposure one issuer type instrument december 31 2014 company’s longterm investments contractual maturities one two years addition company shortterm longterm investments debt securities summarized follows thousands unrealized losses following table summarizes fair value gross unrealized losses company’s investments including securities categorized cash equivalents unrealized losses aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2014 2013 thousands 2014 2013 investments company’s portfolio otherthan temporarily impaired company incur material realized net gains losses years ended december 31 2014 2013 2012 11 fair value measurements tables set forth company’s recurring fair value measurements periods presented thousands included shortterm derivative asset “prepaid expenses current assets” company’s consolidated balance sheets b included shortterm derivative liability “other accrued liabilities” company’s consolidated balance sheets transfers level 1 level 2 2014 2013 company hold investments classified level 3 december 31 2014 2013 addition company facilitiesrelated liabilities related restructuring calculated based discounted future lease payments less sublease assumptions nonrecurring fair value measurement classified level 3 measurement asc 820 see note 8 restructuring costs details company’s term loan credit agreement classified within level 2 instruments borrowings actively traded variable interest rate structure based upon market rates currently available company debt similar terms maturities see note 9 company elected record term loan fair value measured fair value disclosure purpose december 31 2014 2013 estimated fair value term loan approximately 2349 million 2475 million respectively using observable market inputs 12 business risks credit concentration company sells products services serve communications equipment market globally substantially company’s revenues derived sales products related services substantial majority company’s revenue valueadded resellers distributors service providers 2014 2013 2012 one channel partner scansource communications “scansource” accounted 17 16 14 respectively company’s total revenues company subcontracts manufacture products celestica inc “celestica” askey computer corporation “askey” foxconn technology group “foxconn” vtech holding ltd “vtech” thirdparty contract manufacturers company uses celestica’s facilities thailand china askey’s foxconn’s vtech’s facilities china disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases economic political difficulties countries asia reason disruption would harm business results operations company begun develop secondary manufacturing sources certain products celestica’s facilities currently manufacturer substantially products means company essentially solesourced manufacturing products celestica experiences interruption operations suffers capacity constraints may include constraints based production demands company grows business otherwise unable meet company’s current future production requirements company would experience delay inability ship products would immediate negative impact revenues moreover incapacitation company’s subcontractors’ manufacturing sites due destruction natural disaster similar events could result loss product inventory result foregoing company may able meet demand products could negatively affect revenues quarter disruption longer depending upon magnitude event could harm reputation company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses company’s credit risk may increase expansion polycom’s product offerings customers place larger orders initial stocking orders growth emerging markets assurance company’s credit loss experience remain near historical levels december 31 2014 2013 one customer scansource accounted 19 11 respectively total gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows charges 2014 2013 2012 13 commitments contingencies litigation sec investigation time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company faces increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality video voice data web conferencing products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company management believes loss arising matters probable reasonably estimated company record reserve loss additional information becomes available potential liability related matters assessed estimates revised based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s financial position results operations liquidity period unfavorable outcome occurs becomes probable potentially future periods 2014 company recorded 31 million “litigation reserves payments” consolidated statements operations related ongoing litigation matters yet settled july 23 2013 company announced andrew miller resigned positions chief executive officer president polycom’s board directors company disclosed mr miller’s resignation came review audit committee certain expense submissions mr miller audit committee found certain irregularities submissions mr miller accepted responsibility specifically audit committee determined mr miller improperly submitted personal expenses polycom payment business expenses submitted polycom false information nature purpose expenses sec investigation previously disclosed company cooperating enforcement staff securities exchange commission “sec” connection investigation focused mr millers expenses resignation discussions enforcement staff company recently made offer settlement resolve matter subject sec’s approval proposed settlement would entered polycom without admitting denying sec’s findings resolve alleged violations certain provisions securities exchange act 1934 related rules terms proposed settlement company would pay 750000 civil penalty fully reserved consolidated financial statements agree commit cause violations certain provisions securities exchange act 1934 related rules assurance proposal approved sec class action lawsuit july 26 2013 purported shareholder class action initially captioned neal v polycom inc et al case 313cv03476sc presently captioned nathanson v polycom inc et al case 313cv03476sc filed united states district court northern district california company certain current former officers directors december 13 2013 court appointed lead plaintiff approved lead liaison counsel february 24 2014 lead plaintiff filed first amended complaint amended complaint alleges january 20 2011 july 23 2013 company issued materially false misleading statements failed disclose information regarding company’s business operational compliance policies including respect former chief executive officer’s expense submissions company’s internal controls lawsuit alleges company’s financial statements materially false misleading amended complaint alleges violations federal securities laws seeks unspecified compensatory damages relief defendants filed motions dismiss amended complaint time unable estimate range reasonably possible loss relating securities class action derivative lawsuits august 21 2013 october 16 2013 two purported shareholder derivative suits captioned saraceni v miller et al case 513cv03880 donnelly v miller et al case 513cv04810 respectively filed united states district court northern district california certain company’s current former officers directors october 31 2013 two federal derivative actions consolidated polycom inc derivative litigation lead case 313cv03880 plaintiffs filed first amended complaint april 4 2014 january 13 2015 court dismissed first amended complaint granted plaintiffs leave file second amended complaint november 22 2013 december 13 2013 two purported shareholder derivative suits captioned ware v miller et al case 113cv256608 clem v miller et al case 113cv257664 respectively filed superior court california county santa clara certain company’s current former officers directors january 31 2014 two california state derivative actions consolidated polycom inc derivative shareholder litigation lead case 113cv256608 court stayed california state derivative litigation pending resolution federal derivative lawsuit federal securities class action federal california state consolidated derivative lawsuits purport assert claims behalf company named nominal defendant actions complaints including dismissed federal derivative complaint allege claims breach fiduciary duty unjust enrichment corporate waste allege certain defendants failed maintain adequate internal controls issued authorized issuance materially false misleading statements including respect company’s former chief executive officer’s expense submissions company’s internal controls complaints allege certain defendants approved unjustified separation agreement caused company repurchase stock artificially inflated prices complaints seek unspecified compensatory damages corporate governance reforms relief time unable estimate range reasonably possible loss relating derivative actions standby letters credit company standby letters credit totaling approximately 72 million 73 million december 31 2014 2013 respectively leases company leases certain office facilities equipment noncancelable operating leases expiring 2015 2023 december 31 2014 following future minimum lease payments due current lease obligations thousands addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2014 2013 2012 268 million 322 million 328 million respectively 14 foreign currency derivatives company maintains foreign currency risk management program designed reduce volatility company’s economic value effects unanticipated currency fluctuations international operations generate revenues costs denominated foreign currencies company’s policy hedge significant foreign currency revenues costs improve margin visibility reduce earnings volatility associated unexpected changes currency nondesignated hedges company hedges net foreign currency monetary assets liabilities monthly primarily resulting foreign currency denominated receivables payables foreign exchange forward contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates derivative instruments carried fair value changes fair value recorded interest income expense net derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset remeasurement gains losses hedged assets liabilities company executes nondesignated foreign exchange forward contracts primarily denominated euros british pounds israeli shekels brazilian reals chinese yuan japanese yen mexican pesos following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2014 outstanding nondesignated hedges foreign currency dollar amounts thousands following table shows effect company’s nondesignated hedges consolidated statements operations periods presented thousands cash flow hedges company’s foreign exchange risk management program objective reduce volatility company’s economic value unanticipated foreign currency fluctuations company designates forward contracts cash flow hedges foreign currency revenues expenses primarily chinese yuan euro british pound israeli shekel foreign exchange contracts carried fair value consolidated balance sheets maximum duration foreign exchange forward contracts exceed thirteen months speculation prohibited policy receive hedge accounting treatment cash flow hedging relationships formally designated hedge inception tested prospectively retrospectively ensure forward contracts highly effective offsetting changes future cash flows hedged transactions company records effective spot changes cash flow hedges “accumulated comprehensive income” reclassified revenue cost revenues operating expenses together hedged transaction time value forward contracts excluded effectiveness testing recorded “interest income expense net” life contract together ineffective portion hedge following tables show effect company’s derivative instruments designated cash flow hedges consolidated statements operations periods presented thousands year ended december 31 2014 2013 gains losses ineffective portion year ended december 31 2012 loss recorded ineffective portion gain recorded excluded time value portion hedge immaterial december 31 2014 company estimated values reported accumulated comprehensive income reclassified income within next twelve months event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would immediately reclassified “interest income expense net” consolidated statements operations years ended december 31 2014 2013 2012 gains losses following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2014 outstanding cash flow hedges carried fair value consolidated balance sheet foreign currency dollar amounts thousands estimates fair value based applicable commonly quoted prices prevailing financial market information december 31 2014 see note 11 additional information fair value measurements financial assets liabilities including derivative assets derivative liabilities measured fair value consolidated financial statements recurring basis following table sets forth company’s derivative instruments measured gross fair value reflected consolidated balance sheets periods presented thousands derivative assets recorded ”prepaid expenses current assets” consolidated balance sheets b derivative liabilities recorded ”other accrued liabilities” consolidated balance sheets offsetting derivative assets liabilities company entered master netting arrangements derivative counterparties arrangements afford right net derivative assets liabilities counterparty certain default provisions company right setoff amounts payable payee whether arising agreement result netting provisions company’s maximum amount loss derivative transactions due credit risk limited net amounts due counterparties derivative contracts although netting permitted currently company’s policy practice record derivative assets liabilities gross basis consolidated balance sheets following table sets forth offsetting derivative assets periods presented thousands following table sets forth offsetting derivative liabilities periods presented thousands 15 stockholders’ equity share repurchase programs time company’s board directors approved plans company may discretion purchase shares common stock open market privately negotiated transactions july 2014 company announced board directors approved new share repurchase plan “the 2014 repurchase plan” company may discretion purchase shares open market aggregate value 2000 million company expects execute new authorization next two years fund share repurchases cash hand future cash flow operations 2014 company purchased 38 million shares common stock cash 500 million open market received 15 million shares upon settlement accelerated share repurchase contracts discussed 2013 company purchased 452 million shares common stock cash 5023 million including shares purchased tender offer accelerated share repurchase programs discussed purchase price shares company’s stock repurchased recorded reduction stockholders’ equity excess cost treasury stock retired par value portion allocated additional paidin capital based calculated average price equity recorded charge retained earnings september 2013 company announced board directors authorized repurchase 4000 million approximately 20 percent company’s outstanding common stock “return capital program” 2500 million modified “dutch auction” selftender offer “tender offer” subsequent open market purchases privately negotiated transactions company funded program 1500 million cash 2500 million term loan see note 9 modified “dutch auction” selftender offer tender offer expired october 30 2013 company accepted payment aggregate 274 million shares common stock purchase price 1040 per share aggregate cost approximately 2854 million excluding fees expenses relating tender offer excess purchase price fair value date shares tendered material charge recorded company’s consolidated statements operations costs associated tender offer accounted adjustment stockholders’ equity accelerated share repurchase agreements december 4 2013 company entered separate accelerated share repurchase “asr” agreements two financial institutions repurchase aggregate 1146 million common stock part last phase company’s 4000 million return capital program terms asr agreements company paid aggregate 1146 million cash received initial delivery approximately 80 million shares december 2013 asr contracts settled june 2014 whereby company received additional 15 million shares upon settlement aggregate 95 million shares ultimately purchased asr program determined based company’s volumeweighted average stock price “vwap” less agreed upon discount term transactions total shares repurchased immediately retired upon delivery accounted reduction stockholders’ equity costs associated asr transactions recorded adjustment stockholders’ equity additionally company accounted asr transactions repurchases common stock purpose calculating earnings per share shares received accumulated comprehensive income following table summarizes changes accumulated comprehensive income net tax component periods presented thousands tax effects shown separately impacts material see note 14 details gains losses net taxes reclassified accumulated comprehensive income net income related cash flow hedges line item net income affected reclassification gains losses related availableforsale securities reclassified interest income expense net consolidated statements operations net taxes 16 stockbased employee benefit plans equity incentive plans polycom’s equity incentive plans provide among award types stock options restricted stock units performance shares granted employees nonemployee directors may 26 2011 stockholders approved 2011 equity incentive plan “2011 plan” reserved issuance 2011 plan 19800000 shares terminating remaining shares available grant 2004 equity incentive plan “2004 plan” date june 5 2013 shareholders approved addition 10500000 shares available shares issuance 2011 plan additionally extent shares exceed 13636548 shares would returned 2004 plan may 26 2011 account expiration cancellation forfeiture awards granted 1996 stock incentive plan 2004 plan shares instead added reserve shares available 2011 plan activity plans year ended december 31 2014 follows 1 purposes table shares counted fungible basis ie higher multiplier oneforone full value award activity 2 includes 25666 additional shares 39526 shares applying applicable fungible ratio resulting target performance 3 company acquired outstanding unvested stock options vivu inc 2008 equity incentive plan result acquisition vivu inc 2011 stock options terms 2004 plan 2011 plan options may granted prices lower fair market value date grant options granted expire seven years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares 2012 company granted 479571 nonqualified stock options certain employees weightedaverage estimated fair value options 445 per share per terms 2012 option grant 50 options vested one year anniversary grant date remaining 50 vested second anniversary grant date stock options granted 2014 2013 activity stock option plans year ended december 31 2014 follows stock options granted fully vested exercisable december 31 2014 total pretax intrinsic value options exercised years ended december 31 2014 2013 2012 02 million 03 million 31 million respectively options outstanding currently exercisable exercise price december 31 2014 follows december 31 2013 2012 525180 963873 outstanding options exercisable weighted average exercise price 1431 1322 respectively december 31 2014 total compensation cost related stock options yet recognized immaterial performance shares restricted stock units compensation committee board directors may also grant performance shares restricted stock units “rsus” 2011 plan officers nonemployee directors certain employees component company’s broadbased equity compensation program performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria awards earned performance targets performance periods established direction compensation committee met number performance shares subject vesting determined end given performance period generally performance criteria deemed achieved performance shares vest one three years anniversary grant date rsus timebased awards generally vest period one three years date grant company granted performance shares certain employees executives contain market condition based total shareholder return tsr measure company’s relative performance nasdaq composite index performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 one hundred fifty percent 150 target award fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among nasdaq composite index companies performance period company also granted rsus fair value rsus based closing market price company’s common stock date award awards delivered common stock end vesting period stockbased compensation expense rsus recognized using graded vesting method addition company granted nonemployee directors annual awards rsus awards vest quarterly approximately one year date grant fair value awards closing market price company’s common stock date grant stockbased compensation expense awards amortized six months date grant due voluntary termination provisions contained underlying agreements following table summarizes changes unvested performance shares rsus nonemployee director rsus 2014 1 purposes table shares counted oneforone basis fungible share counting basis 2 includes 25666 additional shares resulting target performance 3 includes 140000 restricted stock units granted nonemployee directors december 31 2014 approximately 375 million total unrecognized compensation cost related unvested awards expected recognized weightedaverage period one year total fair value shares vested 2014 2013 2012 461 million 442 million 434 million respectively employee stock purchase plan third quarter 2011 company revised administration employee stock purchase plan “espp” sixmonth offering purchase period twoyear offering period four sixmonth purchase periods current espp company grant stock purchase rights eligible employees twoyear offering period purchase dates end sixmonth purchase period january july participants lock purchase price per share beginning offering period upon plan enrollment stock price subsequent offering period enrollment date less lockin price espp reset feature automatically withdraws reenrolls participants new twoyear offering period espp permits participants increase decrease contribution elections end purchase period future purchase periods within offering period shares purchased employees’ payroll deductions currently maximum 15 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 25000 worth common stock one calendar year period 10000 shares common stock one purchase date december 31 2014 11315067 shares available issued espp total 2944069 shares 2904287 shares 1867683 shares purchased 2014 2013 2012 respectively average per share price 755 741 1124 respectively three months ended march 31 2012 september 30 2012 company modified terms certain existing awards espp result reset feature espp plan incurred resultant cumulative 206 million incremental expense recognized vesting term approximately 16 million 88 million 102 million incremental expense recognized 2014 2013 2012 respectively modification result reset feature espp plan occurred three months ended september 30 2013 resulting incremental expense material stockbased compensation expense following table summarizes stockbased compensation expense recorded allocation within consolidated statements operations periods presented thousands stockbased compensation expense allocated segments separately maintained corporate level stockbased compensation expense recognized consolidated statements operations based awards ultimately expected vest amounts reduced estimated forfeitures estimated time grant based company’s historical experience revised subsequent periods actual forfeitures differ estimates three months ended march 31 2014 company performed annual review assumptions resulted increase forfeiture rate effect change forfeiture rate decreased stockbased compensation expense approximately 18 million decreased company’s net loss approximately 14 million 001 per share three months ended march 31 2014 material impact remaining period 2014 additionally three months ended march 31 2014 company recorded benefit 21 million related actual forfeitures awards granted former officers benefit recorded remaining period 2014 valuation assumptions stock options stock purchase rights weightedaverage estimated fair value stock options granted 2012 445 per share company grant stock options 2014 2013 fair value stock option grant estimated date grant using blackscholes option valuation model based following assumptions estimated fair value per share employee stock purchase rights granted pursuant espp 2014 2013 2012 ranged 280 448 260 457 269 84 respectively estimated date grant using blackscholes option valuation model based following assumptions fair value stock options employee stock purchase rights recognized expense using graded vesting method company computed expected volatility assumption based blended volatility 50 historical volatility 50 implied volatility selection blended volatility assumption based upon company’s assessment blended volatility representative company’s future stock price trends weighs longer term historical volatility near term future implied volatility riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock options stock purchase rights dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock options represents weightedaverage period stock options expected remain outstanding determined based historical experience similar awards giving consideration contractual terms stockbased awards vesting schedules expectations future employee behavior influenced changes terms company’s stockbased awards expected life employee stock purchase rights represents contractual terms underlying program 17 employee benefit plan company defined contribution benefit plan section 401k internal revenue code “polycom 401k plan” covers substantially us employees eligible employees may elect contribute pretax amounts polycom 401k plan payroll deductions subject certain limitations company offer stock investment option polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year matching contributions 100 vested immediately company’s contributions polycom 401k plan totaled approximately 28 million 30 million 30 million 2014 2013 2012 respectively 18 income taxes income tax expense benefit consists following thousands included income tax benefit discontinued operations 2012 tax benefit 354 million recorded sale company’s ews business discussed note 4 income continuing operations income taxes categorized geographically follows thousands company’s tax provision continuing operations differs provision computed using statutory tax rates follows thousands 2012 company implemented global restructuring program designed accommodate trend toward software virtual based solutions versus traditional hardware distribution model part restructuring 388 million federal state taxes recorded 2012 financing global restructuring tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2014 company approximately 14 million tax effected net operating loss carryforwards 11 million tax effected capital loss carryforwards 212 million tax effected credit carryforwards net operating loss carryforwards 01 million credits relate acquisitions result limited amount recognized one year capital loss net operating loss carryforward assets tax credit carryforwards begin expire 2015 included net deferred tax asset balance 32 million valuation allowance 27 million relates research credits jurisdiction history credits excess taxable profits 05 million relates foreign tax credit carryforwards company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2014 cumulative amount earnings upon us income tax provided approximately 3396 million practicable determine income tax liability might incurred earnings repatriated us excess tax benefits associated stock option exercises credited stockholders’ equity reduction income taxes payable resulting exercise employee stock options employee stock programs credited stockholders’ equity approximately 51 million year ended december 31 2012 result certain employment capital investment actions company’s income certain foreign countries subject reduced tax rates portion tax incentives expire 2015 majority remaining tax incentives expire 2016 income tax benefit attributable tax incentives estimated 31 million 002 per share 2014 approximately 02 million based tax incentives expire end fiscal 2015 december 31 2013 december 31 2012 income tax benefits attributable tax incentives estimated 17 million 65 million 001 004 per share respective years 2014 2013 company recorded reserve reductions 09 million 24 million respectively due expiration statutes limitation us foreign jurisdictions 2012 company recorded reserve reductions 100 million 08 million paid settlement multiyear state tax audit 57 million due reduction unrecognized tax benefits research credits acquired companies expiration statutes limitation us foreign jurisdictions also resulted reserve releases 35 million aggregate changes balance company’s gross unrecognized tax benefits follows periods indicated thousands unrecognized tax benefits would affect income tax expense recognized company’s practice recognize interest andor penalties related income tax matters income tax expense december 31 2014 december 31 2013 company approximately 16 million 15 million respectively accrued interest penalties related uncertain tax positions end 2015 uncertain tax positions may reduced result lapse applicable statutes limitations resolutions ongoing audits various jurisdictions company anticipates reduction 2015 approximate 06 million reserve releases would recorded adjustments tax expense period released company files income tax returns us federal jurisdiction various states foreign jurisdictions company longer subject us federal state income tax examinations tax authorities years prior 2011 foreign income tax matters foreign jurisdictions concluded years 2008 except india concluded march 2007 brazil china israel singapore united kingdom concluded years 2009 france concluded years 2010 19 net income loss per share following table sets forth computation basic diluted net income loss per share thousands except pershare amounts basic diluted weighted average shares outstanding 2013 reflected 274 million shares common stock repurchased retired october 2013 pursuant tender offer program initial delivery 80 million shares common stock repurchased retired december 2013 pursuant asr agreements basic diluted weighted average shares outstanding 2014 reflected additional 15 million shares company received june 2014 upon settlement asr agreements see note 15 information diluted shares outstanding include dilutive effect inthemoney employee equity share options unvested performance shares restricted stock units stock purchase rights espp dilutive effect equity awards calculated based average share price fiscal period using treasury stock method potentially dilutive shares excluded computation diluted net income loss per share effect antidilutive 20 business segment information company conducts business globally managed geographically three segments 1 americas consist north america cala reporting units 2 emea 3 apac segments determined accordance management views evaluates company’s business allocates resources based criteria outlined authoritative guidance segment revenue profit segment revenues consist product service revenues product revenues attributed segment based ordering location customer internal reporting purposes determination segment contribution margins geographic segment product revenues may differ slightly actual geographic revenues due internal revenue allocations company’s segments service revenues generally attributed segment based enduser’s location services performed significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently segment contribution margin includes geographic segment revenues less related cost sales direct sales marketing expenses management allocates infrastructure costs facilities costs determining segment contribution margins contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing expenses research development expenses general administrative costs legal accounting stockbased compensation costs transactionrelated costs amortization purchased intangibles restructuring costs interest income expense net segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting reported conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin defined asset data exception gross accounts receivable reviewed management segment level financial information reportable geographical segment fiscal years ended december 31 2014 2013 2012 based company’s internal management system utilized company’s chief operating decision maker “codm” chief executive officer follows thousands united states china individually accounted 10 company’s revenues 2014 2013 2012 net revenues united states 5659 million 5896 million 5830 million years ended december 31 2014 2013 2012 respectively net revenues china 1447 million 1473 million 1593 million years ended december 31 2014 2013 2012 respectively 2014 2013 2012 one customer scansource accounted 17 16 14 respectively company’s revenues december 31 2014 2013 scansource accounted 19 11 respectively total gross accounts receivable following tables set forth reconciliation segment information polycom consolidated totals thousands following table sets forth company’s revenues groups similar products services follows thousands company’s fixed assets net accumulated depreciation located following geographical areas thousands single country outside united states 10 total net fixed assets december 31 2014 2013 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s1 index exhibits exhibit description 21 purchase sale agreement registrant mobile devices holdings llc dated may 10 2012 incorporated herein reference exhibit 21 registrant’s quarterly report form 10q filed commission august 1 2012 22 amendment 1 purchase sale agreement registrant mobile devices holdings llc dated october 22 2012 incorporated herein reference exhibit 21 registrant’s quarterly report form 10q filed commission october 31 2012 31 restated certificate incorporation polycom inc incorporated herein reference exhibit 31 registrant’s current report form 8k filed commission june 2 2011 32 amended restated bylaws polycom inc amended effective december 2 2013 incorporated herein reference exhibit 31 registrant’s current report form 8k filed commission december 3 2013 41 reference made exhibits 31 32 42 specimen common stock certificate incorporated herein reference exhibit 42 registrant’s registration statement form s1 registration 33302296 filed commission march 12 1996 101 lease agreement registrant legacy iii sj america center llc dated august 4 2011 regarding space located 6001 america center drive san jose california incorporated herein reference exhibit 107 registrant’s quarterly report form 10q filed commission august 1 2011 102 settlement agreement registrant mobile devices holdings llc dated october 22 2012 incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission october 31 2012 103 credit agreement dated september 13 2013 among registrant guarantors time party thereto morgan stanley senior funding inc administrative agent collateral agent incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission september 13 2013 104 issuer forward repurchase transaction agreement barclays bank plc acting agent barclays capital inc registrant dated december 4 2013 incorporated herein reference exhibit 1037 registrant’s annual report form 10k filed commission february 21 2014 105 issuer forward repurchase transaction agreement jp morgan securities llc agent jpmorgan chase bank national association london branch registrant dated december 4 2013 incorporated herein reference exhibit 1038 registrant’s annual report form 10k filed commission february 21 2014 106 polycom inc executive severance plan summary plan description amended restated effective december 2 2013 incorporated herein reference exhibit 1040 registrant’s annual report form 10k filed commission february 21 2014 107 form amended change control severance agreement incorporated reference exhibit 105 registrant’s quarterly report form 10q filed commission august 1 2014 108 form indemnification agreement entered registrant directors officers incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission february 11 2008 109 summary arrangement registrant senior executive officers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission november 3 2003 1010 performance bonus plan amended incorporated reference exhibit 101 registrant’s current report form 8k filed commission may 25 2012 exhibit description 1011 polycom inc management bonus plan amended incorporated reference exhibit 1021 registrant’s annual report form 10k filed commission february 29 2008 1012 vivu inc 2008 equity incentive plan amended incorporated herein reference exhibit 991 registrant’s registration statement form s8 registration 333177763 filed commission november 4 2011 1013 polycom inc 2004 equity incentive plan may 27 2010 restatement incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission june 2 2010 1014 polycom inc 2011 equity incentive plan incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission june 7 2013 1015 polycom inc 2005 employee stock purchase plan amended incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission june 11 2014 1016 form nonofficer employee stock option agreement incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission october 29 2004 1017 form officer stock option agreement incorporated herein reference exhibit 103 registrant’s quarterly report form 10q filed commission october 29 2004 1018 form performance share agreement officers incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission april 28 2011 1019 form performance share agreement nonofficers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission april 28 2011 1020 form performance share agreement officers incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission october 31 2011 1021 form performance share agreement nonofficers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission october 31 2011 1022 form restricted stock unit agreement officers incorporated herein reference exhibit 103 registrant’s quarterly report form 10q filed commission october 31 2011 1023 form restricted stock unit agreement nonofficers incorporated herein reference exhibit 104 registrant’s quarterly report form 10q filed commission october 31 2011 1024 form restricted stock unit agreement nonemployee directors incorporated herein reference exhibit 105 registrant’s quarterly report form 10q filed commission october 31 2011 1025 form performance share agreement officers incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission august 1 2012 1026 form performance share agreement nonofficers incorporated herein reference exhibit 102 registrant’s current report form 8k filed commission august 1 2012 1027 form restricted stock unit agreement officers incorporated herein reference exhibit 103 registrant’s current report form 8k filed commission august 1 2012 1028 form restricted stock unit agreement nonofficers incorporated herein reference exhibit 104 registrant’s current report form 8k filed commission august 1 2012 1029 form stock option agreement officers incorporated herein reference exhibit 105 registrant’s current report form 8k filed commission august 1 2012 1030 form stock option agreement nonofficers incorporated herein reference exhibit 106 registrant’s current report form 8k filed commission august 1 2012 1031 form restricted stock unit agreement nonemployee directors incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission april 30 2013 exhibit description 1032 form performance share agreement officers incorporated reference exhibit 102 registrant’s quarterly report form 10q filed commission may 1 2014 1033 form restricted stock unit agreement officers incorporated reference exhibit 103 registrant’s quarterly report form 10q filed commission may 1 2014 1034 offer letter andrew miller dated june 5 2009 incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission july 31 2009 1035 offer letter eric f brown dated january 19 2012 incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission may 1 2012 1036 separation agreement release sudhakar ramakrishna dated march 11 2013 incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission march 15 2013 1037 separation agreement release andrew miller dated july 22 2013 incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission july 23 2013 1038 offer letter peter leav dated november 20 2013 incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission december 3 2013 1039 change control severance agreement peter leav effective december 2 2013 incorporated herein reference exhibit 1036 registrant’s annual report form 10k filed commission february 21 2014 1040 letter dated january 21 2014 regarding additional relocation benefits peter leav incorporated herein reference exhibit 1039 registrant’s annual report form 10k filed commission february 21 2014 1041 release claims eric f brown dated april 15 2014 incorporated reference exhibit 101 registrant’s quarterly report form 10q filed commission may 1 2014 1042 offer letter michael frendo dated april 28 2014 incorporated reference exhibit 103 registrant’s quarterly report form 10q filed commission august 1 2014 1043 promotion letter laura j durr dated june 5 2014 incorporated reference exhibit 104 registrant’s quarterly report form 10q filed commission august 1 2014 2111 subsidiaries registrant 2311 consent independent registered public accounting firm 2411 power attorney included page 65 annual report form 10k 3111 certification president chief executive officer pursuant securities exchange act rules 13a14c 15d14a 3121 certification executive vice president finance administration chief financial officer pursuant securities exchange act rules 13a14c 15d14a 3211 certifications pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 101ins xbrl instance document 101sch xbrl taxonomy extension schema linkbase document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document exhibit description 101pre xbrl taxonomy extension presentation linkbase document indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2015 2014 three years period ended december 31 2015 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc peter leav peter leav chief executive officer president director date february 29 2016 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint peter leav laura j durr either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date peter leav chief executive officer president director february 29 2016 peter leav principal executive officer laura j durr chief financial officer chief accounting officer executive vice president february 29 2016 laura j durr principal financial officer principal accounting officer betsy atkins director february 29 2016 betsy atkins martha h bejar director february 29 2016 martha h bejar gary j daichendt chairman board director february 29 2016 gary j daichendt robert j frankenberg director february 29 2016 robert j frankenberg john kelley director february 29 2016 john kelley scott mercer director february 29 2016 scott mercer polycom inc index consolidated financial statements page management’s report internal control financial reporting f report independent registered public accounting firm f consolidated balance sheets f consolidated statements operations f consolidated statements comprehensive income loss f consolidated statements stockholders’ equity f consolidated statements cash flows f notes consolidated financial statements f financial statement scheduleschedule ii management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures · pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company · provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company · provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate conducted evaluation effectiveness internal control financial reporting based framework internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission based results evaluation management concluded december 31 2015 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles effectiveness company’s internal control financial reporting december 31 2015 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page peter leav laura j durr peter leav chief executive officer president director laura j durr chief financial officer chief accounting officer executive vice president february 29 2016 february 29 2016 report independent registered public accounting firm board directors stockholders polycom inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position polycom inc subsidiaries december 31 2015 december 31 2014 results operations cash flows three years period ended december 31 2015 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing page responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 2 consolidated financial statements company changed manner classifies deferred tax assets liabilities consolidated balance sheet 2015 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california february 29 2016 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data note result net loss continuing operations 2013 potentially issuable common shares excluded diluted shares used computation earnings per share effect antidilutive accompanying notes integral part consolidated financial statements polycom inc consolidated statements comprehensive income loss thousands accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business basis presentation description business polycom inc “polycom” “the company” leading global provider highquality easytouse collaboration solutions enable enterprise government education healthcare customers effectively collaborate distance time zones organizational boundaries company’s solutions built architectures enable unified video voice content communications polycom incorporated state delaware december 1990 trades nasdaq global select market ticker symbol “plcm” principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america “us gaap” consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany balances transactions eliminated use estimates preparation financial statements conformity us gaap requires management make estimates assumptions affect amounts reported company’s consolidated financial statements accompanying notes consolidated financial statements actual results could differ estimates 2 summary significant accounting policies cash equivalents company considers highly liquid investments original maturities three months less time purchase cash equivalents investments classified shortterm longterm based remaining maturities company’s shortterm longterm investments december 31 2015 comprised us nonus government securities us government agency securities corporate debt securities investments held company’s name limited number major financial institutions december 31 2015 2014 company’s investments classified availableforsale unrealized gains losses investments recorded separate component “accumulated comprehensive loss income” consolidated statements stockholders’ equity company reviews individual securities portfolio determine whether decline security’s fair value amortized cost basis otherthantemporary decline fair value considered otherthantemporary cost basis individual security written fair value new cost basis investments sold loss considered otherthantemporarily declined value amount loss writedown accounted realized loss included earnings specific identification method used determine cost securities disposed realized gains losses reflected “interest income expense net” consolidated statements operations allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability customers make required payments company regularly performs credit evaluations customers financial condition considers factors historical experience credit quality age accounts receivable balances geographic countryspecific risks economic conditions may affect customers ability pay allowance doubtful accounts reviewed quarterly adjusted necessary based companys assessment customer’s ability pay inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records writedowns excess obsolete inventory equal difference carrying value inventory estimated future selling price based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets generally one seven years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful lives related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included “interest income expense net” consolidated statements operations goodwill represents excess purchase price fair value net tangible intangible assets acquired business combination goodwill amortized regularly reviewed potential impairment company reviews goodwill impairment annually fourth quarter calendar year whenever events changes circumstances indicate carrying amount goodwill may recoverable company performs initial qualitative assessment determine whether likely fair value reporting unit less carrying amount initial qualitative assessment company determines likely fair value reporting unit exceeds carrying value indication impairment testing performed however company concludes otherwise company required perform twostep impairment test assess potential impairment occurred measure impairment loss discussion goodwill impairment review see note 5 longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months six years purchased intangible assets determined indefinite useful lives amortized longlived assets including purchased intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset group assets eventual disposition company periodically assesses remaining useful lives longlived assets measurement impairment loss longlived assets management expects hold use based estimated fair value asset longlived assets disposed reported lower carrying amount estimated fair value less costs sell warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware products warranties generally start delivery date continue one year software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary deferred services revenue company offers maintenance contracts sale products allow customers receive maintenance support addition contractual product warranty company also provides managed services customers contractual arrangements company recognizes maintenance managed services revenues contracts life service contract revenue recognition company recognizes revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured additionally company recognizes maintenance service revenues hardware software products ratably service periods one five years services upon completion implementation professional services provided company’s products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts multipleelement arrangement includes sale one tangible product offerings one associated services offerings individually considered separate units accounting company allocates revenue element multipleelement arrangement based upon relative selling price deliverable applying relative selling price method company determines selling price deliverable using vendor specific objective evidence “vsoe” selling price exists third party evidence “tpe” selling price neither vsoe tpe selling price exist deliverable company uses best estimate selling price “esp” deliverable revenue allocated element recognized revenue recognition criteria met element vsoe established based company’s standard pricing discounting practices specific product service sold separately determining vsoe company requires substantial majority selling prices product service fall within reasonably narrow pricing range vsoe cannot established company attempts establish selling price element based tpe determined based competitor prices similar deliverables sold separately company unable establish selling price using vsoe tpe company uses esp allocation revenue arrangement esp represents price company would transact sale element sold standalone basis company determines esp product considering multiple factors including limited geographies market conditions competitive landscape pricing practices determination esp made based review historical sales price taking consideration company’s gotomarket strategy generally company uses historical net selling prices establish esp company regularly reviews basis establishing vsoe tpe esp sales returns channel partner programs incentives company’s contracts generally provide right return products however contracts distributors contain stock rotation rights company records estimate future returns based upon contractual rights historical returns experience company records estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives company also accrues joint marketing funds marketing expense company receives separable identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues research development software development costs company expenses research development costs incurred software development costs incurred prior establishment technological feasibility included research development costs incurred eligible material software development costs capitalized upon establishment technological feasibility general availability software products including direct labor related overhead costs well stockbased compensation company defined technological feasibility establishment working model typically occurs beta testing commences company capitalized approximately 56 million 51 million 24 million development costs 2015 2014 2013 respectively software products marketed sold customers capitalized costs included “other assets” company’s consolidated balance sheets amortized productbyproduct basis using straightline method estimated product life generally three years ratio current revenues total projected product revenues whichever greater management believes capitalized software costs recoverable future gross profits generated products advertising company expenses advertising costs incurred advertising expense years ended december 31 2015 2014 136 million years 149 million year ended december 31 2013 income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized company recognizes measures benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions company evaluates uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period change made could material impact company’s effective tax rate operating results company recognizes interest andor penalties related income tax matters income tax expense foreign currency translation assets liabilities nonus subsidiaries local currency functional currency translated us dollars exchange rates effect balance sheet date income expense accounts translated average exchange rates effect period resulting translation adjustments directly recorded separate component “accumulated comprehensive loss income” consolidated balance sheets foreign exchange transaction gains losses remeasurement nonfunctional currency denominated assets liabilities included company’s consolidated statements operations part “interest income expense net” following table sets forth change foreign currency translation adjustments reporting period balances december 31 thousands derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated qualifying cash flow hedge effective portion derivative’s gain loss initially reported separate component “accumulated comprehensive income” consolidated statements stockholders’ equity subsequently reclassified earnings hedged exposure affects earnings excluded ineffective portions gain loss reported “interest income expense net” consolidated statements operations immediately derivative instruments designated cash flow hedges changes fair value recognized “interest income expense net” consolidated statements operations period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk share repurchase treasury shares company periodically repurchases shares market fair value treasury shares repurchased recorded cost reduction stockholders equity retirement repurchased shares common stock reduced amount equal number shares retired multiplied par value excess cost treasury stock retired par value allocated reduction accumulated deficit additional paidin capital net income per share basic net income per share computed dividing net income weighted average number common shares outstanding period diluted net income per share reflects additional dilution potential issuance common stock issuable pursuant exercise stock options unvested restricted stock units performance shares potentially dilutive shares excluded computation diluted net income per share effect antidilutive fair value measurements company certain financial assets liabilities recorded fair value classified level 1 2 3 within fair value hierarchy fair values determined level 1 inputs utilize quoted prices unadjusted active markets identical assets liabilities company ability access fair values determined level 2 inputs utilize data points observable quoted prices similar assets active markets identical similar assets inactive markets interest rates yield curves fair values determined level 3 inputs utilize unobservable data points asset liability recurring basis company measures certain financial assets liabilities fair value including marketable securities foreign currency contracts company’s cash equivalents investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices identical assets active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury government agencies corporate debt securities instruments generally classified within level 2 fair value hierarchy level 2 instruments priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data principal market company executes foreign currency contracts retail market overthecounter environment relatively high level price transparency company’s foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources spot rates interest rate differentials credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy addition company facilitiesrelated liabilities related restructuring calculated based discounted future lease payments less sublease assumptions nonrecurring fair value measurement classified level 3 measurement asc 820 key assumptions used valuation model include discount rates cash flow projections estimated sublease income assumptions involve significant judgment based management’s estimate current forecasted market conditions sensitive susceptible change carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable accounts payable current accrued liabilities approximate fair value due shortterm maturities stockbased compensation company’s stockbased compensation programs consist grants stockbased awards employees nonemployee directors including stock options restricted stock units performance shares well purchase rights pursuant company’s employee stock purchase plan “espp” stockbased compensation expense based estimated fair value awards charged operations requisite service period generally vesting period including effect forfeitures fair value stock option espp awards estimated grant date using blackscholes option valuation model fair value restricted stock units based market value company’s common stock date grant fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock relation target index peer companies performance period stockbased compensation cost performance shares market condition adjusted subsequent changes regardless level ultimate vesting recent accounting pronouncements january 2016 financial accounting standards board “fasb” issued accounting standard update amends current guidance related accounting equity investments financial liabilities fair value option presentation disclosure requirements financial instruments standard effective fiscal years beginning december 15 2017 interim periods within fiscal years beginning december 15 2017 company evaluating impact adopting standard consolidated financial statements disclosures november 2015 fasb issued accounting standard update simplifies presentation deferred income taxes balance sheet requiring deferred tax liabilities assets classified noncurrent lieu current requirement separating current noncurrent classification standard effective fiscal years beginning december 15 2016 interim periods within annual periods early adoption permitted standard applied either prospectively deferred tax liabilities assets retrospectively periods presented company prospectively adopted guidance 2015 reclassified current deferred tax liabilities assets noncurrent december 31 2015 consolidated balance sheets april 2015 fasb issued accounting standard update provides guidance whether cloud computing arrangement includes software license customer arrangement cloud computing arrangement includes software license customer account software license element arrangement consistent acquisition software licenses otherwise customer account arrangement service contract standard effective fiscal years interim periods within fiscal years beginning december 15 2015 early adoption permitted standard applied prospectively arrangements entered materially modified effective date retrospectively company prospectively adopted guidance 2015 adoption material impact company’s consolidated financial statements april 2015 fasb issued accounting standard update requires entity present debt issuance costs balance sheet direct deduction related debt liability rather asset amortization costs continue reported interest expense standard effective fiscal years interim periods within fiscal years beginning december 15 2015 early adoption permitted standard applied retrospectively prior period presented company adopted guidance 2015 reclassified approximately 20 million debt issuance costs related term loan deduction carrying amounts 2014 consolidated balance sheets may 2014 fasb issued accounting standard update provides companies single model use accounting revenue arising contracts customers supersedes current revenue recognition guidance including industryspecific revenue guidance core principle model recognize revenue promised goods services transferred customers amount reflects consideration expected received goods services august 2015 fasb issued accounting standard update defer effective date one year december 15 2017 interim annual reporting periods beginning date permitted early adoption standard original effective date december 15 2016 companies may use either full retrospective modified retrospective approach adopt standard company evaluating potential effects adoption standard consolidated financial statements 3 discontinued operations december 4 2012 company completed disposition net assets enterprise wireless voice solutions “ews” business mobile devices holdings llc delaware limited liability corporation 2013 company recorded additional gain sale discontinued operations net taxes approximately 05 million result final net working capital adjustment accordance purchase agreement additional cash consideration 250 million payable next two years subject certain conditions including meeting certain agreedupon ebitdabased milestones fiscal 2015 2016 conditions met fiscal year ended december 31 2014 additional cash consideration accounted gain sale discontinued operations net taxes realized realizable 4 accounts receivable financing company financing agreement unrelated third party financing company “financing agreement” whereby company offers distributors resellers direct indirect financing purchases company’s products services return company agrees pay financing company fee based predefined percentage transaction amount financed certain instances financing arrangements result transfer receivables without recourse financing company transaction meets applicable criteria accounting standards codification “asc” 860 accounted sale financial assets accounts receivable excluded balance sheet upon third party financing company’s payment remittance company certain legal jurisdictions arrangement fees involve maintenance services products bundled maintenance one price qualify sale financial assets accordance authoritative guidance accordingly accounts receivable related arrangements accounted secured borrowing accordance asc 860 company records liability cash received maintaining associated accounts receivable balance distributor reseller remits payment thirdparty financing company 2015 2014 2013 total transactions entered pursuant terms financing agreement approximately 2326 million 1944 million 1234 million respectively 1394 million 1360 million 1094 million respectively related transfer financial assets arrangement financing receivables accelerated collection company’s cash reduced credit exposure amount due financing company december 31 2015 2014 approximately 327 million 285 million respectively 221 million 202 million respectively related accounts receivable transferred included “trade receivables” company’s consolidated balance sheets fees incurred pursuant financing agreement approximately 34 million 26 million 18 million fiscal year ended december 31 2015 2014 2013 respectively fees recorded reduction revenues company’s consolidated statements operations 5 goodwill purchased intangibles software development costs polycom’s business organized around four major geographic theaters north america caribbean latin america “cala” europe middle east africa “emea” asia pacific “apac” considered reporting units fourth quarter 2015 company performed qualitative assessment four reporting units reporting unit company weighed relative impact factors specific reporting unit well industry macroeconomic factors reporting unit specific factors considered included results recent impairment tests well financial performance changes reporting units’ carrying amounts since recent impairment tests industry reporting units operate company considered growth projections independent sources significant developments transactions within industry 2015 applicable company also determined macroeconomic factors 2015 significant impact discount rates growth rates used valuation performed based qualitative assessment company concluded four reporting units likely fair value reporting unit exceeded carrying amount indication impairment result performing twostep impairment test unnecessary impairment charge recognized 2015 following table summarizes changes carrying amount goodwill company’s segments periods presented thousands following table sets forth details company’s total purchased intangible assets capitalized software development costs products sold following periods thousands company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely impairment charges related company’s purchased intangible assets recognized years ended december 31 2015 2014 2013 following table summarizes amortization expense recorded following periods thousands amortization expense purchased intangibles allocated company’s operating segments estimated future amortization expense purchased intangible assets december 31 2015 follows thousands 6 balance sheet details trade receivables net consist following thousands inventories consist following thousands prepaid expenses current assets consist following thousands property equipment net consist following thousands deferred revenue consist following thousands changes deferred service revenue 2015 2014 follows thousands changes deferred license revenue 2015 2014 follows thousands current accrued liabilities consist following thousands changes warranty obligations 2015 2014 follows thousands 7 restructuring costs 2015 2014 2013 company recorded 111 million 403 million 485 million respectively related restructuring actions included elimination relocation various positions consolidation elimination certain facilities actions generally intended streamline focus company’s efforts properly align company’s cost structure projected future revenue streams following table summarizes activity company’s restructuring reserves thousands 2015 management initiated reduction elimination certain leased facilities elimination approximately 11 percent company’s global workforce expected substantially complete third quarter 2016 actions designed improve profitability strategically investing accretive areas business leveraging outsource partners pursuant announcement december 2015 result fourth quarter 2015 company recorded approximately 94 million charges severance onetime employee benefits individuals impacted restructuring charges 2015 also include approximately 46 million severance payments certain employees approximately 27 million facilitiesrelated charges part discrete followon actions previous restructuring actions adjustments approximately 80 million related change assumptions used facilitiesrelated restructuring reserves estimate additions reserve include 16 million deferred rent expensed prior periods 2014 management completed reduction elimination certain leased facilities elimination approximately six percent company’s global workforce actions designed better align expenses company’s revenue gross margin profile position company improved operating performance pursuant announcement january 2014 result company recorded approximately 286 million restructuring charges related idle facilities upon vacating facilities additions reserve include 23 million deferred rent expensed prior periods additionally company recorded approximately 118 million restructuring charges related severance employee benefits 2014 2013 management completed consolidation elimination certain facilities globally elimination approximately four percent company’s global workforce actions generally intended optimize organization manage expenses gain improve operating efficiencies profitability result company recorded approximately 382 million restructuring charges related idle facilities upon vacating facilities additions reserve include 28 million deferred rent expensed prior periods additionally 2013 company recorded approximately 102 million restructuring charges related severance employee benefits approximately 29 million restructuring charges associated changes company’s product roadmap focused products solutions greater revenue margin potential company expects remaining charges related actions range 13 million 16 million primarily related emea reportable segment december 31 2015 restructuring reserve primarily comprised facilitiesrelated liabilities time reserve initially set company calculates fair value facilitiesrelated liabilities based discounted future lease payments less sublease assumptions extent actual sublease income timing subleasing facility associated cost recorded liability related subleasing terminating company’s lease obligations facilities different initial estimates company adjusts restructuring reserves period information becomes known nonrecurring fair value measurement classified level 3 measurement asc 820 8 debt september 2013 company entered credit agreement “credit agreement” provides 2500 million term loan “term loan” maturing september 13 2018 “maturity date” bears interest company’s option either base rate plus spread 050 100 reserve adjusted libor rate plus spread 150 200 based company’s consolidated leverage ratio preceding four fiscal quarters company entered credit agreement conjunction purposes funding purchases company’s common stock pursuant 2500 million modified “dutch auction” selftender offer announced september 2013 term loan payable quarterly installments principal equal approximately 16 million began december 31 2013 remaining outstanding principal amount term loan due payable maturity date company may prepay term loan whole part time without premium penalty amounts repaid prepaid may borrowed term loan secured substantially assets company certain domestic subsidiaries company guarantors credit agreement subject certain exceptions limitations credit agreement contains customary affirmative negative covenants financial covenants consisting consolidated fixed charge coverage ratio consolidated secured leverage ratio company compliance covenants december 31 2015 credit agreement also includes customary events default occurrence could result acceleration obligations credit agreement certain circumstances default interest rate apply obligations existence event default credit agreement per annum rate equal 200 applicable interest rate overdue principal 200 rate applicable base rate loans overdue amounts december 31 2015 weighted average interest rate term loan 23 accrued interest term loan 06 million current noncurrent portion outstanding term loan 57 million 2288 million net unamortized debt issuance costs 05 million 09 million respectively following table summarizes interest expense recognized related term loan periods presented thousands december 31 2015 future principal payments longterm debt including current portion summarized follows thousands 9 investments company cash equivalents 4351 million 4431 million december 31 2015 2014 respectively cash equivalents generally consist cash banks well highly liquid investments money market funds time deposits savings accounts commercial paper corporate debt securities company’s us government securities mostly comprised direct us treasury obligations guaranteed us government us government agency securities mostly comprised us government agency instruments including mortgagebacked securities company’s nonus government securities mostly comprised nonus government instruments including state municipal foreign government securities ensure investment portfolio sufficiently diversified company’s investment policy requires certain percentage company’s portfolio invested types securities company’s corporate debt securities comprised publiclytraded domestic foreign corporate debt securities company purchase auction rate securities investments instruments meet high quality credit rating standards specified company’s investment policy guidelines also limit amount credit exposure one issuer type instrument december 31 2015 company’s longterm investments contractual maturities one two years addition company shortterm longterm investments debt securities summarized follows thousands unrealized losses following table summarizes fair value gross unrealized losses company’s investments including investments categorized cash equivalents unrealized losses aggregated type investment instrument length time individual securities continuous unrealized loss position thousands 2015 2014 investments company’s portfolio otherthan temporarily impaired company incur material realized net gains losses years ended december 31 2015 2014 2013 10 fair value measurements tables set forth company’s recurring fair value measurements periods presented thousands included shortterm derivative asset “prepaid expenses current assets” consolidated balance sheets b included shortterm derivative liability “other accrued liabilities” consolidated balance sheets transfers level 1 level 2 2015 2014 investments classified level 3 december 31 2015 2014 addition company facilitiesrelated liabilities related restructuring calculated based discounted future lease payments less sublease assumptions nonrecurring fair value measurement classified level 3 measurement asc 820 see note 7 restructuring costs details company’s term loan credit agreement classified within level 2 instruments borrowings actively traded variable interest rate structure based upon market rates currently available company debt similar terms maturities company elected record term loan fair value measured fair value disclosure purpose december 31 2015 2014 estimated fair value term loan using observable market inputs approximately 2265 million 2349 million respectively 11 business risks credit concentration company sells products services serve communications equipment market globally substantially company’s revenues derived sales products related services substantial majority company’s revenue valueadded resellers distributors service providers 2015 2014 2013 one channel partner scansource communications “scansource” accounted 20 17 16 respectively company’s total revenues company subcontracts manufacture products celestica inc “celestica” askey computer corporation “askey” foxconn technology group “foxconn” pegatron corporation “pegatron” vtech holding ltd “vtech” thirdparty contract manufacturers company uses celestica’s facilities thailand laos askey’s foxconn’s pegatron’s vtech’s facilities china disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases economic political difficulties countries asia reason disruption would harm business results operations company relies limited number thirdparty contract manufacturers suppliers provide manufacturing services products substantially company’s video products manufactured celestica’s facilities thailand laos company’s third party contract manufacturers supply products facilities china company begun develop secondary manufacturing sources certain products currently manufacture supply substantial portion products essentially solesourced celestica although company works closely third party contract manufacturing partners manufacturing schedules future operating results could adversely affected contract manufacturer supplier unable meet production commitments reason moreover incapacitation company’s subcontractors’ manufacturing sites due destruction natural disaster similar events could result loss product inventory result foregoing company may able meet demand products could negatively affect revenues quarter disruption longer depending upon magnitude event could harm reputation company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses company’s credit risk may increase expansion polycom’s product offerings customers place larger orders initial stocking orders growth emerging markets assurance company’s credit loss experience remain near historical levels december 31 2015 2014 one customer scansource accounted 20 19 respectively total gross accounts receivable company dependent part continued ability hire assimilate retain highly qualified management personnel changes global organization changes key management personnel could cause disruption business negative impact company’s operating results operational areas transition company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated financial statements charges 2015 2014 2013 12 commitments contingencies litigation sec investigation time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company faces increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality video voice data web conferencing products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company management believes loss arising matters probable reasonably estimated company record reserve loss additional information becomes available potential liability related matters assessed estimates revised based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s consolidated financial statements however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s consolidated financial statements period unfavorable outcome occurs becomes probable potentially future periods 2015 incur litigation reserves payments related ongoing litigation matters 2014 company recorded 31 million “litigation reserves payments” consolidated statements operations related ongoing litigation matters yet settled july 23 2013 company announced andrew miller resigned positions chief executive officer president polycom’s board directors company disclosed mr miller’s resignation came review audit committee certain expense submissions mr miller audit committee found certain irregularities submissions mr miller accepted responsibility specifically audit committee determined mr miller improperly submitted personal expenses polycom payment business expenses submitted polycom false information nature purpose expenses sec investigation previously disclosed company cooperating enforcement staff securities exchange commission “sec” connection investigation focused mr millers expenses resignation march 31 2015 company entered settlement sec terms settlement company admit deny sec’s findings company paid 750000 civil penalty agreed commit cause violations certain provisions securities exchange act 1934 related rules class action lawsuit july 26 2013 purported shareholder class action initially captioned neal v polycom inc et al case 313cv03476sc presently captioned nathanson v polycom inc et al case 313cv03476sc filed united states district court northern district california company certain current former officers directors december 13 2013 court appointed lead plaintiff approved lead liaison counsel february 24 2014 lead plaintiff filed first amended complaint amended complaint alleged january 20 2011 july 23 2013 company issued materially false misleading statements failed disclose information regarding company’s business operational compliance policies including respect former chief executive officer’s expense submissions company’s internal controls lawsuit alleged company’s financial statements materially false misleading amended complaint alleged violations federal securities laws sought unspecified compensatory damages relief april 3 2015 court dismissed claims polycom granted plaintiffs leave amend lead plaintiff filed second complaint may 4 2015 polycom individual defendants moved dismiss second amended complaint june 26 2015 january 8 2016 parties executed settlement agreement proposed settlement subject contingent upon court’s review approval lead plaintiff moved preliminary approval settlement motion pending settlement approved settlement payment made polycom’s insurance carrier derivative lawsuits august 21 2013 october 16 2013 two purported shareholder derivative suits captioned saraceni v miller et al case 513cv03880 donnelly v miller et al case 513cv04810 respectively filed united states district court northern district california certain company’s current former officers directors october 31 2013 two federal derivative actions consolidated polycom inc derivative litigation lead case 313cv03880 january 13 2015 court dismissed operative complaint granted plaintiffs leave amend april 3 2015 court approved stipulation dismissing action prejudice entering judgment favor defendants november 22 2013 december 13 2013 two purported shareholder derivative suits captioned ware v miller et al case 113cv256608 clem v miller et al case 113cv257664 respectively filed superior court california county santa clara certain company’s current former officers directors january 31 2014 two california state derivative actions consolidated polycom inc derivative shareholder litigation lead case 113cv256608 court stayed california state derivative litigation pending resolution federal derivative lawsuit federal securities class action california state consolidated derivative lawsuit purports assert claims behalf company named nominal defendant actions original california state complaints allege claims breach fiduciary duty unjust enrichment corporate waste allege certain defendants failed maintain adequate internal controls issued authorized issuance materially false misleading statements including respect company’s former chief executive officer’s expense submissions company’s internal controls complaints allege certain defendants approved unjustified separation agreement caused company repurchase stock artificially inflated prices complaints seek unspecified compensatory damages corporate governance reforms relief time company unable estimate range reasonably possible loss relating derivative actions permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations material customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liabilities environmental obligations standby letters credit company standby letters credit totaling approximately 15 million 72 million december 31 2015 2014 respectively leases company leases certain office facilities equipment noncancelable operating leases expiring 2016 2023 december 31 2015 following future minimum lease payments due current lease obligations thousands addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2015 2014 2013 235 million 268 million 323 million respectively 13 foreign currency derivatives company maintains foreign currency risk management program designed reduce volatility company’s economic value effects unanticipated currency fluctuations international operations generate revenues costs denominated foreign currencies company’s policy hedge significant foreign currency revenues costs improve margin visibility reduce earnings volatility associated unexpected changes currency company also hedges net foreign currency monetary assets liabilities primarily resulting foreign currency denominated receivables payables foreign exchange forward contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates nondesignated hedges company executes nondesignated foreign exchange forward contracts foreign currency denominated receivables payables primarily denominated euros british pounds israeli shekels brazilian reals chinese yuan mexican pesos derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset remeasurement gains losses hedged assets liabilities following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2015 outstanding nondesignated hedges foreign currency dollar amounts thousands following table shows effect company’s nondesignated hedges consolidated statements operations thousands cash flow hedges company designates forward contracts cash flow hedges foreign currency revenues expenses primarily chinese yuan euro british pound israeli shekel foreign exchange contracts carried fair value consolidated balance sheets maximum duration foreign exchange forward contracts exceed 13 months following tables show effect company’s derivative instruments designated cash flow hedges consolidated statements operations periods presented thousands year ended december 31 2015 2014 2013 gains losses ineffective portion december 31 2015 company estimated values reported “accumulated comprehensive loss income” consolidated statement stockholders’ equity reclassified income within next twelve months event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would immediately reclassified “interest income expense net” consolidated statements operations ineffective portions gains losses cash flow hedges years ended december 31 2015 2014 2013 following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2015 outstanding cash flow hedges carried fair value consolidated balance sheet thousands estimates fair value based applicable commonly quoted prices prevailing financial market information december 31 2015 see note 10 additional information fair value measurements financial assets liabilities including derivative assets derivative liabilities measured fair value consolidated financial statements recurring basis following table sets forth company’s derivative instruments measured gross fair value reflected consolidated balance sheets thousands derivative assets recorded ”prepaid expenses current assets” consolidated balance sheets b derivative liabilities recorded ”other accrued liabilities” consolidated balance sheets offsetting derivative assets liabilities company entered master netting arrangements derivative counterparties arrangements afford right net derivative assets liabilities counterparty certain default provisions company right set amounts payable payee whether arising agreement result netting provisions company’s maximum amount loss derivative transactions due credit risk limited net amounts due counterparties derivative contracts although netting permitted currently company’s policy practice record derivative assets liabilities gross basis consolidated balance sheets following table sets forth offsetting derivative assets thousands following table sets forth offsetting derivative liabilities thousands 14 stockholders’ equity share repurchase programs time company’s board directors approved plans company may discretion purchase shares common stock open market privately negotiated transactions july 2014 company’s board directors approved share repurchase plan “the 2014 repurchase plan” company may discretion purchase shares open market aggregate value 200 million company expects fund share repurchases cash hand future cash flow operations 2015 2014 company purchased 70 million 38 million shares respectively common stock cash 900 million 500 million respectively open market repurchased shares common stock retired reclassified authorized unissued shares december 31 2015 company remaining authorization purchase additional 601 million worth shares open market 2014 repurchase plan 2014 company purchased 38 million shares common stock cash 500 million open market received 15 million shares upon settlement accelerated share repurchase contracts discussed 2013 company purchased 452 million shares common stock cash 5023 million including shares purchased tender offer accelerated share repurchase program discussed accelerated share repurchase agreements december 4 2013 company entered separate accelerated share repurchase “asr” agreements two financial institutions repurchase aggregate 1146 million common stock part last phase company’s 400 million return capital program terms asr agreements company paid aggregate 1146 million cash received initial delivery approximately 80 million shares december 2013 asr contracts settled june 2014 whereby company received additional 15 million shares upon settlement aggregate 95 million shares ultimately purchased asr program determined based company’s volumeweighted average stock price “vwap” less agreed upon discount term transactions total shares repurchased immediately retired upon delivery accounted reduction stockholders’ equity costs associated asr transactions recorded adjustment stockholders’ equity additionally company accounted asr transactions repurchases common stock purpose calculating earnings per share shares received accumulated comprehensive loss income following table summarizes changes accumulated comprehensive income net tax component thousands tax effects shown separately impacts material see note 13 details gains losses net taxes reclassified accumulated comprehensive loss income net income related cash flow hedges line item net income affected reclassification gains losses related availableforsale securities reclassified “interest income expense net” consolidated statements operations net taxes 15 stockbased employee benefit plans equity incentive plans polycom’s equity incentive plans provide among award types stock options restricted stock units performance shares granted employees nonemployee directors may 26 2011 stockholders approved 2011 equity incentive plan “2011 plan” reserved issuance 2011 plan 19800000 shares terminating remaining shares available grant 2004 equity incentive plan “2004 plan” date june 5 2013 shareholders approved addition 10500000 shares available shares issuance 2011 plan shareholders also approved additional 5600000 shares available shares issuance 2011 plan may 27 2015 finally extent shares exceed 13636548 shares would returned 2004 plan may 26 2011 account expiration cancellation forfeiture awards granted 1996 stock incentive plan 2004 plan shares instead added reserve shares available 2011 plan activity plans year ended december 31 2015 follows 1 purpose table shares counted fungible basis ie higher multiplier oneforone full value award activity 2 approved stockholders may 27 2015 3 includes 131212 additional shares 202066 shares applying applicable fungible ratio resulting target performance stock options terms 2004 plan 2011 plan options may granted prices lower fair market value date grant options granted expire seven years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares stock options granted 2015 2014 2013 activity stock option plans year ended december 31 2015 follows stock options granted fully vested exercisable december 31 2015 total pretax intrinsic value options exercised years ended december 31 2015 2014 2013 01 million 02 million 03 million respectively options outstanding currently exercisable exercise price december 31 2015 follows december 31 2015 168601 outstanding options exercisable weighted average exercise price 1161 december 31 2015 compensation cost related stock options recognized performance shares restricted stock units compensation committee board directors may also grant performance shares restricted stock units “rsus” 2011 plan officers nonemployee directors certain employees component company’s broadbased equity compensation program performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria awards earned performance targets performance periods established direction compensation committee met number performance shares subject vesting determined end given performance period generally performance criteria achieved performance shares vest period one three years anniversary grant date rsus timebased awards generally vest period one three years date grant company granted performance shares certain employees executives contain market condition based total shareholder return “tsr” measure company’s relative performance nasdaq composite index performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 one hundred fifty percent 150 target award fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among nasdaq composite index companies performance period company also granted rsus fair value rsus based closing market price company’s common stock date award awards delivered common stock end vesting period stockbased compensation expense rsus recognized using graded vesting method addition company granted rsus nonemployee directors awards vest quarterly approximately one year date grant fair value awards based closing market price company’s common stock date grant stockbased compensation expense awards amortized six months date grant due voluntary termination provisions contained underlying agreements following table summarizes changes unvested performance shares rsus nonemployee director rsus 2015 1 purposes table shares counted oneforone basis fungible share counting basis 2 includes 131212 additional shares resulting target performance 3 includes 135000 restricted stock units granted nonemployee directors december 31 2015 approximately 334 million total unrecognized compensation cost related unvested awards expected recognized weightedaverage period one year total fair value shares vested 2015 2014 2013 441 million 461 million 442 million respectively employee stock purchase plan current employee stock purchase plan “espp” company grant stock purchase rights eligible employees twoyear offering period purchase dates end sixmonth purchase period january july participants lock purchase price per share beginning offering period upon plan enrollment stock price subsequent offering period enrollment date less lockin price espp reset feature automatically withdraws reenrolls participants new twoyear offering period espp permits participants increase decrease contribution elections end purchase period future purchase periods within offering period shares purchased employees’ payroll deductions currently maximum 15 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 25000 worth common stock one calendar year period 10000 shares common stock one purchase date december 31 2015 9164481 shares available issued espp total 2150586 shares 2944069 shares 2904287 shares purchased 2015 2014 2013 respectively average per share price 989 755 741 respectively three months ended september 30 2015 company modified terms certain existing awards espp result reset feature espp plan incurred cumulative 71 million incremental expense recognized vesting term approximately 23 million incremental expense recognized 2015 stockbased compensation expense following table summarizes stockbased compensation expense recorded allocation within consolidated statements operations thousands stockbased compensation expense allocated segments centrally managed corporate level estimated fair value per share employee stock purchase rights granted pursuant espp 2015 2014 2013 ranged 256 427 280 448 260 457 respectively estimated date grant using blackscholes option valuation model based following assumptions fair value employee stock purchase rights recognized expense using graded vesting method company computed expected volatility assumption based blended volatility 50 historical volatility 50 implied volatility selection blended volatility assumption based upon company’s assessment blended volatility representative company’s future stock price trends weighs longer term historical volatility near term future implied volatility riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock purchase rights dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock purchase rights represents contractual terms underlying program 16 employee benefit plan company defined contribution benefit plan section 401k internal revenue code “polycom 401k plan” covers substantially us employees eligible employees may elect contribute pretax amounts polycom 401k plan payroll deductions subject certain limitations company offer stock investment option polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year matching contributions 100 vested one year employment company’s contributions polycom 401k plan totaled approximately 27 million 28 million 30 million 2015 2014 2013 respectively 17 income taxes income tax expense benefit consists following thousands income continuing operations income taxes categorized geographically follows thousands company’s tax provision continuing operations differs provision computed using statutory tax rates follows thousands tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2015 company approximately 63 million tax effected net operating loss carryforwards 03 million tax effected capital loss carryforwards 255 million tax effected credit carryforwards net operating loss carryforwards credits include 14 million 01 million respectively related acquisitions result limited amount recognized one year capital net operating loss carryforward assets begin expire 2019 tax credit carryforwards begin expire 2016 included net deferred tax asset balance 114 million valuation allowance 30 million relates research credits jurisdiction history credits excess taxable profits 84 million includes net operating losses 44 million deferred tax assets 40 million foreign subsidiary history losses company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2015 cumulative amount earnings upon us income tax provided approximately 4038 million practicable determine income tax liability might incurred earnings repatriated us excess tax benefits associated stock option exercises credited stockholders’ equity reduction income taxes payable resulting exercise employee stock options employee stock programs credited stockholders’ equity approximately 27 million year ended december 31 2015 result certain employment capital investment actions company’s income certain foreign countries subject reduced tax rates portion tax incentives expired 2015 majority remaining tax incentives expire 2016 however company intends reapply incentives income tax benefit attributable tax incentives estimated 39 million 003 per share 2015 27 million based tax incentives set expire end fiscal 2016 income tax benefit attributable tax incentives estimated 31 million 002 per share 2014 approximately 02 million based tax incentives expired end fiscal 2015 december 31 2013 income tax benefits attributable tax incentives estimated 17 million 101 per share july 27 2015 united states tax court issued taxpayerfavorable opinion respect altera corporation altera’s litigation internal revenue service “irs” litigation relates treatment sharebased compensation expense intercompany costsharing arrangement taxpayer’s foreign subsidiary fiscal years 2004 2007 opinion court accepted altera’s position excluding sharebased compensation cost sharing arrangement concluded related irs regulations invalid tax court opinion complete tax computation finalized entered tax court record tax court granted irs additional extension time submit tax computation november 12 2015 upon finalization tax computation tax court opinion became final irs 90 day period appeal irs appeals could take two three years litigation resolved company currently unable predict irs appeal opinion outcome appeal adjustment consolidated financial statement recorded time company monitoring case material impact consolidated financial statements potential favorable implications company’s costsharing arrangement 2015 2014 2013 company recorded reserve reductions 19 million 09 million 24 million respectively due expiration statutes limitation us foreign jurisdictions aggregate changes balance company’s gross unrecognized tax benefits follows periods indicated thousands unrecognized tax benefits would affect income tax expense recognized company’s practice recognize interest andor penalties related income tax matters income tax expense december 31 2015 december 31 2014 company approximately 19 million 16 million respectively accrued interest penalties related uncertain tax positions end 2016 uncertain tax positions may reduced result lapse applicable statutes limitations resolutions ongoing audits various jurisdictions company anticipates reduction 2016 approximate 13 million reserve releases would recorded adjustments tax expense period released company files income tax returns us federal jurisdiction various states foreign jurisdictions company longer subject us federal state income tax examinations tax authorities years prior 2012 foreign income tax matters foreign jurisdictions concluded years 2009 except india concluded march 2007 brazil china israel singapore concluded years 2010 france concluded years 2011 18 net income loss per share following table sets forth computation basic diluted net income loss per share thousands except pershare amounts basic diluted weighted average shares outstanding 2013 reflected 274 million shares common stock repurchased retired october 2013 pursuant tender offer program initial delivery 80 million shares common stock repurchased retired december 2013 pursuant asr agreements basic diluted weighted average shares outstanding 2014 reflected additional 15 million shares company received june 2014 upon settlement asr agreements diluted shares outstanding include dilutive effect inthemoney employee equity share options unvested performance shares restricted stock units stock purchase rights espp dilutive effect equity awards calculated based average share price fiscal period using treasury stock method potentially dilutive shares excluded computation diluted net income loss per share effect antidilutive 19 business segment information company conducts business globally managed geographically three segments 1 americas consists north america cala reporting units 2 emea 3 apac segments determined accordance management views evaluates company’s business allocates resources based criteria outlined authoritative guidance segment revenue profit segment revenues consist product service revenues product revenues attributed segment based ordering location customer internal reporting purposes determination segment contribution margins geographic segment product revenues may differ slightly actual geographic revenues due internal revenue allocations company’s segments service revenues generally attributed segment based enduser’s location services performed significant portion segment’s expenses arises shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently segment contribution margin includes geographic segment revenues less related cost sales direct revenues marketing expenses cost revenues consists standard cost revenues include items warranty expense royalties allocation overhead expenses including facilities costs well stockbased compensation costs amortization purchased intangible assets management allocates infrastructure costs facilities costs determining segment contribution margins contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing expenses research development expenses general administrative costs legal accounting stockbased compensation costs transactionrelated costs amortization purchased intangibles restructuring costs interest income expense net segment data results reportable segments derived directly polycom’s management reporting system management measures performance segment based several metrics including contribution margin defined asset data exception gross accounts receivable reviewed management segment level financial information reportable geographical segment fiscal years ended december 31 2015 2014 2013 based company’s internal management system utilized company’s chief operating decision maker “codm” chief executive officer follows thousands united states china individually accounted 10 company’s revenues 2015 2014 2013 net revenues united states 5280 million 5659 million 5896 million years ended december 31 2015 2014 2013 respectively net revenues china 1434 million 1447 million 1473 million years ended december 31 2015 2014 2013 respectively 2015 2014 2013 one customer scansource accounted 20 17 16 respectively company’s revenues december 31 2015 2014 scansource accounted 20 19 respectively total gross accounts receivable following tables set forth reconciliation segment information polycom consolidated totals thousands following table sets forth company’s revenues groups similar products services follows thousands company’s fixed assets net accumulated depreciation located following geographical areas thousands single country outside united states 10 total net fixed assets december 31 2015 2014 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s1 index exhibits exhibit description 21 purchase sale agreement registrant mobile devices holdings llc dated may 10 2012 incorporated herein reference exhibit 21 registrant’s quarterly report form 10q filed commission august 1 2012 22 amendment 1 purchase sale agreement registrant mobile devices holdings llc dated october 22 2012 incorporated herein reference exhibit 21 registrant’s quarterly report form 10q filed commission october 31 2012 31 restated certificate incorporation polycom inc incorporated herein reference exhibit 31 registrant’s current report form 8k filed commission june 2 2011 32 amended restated bylaws polycom inc amended effective february 16 2016 incorporated herein reference exhibit 31 registrant’s current report form 8k filed commission february 17 2016 41 reference made exhibits 31 32 42 specimen common stock certificate incorporated herein reference exhibit 42 registrant’s registration statement form s1 registration 33302296 filed commission march 12 1996 101 lease agreement registrant legacy iii sj america center llc dated august 4 2011 regarding space located 6001 america center drive san jose california incorporated herein reference exhibit 107 registrant’s quarterly report form 10q filed commission august 1 2012 102 credit agreement dated september 13 2013 among registrant guarantors time party thereto morgan stanley senior funding inc administrative agent collateral agent incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission september 13 2013 103 polycom inc executive severance plan summary plan description amended restated effective july 30 2014 incorporated herein reference exhibit 106 registrant’s quarterly report form 10q filed commission august 1 2014 104 form amended restated change control severance agreement incorporated reference exhibit 101 registrant’s quarterly report form 10q filed commission october 29 2015 105 form indemnification agreement entered registrant directors officers incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission february 11 2008 106 summary arrangement registrant senior executive officers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission november 3 2003 107 performance bonus plan amended incorporated reference exhibit 101 registrant’s current report form 8k filed commission may 25 2012 108 polycom inc management bonus plan amended incorporated reference exhibit 1021 registrant’s annual report form 10k filed commission february 29 2008 109 polycom inc 2011 equity incentive plan amended restated may 27 2015 incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission june 1 2015 1010 polycom inc 2005 employee stock purchase plan amended incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission june 11 2014 1011 form performance share agreement officers incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission october 31 2011 1012 form performance share agreement nonofficers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission october 31 2011 1013 form restricted stock unit agreement officers incorporated herein reference exhibit 103 registrant’s quarterly report form 10q filed commission october 31 2011 exhibit description 1014 form restricted stock unit agreement nonofficers incorporated herein reference exhibit 104 registrant’s quarterly report form 10q filed commission october 31 2011 1015 form restricted stock unit agreement nonemployee directors incorporated herein reference exhibit 105 registrant’s quarterly report form 10q filed commission october 31 2011 1016 form performance share agreement officers incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission august 1 2012 1017 form performance share agreement nonofficers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission august 1 2012 1018 form restricted stock unit agreement officers incorporated herein reference exhibit 103 registrant’s quarterly report form 10q filed commission august 1 2012 1019 form restricted stock unit agreement nonofficers incorporated herein reference exhibit 104 registrant’s quarterly report form 10q filed commission august 1 2012 1020 form stock option agreement officers incorporated herein reference exhibit 105 registrant’s quarterly report form 10q filed commission august 1 2012 1021 form stock option agreement nonofficers incorporated herein reference exhibit 106 registrant’s quarterly report form 10q filed commission august 1 2012 1022 form restricted stock unit agreement nonemployee directors incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission april 30 2013 1023 form performance share agreement officers incorporated reference exhibit 102 registrant’s quarterly report form 10q filed commission may 1 2014 1024 form restricted stock unit agreement officers incorporated reference exhibit 103 registrant’s quarterly report form 10q filed commission may 1 2014 1025 form performance share agreement officers incorporated herein reference exhibit 101 registrant’s quarterly report form 10q filed commission april 30 2015 1026 form performance share agreement officers incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission july 31 2015 1027 form performance share agreement nonofficers incorporated herein reference exhibit 103 registrant’s quarterly report form 10q filed commission july 31 2015 1028 form restricted stock unit agreement officers incorporated herein reference exhibit 104 registrant’s quarterly report form 10q filed commission july 31 2015 1029 form restricted stock unit agreement nonofficers incorporated herein reference exhibit 105 registrant’s quarterly report form 10q filed commission july 31 2015 1030 offer letter peter leav dated november 20 2013 incorporated herein reference exhibit 101 registrant’s current report form 8k filed commission december 3 2013 1031 amended restated change control severance agreement peter leav effective august 6 2015 incorporated herein reference exhibit 102 registrant’s quarterly report form 10q filed commission october 29 2015 2111 subsidiaries registrant 2311 consent independent registered public accounting firm 2411 power attorney included page 65 annual report form 10k 3111 certification president chief executive officer pursuant securities exchange act rules 13a14c 15d14a 3121 certification executive vice president finance administration chief financial officer pursuant securities exchange act rules 13a14c 15d14a 3211 certifications pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 101ins xbrl instance document exhibit description 101sch xbrl taxonomy extension schema linkbase document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document indicates management contract compensatory plan arrangement 1 filed herewithitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements see item 8 polycom inc consolidated financial statements december 31 2012 2011 three years period ended december 31 2012 2 financial statement schedule see item 8 following financial statement schedule filed part report schedule iivaluation qualifying accounts schedules listed omitted information required set forth therein applicable shown financial statements notes thereto 3 exhibits see item 15b b exhibits filed incorporated reference report exhibits listed accompanying index exhibits c financial statement schedules see items 8 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized polycom inc andrew miller andrew miller chief executive officer president director date february 14 2013 power attorney know persons presents undersigned officers directors polycom inc delaware corporation hereby constitute appoint andrew miller eric f brown either lawful attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute substitutes may cause done virtue hereof witness whereof undersigned executed power attorney date indicated pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated polycom inc index consolidated financial statements page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements comprehensive income consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplementary financial data unaudited s1 financial statement scheduleschedule ii s2 management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes policies procedures • pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company • provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company • provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate conducted evaluation effectiveness internal control financial reporting based framework internal controlintegrated framework issued committee sponsoring organizations treadway commission based results evaluation management concluded december 31 2012 internal control financial reporting effective provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles effectiveness company’s internal control financial reporting december 31 2012 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors stockholders polycom inc opinion consolidated financial statements listed index appearing page present fairly material respects financial position polycom inc subsidiaries december 31 2012 december 31 2011 results operations cash flows three years period ended december 31 2012 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing page presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing page responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san jose california february 14 2013 polycom inc consolidated balance sheets thousands except share per share data accompanying notes integral part consolidated financial statements polycom inc consolidated statements operations thousands except per share data shares retrospectively adjusted reflect twoforone split effective july 1 2011 see note 1 notes consolidated financial statements note earnings per share amount continuing operations discontinued operations net income presented calculated individually may sum due rounding differences result net loss continuing operations 2012 potentially issuable common shares excluded diluted shares used computation earnings per share period effect antidilutive accompanying notes integral part consolidated financial statements polycom inc consolidated statements comprehensive income thousands accompanying notes integral part consolidated financial statements polycom inc consolidated statements stockholders’ equity thousands except share data shares retrospectively adjusted reflect twoforone split effective july 1 2011 see note 1 notes consolidated financial statements accompanying notes integral part consolidated financial statements polycom inc consolidated statements cash flows thousands consolidated statements cash flows include combined cash flows continuing operations along discontinued operations end period cash equivalents balances december 31 2011 2010 include 200 cash included within “assets held sale” consolidated balance sheets accompanying notes integral part consolidated financial statements polycom inc notes consolidated financial statements 1 description business summary significant accounting policies description business polycom leading global provider highquality easytouse communications solutions enable enterprise government education healthcare customers effectively collaborate distance time zones organizational boundaries solutions built architectures enable unified video voice content communications principles accounting consolidation consolidated financial statements prepared accordance accounting principles generally accepted united states america consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany balances transactions eliminated certain prior year amounts reclassified conform current year presentation result discontinued operations discussed note 3 use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported company’s financial statements accompanying notes actual results could differ estimates cash equivalents company considers highly liquid investments original maturities 90 days less time purchase cash equivalents allowance doubtful accounts company maintains allowance doubtful accounts estimated losses resulting inability company’s customers make required payments company reviews allowance doubtful accounts quarterly assessing individual accounts receivable specific aging amount balances pooled basis based historical collection experience financial conditions company’s customers deteriorate adversely affecting abilities make payments additional allowances would required delinquent account balances written management determined likelihood collection remote investments company’s shortterm longterm investments december 31 2012 comprised us nonus government securities us agency securities corporate debt securities investments classified shortterm longterm based remaining maturities investments held company’s name limited number major financial institutions december 31 2012 2011 company’s investments classified availableforsale carried fair value based quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency end reporting period unrealized gains losses recorded separate component accumulated comprehensive income loss consolidated statements stockholders’ equity investments sold loss considered temporarily declined value charge earnings recorded specific identification method used determine cost securities disposed realized gains losses reflected interest income expense net strategic reasons company made various investments private companies private company investments carried cost written estimated market value indications exist investments temporarily declined value company reviews investments impairment events changes circumstances indicate impairment may exist makes appropriate reductions carrying value necessary company evaluates number factors including price per share recent financing expected timing additional financing liquidation preferences historical forecasted earnings cash flows cash burn rate technological feasibility investee company’s products assess whether investment potentially impaired inventories valued lower cost market cost computed firstin firstout fifo basis consideration given obsolescence excessive levels deterioration factors evaluating net realizable value company records writedowns excess obsolete inventory equal difference carrying value inventory estimated future selling price based upon assumptions future product lifecycles product demand market conditions point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment stated cost less accumulated depreciation amortization depreciation provided using straightline method estimated useful lives assets estimated useful lives one thirteen years amortization leasehold improvements computed using straightline method shorter remaining lease term estimated useful lives related assets typically three thirteen years disposals capital equipment recorded removing costs accumulated depreciation accounts gains losses disposals included results operations goodwill amortized regularly reviewed potential impairment september 2011 fasb issued authoritative guidance goodwill impairment testing provides entities option perform qualitative assessment determine whether impairment testing necessary company elected early adopt guidance 2011 adoption impact company’s consolidated financial statements identification measurement goodwill impairment involves estimation fair value company’s reporting units estimated fair value reporting units based best information available date assessment primarily incorporate management assumptions expected future cash flows future cash flows affected changes industry market conditions rate extent anticipated synergies cost savings realized newly acquired entities impairment longlived assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets range several months six years purchased intangible assets determined indefinite useful lives amortized longlived assets including intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount assets may recoverable determination recoverability based estimate undiscounted future cash flows resulting use asset group assets eventual disposition measurement impairment loss longlived assets management expects hold use based estimated fair value asset longlived assets disposed reported lower carrying amount estimated fair value less costs sell guarantees warranty company provides estimated costs product warranties time revenue recognized specific terms conditions warranties vary depending upon product sold case hardware manufactured company warranties generally start date purchase continue one three years depending product purchased software products generally carry 90day warranty date purchase company’s liability warranties software products provide corrected copy portion software found substantial compliance agreed upon specifications factors affect company’s warranty obligation include product failure rates material usage service delivery costs incurred correcting product failures company assesses adequacy recorded warranty liabilities every quarter makes adjustments liability necessary changes warranty obligation period included component “other accrued liabilities” consolidated balance sheets follows thousands deferred services revenue company offers maintenance contracts sale products allow customers receive service support addition subsequent expiration contractual product warranty company also provides managed services customers contractual arrangements company recognizes maintenance managed services revenue contracts life service contract deferred services revenue 1565 million 1365 million shortterm included component “deferred revenue” december 31 2012 2011 respectively 853 million 757 million longterm included component “longterm deferred revenue” december 31 2012 2011 respectively consolidated balance sheets changes 2012 2011 follows thousands cost providing services years ended december 31 2012 2011 2010 1378 million 984 million 788 million respectively officer director indemnifications permitted required delaware law maximum extent allowable law company certain obligations indemnify current former officers directors certain events occurrences officer director serving company’s request capacity maximum potential amount future payments company could required make indemnification obligations unlimited however company director officer insurance policy mitigates company’s exposure enables company recover portion future amounts paid result company’s insurance policy coverage company believes estimated fair value indemnification obligations material indemnifications customary company’s industry provided local law us jurisdictions company’s standard contracts provide remedies customers defense settlement payment judgment intellectual property claims related use products time company indemnifies customers combinations loss expense liability arising various trigger events related sale use products services addition time company also provides protection customers claims related undiscovered liabilities additional product liabilities environmental obligations revenue recognition company recognizes revenue persuasive evidence arrangement exists title risk loss transferred product payment contingent upon performance installation service obligations price fixed determinable collectability reasonably assured instances final acceptance product service specified customer revenue deferred acceptance criteria met additionally company recognizes maintenance service revenues hardware software products ratably service periods one five years services upon completion installation professional services provided company’s products integrated software essential functionality equipment additionally company provides unspecified software upgrades enhancements related products maintenance contracts entity required allocate revenue arrangement using estimated selling price “esp” deliverables vendor first vendorspecific objective evidence “vsoe” selling price secondly thirdparty evidence “tpe” selling price allocate revenue based relative selling price method multipleelement arrangement includes sale one tangible product offerings one associated services offerings individually considered separate units accounting determination company’s units accounting change early adoption revenue recognition guidance company allocates revenue element multipleelement arrangement based upon relative selling price deliverable applying relative selling price method company determines selling price deliverable using vsoe selling price exists tpe selling price neither vsoe tpe selling price exist deliverable company uses best estimate selling price deliverable revenue allocated element recognized revenue recognition criteria met element vsoe established based company’s standard pricing discounting practices specific product service sold separately determining vsoe company requires substantial majority selling prices product service fall within reasonably narrow pricing range vsoe cannot established company attempts establish selling price element based tpe determined based competitor prices similar deliverables sold separately company unable establish selling price using vsoe tpe company uses esp allocation arrangement consideration esp represents price company would transact sale element sold standalone basis company determines esp product considering multiple factors including limited geographies market conditions competitive landscape pricing practices determination esp made based review historical sales price taking consideration company’s gotomarket strategy generally company uses historical net selling prices establish esp company regularly reviews basis establishing vsoe tpe esp company expect material impact near term changes vsoe tpe esp channel partner programs incentives company records estimated reductions revenues channel partner programs incentive offerings including special pricing agreements promotions volumebased incentives company also accrues coop marketing funds marketing expense company receives identifiable benefit exchange reasonably estimate fair value identifiable benefit received otherwise recorded reduction revenues research development expenditures research development expenditures charged operations incurred consist primarily compensation costs including stockbased compensation outside services expensed materials depreciation allocation overhead expenses including facilities costs software development costs incurred prior establishment technological feasibility included research development expensed incurred technological feasibility established material software development costs capitalized cost amortized straightline basis estimated product life ratio current revenues total projected product revenues whichever greater date period achieving technological feasibility company defined establishment working model typically occurs beta testing commences general availability software short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs advertising company expenses production costs advertising expenses incurred production costs advertising consist primarily trade shows online media magazine radio advertisements agency fees direct production costs advertising expense years ended december 31 2012 2011 2010 268 million 213 million 209 million respectively income taxes company accounts income taxes liability method recognizes deferred tax assets liabilities based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected affect taxable income valuation allowances established reduce deferred tax assets based available objective evidence likely benefit assets realized company recognizes measures benefits uncertain tax positions using twostep approach first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely tax position sustained upon audit including resolution related appeals litigation processes tax positions likely sustained upon audit second step measure tax benefit largest amount 50 likely realized upon settlement significant judgment required evaluate uncertain tax positions company evaluates uncertain tax positions quarterly basis evaluations based upon number factors including changes facts circumstances changes tax law correspondence tax authorities course audits effective settlement audit issues changes recognition measurement uncertain tax positions could result material increases decreases income tax expense period change made could material impact company’s effective tax rate operating results company recognizes interest andor penalties related income tax matters income tax expense foreign currency translation assets liabilities nonus subsidiaries local currency functional currency translated us dollars exchange rates effect balance sheet date income expense accounts translated average exchange rates effect period resulting translation adjustments directly recorded separate component “accumulated comprehensive income loss” foreign exchange transaction gains losses remeasurement nonfunctional currency denominated assets liabilities significant date included company’s results operations part “interest income expense net” result sale company’s former enterprise wireless voice solutions “ews” business see note 3 notes consolidated financial statements december 2012 included wholly owned danish subsidiary danish krone functional currency company recognized associated currency translation adjustment balance 11 million effectively reduced gain sale discontinued operations following table sets forth change foreign currency translation adjustments reporting period balances december 31 thousands derivative instruments accounting changes fair value derivative depends intended use derivative resulting designation derivative instrument designated qualifying cash flow hedge effective portion derivative’s gain loss initially reported separate component accumulated comprehensive income loss subsequently reclassified earnings hedged exposure affects earnings excluded ineffective portions gain loss reported earnings immediately derivative instruments designated cash flow hedges changes fair value recognized earnings period change company hold issue derivative financial instruments speculative trading purposes company enters derivatives counterparties among largest us banks ranked assets order minimize credit risk computation net income per share basic net income per share computed dividing net income weighted average number common shares outstanding period diluted net income per share reflects additional dilution potential issuances common stock issuable pursuant exercise stock options warrants outstanding shares common stock subject repurchase potentially dilutive shares excluded computation diluted net income per share effect antidilutive june 1 2011 company announced board directors approved twoforone stock split company’s outstanding shares common stock effected form 100 stock dividend “the stock split” stock split entitled stockholder record close business june 15 2011 receive one additional share common stock every one share common stock owned date payable company’s transfer agent july 1 2011 par value company’s common stock maintained presplit amount 00005 per share consolidated financial statements notes thereto including share per share data restated stock split occurred earliest period presented fair value measurements company certain financial assets liabilities recorded fair value classified level 1 2 3 within fair value hierarchy fair values determined level 1 inputs utilize quoted prices unadjusted active markets identical assets liabilities company ability access fair values determined level 2 inputs utilize data points observable quoted prices similar assets active markets identical similar assets inactive markets interest rates yield curves fair values determined level 3 inputs utilize unobservable data points asset liability carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable accounts payable accrued liabilities approximate fair value due shortterm maturities stockbased compensation company’s stockbased compensation programs consist grants stockbased awards employees nonemployee directors including stock options restricted stock units performance shares well company’s employee stock purchase plan estimated fair value awards charged income requisite service period generally vesting period fair value stock option employee stock purchase plan “espp” awards estimated grant date using blackscholes option valuation model fair value restricted stock units based market value company’s common stock date grant compensation expense restricted stock units including effect forfeitures recognized applicable service period fair value performance shares based market price company’s stock date grant assumes performance criteria met target payout level achieved compensation cost adjusted subsequent changes outcome performancerelated conditions award vests fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock relation target index companies performance period compensation cost performance shares market condition adjusted subsequent changes regardless level ultimate vesting business combinations company recognizes separately goodwill fair value assets acquired liabilities assumed goodwill acquisition date measured excess consideration transferred net acquisition date fair values assets acquired liabilities assumed company uses best estimates assumptions part purchase price allocation process value assets acquired liabilities assumed acquisition date company’s estimates inherently uncertain subject refinement result measurement period may one year acquisition date company may record adjustments retrospectively fair value assets acquired liabilities assumed corresponding offset goodwill upon conclusion measurement period final determination fair value assets acquired liabilities assumed whichever comes first subsequent adjustments recorded company’s consolidated statements operations addition uncertain tax positions taxrelated valuation allowances assumed connection business combination initially estimated acquisition date company reevaluates items quarterly records adjustments company’s preliminary estimates goodwill provided company within measurement period company continues collect information order determine estimated fair values date acquisition subsequent measurement period company’s final determination tax allowance’s estimated value changes uncertain tax positions tax related valuation allowances affect company’s provision income taxes company’s consolidated statements operations recent pronouncements december 2011 fasb issued accounting standard update requires disclosure effect potential effect offsetting arrangements company’s financial position well enhanced disclosure rights setoff associated company’s recognized assets liabilities january 2013 fasb issued another accounting standard update clarify scope standard issued december 2011 accounting standard updates effective reporting periods beginning january 1 2013 company believe material impact consolidated financial statements upon adoption guidance july 2012 fasb issued accounting standard update intended simplify entity tests indefinitelived intangible assets goodwill impairment providing entities option perform qualitative assessment determine whether impairment testing necessary accounting standard update effective company beginning first quarter fiscal 2013 company believe material impact consolidated financial statements upon adoption guidance 2 business combinations 2011 company completed three business combinations march 21 2011 company completed acquisition outstanding shares accordent technologies inc “accordent” privatelyheld video content management delivery solutions company july 27 2011 company acquired assets hewlettpackard visual collaboration “hpvc” business including halo products managed services business may 2012 company completed purchase certain additional equipment hp financing services approximately 50 million agreed conjunction hpvc acquisition october 14 2011 company acquired vivu inc “vivu” privatelyheld video collaboration software company total net cash paid 2011 business combinations 1636 million plus noncash consideration 02 million company included financial results accordent hpvc vivu consolidated financial statements respective dates acquisition pro forma results operations acquisitions completed years presented effects acquisitions individually aggregate material company’s financial results following table summarizes allocation total purchase consideration assets liabilities assumed 2011 acquisition dates thousands goodwill deductible tax purposes goodwill generated company’s business combinations completed year ended december 31 2011 primarily attributable expected synergies fair values intangible assets calculated based income cost approaches amortized eight months six years acquisitionrelated costs expensed incurred 2012 company made adjustments material preliminary purchase price allocation giving consideration final valuation reports obtaining information regarding among things asset valuations liabilities assumed revisions preliminary estimates 3 discontinued operations may 10 2012 company entered purchase sale agreement “purchase agreement” mobile devices holdings llc delaware limited liability corporation “mobile devices” pursuant company would divest enterprise wireless voice solutions “ews” business affiliate sun capital partners inc october 22 2012 purchase agreement amended “amended purchase agreement” per terms amended purchase agreement mobile devices would acquire spectralink corporation “spectralink” whollyowned subsidiary company purchasing outstanding stock intercompany note spectralink company december 4 2012 company completed disposition assets ews business mobile devices received cash consideration approximately 507 million additional cash consideration 570 million payable next four years subject certain conditions including meeting certain agreedupon ebitdabased milestones additional cash consideration accounted gain sale discontinued operations net taxes realized realizable accordance accounting guidance company reported results operations financial position ews discontinued operations within consolidated statements operations balance sheets periods presented summarized results discontinued operations follows thousands carrying amounts net assets sold december 4 2012 follows thousands company recorded gain 354 million 2012 sale discontinued operations net taxes calculated follows thousands see note 14 notes consolidated financial statements discussion income tax benefit gain sale discontinued operations 4 accounts receivable financing 2012 company launched customer financing program entered financing agreement “financing agreement” unrelated third party financing company program offers channel partners distributors resellers direct indirect financing purchases company’s products services pursuant terms financing agreement company transfers accounts receivable customers without recourse financing company return company agrees pay financing company fee based predefined percentage transaction amount financed transaction meets applicable criteria asc 860 accounted sale financial assets accounts receivable excluded balance sheet upon third party financing company’s payment remittance company certain legal jurisdictions arrangement fees involve maintenance services products bundled maintenance one price qualify sale financial assets accordance authoritative guidance accordingly accounts receivable related arrangements accounted secured borrowing accordance asc 860 company records liability cash received maintaining associated accounts receivable balance endcustomer remits payment thirdparty financing company 2012 total transactions entered pursuant terms financing agreement approximately 283 million 229 million related sale financial assets arrangement financing receivables accelerated collection company’s cash reduced credit exposure amount due financing company december 31 2012 approximately 154 million 124 million related accounts receivable sold included “trade receivables” company’s consolidated balance sheets fees incurred pursuant financing agreement approximately 04 million year ended december 31 2012 recorded reduction revenues 5 goodwill purchased intangibles goodwill tested impairment reporting unit level one level operating segment company adopted amended accounting guidance permits company choose first assess qualitative factors determine whether likely fair value reporting unit less carrying amount based assessment company determines likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary polycom’s business organized around four major geographic theaters north america central americalatin america “cala” europe middle east africa “emea” asia pacific “apac” considered reporting units fourth quarter 2012 2011 company performed qualitative assessment four reporting units concluded four reporting units performing twostep impairment test unnecessary impairment charge required 2012 2011 2012 reporting unit estimated fair value excess carrying value 50 based valuation company’s reporting segments performed may 2012 connection announcement divestiture ews business reporting unit company weighed relative impact factors specific reporting unit well industry macroeconomic factors reporting unit specific factors considered included results recent impairment tests well financial performance changes reporting units’ carrying amounts since recent impairment tests industry reporting units operate company considered growth projections independent sources significant developments transactions within industry 2012 applicable company concluded reporting unit specific industry factors either positive neutral impact fair value reporting units company also determined macroeconomic factors 2012 significant impact discount rates growth rates used valuation performed following table presents changes carrying amount goodwill company’s segments december 31 2012 thousands following table presents details company’s total purchased intangible assets following period thousands 2012 2011 2010 company recorded amortization expense related purchased intangibles 98 million 55 million 14 million respectively included “amortization purchased intangibles” consolidated statements operations 2012 2011 2010 company recorded approximately 76 million 57 million 26 million respectively amortization purchased intangibles “cost product revenues” consolidated statements operations amortization intangibles allocated company’s segments company determined purchased trade name intangible 09 million indefinite life company expects generate cash flows related asset indefinitely consequently trade name amortized reviewed impairment annually sooner indicators potential impairment exist development products associated inprocess research development “iprd” previously capitalized completed 2012 underlying products made available general release associated iprd 14 million reclassified core developed technology amortized estimated lives products commencing 2012 company evaluates purchased intangibles possible impairment ongoing basis impairment indicators exist company performs assessment determine intangible asset impaired extent assessment purchased intangibles impairment conducted first estimating undiscounted future cash flows generated use eventual disposition purchased intangibles comparing amount carrying value assets undiscounted cash flows less carrying amounts impairment exists future cash flows discounted appropriate rate compared carrying amounts purchased intangibles determine amount impairment impairments recorded years ended december 31 2012 2011 2010 estimated future amortization expense purchased intangible assets december 31 2012 follows thousands 6 balance sheet details inventories consist following thousands prepaid expenses current assets consist following thousands property equipment net consist following thousands deferred revenues consist following thousands accrued liabilities consist following thousands 7 restructuring costs 2012 2011 2010 company recorded 220 million 94 million 81 million respectively related restructuring actions included elimination relocation various positions consolidation elimination certain facilities actions generally intended streamline focus company’s efforts properly align company’s cost structure projected future revenue streams following table summarizes activity company’s restructuring reserves thousands 2012 management completed consolidation elimination certain facilities order gain efficiencies including combination headquarters san jose santa clara california one new location san jose california result company recorded approximately 117 million restructuring charges related idle facilities 2012 additions reserve include 28 million deferred rent expensed prior periods additionally company recorded approximately 131 million charges primarily severance employee benefits related restructuring actions approved management october 2011 july 2012 action plan approved july 2012 resulted elimination approximately four percent global workforce enabling company focus resources product development product launch initiatives 2011 management completed consolidation colorado facilities began transition certain engineering product management related support functions andover massachusetts facility locations order achieve efficiencies restructuring charges relating actions primarily included costs idle facilities lesser extent severance relocation costs impacted individuals additionally october 2011 management committed restructuring plan designed better align allocate resources strategic growth areas business actions primarily related reorganization global gotomarket organizations restructuring plan resulted elimination approximately seven percent global workforce majority reductions taking effect fourth quarter 2011 first quarter 2012 enabling creation new positions better aligned strategic initiatives 2011 company recorded approximately 87 million restructuring expenses related severance employee benefits 07 million related idle facilities 2010 company committed several restructuring plans eliminate relocate positions enable hiring additional positions better align execution strategic initiatives restructuring plans included elimination approximately two percent global workforce result actions taken 2010 company recorded restructuring charges 81 million 2010 restructuring costs primarily related severance employee termination benefits december 31 2012 restructuring reserve primarily comprised facilitiesrelated liabilities company calculated fair value facilitiesrelated liabilities based discounted future lease payments less sublease assumptions fair value measurement classified level 3 measurement asc 820 key assumptions used valuation model include discount rates cash flow projections estimated sublease income discount rates cash flow projections sublease assumptions involve significant judgment based management’s estimate current forecasted market conditions sensitive susceptible change 8 investments fair value measurements company cash equivalents 4771 million 3752 million december 31 2012 2011 respectively cash equivalents consist cash banks well highly liquid investments money market funds time deposits savings accounts commercial paper us government agency securities municipal securities corporate debt securities december 31 2012 company’s longterm investments contractual maturities one two years addition company shortterm longterm investments debt equity securities summarized follows thousands december 31 2012 company’s total cash equivalents investments held united states totaled 3028 million remaining 4218 million held various foreign subsidiaries outside united states us government securities company’s us government securities mostly comprised direct us treasury obligations guaranteed us government ensure investment portfolio sufficiently diversified company’s investment policy requires certain percentage company’s portfolio invested types securities us government agency securities company’s us government agency securities mostly comprised us government agency instruments including mortgagebacked securities ensure investment portfolio sufficiently diversified company’s investment policy requires certain percentage company’s portfolio invested types securities nonus government securities company’s nonus government securities mostly comprised nonus government instruments including state municipal foreign government securities ensure investment portfolio sufficiently diversified company’s investment policy allows certain percentage company’s portfolio invested types securities corporate debt securities company’s corporate debt securities comprised publiclytraded domestic foreign corporate debt securities company purchase auction rate securities investments instruments meet high quality credit rating standards specified company’s investment policy guidelines also limit amount credit exposure one issuer type instrument unrealized losses following table summarizes fair value gross unrealized losses company’s investments including securities categorized cash equivalents unrealized losses aggregated type investment instrument length time individual securities continuous unrealized loss position december 31 2012 2011 thousands company reviews individual securities portfolio determine whether decline security’s fair value amortized cost basis otherthantemporary decline fair value considered otherthantemporary cost basis individual security written fair value new cost basis amount writedown accounted realized loss included earnings year ended december 31 2010 result change strategy respect capital gains program company determined certain corporate preferred equity securities otherthan temporarily impaired resulted writedown approximately 65 million company concluded impairment otherthantemporary based upon company’s decision liquidate securities relatively short period time assessment individual holdings company fully liquidated investments 2010 actual loss 57 million original cost resulting realized gain 08 million new cost basis investments impairments 2012 2011 december 31 2012 2011 company determined investments portfolio otherthan temporarily impaired private company investments strategic reasons company made various investments private companies cost method accounting used account investments hold nonmaterial ownership percentage written estimated net realizable value indications exist investments impaired investments recorded “other assets” company’s consolidated balance sheets totaled 20 million december 31 2012 2011 fair value measurements fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions threetier value hierarchy prioritizes inputs used measuring fair value follows level 1 observable inputs quoted prices active markets level 2 inputs quoted prices active markets observable either directly indirectly level 3 unobservable inputs little market data require company develop assumptions hierarchy requires company use observable market data available minimize use unobservable inputs determining fair value recurring basis company measures certain financial assets liabilities fair value including marketable securities foreign currency contracts company’s cash investment instruments classified within level 1 level 2 fair value hierarchy valued using inputs quoted market prices broker dealer quotations alternative pricing sources reasonable levels price transparency types instruments valued based quoted market prices identical assets active markets include money market funds instruments generally classified within level 1 fair value hierarchy types instruments valued based observable inputs include us treasury securities government agencies corporate bonds commercial paper instruments generally classified within level 2 fair value hierarchy december 31 2012 company’s fixed income availableforsale securities include us treasury securities government agencies 61 corporate bonds 23 commercial paper 15 nonus government securities 1 money market funds 0 included availableforsale securities approximately 130 million cash equivalents consist investments original maturities three months less include money market funds principal market company executes foreign currency contracts retail market overthecounter environment relatively high level price transparency market participants company’s counterparties large money center banks regional banks company’s foreign currency contracts valuation inputs based quoted prices quoted pricing intervals public data sources specifically spot exchange rates libor rates credit default rates involve management judgment contracts typically classified within level 2 fair value hierarchy fair value company’s marketable securities foreign currency contracts determined using following inputs december 31 2012 thousands included cash equivalents short longterm investments company’s consolidated balance sheets b included short term derivative asset prepaid expenses current assets company’s consolidated balance sheets c included short term derivative liability accrued liabilities company’s consolidated balance sheets 2012 transfers different levels fair value measurements 9 business risks credit concentration company sells products services serve communications equipment market globally substantially company’s revenues derived sales products related services substantial majority company’s revenue valueadded resellers distributors service providers 2012 2011 2010 one channel partner scansource communications accounted 14 company’s total net revenues factors adversely affecting demand supply products services could materially adversely affect company’s business financial performance particular economic conditions worldwide contributed time slowdowns communications networking industries caused negative impact specific segments markets company operates business grown company become increasingly exposed adverse changes general economic conditions result reductions capital expenditures enduser customers products longer sales cycles deferral delay purchase commitments products increased competition factors adversely impacted company’s operating results prior periods global economic concerns varying pace global economic recovery recent sovereign debt crisis continue create uncertainty unpredictability cause company continue cautious future outlook global economic downturn would negatively impact technology spending company’s products services could materially adversely affect business operating results financial condition company subcontracts manufacture products celestica askey flextronics foxconn vtech thirdparty contract manufacturers company uses celestica’s facilities thailand china flextronics’ facilities mexico askey’s foxconn’s vtech’s facilities china disruption services due natural disaster terrorist acts quarantines disruptions associated infectious diseases economic political difficulties countries asia reason disruption would harm business results operations company begun develop secondary manufacturing sources certain products celestica’s facilities currently manufacturer substantially products means company essentially solesourced manufacturing products celestica experiences interruption operations suffers capacity constraints may include constraints based production demands company grows business otherwise unable meet company’s current future production requirements company would experience delay inability ship products would immediate negative impact revenues moreover incapacitation company’s subcontractors’ manufacturing sites due destruction natural disaster similar events could result loss product inventory result foregoing company may able meet demand products could negatively affect revenues quarter disruption longer depending upon magnitude event could harm reputation addition operating international environment exposes company certain inherent risks including unexpected changes regulatory requirements tariffs difficulties staffing managing foreign operations potentially adverse tax consequences could harm company’s business results operations company’s cash equivalents investments maintained limited number investment management companies commercial banks international affiliates invested form demand deposit accounts time deposits savings accounts money market accounts corporate debt securities government securities municipal securities deposits one financial institution may exceed amount insurance provided deposits investments covered insurance company markets products distributors endusers throughout world management performs ongoing credit evaluations company’s customers maintains allowance potential credit losses company’s credit risk may increase expansion polycom’s product offerings customers place larger orders initial stocking orders growth emerging markets assurance company’s credit loss experience remain near historical levels december 31 2012 2011 single customer accounted 10 gross accounts receivable company purchased licenses technology incorporated products value longterm assets monitored impairment determined writedown necessary charge could material adverse effect company’s consolidated results operations financial position cash flows charges 2012 2011 2010 10 commitments contingencies litigation settlement agreements time company involved claims legal proceedings arise ordinary course business company expects number significance matters increase business expands particular company expects face increasing number patent intellectual property claims number products competitors polycom’s industry grows functionality video voice data web conferencing products overlap claims proceedings company whether meritorious could time consuming result costly litigation require significant amounts management time result diversion significant operational resources require company enter royalty licensing agreements required may available terms favorable company management believes loss arising matters probable reasonably estimated company record amount loss additional information becomes available potential liability related matters assessed estimates revised based currently available information management believe ultimate outcomes unresolved matters individually aggregate likely material adverse effect company’s financial position liquidity results operations however litigation subject inherent uncertainties company’s view matters may change future unfavorable outcome occur exists possibility material adverse impact company’s financial position liquidity results operations period unfavorable outcome occurs becomes probable potentially future periods standby letters credit company standby letters credit totaling approximately 76 million 23 million december 31 2012 2011 respectively license agreements company enters various license agreements normal course business cost agreements amortized expected life respective agreements cost agreements amounts amortized years presented combined individually significant leases company leases certain office facilities equipment noncancelable operating leases expiring 2013 2023 december 31 2012 following future minimum lease payments due current lease obligations thousands sublease assumptions included future minimum lease payments addition minimum lease payments company contractually obligated majority operating leases pay certain operating expenses term lease maintenance taxes insurance rent expense including effect future rent escalations rent holiday periods recognized straightline basis term lease deemed commence upon company gaining access control facility rent expense years ended december 31 2012 2011 2010 328 million 285 million 233 million respectively difference monthly contractual rental payment straightline monthly lease obligation multiyear lease agreement accounted deferred lease obligation shortterm deferred lease obligation included accrued liabilities less 01 million 10 million december 31 2012 2011 respectively longterm deferred lease obligation included longterm liabilities 113 million 53 million december 31 2012 2011 respectively event company exercise option extend term leases expire company may incur certain costs restore properties conditions place time commencement lease company unable estimate fair value restoration costs cannot determined end lease term times based landlord’s discretion subsequent negotiations landlord company however company believe costs would significant 11 foreign currency derivatives company maintains foreign currency risk management program designed reduce volatility company’s economic value effects unanticipated currency fluctuations international operations generate revenues costs denominated foreign currencies company’s policy hedge significant foreign currency revenues costs improve margin visibility reduce earnings volatility associated unexpected changes currency nondesignated hedges company hedges net foreign currency monetary assets liabilities monthly primarily resulting foreign currency denominated receivables payables foreign exchange forward contracts reduce risk company’s earnings cash flows adversely affected changes foreign currency exchange rates derivative instruments carried fair value changes fair value recorded interest income expense net derivative instruments subject company material balance sheet risk due exchange rate movements gains losses derivatives intended offset remeasurement gains losses hedged assets liabilities company executes nondesignated foreign exchange forward contracts primarily denominated euros british pounds israeli shekels brazilian reais japanese yen mexican pesos following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2012 outstanding nondesignated hedges foreign currency dollar amounts thousands following table shows effect company’s nondesignated hedges consolidated statement operations twelve months ended december 31 2012 thousands cash flow hedges company’s foreign exchange risk management program objective reduce volatility company’s economic value unanticipated foreign currency fluctuations company designates forward contracts cash flow hedges foreign currency revenues expenses primarily euro british pound israeli shekel foreign exchange contracts carried fair value balance sheet maximum duration foreign exchange forward contracts exceed thirteen months speculation prohibited policy receive hedge accounting treatment cash flow hedging relationships formally designated hedge inception tested prospectively retrospectively ensure forward contracts highly effective offsetting changes future cash flows hedged transactions company records effective spot changes cash flow hedges accumulated comprehensive income loss reclassified revenue cost goods sold operating expenses together hedged transaction time value forward contracts excluded effectiveness testing recorded interest income expense net life contract together ineffective portion hedge following tables show effect company’s derivative instruments designated cash flow hedges consolidated statements operations twelve months ended december 31 2012 2011 thousands year ended december 31 2012 loss recorded ineffective portion gain recorded excluded time value portion hedge immaterial year ended december 31 2011 gainloss recorded ineffective portion approximately 04 million loss recorded excluded time value portion hedge december 31 2012 company estimated values reported accumulated comprehensive income loss reclassified income within next twelve months following table summarizes derivativerelated activity accumulated comprehensive income loss thousands taxeffected event underlying forecasted transaction occur becomes probable occur related hedge gains losses cash flow hedge would immediately reclassified interest income expense net consolidated statements operations years ended december 31 2012 2011 gains losses following table summarizes company’s notional position currency approximate us dollar equivalent december 31 2012 outstanding cash flow hedges carried fair value balance sheet foreign currency dollar amounts thousands estimates fair value based applicable commonly quoted prices prevailing financial market information december 31 2012 see note 8 notes consolidated financial statements additional information fair value measurements financial assets liabilities including derivative assets derivative liabilities measured fair value consolidated financial statements recurring basis following table shows company’s derivative instruments measured gross fair value reflected consolidated balance sheets december 31 2012 2011 thousands derivative assets recorded prepaid expenses current assets consolidated balance sheets b derivative liabilities recorded accrued liabilities consolidated balance sheets 12 stockholders’ equity stock option plans may 26 2011 stockholders approved 2011 equity incentive plan “2011 plan” reserved issuance 2011 plan 19800000 shares adjusted twoforone stock split effective july 1 2011 terminating remaining shares available grant 2004 equity incentive plan “2004 plan” date extent shares exceed 13636548 shares adjusted stock split would returned 2004 plan 1996 stock incentive plan “1996 plan” result expiration cancellation forfeiture shares instead added reserve shares available 2011 plan terms 2004 plan 2011 plan options may granted prices lower fair market value date grant options granted expire seven ten years date grant exercisable upon vesting company settles employee stock option exercises newly issued common shares 2012 company granted 479571 nonqualified stock option shares certain employees per terms option grant 50 options vest one year anniversary grant date remaining 50 vest second anniversary grant date weightedaverage estimated fair value nonqualified stock options granted 2012 445 per share options granted 2011 2010 performance shares restricted stock units compensation committee board directors may also grant performance shares restricted stock units 2011 plan officers nonemployee directors certain employees component company’s broadbased equity compensation program prior may 2011 compensation committee granted performance shares restricted stock units 2004 plan performance shares represent commitment company deliver shares polycom common stock future point time subject fulfillment company predefined performance criteria awards earned performance targets performance periods established direction compensation committee met number performance shares subject vesting determined end given performance period generally performance criteria deemed achieved performance shares vest one three years anniversary grant date restricted stock units timebased awards generally vest period one three years date grant 2012 2011 company granted performance shares certain employees executives contain market condition based total shareholder return tsr measure company’s relative performance nasdaq composite index performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 one hundred fifty percent 150 target award prior 2011 company granted performance shares contain market condition based total shareholder return tsr measure company’s relative performance russell 2000 index performance shares delivered common stock end vesting period based company’s actual performance compared target performance criteria may equal zero percent 0 two hundred percent 200 target award fair value performance share market condition estimated date award using monte carlo simulation model estimate total return ranking company’s stock among nasdaq composite index russell 2000 index companies applicable performance period 2010 company granted 189000 performance shares weighted average fair value 1137 per share adjusted stock split based closing market price company’s common stock date award performance shares contain performance condition based attaining predefined gross margin dollar goals calendar 2010 performance shares adjusted actual forfeitures fully vested issued first quarter 2011 company issue similar performance shares periods 2012 2011 company also granted restricted stock units year ended december 31 2012 2011 2010 fair value restricted stock units based closing market price company’s common stock date award awards generally vest one three years equal annual installments anniversary date grant delivered common stock end vesting period stockbased compensation expense restricted stock units recognized using graded vesting method 2012 2011 2010 company granted nonemployee directors annual awards restricted stock units awards vest quarterly one year date grant fair value awards fair market value company’s common stock date grant stockbased compensation expense awards generally amortized six months date grant due voluntary termination provisions contained underlying agreements activity plans year ended december 31 2012 follows 1 purposes table shares counted fungible basis full value award activity 2 options expected vest result applying prevesting forfeiture rate assumption total outstanding options total pretax intrinsic value options exercised years ended december 31 2012 2011 2010 31 million 193 million 317 million respectively december 31 2012 2011 2010 963873 1644733 3305550 outstanding options exercisable weighted average exercise price 1322 1137 1232 respectively adjusted stock split options outstanding currently exercisable exercise price december 31 2012 adjusted stock split follows aggregate intrinsic value stock options outstanding stock options exercisable december 31 2012 approximately 182000 162000 respectively december 31 2012 total compensation cost related nonvested stock options yet recognized 10 million expected recognized next 11 months weightedaverage basis following information summarizes changes unvested performance shares restricted stock units nonemployee director restricted stock units 2012 1 purposes table shares counted oneforone basis fungible share counting basis 2 includes 120000 restricted stock units granted nonemployee directors december 31 2012 approximately 740 million total unrecognized compensation cost related unvested awards expected recognized weightedaverage period 14 months total fair value shares vested 2012 2011 2010 434 million 366 million 325 million respectively employee stock purchase plan third quarter 2011 company revised administration employee stock purchase plan “espp” sixmonth offering purchase period twoyear offering period four sixmonth purchase periods current employee stock purchase plan company grant stock purchase rights eligible employees twoyear offering period purchase dates end sixmonth purchase period january july participants lock purchase price per share beginning offering period upon plan enrollment stock price subsequent offering period enrollment date less lockin price espp plan reset feature automatically withdraws reenrolls participants new twoyear offering period shares purchased employees’ payroll deductions currently maximum 15 employees’ compensation purchase prices equal 85 lesser fair market value company’s common stock either date employee’s entrance offering period purchase date participant may purchase 25000 worth common stock one calendar year period 10000 shares common stock one purchase date company reserved 22 million shares common stock issuance plan including seven million shares approved shareholders may 2011 adjusted twoforone stock split 2012 2011 2010 1867683 shares 1143614 shares 1312290 shares purchased average per share prices 1124 1519 965 respectively adjusted stock split three months ended march 31 2012 september 30 2012 company modified terms certain existing awards espp result reset feature espp plan incurred resultant cumulative 206 million incremental expenses recognized vesting term approximately 102 million incremental expense recognized 2012 modification 2011 2010 valuation expense information following table summarizes stockbased compensation expense recorded allocation within consolidated statements operations thousands stockbased compensation expense allocated segments separately maintained corporate level company elected capitalize stockbased compensation years ended december 31 2012 2011 2010 due amounts immaterial valuation assumptions company grant stock options fiscal years ended december 31 2011 2010 fiscal year ended december 31 2012 company granted 479571 stock options weightedaverage estimated fair value 445 per share fair values options estimated date grant using blackscholes option valuation model year ended december 31 2012 using following assumptions weightedaverage estimated fair value employee stock purchase rights granted pursuant employee stock purchase plan years ended december 31 2012 2011 2010 466 per share 782 per share 342 per share respectively fair value employee stock purchase right grant estimated date grant using blackscholes option valuation model recognized expense using graded vesting attribution method following weightedaverage assumptions starting third quarter 2011 company computed expected volatility assumption based blended volatility 50 historical volatility50 implied volatility selection blended volatility assumption based upon company’s assessment blended volatility representative company’s future stock price trends weighs longer term historical volatility near term future implied volatility prior third quarter 2011 company used implied volatility oneyear traded options company’s stock riskfree interest rate assumption based upon published interest rates appropriate expected life company’s employee stock options employee stock purchases dividend yield assumption based company’s history paying dividends future expectations dividend payouts expected life employee stock options represents weightedaverage period stock options expected remain outstanding determined based historical experience similar awards giving consideration contractual terms stockbased awards vesting schedules expectations future employee behavior influenced changes terms stockbased awards stockbased compensation expense recognized consolidated statements operations based awards ultimately expected vest amounts reduced estimated forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates forfeitures estimated based company’s historical experience share repurchase program time company’s board directors approved plans company may discretion purchase shares common stock open market years ended december 31 2012 2011 company purchased 51 million shares 20 million shares respectively common stock open market cash 550 million 400 million respectively purchase price shares company’s stock repurchased recorded reduction stockholders’ equity excess cost treasury stock retired fair value based calculated average price equity recorded charge retained earnings board directors approved increase current share repurchase authorization include 497 million net proceeds sale ews business completed december 2012 december 31 2012 company authorized purchase additional 728 million shares open market current share repurchase plan accumulated comprehensive income net tax thousands accumulated comprehensive income comprised following tax effects shown separately impacts material 13 employee benefits plans 401k plans company 401k plan polycom 401k plan covers majority employees united states eligible employee may elect contribute polycom 401k plan payroll deductions lesser 60 eligible compensation 17000 2012 subject current statutory limitations company offer stock investment option polycom 401k plan company discretion board directors may make matching contributions polycom 401k plan company matches cash 50 first 6 compensation employees contribute polycom 401k plan certain maximum per participating employee per year 2012 2011 2010 fiscal years maximum company cash match 2000 per participating employee per year polycom 401k plan provides employees projected age 50 older end year elected contribute polycom 401k plan may also make catchup contribution 5500 company’s contributions polycom 401k plan totaled approximately 30 million 30 million 24 million 2012 2011 2010 respectively 14 income taxes income tax expense consists following thousands included income tax benefit expense discontinued operations 2012 tax benefit 354 million recorded sale company’s ews business discussed note 3 income continuing operations income taxes categorized geographically follows thousands company’s tax provision continuing operations differs provision computed using statutory tax rates follows thousands december 31 2012 company effectively completed first phase global restructuring project affecting existing legal entity structure designed accommodate trend towards software virtual based solutions versus traditional hardware distribution model part restructuring 388 million federal state taxes recorded financing global restructuring tax effects temporary differences give rise deferred tax assets liabilities presented thousands december 31 2012 company approximately 19 million tax effected net operating losses 14 million tax effected capital loss carryforwards 130 million tax effected credit carryforwards capital net operating loss carryforward assets tax credit carryforwards begin expire 2015 included net deferred tax asset balance 32 million valuation allowance recorded related primarily research credits jurisdiction history credits excess taxable profits company provides us income taxes earnings foreign subsidiaries unless considered permanently invested outside us december 31 2012 cumulative amount earnings upon us income tax provided approximately 3200 million practicable determine income tax liability might incurred earnings repatriated us excess tax benefits associated stock option exercises credited stockholders’ equity reductions income taxes payable resulting exercise employee stock options employee stock programs credited stockholders’ equity approximately 51 million 137 million 104 million twelve months ended december 31 2012 2011 2010 respectively company granted beneficial tax status israeli tax authorities income earned israel terms company eligible significant tax rate reductions following first year company israeli taxable income consideration tax losses carried forward tax rates 2012 2011 2010 50 38 66 respectively tax rate reduction currently effective 2014 company expects reapply subsequent periods expiration company realized tax savings 48 million 2012 003 per diluted share 52 million 2011003 per diluted share 03 million 2010 tax holiday israel material impact earnings per share 2010 reduced tax rates well tax benefits conditional upon company fulfilling terms stipulated israeli law encouragement capital investments 1959 effective 2008 company granted beneficial tax status singapore economic development board income earned singapore terms company eligible tax rate reduction 17 10 qualified income reduced tax rate conditional upon fulfillment terms stipulated singapore economic development board currently effective 2013 company expects reapply subsequent periods expiration tax savings realized 06 million 2012 05 million 2011 tax savings 2010 tax holiday singapore material impact earnings per share addition beginning 2008 company’s subsidiary china granted highnew technology enterprise “hnte” recognition company’s tax rate reduced 25 15 tax savings realized 07 million 2011 04 million 2010 tax savings 2012 also 2008 company’s subsidiary thailand granted regional headquarters status “rhs” tax rate reduced 30 10 associated tax savings 05 million 2012 2011 06 million 2010 beneficial tax status china thailand remain effect long company meets statutory requirements qualification tax holidays china thailand material impact earnings per share 2012 company recorded reserve reductions 100 million 08 million paid settlement multiyear state tax audit 57 million due reduction unrecognized tax benefits research credits acquired companies expiration statutes limitation us foreign jurisdictions also resulted reserve releases 35million 2011 company recorded reserve releases 81 million 69 million due resolution multiyear tax audits expiration statutes limitation us foreign jurisdictions resulted reserve releases 08 million 04 million reserve releases due changes foreign exchange rates 2010 california franchise tax board completed audit 2005 2006 tax years audit resulted payment 08 million certain audit issues also settled year resulting release accrued taxes 15 million additionally 34 million tax reserves related cost sharing stock based compensation released adjustment stockholders’ equity 07 million tax reserves released due changes foreign exchange rates year aggregate changes balance company’s gross unrecognized tax benefits follows periods indicated thousands included balance december 31 2012 230 million unrecognized tax benefits would affect income tax expense recognized company’s practice recognize interest andor penalties related income tax matters income tax expense december 31 2012 2011 respectively company approximately 15 million 20 million accrued interest penalties related uncertain tax positions end 2012 uncertain tax positions may reduced result lapse applicable statutes limitations resolutions ongoing audits various jurisdictions company anticipates reduction 2013 approximate 25 million reserve releases would recorded adjustments tax expense period released company files income tax returns us federal jurisdiction various states foreign jurisdictions company longer subject us federal state income tax examinations tax authorities years prior 2009 foreign income tax matters foreign jurisdictions concluded years 2006 except hong kong singapore concluded years 2005 brazil china germany switzerland israel concluded years 2007 france united kingdom concluded years 2008 15 business segment information polycom’s business organized around four major geographic theatres north america central americalatin america “cala” europe middle east africa “emea” asia pacific “apac” reporting purposes company aggregates north america cala one segment named americas reports emea apac separate segments determined accordance management views evaluates company’s business allocates resources based criteria outlined authoritative guidance segment revenue profit segment revenues attributed theater based ordering location customer significant portion segment’s expenses arise shared services infrastructure polycom historically allocated segments order realize economies scale use resources efficiently expenses include information technology services facilities infrastructure costs segment data results reportable segments derived directly polycom’s management reporting system results based polycom’s method internal reporting reported conformity accounting principles generally accepted united states management measures performance segment based several metrics including contribution margin defined asset data exception gross accounts receivable reviewed management segment level financial information reportable geographical segment fiscal years ended december 31 2012 2011 2010 based company’s internal management system utilized company’s chief operating decision maker codm follows thousands united states china individually accounted 10 company’s revenues 2012 2011 united states accounted 10 company’s revenues 2010 net revenues united states 5830 million 5936 million 5006 million years ended december 31 2012 2011 2010 respectively net revenues china 1593 million 1615 million years ended december 31 2012 2011 respectively segment contribution margin includes geographic segment revenues less related cost sales direct sales marketing expenses management allocates infrastructure costs facilities costs determining segment contribution margin contribution margin used part evaluate performance allocate resources segments certain operating expenses allocated segments separately managed corporate level unallocated costs include corporate manufacturing costs sales marketing costs direct sales marketing expenses research development expense general administrative costs legal accounting stockbased compensation costs acquisitionrelated costs amortization purchased intangible assets purchased inprocess research development costs litigation reserves payments restructuring costs interest income expense net reconciliation segment information polycom consolidated totals follows thousands following table summarizes company’s revenues groups similar products services follows thousands 2012 2011 2010 one customer americas segment scansource communications accounted 14 company’s revenues company’s fixed assets net accumulated depreciation located following geographical areas thousands one country outside united states 10 total net fixed assets december 31 2012 2011 16 net income per share disclosures reconciliation numerator denominator basic diluted net income per share provided follows thousands except per share amounts adjusted stock split 2012 2011 2010 approximately 2930515 0 1565390 shares adjusted stock split respectively relating potentially dilutive securities primarily common stock awards stock options excluded denominator computation diluted net income per share inclusion would antidilutive result net loss continuing operations 2012 2067069 shares potentially issuable common shares addition aforementioned shares excluded diluted shares used computation earnings per share 2012 effect antidilutive shares excluded 2011 2010 polycom inc supplementary financial data unaudited thousands except per share amounts s1 financial statement scheduleschedule ii polycom inc valuation qualifying accounts thousands s2 index exhibits indicates management contract compensatory plan arrangement xbrl information furnished filed part registration statement prospectus purposes sections 11 12 securities exchange act 1933 amended deemed filed purposes section 18 securities exchange act 1934 amended otherwise subject liability sections 1 filed herewith