<PAGE>
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
POLYCOM, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials:
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[LOGO]
November 17, 1997
Dear Stockholder:
I am pleased to forward the enclosed Proxy Statement for the special meeting
(the "POLYCOM MEETING") of Stockholders of Polycom, Inc. ("POLYCOM") to be held
December 10, 1997 at 10:00 a.m. local time, at Polycom's offices located at 2584
Junction Avenue, San Jose, California. The purpose of the Polycom Meeting is to
consider and vote upon the combination of ViaVideo Communications, Inc.
("VIAVIDEO") with Polycom through the merger (the "MERGER") of Venice
Acquisition Corporation ("MERGER SUB"), a wholly-owned subsidiary of Polycom,
with and into ViaVideo.
The Merger is subject to the terms and conditions of an Agreement and Plan
of Reorganization, dated as of June 11, 1997, as amended September 29, 1997 (the
"REORGANIZATION AGREEMENT"), by and among Polycom, Merger Sub and ViaVideo. In
the Merger, Merger Sub will be merged with and into ViaVideo; ViaVideo will be
the surviving corporation and will thus become a wholly-owned subsidiary of
Polycom. Immediately prior to the Merger, each outstanding share of ViaVideo
Preferred Stock shall be converted into one share of ViaVideo Common Stock
(together, the "VIAVIDEO COMMON STOCK") and pursuant to the Merger, each
outstanding share of ViaVideo Common Stock will be converted, without any action
on the part of the holder thereof, into the right to receive 1.183684 (the
"EXCHANGE RATIO") shares of newly-issued Common Stock of Polycom ("POLYCOM
COMMON STOCK"). Notwithstanding the foregoing, if the total value of Polycom's
Common Stock to be issued (assuming the total amount of shares outstanding and
reserved under the ViaVideo 1996 Stock Option/Stock Issuance Plan are exercised
for ViaVideo Common Stock) in the Merger, based on the average of the closing
prices of Polycom's Common Stock as quoted on the National Market System of the
Nasdaq Stock Market for the ten (10) trading days immediately preceding (and
including) the second trading day prior to the effective time of the Merger (the
"TOTAL VALUE") exceeds $90,000,000, the Exchange Ratio shall be reduced such
that the Total Value shall be $90,000,000. In addition, Polycom will assume
ViaVideo's obligations with respect to outstanding options to purchase
ViaVideo's Common Stock and such options will be converted into options to
purchase Polycom Common Stock. The shares of Polycom Common Stock held by
Polycom stockholders prior to the Merger will remain unchanged by the Merger.
Based on the capitalization of ViaVideo and Polycom as of the date of the
Reorganization Agreement and based on the closing price of Polycom Common Stock
on October 28, 1997 ($5.75), it is expected that, as a result of the Merger,
Polycom will increase its fully-diluted shares outstanding by approximately 9.76
million shares, which will represent approximately 34% of Polycom's outstanding
Common Stock following the Merger. These numbers do not reflect the possible
exercise of a right of first offer held by one of Polycom's securityholders,
which, if exercised within 45 days of the effective time of the Merger, would
give that securityholder the right to acquire approximately 950,000 shares of
Polycom Common Stock at $7.50 per share.
The accompanying Proxy Statement provides a detailed description of the
Reorganization Agreement, certain business and financial information of Polycom
and ViaVideo and other important information, which you are urged to read
carefully. Copies of the Reorganization Agreement and the form of Certificate of
Merger are attached to the Proxy Statement as APPENDIX A.
<PAGE>
THE POLYCOM BOARD OF DIRECTORS (THE "POLYCOM BOARD") HAS CAREFULLY REVIEWED
AND CONSIDERED THE TERMS AND CONDITIONS OF THE REORGANIZATION AGREEMENT AND THE
PROPOSED MERGER. THE DISINTERESTED MEMBERS OF THE POLYCOM BOARD UNANIMOUSLY
BELIEVE THE TERMS AND CONDITIONS OF THE REORGANIZATION AGREEMENT AND THE
PROPOSED MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE POLYCOM
STOCKHOLDERS. THE DISINTERESTED MEMBERS OF THE POLYCOM BOARD HAVE UNANIMOUSLY
APPROVED THE TERMS AND CONDITIONS OF THE REORGANIZATION AGREEMENT AND THE
MERGER, AND UNANIMOUSLY RECOMMEND THAT THE POLYCOM STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE REORGANIZATION AGREEMENT AND CONSUMMATION OF THE MERGER.
The Polycom Board has received a written opinion dated as of June 11, 1997
(the "MONTGOMERY OPINION") from Montgomery Securities, that as of such date, and
based upon and subject to the factors and assumptions set forth in such written
opinion, the consideration to be paid by Polycom to the holders of ViaVideo
Common Stock pursuant to the Reorganization Agreement is fair to Polycom, from a
financial point of view. A copy of the opinion is attached to the Proxy
Statement as APPENDIX B. Polycom stockholders are urged to read the Montgomery
Opinion in its entirety.
The Reorganization Agreement and the consummation of the Merger must be
approved by the holders of Polycom Common Stock representing a majority of the
outstanding shares of Polycom Common Stock entitled to vote. Your vote on this
matter is very important. We urge you to review carefully the enclosed material
and to return your proxy promptly.
WHETHER OR NOT YOU PLAN TO ATTEND THE POLYCOM MEETING, PLEASE MARK, SIGN,
DATE AND PROMPTLY RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY.
On behalf of the Polycom Board, I thank you for your support and urge you to
vote FOR approval of the Reorganization Agreement and the consummation of the
Merger.
Sincerely,
[SIG]
Brian L. Hinman
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
<PAGE>
POLYCOM, INC.
2584 JUNCTION AVENUE
SAN JOSE, CA 95134
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 10, 1997
---------------------
TO THE STOCKHOLDERS OF POLYCOM, INC.
NOTICE IS HEREBY GIVEN that a special meeting (the "POLYCOM MEETING") of
Stockholders of Polycom, Inc., a Delaware corporation ("POLYCOM"), will be held
at 10:00 a.m., local time, on December 10, 1997 at Polycom's offices located at
2584 Junction Avenue, San Jose, California for the following purposes:
1. To consider and vote upon a proposal to approve (a) the Agreement and
Plan of Reorganization, dated as of June 11, 1997, as amended September 29, 1997
(the "REORGANIZATION AGREEMENT"), by and among Polycom, Venice Acquisition
Corporation, a Delaware corporation and a newly formed, wholly-owned subsidiary
of Polycom ("MERGER SUB"), and ViaVideo Communications, Inc. ("VIAVIDEO"), and
(b) the merger of Merger Sub with and into ViaVideo (the "MERGER") whereby,
among other things, ViaVideo will survive the Merger and become a wholly-owned
subsidiary of Polycom. Immediately prior to the Merger, each outstanding share
of ViaVideo Preferred Stock shall be converted into one share of ViaVideo Common
Stock (together, the "VIAVIDEO COMMON STOCK") and pursuant to the Merger, each
outstanding share of ViaVideo Common Stock will be converted, without any action
on the part of the holder thereof, into the right to receive 1.183684 (the
"EXCHANGE RATIO") shares of newly-issued Common Stock of Polycom ("POLYCOM
COMMON STOCK"), and each outstanding option to purchase a share of ViaVideo
Common Stock will be assumed by Polycom and converted into an option to purchase
that number of whole shares of Polycom Common Stock equal to the product of the
number of shares of ViaVideo Common Stock that were issuable upon exercise of
such option immediately prior to the effective time of the Merger multiplied by
the Exchange Ratio and rounded down to the nearest whole number of shares of
Polycom Common Stock, with the exercise price adjusted accordingly.
Notwithstanding the foregoing, if the total value of Polycom's Common Stock to
be issued (assuming the total amount of shares outstanding and reserved under
the ViaVideo 1996 Stock Option/Stock Issuance Plan are to be exercised for
ViaVideo Common Stock) in the Merger based on the average of the closing prices
of Polycom's Common Stock as quoted on the National Market System of the Nasdaq
Stock Market for the ten (10) trading days immediately preceding (and including)
the second trading day prior to the effective time of the Merger (the "TOTAL
VALUE") exceeds $90,000,000, the Exchange Ratio shall be reduced such that the
Total Value shall be $90,000,000.
2. To transact such other business as may properly come before the Polycom
Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement, a copy of which is attached hereto and made a part hereof and which
you are urged to read carefully.
The Board of Directors has fixed the close of business on October 28, 1997
as the record date for determining stockholders entitled to notice of and to
vote at the Polycom Meeting and any adjournment or postponement thereof.
Approval of the Reorganization Agreement and the Merger will require the
affirmative vote of the holders of Polycom Common Stock representing a majority
of the outstanding shares of Polycom Common Stock entitled to vote.
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE POLYCOM MEETING, YOU ARE
URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE POLYCOM
MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT AT ANY TIME
<PAGE>
BEFORE IT HAS BEEN VOTED AT THE POLYCOM MEETING. ANY STOCKHOLDER ATTENDING THE
POLYCOM MEETING MAY VOTE IN PERSON EVEN IF SUCH STOCKHOLDER HAS RETURNED A
PROXY.
BY ORDER OF THE BOARD OF DIRECTORS
<TABLE>
<S> <C> <C>
[SIG]
Brian L. Hinman
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
</TABLE>
San Jose, California
November 17, 1997
<PAGE>
POLYCOM, INC.
PROXY STATEMENT
---------------------
This Proxy Statement is being furnished to the stockholders of Polycom,
Inc., a Delaware corporation ("POLYCOM"), in connection with the solicitation of
proxies by the Polycom Board of Directors (the "POLYCOM BOARD") for use at the
special meeting of Polycom stockholders (the "POLYCOM MEETING") to be held at
10:00 a.m., local time, on December 10, 1997, at Polycom's offices located at
2584 Junction Avenue, San Jose, California, and at any adjournments or
postponements of the Polycom Meeting.
This Proxy Statement relates to the issuance of shares of Common Stock of
Polycom, $.0005 par value per share ("POLYCOM COMMON STOCK"), pursuant to the
merger (the "MERGER") of Venice Acquisition Corporation, a Delaware corporation
and a newly formed, wholly-owned subsidiary of Polycom ("MERGER SUB"), with and
into ViaVideo Communications, Inc., a Delaware corporation ("VIAVIDEO"), under
the terms of the Agreement and Plan of Reorganization, dated as of June 11,
1997, as amended September 29, 1997 (the "REORGANIZATION AGREEMENT"), by and
among Polycom, Merger Sub and ViaVideo. A copy of the Reorganization Agreement
is attached hereto as APPENDIX A. As a result of the Merger, ViaVideo will
become a wholly-owned subsidiary of Polycom.
Immediately prior to the Merger, each outstanding share of Preferred Stock
of ViaVideo, $.001 par value per share (the "VIAVIDEO PREFERRED STOCK"), shall
be converted into one share of Common Stock of ViaVideo, $.001 par value per
share (the "VIAVIDEO COMMON STOCK"). Upon the effectiveness of the Merger, (a)
each outstanding share of Common Stock of ViaVideo, will be converted into the
right to receive 1.183684 (the "EXCHANGE RATIO") shares of newly-issued Polycom
Common Stock, and (b) each outstanding option to purchase a share of ViaVideo
Common Stock ("VIAVIDEO OPTION") will be assumed by Polycom and converted into
an option to purchase that number of whole shares of Polycom Common Stock equal
to the product of the number of shares of ViaVideo Common Stock that were
issuable upon exercise of such option immediately prior to the effective time of
the Merger multiplied by the Exchange Ratio and rounded down to the nearest
whole number of shares of Polycom Common Stock, with the exercise price adjusted
accordingly. Notwithstanding the foregoing, if the total value of Polycom's
Common Stock to be issued (assuming the total amount of shares outstanding and
reserved under the ViaVideo 1996 Stock Option/Stock Issuance Plan (the "VIAVIDEO
OPTION PLAN") are to be exercised for ViaVideo Common Stock) in the Merger (the
"TOTAL VALUE"), based on the average of the closing prices of Polycom's Common
Stock as quoted on the National Market System of the Nasdaq Stock Market (the
"NASDAQ NATIONAL MARKET") for the ten (10) trading days immediately preceding
(and including) the second trading day prior to the Effective Time (the "CLOSING
PRICE") exceeds $90,000,000, the Exchange Ratio shall be reduced such that the
Total Value shall be $90,000,000. The Total Value would equal $90,000,000 if the
Closing Price were $9.00 per share. If the Closing Price is less than $3.00 per
share, as adjusted for any stock splits, stock dividends or recapitalizations,
ViaVideo shall not be obligated to consummate the Merger. An aggregate of
approximately 8,413,979 million shares of Polycom Common Stock (based on
7,108,298 shares of ViaVideo Common Stock outstanding as of October 28, 1997 and
on the closing price of Polycom Common Stock as of October 28, 1997 ($5.75) will
be issued by Polycom in the Merger and options to purchase an aggregate of
approximately 1,342,356 additional shares of Polycom Common Stock (based on
1,134,050 shares of ViaVideo Common Stock subject to outstanding ViaVideo
Options as of October 28, 1997 and on the Exchange Ratio) will be assumed by
Polycom in the Merger. The number of shares of Polycom Common Stock to be issued
in the Merger, assuming a Closing Price of between $3.00 per share and $9.00 per
share (based on 8,448,198 shares of ViaVideo Common Stock outstanding assuming
the exercise of the shares available for grant and shares outstanding under the
ViaVideo Option Plan as of October 28, 1997) will be 9,999,997. Since the market
price of Polycom Common Stock is subject to fluctuation, the Polycom
stockholders will not know the actual value of the Merger consideration at the
time of the Polycom Meeting. These numbers do not reflect the possible exercise
of a right of first offer held by one of Polycom's securityholders, which, if
exercised within 45 days of the effective time of the Merger, would give that
securityholder the right to acquire approximately 950,000 shares of Polycom
Common Stock at $7.50 per share.
On October 28, 1997, the closing sales prices on the Nasdaq National Market
of Polycom Common Stock was $5.75.
This Proxy Statement and the accompanying forms of proxy are first being
mailed to stockholders of Polycom on or about November 17, 1997.
<PAGE>
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT. THE PROPOSED
MERGER IS A COMPLEX TRANSACTION. POLYCOM STOCKHOLDERS ARE STRONGLY
URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT IN
ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO
UNDER "RISK FACTORS" STARTING ON PAGE 15.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROXY STATEMENT IS NOVEMBER 17, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AVAILABLE INFORMATION...................................................................................... 1
TRADEMARKS................................................................................................. 2
FORWARD-LOOKING STATEMENTS................................................................................. 2
SUMMARY.................................................................................................... 3
The Companies............................................................................................ 3
The Merger; Conversion of Securities..................................................................... 4
The Polycom Meeting...................................................................................... 5
Fairness Opinion of Financial Advisor.................................................................... 7
Recommendation of Polycom's Board of Directors........................................................... 7
The Reorganization Agreement............................................................................. 7
Related Agreements....................................................................................... 10
Interests of Certain Persons in the Merger............................................................... 11
Risk Factors............................................................................................. 11
Certain Federal Income Tax Considerations................................................................ 11
Accounting Treatment..................................................................................... 11
Stockholder Rights....................................................................................... 12
Market Price and Dividend Information.................................................................... 12
Comparative Per Share Data............................................................................... 13
RISK FACTORS............................................................................................... 15
Risks Relating to the Merger............................................................................. 15
Risks Relating to Polycom................................................................................ 18
Risks Relating to ViaVideo............................................................................... 24
THE POLYCOM MEETING........................................................................................ 28
Date, Time and Place of the Polycom Meeting.............................................................. 28
Matters to Be Considered at the Polycom Meeting.......................................................... 28
Record Date and Shares Entitled to Vote.................................................................. 28
Voting of Proxies........................................................................................ 28
Vote Required............................................................................................ 28
Quorum; Abstentions and Broker Non-Votes................................................................. 29
Solicitation of Proxies and Expenses..................................................................... 29
Board Recommendation..................................................................................... 29
THE MERGER AND RELATED TRANSACTIONS........................................................................ 30
General.................................................................................................. 30
Conversion of Shares..................................................................................... 30
Conversion of Options.................................................................................... 30
Background of the Merger................................................................................. 31
Reasons for the Merger................................................................................... 33
Operations Following the Merger.......................................................................... 34
Fairness Opinion of Financial Advisor.................................................................... 34
The Reorganization Agreement............................................................................. 38
Related Agreements....................................................................................... 46
Federal Securities Law Consequences...................................................................... 48
Regulatory Matters....................................................................................... 48
Certain Federal Income Tax Considerations................................................................ 48
Accounting Treatment..................................................................................... 50
Appraisal Rights......................................................................................... 50
Interests of Certain Persons in the Merger............................................................... 51
BUSINESS OF POLYCOM........................................................................................ 52
Business................................................................................................. 52
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Products................................................................................................. 53
Technology............................................................................................... 56
Sales and Distribution................................................................................... 58
Customer Service and Support............................................................................. 59
Research and Development................................................................................. 60
Competition.............................................................................................. 61
Manufacturing............................................................................................ 62
Intellectual Property and Other Proprietary Rights....................................................... 63
Employees................................................................................................ 64
Properties............................................................................................... 64
Legal Proceedings........................................................................................ 64
PRINCIPAL STOCKHOLDERS OF POLYCOM.......................................................................... 65
BUSINESS OF VIAVIDEO....................................................................................... 68
Business................................................................................................. 68
Industry Background...................................................................................... 68
ViaVideo's Strategy...................................................................................... 69
Technology............................................................................................... 70
Patents and Trademarks................................................................................... 71
Products................................................................................................. 71
Research and Development................................................................................. 72
Sales and Marketing...................................................................................... 72
Manufacturing............................................................................................ 73
Competition.............................................................................................. 73
Employees................................................................................................ 74
Properties............................................................................................... 74
Legal Proceedings........................................................................................ 74
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................................... 75
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF POLYCOM................................................. 80
POLYCOM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 81
Overview................................................................................................. 81
Quarterly Results of Operations.......................................................................... 83
Quarterly Liquidity and Capital Resources................................................................ 90
Results of Operations for the Three Years Ended December 31, 1996........................................ 91
Liquidity and Capital Resources for the Three Years Ended December 31, 1996.............................. 94
Recent Accounting Pronouncements......................................................................... 95
SELECTED HISTORICAL FINANCIAL DATA OF VIAVIDEO............................................................. 96
VIAVIDEO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 97
Overview................................................................................................. 97
Results of Operations.................................................................................... 97
Liquidity and Capital Resources.......................................................................... 98
Inflation................................................................................................ 98
New Accounting Standards................................................................................. 98
STOCKHOLDER PROPOSALS...................................................................................... 99
EXPERTS.................................................................................................... 99
LEGAL MATTERS.............................................................................................. 99
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
APPENDICES
A--Agreement and Plan of Reorganization, as amended, and Certificate of Merger........................... A-1
B--Opinion of Montgomery Securities...................................................................... B-1
</TABLE>
ii
<PAGE>
NO PERSON HAS BEEN AUTHORIZED BY POLYCOM TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT IN CONNECTION WITH THE
SOLICITATION OF PROXIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY POLYCOM.
THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION CONTAINED
HEREIN SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Polycom is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "COMMISSION"). These materials can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York,
New York 10048. Copies of these materials can also be obtained from the
Commission at prescribed rates by writing to the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's web site is
http://www.sec.gov. The Polycom Common Stock is quoted on the Nasdaq National
Market. Reports and other information filed by Polycom may be inspected at the
offices of the National Association of Securities Dealers, Inc., Market Listing
Section, 1735 K Street, N.W., Washington, D.C. 20006.
1
<PAGE>
TRADEMARKS
Polycom, SoundStation, SoundStation Premier, ShowStation, SoundPoint and
Polycom logos are registered trademarks of Polycom in the U.S. and various
countries. ViaVideo Communications, ViewStation and ViaVideo logos are
trademarks of ViaVideo. This Proxy Statement also contains trademarks of
companies other than ViaVideo, Polycom and its subsidiary.
FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
AND SECTION 21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THE RISK FACTORS BEGINNING ON PAGE 15 HEREOF. POLYCOM DOES
NOT MAKE ANY EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY AS TO THE
ATTAINABILITY OF THE PROJECTED OR ESTIMATED FINANCIAL INFORMATION REFERENCED OR
SET FORTH HEREIN UNDER "THE MERGER AND RELATED TRANSACTIONS--FAIRNESS OPINION OF
FINANCIAL ADVISOR" OR ELSEWHERE HEREIN OR AS TO THE ACCURACY OR COMPLETENESS OF
THE ASSUMPTIONS FROM WHICH THAT PROJECTED OR ESTIMATED INFORMATION IS DERIVED.
PROJECTIONS OR ESTIMATIONS OF THE COMBINED COMPANY'S FUTURE PERFORMANCE ARE
NECESSARILY SUBJECT TO A HIGH DEGREE OF UNCERTAINTY AND MAY VARY MATERIALLY FROM
ACTUAL RESULTS. REFERENCE IS MADE TO THE PARTICULAR DISCUSSIONS SET FORTH UNDER
"RISK FACTORS," "POLYCOM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "VIAVIDEO'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." IN CONNECTION WITH
FORWARD-LOOKING STATEMENTS WHICH APPEAR IN THESE AND OTHER DISCLOSURES,
STOCKHOLDERS OF POLYCOM SHOULD CAREFULLY REVIEW THE FACTORS SET FORTH IN THIS
PROXY STATEMENT UNDER "RISK FACTORS" BEGINNING ON PAGE 15 HEREOF.
2
<PAGE>
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT, AND THE APPENDICES HERETO. THE SUMMARY DOES NOT CONTAIN
A COMPLETE STATEMENT OF MATERIAL INFORMATION RELATING TO THE REORGANIZATION
AGREEMENT, THE MERGER OR THE OTHER MATTERS DISCUSSED HEREIN AND IS SUBJECT TO,
AND QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS CONTAINED IN THIS PROXY STATEMENT AND THE APPENDICES HERETO.
STOCKHOLDERS ARE URGED TO READ THIS PROXY STATEMENT AND THE APPENDICES IN THEIR
ENTIRETY.
THE COMPANIES
POLYCOM.
Polycom develops, manufactures and markets audioconferencing and
dataconferencing products that facilitate meetings at a distance. With its
SoundStation product line, Polycom believes it has established itself as a
leading provider of audioconferencing equipment designed for group use.
SoundStation is a high quality, full-duplex, easy-to-use audioconferencing
solution. The SoundStation products are designed to operate with local telephone
systems throughout the world, and Polycom has obtained regulatory approval for
SoundStation's use in 25 countries. Polycom's technologies permit its
SoundStation products to achieve audioconferencing communications quality that
approaches handset communications quality. More than 150,000 SoundStation
systems had been shipped as of September 30, 1997, and Polycom believes
SoundStation is the best selling product in the group audioconferencing market.
In addition, Polycom also began shipping its SoundStation Premier and Sound
Point products in the second half of 1996.
Polycom's innovative ShowStation dataconferencing product, introduced in
November 1995, enables real-time exchange of data and other images over ordinary
telephone lines via the rapidly emerging T.120 dataconferencing protocol
standard. ShowStation is a cost-effective, easy-to-use, high resolution
dataconferencing solution that enables groups in multiple locations to
simultaneously view, edit and annotate paper or electronic documents and data in
a lights-on environment. Polycom expects to introduce its next generation
ShowStation product in the fourth quarter of 1997.
Polycom's products integrate advanced telecommunications, acoustic, image
capture and processing technologies. Polycom sells its products globally through
its direct sales force and maintains marketing and sales relationships with
Lucent Technologies, Inc. ("LUCENT"), MCI Telecommunications Corporation
("MCI"), Minnesota Mining and Manufacturing Corporation ("3M"), ConferTech
International, Inc. ("CONFERTECH"), British Telecommunications, plc ("BRITISH
TELECOM"), Siemens AG ("SIEMENS"), Sprint North Supply ("SPRINT"), SKC
Communications Products ("SKC"), GBH Distributing, Inc. ("GBH"), Unitel Pty.
Limited ("UNITEL"), PictureTel Corporation ("PICTURETEL"), Hibino Corporation
("HIBINO"), and Hello Direct, Inc. ("HELLO DIRECT"), which collectively
represented approximately 64% of Polycom's net revenues in the first half of
1997, as well as with other resellers and OEMs.
Unless otherwise indicated, "POLYCOM" refers to Polycom, Inc., a Delaware
corporation, and its wholly-owned subsidiary Polyspan Teleconferencing, B.V.
Polycom was incorporated in Delaware on December 13, 1990. Polycom's principal
executive offices are located at 2584 Junction Avenue, San Jose, California
95134. Its telephone number is (408) 526-9000.
VIAVIDEO.
ViaVideo was founded in September 1996 to design and develop high quality,
low-cost, easy-to-use, group videoconferencing systems that utilize advanced
video and audio compression technologies along with Internet/Web-based features.
ViaVideo believes that these technologies and features will permit users to
replicate the dynamics and effectiveness of face-to-face meetings and
presentations from remote locations through the transmission of color motion
video integrated with full duplex audio at data rates as low as 56 kilobits per
second (Kbps). The videoconferencing system being developed by ViaVideo
incorporates the latest advances in video processor technology and uses a new
generation, non-PC based
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platform. ViaVideo anticipates commencing a beta testing program of its first
product in the fourth quarter of 1997.
Unless otherwise indicated, "VIAVIDEO" refers to ViaVideo Communications,
Inc., a Delaware corporation. ViaVideo was incorporated in Delaware on September
10, 1996. ViaVideo's principal executive offices are located at 8900 Shoal
Creek, Building 300, Austin, Texas 78757. Its telephone number is (512)
483-0200.
MERGER SUB.
"MERGER SUB" refers to Venice Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of Polycom formed solely for the purpose
of the Merger. Merger Sub was incorporated in Delaware on May 22, 1997. Merger
Sub's principal executive offices are located at 2584 Junction Avenue, San Jose,
California 95134. Its telephone number is (408) 526-9000.
THE MERGER; CONVERSION OF SECURITIES
Polycom, Merger Sub and ViaVideo have entered into the Reorganization
Agreement, a copy of which is attached hereto as APPENDIX A, whereby Merger Sub
will be merged with and into ViaVideo, resulting in ViaVideo becoming a
wholly-owned subsidiary of Polycom. See "The Merger and Related Transactions."
Upon consummation of the Merger, each share of ViaVideo Common Stock then
outstanding (assuming the conversion of all outstanding ViaVideo Preferred Stock
into ViaVideo Common Stock) will be converted automatically into the right to
receive 1.183684 shares of newly-issued Polycom Common Stock. Notwithstanding
the foregoing, if the Total Value of Polycom's Common Stock to be issued
(assuming the total amount of shares outstanding and reserved under the ViaVideo
Option Plan are to be exercised for ViaVideo Common Stock) in the Merger, based
on the average of the closing prices of Polycom's Common Stock as quoted on the
Nasdaq National Market System for the ten (10) trading days immediately
preceding (and including) the second trading day prior to the effective time of
the Merger exceeds $90,000,000, the Exchange Ratio shall be reduced such that
the Total Value shall be $90,000,000. In addition, Polycom will assume
ViaVideo's obligations with respect to outstanding options to purchase
ViaVideo's Common Stock and such options will be converted into options to
purchase Polycom Common Stock.
As of October 28, 1997 (the "RECORD DATE"), ViaVideo had 7,108,298 shares of
Common Stock outstanding (assuming the conversion of all shares of ViaVideo
Preferred Stock into ViaVideo Common Stock) and 1,134,050 shares of Common Stock
reserved for issuance pursuant to outstanding stock options. Based on the
closing price of Polycom Common Stock of $5.75 and outstanding shares of
ViaVideo Common Stock on the Record Date, and assuming the exercise of all
outstanding options to purchase ViaVideo Common Stock, the aggregate value of
the Merger consideration to be issued in the transaction would be $56,098,929,
and ViaVideo stockholders would receive 1.183684 shares of Polycom Common Stock
for each share of ViaVideo Common Stock owned by such stockholder. Based on the
7,108,298 shares of ViaVideo Common Stock outstanding as of the Record Date, the
minimum value of the Merger consideration that is assured to be issued to
ViaVideo stockholders, assuming a Closing Price of $3.00 per share and excluding
the Escrow Shares (as defined below), is $22,717,743. Depending upon the actual
Closing Price and the release of the Escrow Shares to the ViaVideo stockholders,
such minimum amount could be substantially higher than $22,717,743 but in no
event could it be greater than $90,000,000. See "The Merger and Related
Transactions--Conversion of Shares."
The following table indicates the relative Exchange Ratio, Total Value and
total shares of Polycom Common Stock to be issued in the Merger based on various
different Closing Prices of Polycom Common Stock, ranging from $3.00 per share
to $10.00 per share and based upon the 8,448,198 shares of ViaVideo Common Stock
outstanding assuming the exercise of shares available for grant and shares
outstanding
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under the ViaVideo Option Plan as of October 31, 1997. ViaVideo has no
obligation to consummate the Merger if the Closing Price is less than $3.00 per
share. If the Total Value were to be greater than $90,000,000, the Exchange
Ratio would be adjusted so that the Total Value would equal $90,000,000.
<TABLE>
<CAPTION>
CLOSING PRICE OF POLYCOM COMMON STOCK
----------------------------------------------------------------------------------------------
$3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exchange Ratio................ 1.183684 1.183684 1.183684 1.183684 1.183684 1.183684 1.183684 1.065316
Total Value................... $29,999,990 $39,999,987 $49,999,984 $59,999,981 $69,999,978 $79,999,974 $89,999,971 $90,000,000
Shares Issued................. 9,999,997 9,999,997 9,999,997 9,999,997 9,999,997 9,999,997 9,999,997 9,000,000
</TABLE>
Because the market price of Polycom Common Stock is subject to fluctuation,
the Polycom stockholders will not know the exact value of the Merger
consideration at the time of the Polycom Meeting since the Closing Price is
likely to change from the time of the Polycom Meeting to the Effective Time. For
current information on the Exchange Ratio and the number of shares of Polycom
Common Stock to be issued on a per share basis, Polycom stockholders are
encouraged to call Polycom at 888-261-6343.
The shares of Polycom Common Stock outstanding prior to the Merger will
remain unchanged by the Merger, except for dilution of approximately 30%
resulting from the Merger.
REASONS FOR THE MERGER
Polycom and ViaVideo have identified several potential benefits of the
Merger that they believe will contribute to the success of Polycom and ViaVideo
after the Merger (together, the "COMBINED COMPANY"). The Combined Company
intends to, among other things, introduce new videoconferencing products
incorporating new technologies into the market prior to its competitors and to
enhance its competitiveness by leveraging Polycom's infrastructure and
distribution channels with ViaVideo's proprietary technology to allow the
Combined Company to deliver a full line of audio, video and dataconferencing
products. See "The Merger and Related Transactions--Background of the Merger"
and "--Reasons for the Merger."
OPERATIONS FOLLOWING THE MERGER
Following the Merger, ViaVideo will continue its operations as a
wholly-owned subsidiary of Polycom.
THE POLYCOM MEETING
DATE, TIME AND PLACE OF THE POLYCOM MEETING
The Polycom Meeting will be held on December 10, 1997, at 10:00 a.m., local
time, at Polycom's offices located at 2584 Junction Avenue, San Jose,
California.
PURPOSE OF THE POLYCOM MEETING
At the Polycom Meeting, stockholders of record of Polycom will be asked to
consider and vote upon a proposal to approve the Reorganization Agreement and
the consummation of the Merger. Stockholders of Polycom will also consider and
vote upon any other matter that may properly come before the Polycom Meeting and
any adjournment or postponement thereof. Representatives of Polycom's principal
independent accountants are expected to be present at the Polycom Meeting. Such
representatives will have the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.
RECORD DATE; SHARES ENTITLED TO VOTE
Only holders of record of Polycom Common Stock on the Record Date are
entitled to notice of and to vote at the Polycom Meeting. At the close of
business on the Record Date, there were outstanding and
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entitled to vote 19,189,370 shares of Polycom Common Stock, each of which will
be entitled to one vote on each matter to be acted upon.
VOTE REQUIRED; CERTAIN VOTING INFORMATION; IRREVOCABLE PROXIES
Approval of the Reorganization Agreement and the consummation of the Merger
will require the affirmative vote of the holders of a majority of the
outstanding shares of Polycom Common Stock entitled to vote. See "The Merger and
Related Transactions--Related Agreements--Voting Agreements" below for
information with respect to voting agreements entered into by certain
stockholders of Polycom. Approval of the Merger by the stockholders and any
abstentions from voting thereon may be deemed a "ratification" of the Merger
under Delaware law, which may provide either Polycom or ViaVideo with a complete
or partial defense to any subsequent stockholder challenges to the Merger.
Polycom does not have a current intention to assert such vote as a defense to
any subsequent challenge to the transaction, but neither company intends to
waive any rights under Delaware law related thereto, and Polycom may in fact
assert such vote as a defense to any legal claim which may be raised.
Stockholders should therefore recognize that their vote may be used as a defense
to any such claim, and that such a vote may eliminate or impair their legal
right to challenge the transaction following the closing of the Merger.
As of the Record Date, Polycom's directors and executive officers (and their
affiliates), as a group, beneficially owned 7,846,225 shares (exclusive of any
shares issuable upon the exercise of options unexercised as of such date), or
approximately 41% of the 19,189,370 shares of Polycom Common Stock that were
issued and outstanding as of such date. Each of Brian L. Hinman, Robert C.
Hagerty, Dale A. Bastian, Michael R. Kourey, Ardesher Falaki, Gilbert J.
Pearson, Alan D. Hagedorn, Bandel Carano, James R. Swartz, John Morgridge and
Stanley J. Meresman, who, as of the Record Date, in the aggregate beneficially
owned 7,846,225 shares (exclusive of any shares issuable upon the exercise of
options), or approximately 41% of the shares of Polycom Common Stock, have
agreed with ViaVideo to vote in favor of the Reorganization Agreement and
consummation of the Merger and have executed irrevocable proxies in connection
therewith. See "The Merger and Related Transactions--Related Agreements--Voting
Agreements." As of the Record Date, there were 127 stockholders of record who
held shares of Polycom Common Stock, as shown on the records of Polycom's
transfer agent for such shares. Based on the 19,189,370 shares of Polycom Common
Stock outstanding and entitled to vote on the Record Date, a total of 9,594,686
shares are required to be voted in favor of the Merger in order for the Merger
to be approved and consummated. Accordingly, Polycom's directors, executive
officers and their affiliates hold shares representing approximately 82% of the
total number of shares required for approval of the transaction.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the Polycom Meeting
is a majority of the shares of Common Stock issued and outstanding as of the
Record Date. Abstentions and broker non-votes each will be included in
determining the number of shares present and voting at the meeting for the
purpose of determining the presence of a quorum. Because approval of the
Reorganization Agreement and the consummation of the Merger requires the
affirmative vote of a majority of the outstanding shares of Polycom Common Stock
entitled to vote thereon, abstentions and broker non-votes will have the same
effect as votes against the Reorganization Agreement and the consummation of the
Merger. However, under applicable Delaware law, an abstention may have the same
effect as a vote for the Merger in determining whether the stockholders have
"ratified" the Merger, and, accordingly abstentions may impair the ability of
stockholders to maintain a subsequent challenge to the Merger. THE ACTIONS
PROPOSED IN THIS PROXY STATEMENT ARE NOT MATTERS THAT CAN BE VOTED ON BY BROKERS
HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS' SPECIFIC INSTRUCTIONS.
ACCORDINGLY, ALL BENEFICIAL OWNERS OF POLYCOM COMMON STOCK ARE URGED TO RETURN
THE ENCLOSED PROXY CARD MARKED TO INDICATE THEIR VOTES.
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APPRAISAL RIGHTS
Stockholders of Polycom who dissent from the Merger will not be entitled to
rights of appraisal under Section 262 of the Delaware General Corporation Law
(the "DGCL"). See "The Merger and Related Transactions--Appraisal Rights."
FAIRNESS OPINION OF FINANCIAL ADVISOR
Montgomery Securities ("MONTGOMERY") has delivered to the Polycom Board its
written opinion, dated June 11, 1997 (the "MONTGOMERY OPINION"), that, as of
such date, and based upon and subject to the factors and assumptions set forth
in such written opinion, the consideration to be paid for the ViaVideo Common
Stock pursuant to the Merger is fair, from a financial point of view, to Polycom
as of the date of such opinion. The full text of the Montgomery Opinion is
attached as APPENDIX B to this Proxy Statement. Polycom stockholders are urged
to read the Montgomery Opinion in its entirety. See "The Merger and Related
Transactions--Fairness Opinion of Financial Advisor."
RECOMMENDATION OF POLYCOM'S BOARD OF DIRECTORS
THE DISINTERESTED MEMBERS OF THE POLYCOM BOARD (I) UNANIMOUSLY BELIEVE THE
TERMS AND CONDITIONS OF THE REORGANIZATION AGREEMENT AND THE PROPOSED MERGER ARE
FAIR TO, AND IN THE BEST INTERESTS OF, POLYCOM STOCKHOLDERS, (II) HAVE
UNANIMOUSLY APPROVED THE TERMS OF THE REORGANIZATION AGREEMENT AND THE MERGER,
AND (III) UNANIMOUSLY RECOMMEND THAT POLYCOM STOCKHOLDERS VOTE FOR THE APPROVAL
OF THE REORGANIZATION AGREEMENT AND CONSUMMATION OF THE MERGER. THE PRIMARY
FACTORS CONSIDERED AND RELIED UPON BY THE POLYCOM BOARD IN REACHING ITS
RECOMMENDATION ARE REFERRED TO IN "THE MERGER AND RELATED TRANSACTIONS--REASONS
FOR THE MERGER" AND "--BACKGROUND OF THE MERGER."
THE REORGANIZATION AGREEMENT
REPRESENTATIONS, WARRANTIES AND COVENANTS
Under the Reorganization Agreement, Polycom and ViaVideo made a number of
representations and warranties regarding their respective capital structures,
intellectual property, operations, financial conditions and other matters,
including their authority to enter into the Reorganization Agreement and to
consummate the Merger. Each of Polycom and ViaVideo covenanted that, until the
consummation of the Merger or the termination of the Reorganization Agreement,
it will carry on its business in the ordinary course and attempt to preserve its
present business and relationships with customers, suppliers and others, it will
not take certain actions without the other's consent, and it will use its best
efforts to consummate the Merger. See "The Merger and Related Transactions--The
Reorganization Agreement--Representations, Warranties and Covenants."
NO SOLICITATION OF TRANSACTIONS
ViaVideo has agreed not to take any action to, directly or indirectly,
solicit, initiate, or encourage any offer or proposal for, or any indication of
interest in 15% or more of the outstanding shares of capital stock of ViaVideo,
a merger or other business combination involving ViaVideo or the acquisition of
any significant equity interest in, or significant portion of the assets of,
ViaVideo ("TAKEOVER PROPOSAL") or engage in negotiations with, or disclose any
nonpublic information relating to ViaVideo or any of its subsidiaries to, or
afford access to the properties, books or records of ViaVideo to, any person
that has advised ViaVideo it has considered making or has made a Takeover
Proposal, or to any person relating to a possible acquisition of ViaVideo,
except that if ViaVideo notifies Polycom that ViaVideo will run out of cash and
cash equivalents on or before June 1, 1998, ViaVideo may initiate discussions
with venture
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capitalists and other non-corporate investors for the purpose of raising equity
funding for operations, such a transaction not to close prior to March 31, 1998.
The foregoing restrictions on ViaVideo's activities are waivable by Polycom. See
"The Merger and Related Transactions--The Reorganization Agreement--No
Solicitation of Transactions."
CONDITIONS TO THE MERGER
In addition to the requirement that the requisite approval of Polycom and
ViaVideo stockholders be received, the consummation of the Merger is subject to
a number of other conditions that, if not satisfied or waived, may cause the
Merger not to be consummated and the Reorganization Agreement to be terminated.
Each party's obligation to consummate the Merger is conditioned on, among other
things, approval of this Proxy Statement by the Commission, the accuracy of the
other party's representations, the other party's performance of its covenants,
the absence of a material adverse change with respect to the other party,
favorable legal opinions (including opinions to the effect that the Merger will
be treated as a tax-free reorganization for federal income tax purposes), the
receipt of a letter from Polycom's and ViaVideo's independent accountants that
the Merger will be treated as a pooling of interests for accounting purposes and
the absence of legal action preventing the consummation of the Merger.
Additionally, Polycom's obligation to consummate the Merger is conditioned on,
among other things, ViaVideo's first commercial shipment of its first
videoconferencing product, which meets previously agreed upon specifications, to
occur on or prior to March 31, 1998 (which condition is waivable by Polycom),
and ViaVideo's obligation to consummate the Merger is conditioned on, among
other things, the closing price of Polycom's Common Stock (as determined by the
average of the closing prices of Polycom's Common Stock as quoted on the Nasdaq
National Market System for the ten (10) trading days immediately preceding, and
including, the second trading day prior to the Effective Time, the "CLOSING
PRICE") being at least $3.00 per share. At any time prior to the Merger, either
party may waive compliance with any of the agreements or satisfaction of any of
the conditions in the Reorganization Agreement.
CLOSING
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Reorganization Agreement, Merger Sub and ViaVideo
will file a Certificate of Merger with the Secretary of State of Delaware and
the Recorder of the County in which the registered office of ViaVideo is
located. The Merger will become effective upon such filings (the "EFFECTIVE
TIME"). It is anticipated that, assuming all conditions are met, the Merger will
occur and a closing will be held on or before March 31, 1998. See "The Merger
and Related Transactions--The Reorganization Agreement--Closing."
REGISTRATION RIGHTS
The shares of Polycom Common Stock to be issued in the Merger will be issued
in a transaction exempt from the registration requirements of the Securities
Act. Polycom has granted registration rights (the "REGISTRATION RIGHTS") to the
holders of ViaVideo Common Stock and has covenanted to file a registration
statement on Form S-3 (the "REGISTRATION STATEMENT") within thirty (30) days of
the Effective Time in order to register the Polycom Common Stock to be issued in
the Merger for resale. The Registration Rights include, among other things, an
obligation by Polycom to keep the Registration Statement effective for a period
of two (2) years as well as cross indemnification provisions whereby Polycom and
the ViaVideo stockholders agree to indemnify each other for any liability that
might arise from any untrue statement contained in the Registration Statement
made by that party. See "The Merger and Related Transactions--Registration
Rights."
TERMINATION, AMENDMENT AND WAIVER
At any time prior to the Effective Time, the Reorganization Agreement may be
terminated by mutual consent authorized by the Polycom and ViaVideo Boards of
Directors, or by either Polycom or ViaVideo
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(i) if, without fault of the terminating party, the closing of the Merger has
not occurred on or before March 31, 1998, (ii) if there is a breach by the other
party of a representation, warranty or obligation set forth in the
Reorganization Agreement in any material respect and such breach is not cured
within ten (10) business days after written notice from the other, provided that
the terminating party is not at that time in willful breach of the
Reorganization Agreement, (iii) if the required approval of the stockholders of
Polycom and/or ViaVideo is not obtained, or (iv) if there is a final,
non-appealable order of a court of competent jurisdiction in effect preventing
consummation of the Merger. (See "The Merger and Related Transactions--The
Reorganization Agreement--Termination, Amendment and Waiver").
The Reorganization Agreement may be terminated by Polycom at Polycom's sole
discretion prior to the Effective Time if (i) ViaVideo's Board of Directors
withdraws or modifies its recommendation of the Reorganization Agreement or the
Merger in a manner adverse to Polycom, provided that Polycom is not at that time
in willful breach of the Reorganization Agreement; (ii) for any reason ViaVideo
fails to call and hold a ViaVideo stockholders meeting to vote on and approve
the Reorganization Agreement and the consummation of the Merger by March 31,
1998; or (iii) holders of more than nine percent (9%) of ViaVideo Common Stock
have not voted in favor of the Merger by March 31, 1998.
The Reorganization Agreement may be terminated by ViaVideo prior to the
Effective Time if (i) the Polycom Board shall have withdrawn or modified its
recommendation of the Reorganization Agreement or Merger in a manner adverse to
ViaVideo, provided that ViaVideo is not at that time in willful breach of this
Reorganization Agreement; (ii) for any reason Polycom fails to call and hold a
Polycom stockholders meeting to vote on and approve the Reorganization Agreement
and the consummation of the Merger by March 31, 1998 or (iii) Polycom's
Stockholders do not approve the Merger and the Agreement by the requisite vote
at the Polycom Meeting.
The Reorganization Agreement may be amended by Polycom and ViaVideo at any
time before or after approval by the Polycom, ViaVideo or Merger Sub
stockholders, except that, after such approval, no amendment may be made which
(i) alters or changes the amount or kind of consideration to be received on
conversion of the ViaVideo Common Stock, (ii) alters or changes any term of the
Certificate of Incorporation of the surviving corporation to be effected by the
Merger, or (iii) alters or changes any of the terms and conditions of the
Reorganization Agreement if such alteration or change would adversely affect the
holders of ViaVideo or Merger Sub Common Stock. See "The Merger and Related
Transactions--The Reorganization Agreement--Termination, Amendment and Waiver."
FEES AND EXPENSES; TERMINATION FEE
Whether or not the Merger is consummated, all costs and expenses incurred in
connection with the Reorganization Agreement and the Merger will be paid by the
party incurring the expense, provided, however, that any out-of-pocket expenses
incurred by ViaVideo in excess of $175,000, except in limited circumstances,
shall remain an obligation of ViaVideo's stockholders.
Notwithstanding the foregoing, in certain events, if Polycom or ViaVideo
terminates the Reorganization Agreement, the terminating party must promptly pay
to the other party all of the fees and out-of-pocket costs incurred by the
non-terminating party. In certain cases, the cash sum of $4,000,000 shall also
be paid to the terminating party. See "The Merger and Related Transactions--The
Reorganization Agreement--Fees and Expenses; Termination Fee."
ESCROW AND INDEMNIFICATION
Pursuant to Article VIII of the Reorganization Agreement ("ARTICLE VIII"),
at the Effective Time, Polycom will deposit into escrow certificates
representing 10% of the shares of Polycom Common Stock otherwise issuable to the
holders of ViaVideo Common Stock in the Merger, on a pro rata basis. Such shares
(the "ESCROW SHARES") will be registered in the name of and deposited with State
Street Bank and Trust Company of California, N.A. (the "ESCROW AGENT") to be
entered into among Polycom, the Escrow
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Agent and Craig B. Malloy as agent of the ViaVideo stockholders (the
"STOCKHOLDERS AGENT"), to constitute the "ESCROW FUND." The Escrow Fund will be
available to provide a fund against which Polycom, its affiliates, officers,
directors, employees and agents may assert indemnification claims for losses,
damages, costs and expenses (including reasonable legal fees and expenses) that
an they may have incurred by reason of (i) any inaccuracy in or breach of any
representation, warranty or covenant of ViaVideo contained in the Reorganization
Agreement or (ii) a breach of the confidentiality agreement between ViaVideo and
Polycom (collectively, "POLYCOM LOSSES"). Subject to certain exceptions, claims
against the Escrow Fund shall be Polycom's sole remedy following the Merger for
any Polycom Losses. In the case of any Polycom Losses, Polycom must deliver
notice of such losses to the Escrow Agent and the Stockholders' Agent. If the
Stockholder's Agent disputes the claim, the matter must be resolved by binding
arbitration. Polycom's right to receive shares from the Escrow Fund is subject
to certain limitations. The indemnification period will end on the earlier of
(i) twelve (12) months following the Effective Time or (ii) the date on which
Polycom issues its audited consolidated financial statements which include the
results of ViaVideo for the fiscal year ending December 31, 1997 or December 31,
1998, depending on the Effective Date. Any Escrow Shares available for
distribution at the end of the indemnification period will be issued to the
former stockholders of ViaVideo on a pro rata basis. See "The Merger and Related
Transactions--The Reorganization Agreement--Escrow and Indemnification."
INDEMNIFICATION BY POLYCOM
Polycom has agreed that, from and after the Effective Time, Polycom will
cause ViaVideo to indemnify and hold harmless the present and former officers,
directors, employees and agents of ViaVideo in respect of acts or omissions
occurring on or prior to the Effective Time to the extent provided under
ViaVideo's then effective Certificate of Incorporation and Bylaws or any
indemnification agreement with ViaVideo officers and directors to which ViaVideo
is a party, in each case in effect on March 1, 1997; provided that such
indemnification shall be subject to any limitation imposed from time to time
under applicable law.
RELATED AGREEMENTS
VOTING AGREEMENTS
In connection with the Merger, directors and executive officers of Polycom
and ViaVideo have entered into voting agreements with ViaVideo and Polycom,
respectively. The terms of such voting agreements provide that each of such
stockholders will vote all shares of Polycom Common Stock, ViaVideo Common Stock
and ViaVideo Preferred Stock beneficially owned by such stockholders, as the
case may be, in favor of the approval of the Reorganization Agreement and
consummation of the Merger and against any competing proposals (the "VOTING
AGREEMENTS"). The Voting Agreements are accompanied by irrevocable proxies
whereby the stockholders of Polycom and ViaVideo provide to ViaVideo and
Polycom, respectively, the right to vote their shares on the proposals relating
to the Reorganization Agreement and the Merger at the Polycom Meeting or the
ViaVideo Meeting, as the case may be, and on any competing proposal at a Polycom
or ViaVideo stockholder meeting, as the case may be. Holders of approximately
41% and 100% (exclusive of any shares issuable upon the exercise of options) of
the shares of Polycom Common Stock and ViaVideo Common Stock, respectively,
entitled to vote at the stockholder meeting have entered into such Voting
Agreements and irrevocable proxies. See "The Merger and Related
Transactions--Related Agreements--Voting Agreements."
AFFILIATES AGREEMENTS
To help ensure that the Merger will be accounted for as a pooling of
interests and to help ensure that the Merger shall qualify as a Reorganization
(as defined below), the affiliates of Polycom and ViaVideo have executed
agreements which, among other things and with certain limited exceptions,
prohibit such persons from disposing of their Polycom Common Stock or ViaVideo
Common Stock, as the case may be,
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until Polycom publicly releases financial results covering at least 30 days of
combined operations of Polycom and ViaVideo after the Merger and confirm that
each such person does not currently, and will not at the Effective Time, have a
plan to dispose of more than fifty percent (50%) of the shares of Polycom Common
Stock to be acquired by such person in the Merger, (the "AFFILIATES
AGREEMENTS"). See "The Merger and Related Transactions--Related
Agreements--Affiliates Agreements."
STOCKHOLDER'S REPRESENTATION AGREEMENTS
To help ensure that the Merger will qualify as a Reorganization (as defined
below), Polycom has entered into stockholder representation agreements (the
"STOCKHOLDER'S REPRESENTATION AGREEMENTS") with the non-affiliate stockholders
of ViaVideo which, among other things, confirm that each such stockholder does
not currently, and will not at the Effective Time, have a plan to dispose of
more than fifty percent (50%) of the shares of Polycom Common Stock to be
received by such stockholder pursuant to the Merger, and which also appoint
Craig B. Malloy as the Stockholder's Agent and consent to be bound by the Escrow
Agreement and Article VIII. See "The Merger and Related Transactions--Related
Agreements--Stockholder's Representation Agreements."
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
Polycom has entered into an employment and non-competition agreement with
each of Craig B. Malloy, Michael J. Hogan, Michael L. Kenoyer, Patrick D.
Vanderwilt, Errol R. Williams and David N. Hein. The employment and
non-competition agreements are contingent upon the occurrence of the Merger and
will become effective at the effective time of the Merger. See "The Merger and
Related Transactions--Related Agreements--Employment and Non-Competition
Agreements."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Polycom Board of Directors with
respect to the Reorganization Agreement and the Merger, the Polycom stockholders
should be aware that certain directors, officers of Polycom and ViaVideo have
interests in the Merger that present them with potential conflicts of interest.
See "The Merger and Related Transactions--Interests of Certain Persons in the
Merger."
RISK FACTORS
IN CONSIDERING WHETHER TO APPROVE THE REORGANIZATION AGREEMENT AND THE
CONSUMMATION OF THE MERGER, POLYCOM STOCKHOLDERS SHOULD CAREFULLY REVIEW AND
CONSIDER THE INFORMATION CONTAINED BELOW UNDER THE CAPTION "RISK FACTORS."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Merger is intended to qualify as a "reorganization" under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "CODE") (a
"REORGANIZATION"). It is a condition to the obligation of each of the parties to
consummate the Merger that such party receives an opinion of its counsel to the
effect that the Merger will qualify as a Reorganization, although such condition
could be waived by the parties. See "The Merger and Related
Transactions--Certain Federal Income Tax Considerations."
ACCOUNTING TREATMENT
The Merger is intended to be treated as a pooling of interests for
accounting purposes. As a condition to Polycom's and ViaVideo's obligations to
consummate the Merger, each of Polycom and ViaVideo will receive a letter from
Coopers & Lybrand L.L.P., independent accountants, confirming that the Merger
qualifies for pooling-of-interests accounting treatment. See "The Merger and
Related Transactions - Accounting Treatment."
11
<PAGE>
STOCKHOLDER RIGHTS
The rights of Polycom and ViaVideo stockholders are governed by the DGCL and
by each of Polycom's and ViaVideo's Certificates of Incorporation and Bylaws.
Upon consummation of the Merger, ViaVideo stockholders will become stockholders
of Polycom, and their rights as stockholders of Polycom will be governed by the
DGCL and by Polycom's Certificate of Incorporation and Bylaws.
MARKET PRICE AND DIVIDEND INFORMATION
POLYCOM MARKET PRICE DATA
Polycom's Common Stock is traded on the Nasdaq National Market under the
symbol "PLCM." The following table sets forth the range of high and low closing
sales prices reported on the Nasdaq National Market for Polycom Common Stock for
the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal 1996
First Quarter............................................................... N/A N/A
Second Quarter.............................................................. 10.50 6.63
Third Quarter............................................................... 9.25 6.00
Fourth Quarter.............................................................. 7.13 4.25
Fiscal 1997
First Quarter............................................................... 5.69 3.50
Second Quarter.............................................................. 5.38 2.75
Third Quarter............................................................... 5.88 4.38
Fourth Quarter (through October 28, 1997)................................... 6.31 5.00
</TABLE>
DIVIDEND INFORMATION
Neither Polycom nor ViaVideo has ever paid any cash dividends on its stock,
and both anticipate that for the foreseeable future they will continue to retain
any earnings for the foreseeable future for use in the operation of their
respective businesses.
RECENT CLOSING PRICES
The following table sets forth the closing prices per share of Polycom
Common Stock on the Nasdaq National Market on June 10, 1997, the last trading
day before announcement of the proposed Merger, and on November 17, 1997, the
latest practicable trading day before the printing of this Proxy Statement, and
the equivalent per share prices for ViaVideo Common Stock based on the Polycom
Common Stock prices:
<TABLE>
<CAPTION>
POLYCOM STOCK VIAVIDEO EQUIVALENT (1)
--------------- -----------------------
<S> <C> <C>
June 10, 1997.......................................... $ 3.75 $ 4.44
November 17, 1997...................................... $ 6.06 $ 7.18
</TABLE>
- ------------------------
(1) Represents the equivalent of one share of ViaVideo Common Stock calculated
by multiplying the closing price per share of Polycom Common Stock by the
Exchange Ratio.
Because the market price of Polycom Common Stock is subject to fluctuation,
the market value of the shares of Polycom Common Stock that holders of ViaVideo
Common Stock will receive in the Merger may increase or decrease prior to and
following the Merger. NO ASSURANCE CAN BE GIVEN AS TO THE FUTURE PRICE OR MARKET
FOR POLYCOM COMMON STOCK.
NUMBER OF STOCKHOLDERS
As of October 28, 1997, there were 127 stockholders of record who held
shares of Polycom Common Stock (although Polycom has been informed that there
are approximately 2,100 beneficial owners), as shown on the records of Polycom's
transfer agent for such shares. As of October 28, 1997, there were 13
stockholders of record who held shares of ViaVideo Common Stock and ViaVideo
Preferred Stock as shown in ViaVideo's stock transfer ledger.
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<PAGE>
COMPARATIVE PER SHARE DATA
The following tables set forth certain historical per share data of Polycom
and ViaVideo and combined per share data on an unaudited pro forma basis after
giving effect to the Merger on a pooling-of-interests basis assuming that
1.183684 of a share of Polycom Common Stock is issued in exchange for each share
of ViaVideo Common Stock and ViaVideo Preferred Stock in the Merger. This data
should be read in conjunction with the Selected Historical Financial Data, the
Unaudited Pro Forma Combined Condensed Consolidated Financial Statements and the
separate historical consolidated financial statements of Polycom and ViaVideo
and the notes thereto included elsewhere in this Proxy Statement. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the combined financial position or results of future periods or
the results that actually would have been realized had the entities been a
single entity during the periods presented.
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- --------------------
1996 1995 1994 1997 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Historical--Polycom
Net income (loss) per share.................................... $ 0.08 $ (0.37) $ (0.73) $ (0.06) $ 0.05
Book value per share(1)........................................ 1.63 1.59
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
PERIOD FROM SEPTEMBER 10,
1996 (INCEPTION) TO
DECEMBER 31,
-------------------------
1996
------------------------- AS OF AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30,
---------------------------
1997
---------------------------
(UNAUDITED)
<S> <C> <C>
Historical--ViaVideo
Net loss per share....................................... $ (0.16) $ (2.53)
Book value per share(1).................................. 0.75 1.66
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE NINE
YEAR ENDED(2) MONTHS ENDED SEPTEMBER 30,
------------------------- ---------------------------
1996 1997
------------------------- ---------------------------
<S> <C> <C>
Unaudited Pro forma combined per share data(3):
Pro forma net income (loss) per Polycom Share............ $ 0.05 $ (0.26)
Pro forma book value per Polycom share................... 1.36 1.24
Unaudited Equivalent pro forma combined per share data(4):
Equivalent pro forma net income (loss) per ViaVideo
share.................................................. 0.06 (0.30)
Equivalent pro forma book value per ViaVideo share....... 1.61 1.47
</TABLE>
- ------------------------
(1) The historical book value per share for Polycom is computed by dividing
stockholders' equity by the number of shares of common stock outstanding at
the end of each period. The historical book value per share for ViaVideo is
computed by dividing stockholders' equity by the number of shares of common
stock outstanding at the end of each period.
(2) The 1994 and 1995 periods were not presented due to the fact that ViaVideo
began operations in September of 1996 and therefore the 1994 and 1995 pro
forma information for such periods would be the same as the historical
information for Polycom only.
13
<PAGE>
(3) For purposes of this presentation, pro forma combined net income per share
data reflects ViaVideo's per share data for the period from September 10,
1996 (inception) through December 31, 1996, and for the nine months ended
September 30, 1997, and Polycom's per share data for December 31, 1996 and
for the nine months ended September 30, 1997. The pro forma combined net
income (loss) per share data is based on the combined weighted average
number of shares outstanding of Polycom and ViaVideo for each period based
on the exchange ratio of 1.183684 shares of Polycom Common Stock for each
share of ViaVideo Common Stock shares and for each share of ViaVideo
Preferred Stock. Prior to the Merger all of ViaVideo's Preferred Stock will
convert into shares of ViaVideo Common Stock on a one for one basis.
(4) The ViaVideo equivalent pro forma per share amounts are calculated by
multiplying the combined pro forma per share data amounts by the Exchange
Ratio of 1.183684 shares of Polycom Common Stock for each share of ViaVideo
Capital Stock.
14
<PAGE>
RISK FACTORS
The following risk factors should be considered by holders of Polycom Common
Stock and ViaVideo capital stock in evaluating whether to approve the
Reorganization Agreement and the consummation of the Merger. These factors
should be considered in conjunction with the other information contained in this
Proxy Statement and the Appendices hereto.
RISKS RELATING TO THE MERGER
UNCERTAINTIES RELATING TO THE INTEGRATION OF, AND IMPACT ON,
OPERATIONS. Polycom and ViaVideo have entered into the Reorganization Agreement
with the expectation that the Merger will result in operating and strategic
benefits, including operating cost reductions and product development, marketing
and sales synergies. The anticipated benefits of the Merger may not be achieved
unless the operations of ViaVideo are successfully combined with those of
Polycom in a coordinated, timely and efficient manner, and there can be no
assurance this will occur. The transition to a combined company will require
substantial attention from management. The diversion of the attention of
management and any difficulties encountered in the transition process could have
an adverse impact on the revenues and operating results of the Combined Company.
The combination of the two companies will also require integration of the
companies' product offerings and the coordination of their sales and marketing
efforts. The difficulties of assimilation may be increased by the necessity of
integrating personnel with disparate business backgrounds and combining two
different corporate cultures. In addition, the process of combining the two
organizations could cause the interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses, which could have an
adverse effect on their combined operations. Further, Polycom does not currently
anticipate that ViaVideo employees will be relocated from ViaVideo's facilities
in Austin, Texas to Polycom's facilities in San Jose, California, which may
increase the difficulties of assimilation of the two companies. Once the Merger
has been completed, the Combined Company's operating expenses will increase in
absolute dollars. The amount of the increase is expected to be less than would
otherwise occur if the two companies remained separate due to the expected
operational synergies. Should the expected revenues from ViaVideo products not
occur, or occur later or in an amount less than expected, the combined operating
expenses, in both absolute dollars and as a percentage of net revenues, of
Polycom would be higher than if the Merger had not occurred. The resulting
higher operating expenses could have a materially adverse affect on the
financial results of the Combined Company. There can be assurance that the
Merger will not decrease the operating income of Polycom. There can be no
assurance that either company will retain its key technical personnel or that
the Combined Company will realize any of the other anticipated benefits of the
Merger. Failure to achieve the anticipated benefits of the Merger or to
successfully integrate the operations of the companies could have a material
adverse effect upon the business, operating results and financial condition of
the Combined Company. Even if the benefits of the Merger are achieved and the
two companies' operations are successfully integrated, there can be no assurance
that future operating results and financial condition of the Combined Company
will not be adversely affected by any number of economic, market or other
factors that are not related to the Merger.
POTENTIAL DILUTIVE EFFECT TO POLYCOM STOCKHOLDERS. Although the companies
believe that beneficial synergies will result from the Merger, there can be no
assurance that the combining of the two companies' businesses, even if achieved
in an efficient, effective and timely manner, will result in combined results of
operations and financial condition superior to what would have been achieved by
each company independently, or as to the period of time required to achieve such
result. The issuance of Polycom Common Stock in connection with the Merger may
have the effect of reducing Polycom net income per share from levels otherwise
expected and could reduce the market price of the Polycom Common Stock unless
revenue growth or cost savings and other business synergies sufficient to offset
the effect of such issuance can be achieved.
15
<PAGE>
EFFECTS OF THE MERGER ON CUSTOMERS. The announcement and consummation of
the Merger could cause customers and potential customers of Polycom or ViaVideo
to delay or cancel orders for products as a result of customer concerns and
uncertainty over product evolution, integration and support of the Combined
Company's products. Such a delay or cancellation of orders could have a material
adverse effect on the business, results of operations and financial condition of
either or both of Polycom or ViaVideo.
EFFECTS OF THE MERGER ON PICTURETEL RELATIONSHIP. Polycom and PictureTel
have entered into agreements whereby PictureTel resells Polycom's ShowStation
products and supplies Polycom's SoundPoint products to other producers of
videoconferencing products. Polycom does not have any such agreements with
PictureTel regarding the resale or supply of any new products to be developed by
the Combined Company as a result of the Merger. Polycom and PictureTel are also
competitors in the teleconferencing market and as such, there can be no
assurance that PictureTel will enter into future agreements to resell or supply
any new or enhanced products of the Combined Company. As ViaVideo intends to
introduce a product more directly competitive with PictureTel products, the
Merger could potentially increase competition between the Combined Company and
PictureTel which could strain the existing relationship between the companies,
which could have a material adverse effect on the business, results of
operations and financial condition of the Combined Company.
TRANSACTION EXPENSES; COSTS OF INTEGRATION. The negotiation and
implementation of the Merger is currently anticipated to result in aggregate
expenses (including investment banking, legal and accounting fees) estimated to
be approximately $737,000. This estimate is preliminary and subject to change.
These costs are expected to be charged against income of Polycom in the four
fiscal quarters ending in the first quarter of 1998. In addition, following the
Merger Polycom may incur additional charges to operations to reflect the costs
associated with integrating the two companies. The Merger will have a short-term
adverse effect on the net income of Polycom due to the aforementioned expenses.
There can be no assurance that Polycom will not make additional material charges
in subsequent quarters to reflect additional costs associated with the Merger.
SHARES ELIGIBLE FOR FUTURE SALE. Polycom will issue approximately 8,402,023
shares of Polycom Common Stock in the Merger and will assume options to purchase
ViaVideo Common Stock which shall be convertible into 1,342,356 shares of
Polycom Common Stock. Polycom has agreed to register the resale of such shares
with the Commission within thirty (30) days of the Effective Time and to keep
such registration effective for a period of two (2) years. In general, after
registration, such shares will be freely tradable following the Merger. The sale
of any of these shares may cause substantial fluctuations in the price of
Polycom Common Stock over short time periods.
VOLATILITY OF STOCK PRICES; VALUE OF CONSIDERATION DEPENDS ON PRICE OF
POLYCOM COMMON STOCK. Polycom's Common Stock has experienced substantial price
volatility and can be expected to continue to experience substantial volatility
in response to actual or anticipated quarterly variations in operating results,
announcements of technological innovations or new products by Polycom or its
respective competitors, developments related to patents or other intellectual
property rights, developments in Polycom's relationships with its respective
customers, distributors or suppliers, acquisitions or divestitures of other
companies in the teleconferencing industry, and other events or factors. In
addition, any shortfall or changes in revenue, gross margins, earnings, or other
financial results from analysts' expectations could cause the price of Polycom
Common Stock to fluctuate significantly. In recent years, the stock market in
general has experienced extreme price and volume fluctuations, which have
particularly affected the market price of many technology companies and which
have often been unrelated to the operating performance of those companies. These
broad market fluctuations may adversely affect the market price of Polycom
Common Stock.
Fluctuations in the prices of Polycom Common Stock could affect the value of
the merger consideration and the Exchange Ratio. Under the terms of the
Reorganization Agreement, the shares of ViaVideo capital stock issued and
outstanding at the Effective Time will be converted into the right to receive
shares
16
<PAGE>
of Polycom Common Stock. While the Exchange Ratio will be adjusted under certain
circumstances based on the closing sale prices of Polycom Common Stock during
the ten (10) trading days immediately preceding (and including) the second
trading day prior to the Effective Time, the value of the consideration to be
received by holders of ViaVideo Common Stock upon the Merger will depend on the
value of Polycom Common Stock. See "The Merger and Related Transactions--The
Merger Consideration-- Conversion of Shares." There can be no assurance that the
market price of Polycom Common Stock on and after the Effective Time will not be
higher or lower than their respective prices on the last trading day prior to
the public announcement of the Merger, the second trading day prior to the
Effective Time or any other date. Stockholders should obtain and consider recent
trading prices of Polycom Common Stock in determining whether to vote in favor
of the Reorganization Agreement and the consummation of the Merger.
POTENTIAL UNAVAILABILITY OF "POOLING OF INTERESTS" ACCOUNTING TREATMENT OF
MERGER. The Merger is intended to qualify as a "pooling of interests" for
accounting and financial reporting purposes. Under this method of accounting,
the assets and liabilities of Polycom and ViaVideo will be carried forward to
the Combined Company at their recorded amounts, income from the Combined Company
will include income from Polycom and ViaVideo for the entire fiscal period in
which the combination occurs and the reported income of the separate companies
for prior periods will be combined and restated as the results of operations of
the Combined Company. Availability of pooling-of-interests accounting treatment
is a condition to consummation by Polycom and ViaVideo of the Merger, although
such condition may be waived by mutual agreement of Polycom and ViaVideo. At the
present time, Polycom and ViaVideo do not intend to waive such
pooling-of-interests accounting treatment as a condition of the Merger.
Under the pooling-of-interest rules, none of the officers, directors or
affiliates of either of the combining companies may sell any shares of either of
the combining companies (except for certain de minimis sales) until the Combined
Company releases financial results covering at least thirty days of combined
operations of Polycom and ViaVideo. Accordingly, pooling-of-interests accounting
treatment for the Merger as of such time may not be available because of sales
by such stockholders (except for certain de minimis sales) after the
consummation of the Merger and prior to the time the Combined Company releases
such financial results. As a result of the unavailability of such accounting
treatment, the Merger would be accounted for under the purchase method of
accounting, which would have the effects discussed below. Each of the current
officers, directors and affiliates of ViaVideo and each of the current officers,
directors and affiliates of Polycom have entered into affiliate agreements
agreeing to comply with this restriction.
There can be no assurance that an officer, director or affiliate of either
company will not sell shares of Polycom or ViaVideo stock or that all
requirements necessary to qualify for pooling of interests will be met. If any
of such events occur prior to consummation of the Merger, then neither company
is required to consummate the Merger. However, if both companies nevertheless
elected to consummate the Merger, the Merger would necessarily be accounted for
under the purchase method of accounting, which would require ViaVideo's assets
to be recognized at their fair value and any excess of the purchase price over
such fair value to be recognized as goodwill on Polycom's balance sheet. The
goodwill would thereafter be amortized as an expense over its anticipated useful
life. The impact of such treatment would have a material adverse effect on the
Combined Company's results of operations. If any such events occur subsequent to
consummation of the Merger and prior to the release of the financial results
covering at least thirty days of combined operations, the Merger would also be
required to be accounted for under the purchase method of accounting, which
could have a material adverse effect on the Combined Company's results of
operations as described above.
POTENTIAL CONFLICTS OF INTEREST. In considering the recommendation of the
Polycom Board with respect to the Merger, stockholders of Polycom should be
aware that certain officers and directors of Polycom and ViaVideo have interests
in the Merger that are in addition to the interests of Polycom stockholders
generally. Craig B. Malloy, Michael J. Hogan, Michael L. Kenoyer, Patrick D.
Vanderwilt, Errol R.
17
<PAGE>
Williams and David N. Hein have entered into Employment Agreements which provide
for continuation of each person's salary and benefits for up to an eighteen (18)
month period in the event that his employment is terminated without cause.
Furthermore, the Reorganization Agreement provides that after the Effective
Time, Polycom will cause ViaVideo to indemnify and hold harmless the present and
former officers, directors, employees and agents of ViaVideo in respect of acts
or omissions occurring on or prior to the Effective Time to the extent provided
under ViaVideo's then effective Certificate of Incorporation and Bylaws or any
indemnification agreement with ViaVideo officers and directors to which ViaVideo
is a party, in each case in effect on March 1, 1997. Polycom and ViaVideo have
also entered into services agreements between the companies whereby each company
will provide consulting and administrative support services, upon request, to
the other for a fee. Mr. Bandel Carano is a member of both the Polycom and
ViaVideo Boards, and as such Mr. Carano left the Polycom Board meeting prior to
the discussions regarding the approval of the Merger and abstained from voting
on the Merger in his capacity as a director of Polycom. Mr. Carano is a general
partner of Oak Investment Partners which is a significant stockholder in both
Polycom and ViaVideo. Mr. Swartz was a member of the PictureTel Board of
Directors as well as the Polycom Board at the time of approval of the Merger and
abstained from voting on the Merger in his capacity as a director of Polycom.
Mr. Swartz has subsequently resigned from the PictureTel Board of Directors.
Brobeck, Phleger & Harrison LLP represented Polycom in the negotiation of the
Reorganization Agreement and is representing ViaVideo with respect to matters
required to close the transactions contemplated thereby. Gunderson Dettmer
Stough Villaneuve Franklin and Hachigian LLP represented ViaVideo in the
negotiation of the Reorganization Agreement and is representing Polycom with
respect to matters required to close the transactions contemplated thereby.
Brobeck, Phleger & Harrison LLP is currently representing ViaVideo in pending
litigation. See "The Merger and Related Transactions-- Interests of Certain
Persons in the Merger" and "Business of ViaVideo--Litigation."
RISKS RELATING TO POLYCOM
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS AND FUTURE GROWTH
RATE. Polycom's operating results have fluctuated in the past and may fluctuate
in the future as a result of a number of factors, including market acceptance of
the next generation of ShowStation products and other new product introductions
and product enhancements by Polycom or its competitors, the prices of Polycom's
or its competitors' products, the mix of products sold, the mix of products sold
directly and through resellers, fluctuations in the level of international
sales, the cost and availability of components, manufacturing costs, the level
of warranty claims, changes in Polycom's distribution network, the level of
royalties to third parties and changes in general economic conditions. In
addition, competitive pressure on pricing in a given quarter could adversely
affect Polycom's operating results for such period, and such price pressure over
an extended period could materially adversely affect Polycom's long-term
profitability. Polycom's ability to maintain or increase net revenues will
depend upon its ability to increase unit sales volumes of its SoundStation,
SoundStation Premier and SoundPoint families of audioconferencing products and
the dataconferencing line of products, currently comprised of the ShowStation
products, and any new products or product enhancements. There can be no
assurance that Polycom will be able to increase unit sales volumes of existing
products, introduce and sell new products or reduce its costs as a percentage of
net revenues.
From inception through the nine month period ended September 30, 1995, the
Company incurred losses from operations, primarily as a result of its
investments in the development of its products and the expansion of its sales
and marketing, manufacturing and administrative organizations. The Company
achieved profitability in the fourth quarter of 1995 and generated a small
operating income in each quarter of fiscal 1996. The Company incurred an
operating loss in the first and second quarter of 1997. The Company intends to
continue to invest significantly in research and development, and plans to
operate with an operating loss or break-even results, excluding acquisition
expenses, through the third quarter of 1997. There can be no assurance that the
Company will achieve its operating plans or achieve profitable operations in any
subsequent period.
18
<PAGE>
Polycom typically ships products within a short time after receipt of an
order, does not usually have a significant backlog and backlog fluctuates
significantly from period to period. As a result, backlog at any point in time
is not a good indicator of future net revenues and net revenues for any
particular quarter cannot be predicted with any degree of accuracy. Accordingly,
Polycom's expectations for both short- and long-term future net revenues are
based in large part on its own estimate of future demand and not on firm
customer orders. In addition, Polycom has in the past received orders and
shipped a substantial percentage of the total products sold during a particular
quarter in the last several weeks of the quarter. In some cases, these orders
have consisted of distributor stocking orders and Polycom has from time to time
provided special incentives for distributors to purchase more than the minimum
quantities required under their agreements with Polycom. Therefore, Polycom has
been uncertain, throughout most of each quarter, as to the level of revenues it
will achieve in the quarter and the impact that distributor stocking orders will
have on revenues and gross margins in that quarter and subsequent quarters. In
addition, because a substantial percentage of product sales occur at the end of
the quarter, product mix and therefore gross margins are difficult to predict.
Further, there can be no guarantee that Polycom's contract manufacturers will be
able to meet product demand before the quarter ends. Polycom anticipates that
this pattern of sales will continue in the future. Expense levels are based, in
part, on these estimates and, since Polycom is limited in its ability to reduce
expenses quickly if orders and net revenues do not meet expectations in a
particular period, operating results would be adversely affected. In addition, a
seasonal demand may develop for Polycom's products in the future. Due to all of
the foregoing factors, it is likely that in some future quarter Polycom's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of Polycom's Common Stock would likely be
materially adversely affected.
Polycom's future growth is substantially dependent on net revenues generated
from sales of Polycom's next generation of ShowStation products. In November
1995, Polycom began customer shipments of its first generation ShowStation
products. Dataconferencing is an emerging market and there can be no assurance
that it will develop sufficiently to enable Polycom to achieve broad commercial
acceptance of its ShowStation products. Because the dataconferencing market is
relatively new and evolving, and because current and future competitors are
likely to introduce competing dataconferencing products, it is difficult to
predict the rate at which demand for Polycom's next generation of ShowStation
products will grow, if at all, or to predict the level of future growth, if any,
of the dataconferencing market. If the dataconferencing market fails to grow, or
grows more slowly than anticipated, Polycom's business, operating results and
financial condition will be materially adversely affected. Although there are
currently no products in the dataconferencing market that offer all of the same
functions and features as the next generation of ShowStation products, there are
products that enable users to participate in a dataconference and other
products, such as multimedia presentation products, that are not designed
primarily for dataconferencing but can be used to provide a dataconferencing
solution. There can be no assurance that the market for dataconferencing
products with the functions and features of the next generation of ShowStation
products will achieve broad commercial acceptance or that the market for
Polycom's new ShowStation product will grow.
Even if the market for dataconferencing products does develop, there can be
no assurance that Polycom's next generation of ShowStation products will achieve
commercial success within such market. Due to the unique nature of the new
ShowStation products, Polycom believes it will be required to incur significant
expenses for sales and marketing, including advertising, to educate potential
customers as to the desirability of ShowStation. Polycom also expects to incur
substantially longer sales cycles with respect to its ShowStation products than
has been the case for the SoundStation products. In addition, the list price of
the ShowStation products, which is significantly higher than the SoundStation
product, could significantly limit consumer acceptance of the ShowStation
products. Furthermore, given the significant differences between the
SoundStation and the ShowStation products, Polycom is developing new
distribution channels for the ShowStation products and there can be no assurance
that Polycom will be successful selling the next generation of ShowStation
products through these distribution channels. In addition, Polycom's ShowStation
products comply with certain layers of the emerging T.120 standard. Increasing
19
<PAGE>
market acceptance and longevity of the T.120 standard is in part a function of
user acceptance and the incorporation of the T.120 standard into personal
computer operating systems, teleconferencing appliances and the network
infrastructure and is therefore difficult to predict. Because of Polycom's focus
on the T.120 standard, Polycom's operating results would be materially adversely
affected if another technology were to significantly challenge or replace the
emerging T.120 industry standard. Broad commercialization of Polycom's next
generation of ShowStation products will require Polycom to overcome significant
technological and market development obstacles, many of which may not be
currently foreseen.
Polycom's new ShowStation products are extremely complex and because of the
recent introduction of these products, Polycom has had limited experience with
respect to the performance and reliability of these products. Polycom is in the
process of finalizing negotiations with a potential contract manufacturer of its
next generation of ShowStation products. If Polycom's new ShowStation products
have performance, reliability or quality problems or shortcomings, then Polycom
may experience reduced orders, higher manufacturing costs and additional
warranty and service expenses which would have a material adverse effect on
Polycom's business, financial condition and results of operations. For example,
Polycom chose to stop shipments of its ShowStation products from mid-January
1996 through the end of February 1996 to correct software and other technical
problems identified by initial customers. There can be no assurance that the new
ShowStation will be able to achieve or sustain commercial acceptance, that sales
of the new ShowStation products will account for a material part of Polycom's
net revenues or that Polycom will be able to achieve volume manufacturing.
Failure of the next generation of ShowStation products to achieve or sustain
commercial acceptance, or of Polycom or its contract manufacturer to achieve
volume manufacturing would have a material adverse effect on Polycom's business,
financial condition and results of operations.
SALES AND DISTRIBUTION. Polycom sells its SoundStation and ShowStation
products primarily through resellers. Polycom's resellers accounted for
approximately 74%, 71%, 67% and 71% of Polycom's net revenues in 1994, 1995,
1996 and the nine months ended September 30, 1997, respectively. ConferTech
accounted for 14% and 11% of net revenues in 1994 and 1995, respectively, and
2Confer/Mutare, Inc. accounted for 11% in 1994. No other customer or reseller
accounted for more than 10% of Polycom's net revenues during the periods
indicated and no customer or reseller accounted for more than 10% of net
revenues in 1996. Resellers generally offer products of several different
companies, including products that compete with Polycom's products. Accordingly,
these resellers may give higher priority to products of other suppliers, thus
reducing their efforts to sell Polycom's products. Agreements with resellers may
be terminated at any time. A reduction in sales effort or termination of a
distribution relationship by one of Polycom's resellers could have a material
adverse effect on future operating results. Use of resellers also entails the
risk that resellers will build up inventories in anticipation of a growth in
sales. If such sales growth does not occur as anticipated by these resellers,
these resellers may substantially decrease the amount of product ordered in
subsequent quarters, causing or contributing to fluctuations in Polycom's future
operating results. Furthermore, although Polycom takes steps to reduce channel
conflict, sales by Polycom's direct sales force to potential and current
customers of these resellers could have an adverse effect on Polycom's reseller
relationships. The teleconferencing distribution industry has historically been
characterized by rapid change, including consolidations and financial
difficulties of certain resellers and the emergence of alternative distribution
channels. In addition, there is an increasing number of companies competing for
access to these channels. The loss or ineffectiveness of any of Polycom's major
resellers could have a material adverse effect on Polycom's operating results.
There can be no assurance that Polycom will be able to successfully sell its
products through any new channels that Polycom may be required to develop as a
result of the foregoing or any other factors. Polycom commenced customer
shipments of its first generation ShowStation in November 1995. Polycom is in
the process of negotiating with potential distributors of its next generation of
ShowStation products. Polycom currently has only one distribution agreement with
respect to its next generation ShowStation product. Polycom entered into a
distribution agreement with 3M in March, 1997, and such agreement has certain
exclusivity provisions and minimum purchase requirements. The Company's results
of operations with respect to its next generation
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ShowStation product, at least in the near term, will be substantially dependent
on the success of 3M as a reseller of this next generation product. There can be
no assurance that Polycom will be able to successfully develop a distribution
network for the next generation of its ShowStation products; if no such
distribution nextworks are developed it could have a material adverse effect on
Polycom's business, financial condition or results of operations.
Polycom's net revenues from international sales represented approximately
23%, 24%, 23% and 23% of Polycom's total net revenues in the years ended
December 31, 1994, 1995, 1996 and the nine months ended September 30, 1997,
respectively. The reduction in the percentage of international net revenues from
the 1995 year resulted from initial sales of new products, which were sold
primarily in North America. Polycom is planning to establish product
distribution centers in the European and Asia Pacific markets in order to better
serve its international customers which will increase the costs associated with
such international operations. International sales are subject to a number of
risks, including changes in foreign government regulations and
telecommunications standards, export license requirements, tariffs and taxes,
other trade barriers, fluctuations in currency exchange rates, difficulty in
collecting accounts receivable, difficulty in staffing and managing foreign
operations and political and economic instability. Sales to international
resellers are usually made in U.S. dollars in order to minimize the risks
associated with fluctuating foreign currency exchange rates. To date, a
substantial majority of Polycom's international sales have been denominated in
U.S. currency, however, Polycom expects that in the future more international
sales may be denominated in local currencies. Fluctuations in currency exchange
rates could cause Polycom's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. In addition, the costs associated with developing
international sales may not be offset by increased sales in the short term, or
at all.
RESEARCH AND DEVELOPMENT. Polycom believes that its future success depends
in part on its ability to continue to enhance its existing products and to
develop new products that maintain technological competitiveness. Polycom's
current development efforts are focused on both the audioconferencing and
dataconferencing businesses. In the audioconferencing market, Polycom is
developing SoundStation and SoundStation Premier product line extensions into
the higher and the lower end of the market. In the dataconferencing market,
Polycom is devoting significant resources to developing a next generation of its
ShowStation products. Polycom intends to expand upon this new product platform
through the development of ShowStation options, upgrades and future product
generations. There can be no assurance, however, that these products will be
made commercially available as expected or otherwise on a timely and
cost-effective basis or that, if introduced, these products will achieve market
acceptance. Furthermore, there can be no assurance that these products will not
be rendered obsolete by changing technology or new product announcements by
other companies.
The audioconferencing and dataconferencing markets are subject to rapid
technological change, frequent new product introductions and enhancements,
changes in end-user requirements and evolving industry standards. Polycom's
ability to remain competitive in this market will depend in significant part
upon its ability to successfully develop, introduce and sell new products and
enhancements on a timely and cost-effective basis. The success of Polycom in
developing new and enhanced products depends upon a variety of factors,
including new product selection, timely and efficient completion of product
design, timely and efficient implementation of manufacturing, assembly and test
processes, product performance at customer locations and development of
competitive products and enhancements by competitors. Polycom is currently
engaged in the development of several new products and extensions of the
SoundStation, SoundStation Premier, SoundPoint and ShowStation products, and
expects to continue to invest significant resources in new product development
and enhancements to current and future products. In addition, Polycom's
introduction of its next generation of ShowStation and other new products could
result in higher warranty claims, product returns and manufacturing, sales and
marketing and other expenses that could materially adversely affect Polycom's
business, financial condition, cash flows or results of operations. There can be
no assurance that Polycom will be successful in selecting, developing,
manufacturing
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and marketing, or recognize a return on new products or enhancements. The
inability of Polycom to introduce new products or enhancements on a timely and
cost-effective basis that contribute significantly to net revenues could have a
material adverse effect on Polycom's business, financial condition, cash flows
or results of operations. In the past, Polycom has experienced delays from time
to time in the introduction of certain of its products. In particular, the
introduction of ShowStation was delayed by approximately eighteen months from
the originally anticipated date of introduction because of unforeseen technical
challenges and difficulties in building core technologies and for approximately
six weeks in the first quarter of 1996 shipments were interrupted in order to
correct software and other technical problems identified by initial customers.
In addition, new product or technology introductions by Polycom's competitors
could cause a decline in sales or loss of market acceptance of Polycom's
existing products or new products. Further, from time to time, Polycom may
announce new products, capabilities or technologies that have the potential to
replace Polycom's existing product or future products. There can be no assurance
that announcements of product enhancements or new product offerings by Polycom
or its competitors will not cause customers to defer or stop purchasing
Polycom's products.
COMPETITION. The market for teleconferencing products is highly competitive
and subject to rapid technological change, regulatory developments and emerging
industry standards. Polycom expects competition to persist and increase in the
future. In the audioconferencing market segment, Polycom's major competitors
include Coherent Communications Systems Corporation, NEC, Gentner, Lucent (one
of Polycom's resellers), Panasonic and other companies that offer lower cost
full duplex speakerphones such as 3Com/U.S. Robotics, Inc. ("3COM/USR") and
Hello Direct (one of Polycom's resellers). Hello Direct offers a competitive
product under the Hello Direct name through an OEM relationship with Gentner.
Most of these companies have substantially greater financial resources and
production, marketing, engineering and other capabilities than Polycom with
which to develop, manufacture, market and sell their products. In addition, all
major telephony manufacturers produce hands-free speakerphone units that are a
lower cost, lower quality alternative to Polycom's audioconferencing products.
In the dataconferencing market segment, Polycom's major competitors include
Microfield Graphics, Inc. and SMART Technologies, Inc., which have substantially
greater financial resources and production, marketing, engineering and other
capabilities than Polycom with which to develop, manufacture, market and sell
their products. In addition, in this market segment, videoconferencing, PC-based
communications solutions and multimedia presentation products may be an
alternative for certain applications.
Polycom believes its ability to compete depends on such factors as
reputation, quality, customer support and service, price, features and functions
of products, ease of use, reliability, and marketing and distribution channels.
Polycom believes it competes favorably with respect to each of these factors.
There can be no assurance that Polycom will be able to compete successfully in
the future with respect to any of the above factors.
Polycom expects its competitors to continue to improve the performance of
their current products and to introduce new products or new technologies that
provide improved performance characteristics. New product introductions by
Polycom's competitors could cause a significant decline in sales or loss of
market acceptance of Polycom's existing products and future products. For
example, 3Com/USR introduced an audioconferencing product that is being sold at
a price substantially lower than Polycom's list price for SoundStation. Polycom
believes that the possible effects from this ongoing competition may be the
reduction in the prices of its products and its other competitors' products or
the introduction of additional lower priced competitive products. Although such
reduction was not in direct response to the introduction of a lower priced
audioconferencing product by 3Com/USR, Polycom reduced the North American list
price of its SoundStation product line by 37% in January 1997 which resulted in
lower gross margins. Polycom expects this increased competitive pressure may
lead to intensified price-based competition, resulting in lower prices and gross
margins which would materially adversely affect Polycom's business, financial
condition and results of operations. There can be no assurance that Polycom will
be able to compete successfully.
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MANUFACTURING. Polycom's manufacturing operations consist primarily of
materials planning and procurement, test development and manufacturing
engineering. Polycom subcontracts the manufacture of its SoundStation products
to International Manufacturing Services, Inc. ("IMS") of Thailand, a global
third party contract manufacturer, and is in the process of transferring the
manufacturing of the SoundStation Premier products to IMS. IMS is ISO 9002
approved and has British Approvals Board for Telecommunications ("BABT")
registration. Polycom's products are quality tested by automated test equipment
with final functional tests performed on equipment and with processes developed
or approved by Polycom.
Polycom has recently transferred the manufacturing of its SoundStation
Premier product lines to IMS. Polycom manufactures its SoundPoint product
through General Electronics (H.K.) Ltd., a Hong Kong based contract
manufacturer. Polycom is in the process of finalizing negotiations with a
contract manufacturer for its next generation of ShowStation products. Polycom
is located in the San Francisco Bay Area, which has in the past and may in the
future experience significant, destructive seismic activity that could damage,
destroy or disrupt Polycom's facilities or its operations. Polycom maintains no
earthquake insurance for damages or business interruptions. In the event that
Polycom or its contract manufactures were to experience financial or operational
difficulties that are not covered by insurance, it would adversely affect
Polycom's results of operations until Polycom could establish sufficient
manufacturing supply through an alternative source, and the effect of such
reduction or interruption in supply on results of operations would be material.
Polycom believes that there are a number of alternative contract manufacturers
that could produce Polycom's products, but in the event of a reduction or
interruption of supply, for any reason, it would take a significant period of
time to qualify an alternative subcontractor and commence manufacturing, which
would have a material adverse effect on Polycom's business, financial condition,
cash flows and results of operations.
Certain key components used in Polycom's products are currently available
from only one source and others are available from only a limited number of
sources. Components currently available from only one source include certain key
integrated circuits and optical elements. Polycom also obtains certain plastic
housings, metal castings and other components from suppliers located in Hong
Kong and China, and any political or economic instability in that region in the
future, or future import restrictions, may cause delays or an inability to
obtain such supplies. Polycom has no supply commitments from its suppliers and
generally purchases components on a purchase order basis either directly or
through its contract manufacturer. Polycom and Polycom's contract manufacturers
have had limited experience purchasing volume supplies of components for its
SoundStation and ShowStation products, and some of the components included in
these products, such as microprocessors and other integrated circuits, have from
time to time been subject to limited allocations by suppliers, and there can be
no assurance that Polycom will not in the future be subject to component supply
allocations that would adversely affect Polycom's operating results. In the
event that Polycom or its contract manufacturer were unable to obtain sufficient
supplies of components or develop alternative sources as needed, Polycom's
operating results could be materially adversely affected. Moreover, operating
results could be materially adversely affected by receipt of a significant
number of defective components, an increase in component prices or the inability
of Polycom to obtain lower component prices in response to competitive price
reductions.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS. While Polycom relies on
a combination of patent, copyright, trademark and trade secret laws and
confidentiality procedures to protect its proprietary rights, Polycom believes
that factors such as technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are more essential to establishing and maintaining
a technology leadership position. Polycom currently has seven United States
patents issued covering the SoundStation and ShowStation designs, the concept
and function of the ShowStation and certain echo cancellation technology that
expire in 2007, 2010, 2011, 2012, 2013 and 2015. In addition, Polycom currently
has six United States patents pending, five foreign patents issued, which expire
in 2001, 2003, 2010, 2016 and 2017, and sixteen foreign patent applications
pending.
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Polycom, SoundStation Premier, ShowStation, SoundPoint, SoundStation and Polycom
logos are registered trademarks of Polycom in the U.S. and various countries.
According to federal and state law, Polycom's trademark protection will continue
for as long as Polycom continues to use its trademark in connection with the
products and services of Polycom. Polycom seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which only afford limited protection. There can be no assurance that others will
not independently develop similar proprietary information and techniques or gain
access to Polycom's intellectual property rights or disclose such technology or
that Polycom can meaningfully protect its intellectual property rights. In
addition, there can be no assurance that any patent or registered trademark
owned by Polycom will not be invalidated, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to Polycom or that
any of Polycom's pending or future patent applications will be issued with the
scope of the claims sought by Polycom, if at all. Furthermore, there can be no
assurance that others will not develop similar products, duplicate Polycom's
products or design around the patents owned by Polycom. In addition, there can
be no assurance that foreign intellectual property laws will protect Polycom's
intellectual property rights.
Litigation may be necessary to enforce Polycom's patents and other
intellectual property rights, to protect Polycom's trade secrets, to determine
the validity of and scope of the proprietary rights of others, or to defend
against claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on Polycom's business, financial condition, cash flows or results of
operations. There can be no assurance that infringement or invalidity claims by
third parties or claims for indemnification resulting from infringement claims
will not be asserted in the future or that such assertions, if proven to be
true, will not materially adversely affect Polycom's business, financial
condition, cash flows and results of operations. If any claims or actions are
asserted against Polycom, Polycom may seek to obtain a license under a third
party's intellectual property rights. There can be no assurance, however, that a
license will be available under reasonable terms or at all. In addition, Polycom
could decide to litigate such claims, which could be extremely expensive and
time consuming and could materially adversely affect Polycom's business,
financial condition, cash flows or results of operations.
Polycom incorporates into its ShowStation products software licensed from
third parties, including certain communications software which is licensed from
DataBeam Corporation ("DATABEAM"), digitizer and pen software which is licensed
from Scriptel Corporation ("SCRIPTEL") and Windows software from Microsoft
Corporation ("MICROSOFT"). The DataBeam license agreement will terminate in
March 2001 if either party has given notice at least 90 days prior to that time
of its desire to terminate the agreement. The Scriptel agreement terminates June
30, 1998 but may be extended for six month periods upon mutual agreement of the
parties. There can be no assurance that these third-party software licenses will
continue to be available to Polycom on commercially reasonable terms. The
termination or impairment of these software licenses could result in delays or
reductions in new product introductions or product shipments until equivalent
software could be developed, licensed and integrated, which would materially
adversely affect Polycom's business, financial condition, cash flows, and
results of operations.
EMPLOYEES. Polycom believes that its future success will depend in part on
its continued ability to hire, assimilate and retain qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
Polycom will be successful in attracting or retaining such personnel. The loss
of any key employee, the failure of any key employee to perform in his or her
current position or Polycom's inability to attract and retain skilled employees,
as needed, could materially adversely affect Polycom's business, financial
condition, cash flows or results of operations.
RISKS RELATING TO VIAVIDEO
LITIGATION WITH VTEL CORPORATION; PROPRIETARY RIGHTS. On September 3, 1997,
VTEL Corporation ("VTEL") filed a lawsuit in the District Court in Travis
County, Texas against ViaVideo and its founders
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(who were formerly employed by VTEL). In the lawsuit, VTEL alleges breach of
contract, breach of confidential relationship, disclosure of proprietary
information, and related allegations. The management of ViaVideo believes that
these claims are without merit and intends to defend them vigorously. Also, the
management of ViaVideo, after consultation with outside legal counsel, believes
that the likelihood of an unfavorable outcome arising from the adjudication of
this lawsuit is remote. Nevertheless, the costs of defense, regardless of
outcome, could have an adverse effect on the results of operations and financial
condition of the Combined Company. If ViaVideo were found to have infringed upon
the proprietary rights of VTEL or any other third party, it could be required to
pay damages, cease sales of the infringing products, discontinue such products
or such other injunctive relief a court may determine, any of which could have a
material adverse effect on ViaVideo's and, subsequent to the Merger, on
Polycom's business, operating results and financial condition. See "Business of
ViaVideo--Legal Proceedings."
The success and ability of ViaVideo to compete is dependent in part upon its
proprietary technology. While ViaVideo relies on trademark, trade secret and
copyright laws to protect its technology, ViaVideo believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and customer
support are essential to establishing and maintaining a leadership position.
ViaVideo currently has one patent application pending and two intent to use
trademark applications. There can be no assurance that a patent will issue with
the scope of claims sought by ViaVideo, if at all. Once a patent issues, there
can be no assurance that it will not be invalidated, circumvented or challenged,
or that the rights granted thereunder will provide competitive advantages to
ViaVideo. There can be no assurance that others will not develop technologies
that are similar or superior to ViaVideo's technology.
LIMITED OPERATING HISTORY OF VIAVIDEO; UNCERTAIN PROFITABILITY. ViaVideo
was incorporated in 1996 and has not commenced shipment of any product. ViaVideo
has incurred operating losses since inception and at September 30, 1997, had an
accumulated deficit of $5,891,144. ViaVideo's products are designed for the
communications equipment industry from which the amount and timing of revenues
is uncertain and expected to be subject to significant fluctuation when and if
the products experience greater exposure and use. With a limited operating
history and no product sales to date, there can be no assurance of revenues from
sales of ViaVideo's products following the Merger or that ViaVideo will be able
to achieve profitability on a quarterly or annual basis.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. ViaVideo's operating results
may be subject to quarterly fluctuations as a result of a number of factors.
These factors include the introduction and market acceptance of new products;
variations in sales channels, product costs or mix of products sold, sales under
distributor agreements; the timing of orders and manufacturing lead times; and
changes in general economic conditions and specific economic conditions in the
industry, any of which could have an adverse impact on operations and financial
results.
COMPETITION. The videoconferencing industry is highly competitive and is
characterized by regular introductions of new, more advanced, and lower cost
products. ViaVideo believes the industry's primary competitive factors are video
and audio quality, price, ease-of-use, ease-of-installation, features and
functionality, and market visibility and recognition.
There are a number of companies, both domestically and internationally
based, that offer products that will compete with ViaVideo's products, including
PictureTel, which dominates the group videoconferencing market and which is a
significant distributor of Polycom products. Other manufacturers and providers
of competitive group videoconferencing systems include, among others, VTEL, CLI
(recently acquired by VTEL), Intel, Sony, NEC, Tandberg, Mitsubishi, Panasonic,
Fujitsu, British Telecom, General Plesey Telecommunications and Vista
Communications Instruments. In addition, with advances in telecommunications
standards, connectivity, and video processing technology and the increasing
market acceptance of videoconferencing, other established or new companies may
develop or market products competitive with ViaVideo's products.
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Significant manufacturers and suppliers of personal videoconferencing
products, including many of the companies mentioned above, as well as Creative
Labs, Inc., 8X8, Inc., Netscape, Microsoft, VSI, RSI, White Pine, could expand
their product lines into competitive group videoconferencing systems or enhance
the performance and functionality of personal videoconferencing products to the
point where they are more directly competitive with ViaVideo's products.
Most of ViaVideo's competitors and potential competitors are substantially
larger than ViaVideo and benefit from greater financial, marketing,
manufacturing, and other resources, greater market presence, recognition, and
share, more established distribution channels, and broader product offerings.
Although ViaVideo believes it will be positioned well to compete with these
companies, there can be no assurance that ViaVideo will be able to compete
successfully against current and future competitors and the failure to do so
successfully will have a material adverse effect upon ViaVideo's business,
operating results and financial condition.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL AND MARKET
CHANGE. The markets for ViaVideo's products are characterized by changing
technology, evolving industry standards and frequent new product introductions.
The success of ViaVideo's new products is dependent on several factors,
including proper new product definition, product cost, timely completion and
introduction of new products, differentiation of new products from those of
ViaVideo's competitors and market acceptance of these products. ViaVideo has
addressed the need to develop new products through its internal development
efforts and joint developments with other companies. There can be no assurance
that ViaVideo will successfully identify new product opportunities and develop
and bring new products to market in a timely manner, or that products and
technologies developed by others will not render ViaVideo's products or
technologies obsolete or noncompetitive. The failure of ViaVideo's new products
development efforts could have a material adverse effect on Polycom's and
ViaVideo's business and results of operations.
NO MANUFACTURING EXPERIENCE. ViaVideo is still in the development stage
with respect to its first videoconferencing product and therefore has no
manufacturing experience. ViaVideo is currently in negotiations with potential
contract manufacturers, but no assurance can be given that such negotiations
will be concluded successfully. There can be no assurance that ViaVideo will be
able to manufacture its products in commercial quantities or at acceptable cost
structures, if at all.
DEPENDENCE ON SOLE SUPPLIERS; CERTAIN SOLE SUPPLIERS ARE POTENTIAL
COMPETITORS. ViaVideo currently procures from single sources certain key
components for its video conferencing product, including certain parts from Sony
Electronics, Inc. ("SONY") and Philips Semiconductors, Inc. ("PHILIPS").
ViaVideo purchases these components on a purchase order basis, does not carry
significant inventories of these components and does not have any long-term
supply contracts with its sole source vendors. ViaVideo's reliance on sole
sources entails certain risks, including reduced control over the price, timely
delivery, reliability and quality of the components. ViaVideo has designed its
products to be compatible with certain integrated circuits produced by Philips
and certain video equipment produced by Sony. If ViaVideo could no longer obtain
such integrated circuits or video equipment, ViaVideo would incur substantial
expense and take substantial time in redesigning its products to be compatible
with components from other manufacturers. Additionally, both Sony and Philips
are potential competitors of ViaVideo in the video conferencing market which may
adversely affect ViaVideo's ability to obtain necessary components. Failure to
obtain adequate supplies could prevent or delay product shipments which could
materially and adversely affect ViaVideo's business, financial condition and
results of operations.
DEPENDENCE UPON KEY PERSONNEL. Continued development and commercialization
of ViaVideo's products also depends substantially upon the continued efforts at
ViaVideo of engineering and marketing personnel, and there can be no assurance
that such individuals will continue to remain employed by Polycom after the
Merger. The loss of the services of any executive officer or other key technical
or management personnel of ViaVideo for any reason could have a material adverse
effect on the business, operating results and financial condition of the
Combined Company.
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The future success of the Combined Company also depends on its continuing
ability to identify, hire, train, motivate and retrain other highly qualified
technical and managerial personnel. Competition for such personnel is intense.
There can be no assurance that the Combined Company will be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. The inability to attract and retain the necessary technical and
managerial personnel could have a material and adverse effect upon its business,
operating results and financial condition.
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THE POLYCOM MEETING
DATE, TIME AND PLACE OF THE POLYCOM MEETING
The Polycom Meeting will be held on December 10, 1997 at 10:00 a.m., local
time, located at Polycom's offices located at 2584 Junction Avenue, San Jose,
California.
MATTERS TO BE CONSIDERED AT THE POLYCOM MEETING
At the Polycom Meeting, stockholders of Polycom will be asked to consider
and vote upon proposals (i) to approve and adopt the Reorganization Agreement
and to approve the consummation of the Merger and (ii) to transact such other
business as may properly come before the Polycom Meeting or any postponements or
adjournments thereof.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only holders of record of Polycom Common Stock at the close of business on
the Record Date are entitled to notice of and to vote at the Polycom Meeting. As
of the close of business on the Record Date, there were 19,189,370 shares of
Polycom Common Stock outstanding and entitled to vote, held of record by 127
stockholders (although Polycom has been informed that there are approximately
2,100 beneficial owners). A majority, or 9,594,686 of these shares, present in
person or represented by proxy, will constitute a quorum for the transaction of
business. Each Polycom stockholder is entitled to one vote for each share of
Polycom Common Stock held as of the Record Date.
VOTING OF PROXIES
The Polycom proxy accompanying this Proxy Statement is solicited on behalf
of the Polycom Board for use at the Polycom Meeting. Stockholders are requested
to complete, date and sign the accompanying proxy and promptly return it in the
accompanying envelope or otherwise mail it to Polycom. All properly executed
proxies received by Polycom prior to the vote at the Polycom Meeting, and that
are not revoked, will be voted at the Polycom Meeting in accordance with the
instructions indicated on the proxies or, if no direction is indicated, to
approve the Reorganization Agreement and the consummation of the Merger. The
Polycom Board does not presently intend to bring any other business before the
Polycom Meeting and, so far as is known to the Polycom Board, no other matters
are to be brought before the Polycom Meeting. As to any business that may
properly come before the Polycom Meeting, however, it is intended that proxies,
in the form enclosed, will be voted in respect thereof in accordance with the
judgment of the persons voting such proxies. A Polycom stockholder who has given
a proxy (other than an irrevocable proxy, such as those delivered pursuant to a
Voting Agreement referred to in "The Merger and Related Transactions--Related
Agreements--Voting Agreements") may revoke it at any time before it is exercised
at the Polycom Meeting by (i) delivering to the Secretary of Polycom a written
notice, bearing a date later than the date of the proxy, stating that the proxy
is revoked, (ii) signing and so delivering a proxy relating to the same shares
and bearing a later date than the date of the previous proxy prior to the vote
at the Polycom Meeting or (iii) attending the Polycom Meeting and voting in
person (however, mere attendance at the meeting will not in and of itself have
the effect of revoking the proxy).
VOTE REQUIRED
Approval of the Reorganization Agreement and the consummation of the Merger
by Polycom's stockholders is required by the Delaware General Corporation Law.
Such approval requires the affirmative vote of the holders of a majority of the
shares of Polycom Common Stock outstanding and entitled to vote. Certain
stockholders of Polycom have entered into Voting Agreements and have delivered
irrevocable proxies obligating them to vote in favor of the Reorganization
Agreement and the consummation of the Merger. As of the Record Date, such
stockholders, constituting all executive officers and directors of Polycom and
their affiliates, as a group beneficially owned 7,846,225 shares (exclusive of
any shares
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issuable upon the exercise of options) of Polycom Common Stock (constituting
approximately 41% of the shares of Polycom Common Stock then outstanding). See
"The Merger and Related Transactions-- Related Agreements--Voting Agreements."
Votes cast by proxy or in person at the Polycom Meeting will be tabulated by
the Inspector of Elections appointed for the meeting. The Inspector of Elections
will also determine whether or not a quorum is present.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the Polycom Meeting
is a majority of the shares of Polycom Common Stock issued and outstanding on
the Record Date. Abstentions and broker non-votes are counted as present for the
purpose of determining the presence of a quorum. Because approval of the
Reorganization Agreement and the consummation of the Merger requires the
affirmative vote of a majority of the outstanding shares of Polycom Common Stock
entitled to vote thereon, abstentions and broker non-votes will have the same
effect as votes against the Reorganization Agreement and the consummation of the
Merger. THE ACTIONS PROPOSED IN THIS PROXY STATEMENT ARE NOT MATTERS THAT CAN BE
VOTED ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS'
SPECIFIC INSTRUCTIONS. ACCORDINGLY, ALL BENEFICIAL OWNERS OF POLYCOM COMMON
STOCK ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE THEIR
VOTES.
SOLICITATION OF PROXIES AND EXPENSES
Polycom will bear the cost of solicitation of proxies from its stockholders
including preparation, assembly, printing and mailing of the proxy statement. In
addition to solicitation by mail, the directors, officers, employees and agents
of Polycom may solicit proxies from stockholders by telephone, facsimile or in
person. Following the original mailing of the proxies and other soliciting
materials, Polycom will request brokers, custodians, nominees and other record
holders to forward copies of the proxy and other soliciting materials to persons
for whom they hold shares of Polycom Common Stock and to request authority for
the exercise of proxies. In such cases, Polycom, upon the request of the record
holders, will reimburse such holders for their reasonable expenses.
BOARD RECOMMENDATION
THE DISINTERESTED DIRECTORS OF POLYCOM HAVE UNANIMOUSLY APPROVED THE
REORGANIZATION AGREEMENT AND THE MERGER AND BELIEVE THAT THE TERMS OF THE
REORGANIZATION AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN THE BEST
INTERESTS OF, POLYCOM AND ITS STOCKHOLDERS AND THEREFORE RECOMMEND THAT THE
HOLDERS OF POLYCOM COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE
REORGANIZATION AGREEMENT AND THE CONSUMMATION OF THE MERGER. In considering such
recommendation, Polycom stockholders should be aware that certain directors and
officers of Polycom have interests in the Merger that may present them with
potential conflicts of interest. See "The Merger and Related
Transactions--Interests of Certain Persons in the Merger."
THE MATTERS TO BE CONSIDERED AT THE POLYCOM MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF POLYCOM. ACCORDINGLY, POLYCOM STOCKHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT,
AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY.
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THE MERGER AND RELATED TRANSACTIONS
GENERAL
The Reorganization Agreement provides for the merger of a newly formed,
wholly-owned subsidiary of Polycom with and into ViaVideo, with ViaVideo to be
the surviving corporation of the Merger and thus to become a wholly-owned
subsidiary of Polycom. The discussion in this Proxy Statement of the Merger and
the description of the principal terms and conditions of the Reorganization
Agreement are subject to and qualified in their entirety by reference to the
Reorganization Agreement, a copy of which is attached to this Proxy Statement as
APPENDIX A and is incorporated herein by reference. You are urged to read the
Reorganization Agreement in its entirety.
CONVERSION OF SHARES
Upon the consummation of the Merger, each then outstanding share of ViaVideo
Common Stock will automatically be converted into the right to receive 1.183684
shares of Polycom Common Stock; however, if the total value of Polycom's Common
Stock to be issued (assuming the total amount of shares
outstanding and reserved under the ViaVideo Option Plan were to be exercised for
ViaVideo Common Stock) in the Merger, based on the average of the closing prices
of Polycom's Common Stock as quoted on the Nasdaq National Market System for the
ten (10) trading days immediately preceding (and including) the second trading
day prior to the Effective Time (the "Total Value") exceeds $90,000,000, the
Exchange Ratio shall be reduced such that the Total Value shall be $90,000,000.
No fractional shares of Polycom Common Stock will be issued in the Merger.
Instead, each ViaVideo stockholder who would otherwise be entitled to receive a
fraction of a share of Polycom Common Stock will receive an amount of cash equal
to the per share market value of Polycom Common Stock (based on the average
closing price of Polycom Common Stock as quoted on the Nasdaq National Market
for the ten (10) most recent days that Polycom Common Stock was traded ending on
the trading day immediately prior to the Effective Time) multiplied by the
fraction of a share of Polycom Common Stock to which the stockholder would
otherwise be entitled. Based upon the capitalization of Polycom and ViaVideo as
of the date of the Reorganization Agreement, the stockholders of ViaVideo will
own Polycom Common Stock representing approximately 30.5% of the Polycom Common
Stock outstanding immediately after consummation of the Merger. Polycom will use
its best efforts to file a registration statement on Form S-3 with the
Commission within thirty (30) days of the Effective Time with respect to such
shares of Polycom Common Stock to be issued in the Merger.
CONVERSION OF OPTIONS
Upon consummation of the Merger, each then outstanding ViaVideo Option will
be assumed by Polycom and will automatically be converted into an option to
purchase a number of shares of Polycom Common Stock determined by multiplying
the number of shares of ViaVideo Common Stock subject to a ViaVideo Option by
the Exchange Ratio, at an exercise price per share equal to the exercise price
per share of the ViaVideo Option at the time of the Merger divided by the
Exchange Ratio rounded up to the nearest whole cent. To avoid fractional shares,
the number of shares of Polycom Common Stock subject to an assumed ViaVideo
Option will be rounded down to the nearest whole share. The other terms of the
ViaVideo Options, including vesting schedules, will remain unchanged. Polycom
will file a Registration Statement on Form S-8 with the Commission with respect
to the shares of Polycom Common Stock issuable upon exercise of the assumed
ViaVideo Options.
As of the Record Date, 1,134,050 shares of ViaVideo Common Stock were
subject to outstanding ViaVideo Options. Upon the assumption of such options by
Polycom upon consummation of the Merger, approximately 1,342,356 shares of
Polycom Common Stock will be subject to such options.
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BACKGROUND OF THE MERGER
The markets for teleconferencing products became increasingly competitive
throughout 1996 and 1997. By early 1997, new enabling technologies began to
indicate an apparent shift in the videoconferencing market segment for products
to be launched by the end of 1997. In an effort to grow their businesses in an
increasingly competitive environment, each of Polycom and ViaVideo has
continually evaluated strategic relationships of various forms such as potential
OEM arrangements, joint marketing relationships, and potential acquisitions of
technologies and companies.
In November 1996, Craig Malloy, ViaVideo's President, met with Brian Hinman,
Polycom's Chairman of the Board and Chief Executive Officer, at Polycom's
offices in San Jose, California to preliminarily discuss ViaVideo's product
architecture and a possible distribution arrangement for ViaVideo's products.
Polycom and ViaVideo executed a nondisclosure agreement and agreed to have
further discussions. In late January, 1997, representatives of Polycom met with
representatives of ViaVideo in San Jose, California to continue discussions of a
possible distribution relationship. Polycom was represented by Mr. Hinman, Mr.
Robert Hagerty, its President and Chief Operating Officer and a member of the
Board of Directors of Polycom, and Mr. Michael Kourey, its Vice President,
Finance and Administration and Chief Financial Officer. ViaVideo was represented
by Mr. Malloy. At that meeting, Polycom and ViaVideo finalized a memorandum of
understanding (the "MOU") to be executed by Polycom, ViaVideo, and 3M. The MOU
granted Polycom and 3M an option to invest in a future Series B financing for
ViaVideo in exchange for Polycom and 3M providing technical consultation in
their respective areas of expertise. The MOU was subsequently signed by all
three parties.
On January 30, 1997, Messrs. Hinman, Kourey, and other Polycom
representatives visited with ViaVideo at their facilities in Austin, Texas.
ViaVideo was represented by Mr. Craig Malloy, Mr. Michael Kenoyer, its Vice
President of Engineering and Mr. William Paape, its Chief Financial Officer. At
the meeting, Polycom and ViaVideo discussed the potential details of the
investment in ViaVideo and the parameters of distribution agreement between the
two companies.
In a series of telephonic meetings between February 10, 1997 and February
25, 1997, representatives of Polycom and ViaVideo held telephonic meetings to
continue discussing a potential distribution relationship. Throughout these
meetings, the parties discussed the business position of each company and the
complementary natures of the infrastructure, distribution channels and
proprietary technology of Polycom and the next-generation videoconferencing
technology of ViaVideo. At this time, however, the parties only discussed
potential joint distribution efforts, not a business combination.
On March 5, 1997, the Polycom Board held a regular meeting at which, among
other matters, the Polycom Board discussed the relative merits of investing in
ViaVideo, entering into a distribution agreement with ViaVideo and a possible
business combination between Polycom and ViaVideo. The Polycom Board did not
discuss financial terms of a combination of the companies.
On March 17, 1997 and March 18, 1997, Messrs. Hinman, Hagerty and Malloy met
in San Jose, California to discuss the issues and opportunities facing both
companies and the benefits and obstacles of a business combination of the two
companies. At this time, the parties discussed numerous possible combinations,
including granting Polycom an option to purchase ViaVideo or a purchase
transaction and the timing of any potential business combination.
On March 18, 1997, the ViaVideo Board held a regular meeting at which, among
other matters, the ViaVideo board discussed the relative merits of a
distribution agreement and a possible business combination of Polycom and
ViaVideo and granting Polycom an option to purchase ViaVideo. The ViaVideo Board
instructed ViaVideo's management to continue pursuing talks with Polycom
regarding a business combination rather than an option to purchase ViaVideo.
In early April, Mr. Hagerty established a cross-functional team to identify
and highlight the risks to Polycom created by the potential combination of
Polycom and ViaVideo (a "RED TEAM"). The Red Team
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consisted of representatives from the sales, finance, engineering, manufacturing
and marketing organizations. The team published their report on May 6, 1996.
On April 4, 1997, Mr. Hinman and other employees of Polycom met with Messrs.
Collier and Malloy in Austin, Texas to assess ViaVideo's technical expertise,
product stage and to discuss other engineering due diligence issues. These
discussions did not address any financial or structural terms of a possible
business combination. Simultaneously, Mr. William Paape, Chief Financial Officer
of ViaVideo, and Mr. Kourey began preparing a joint business model in San Jose,
California.
On April 8, 1997, representatives from Polycom traveled to ViaVideo's
facilities in Austin, Texas to perform technical due diligence on ViaVideo's
technology and determine ViaVideo's progress toward commercializing their first
videoconferencing product. Polycom was represented by Mr. Ardeshir Falaki, Vice
President of Dataconferencing Engineering. Mr. Gil Pearson, Vice President of
Audioconferencing Engineering, Mr. Jeff Rodman, Polycom Co-Founder and Fellow;
Mr. Pasquale Romano, Director of Advanced Development and Mr. Robert Dye,
Director of Dataconferencing Product Marketing. ViaVideo's entire technical team
participated in the review.
On April 8, 1997 and April 10, 1997, representatives of Polycom and ViaVideo
and their respective legal advisors held telephonic meetings to discuss the
potential structure of a business combination and other financial and legal
issues.
On April 30, 1997, Messrs. Hinman, Hagerty and Kourey met with Mr. Malloy
and Mr. Michael Kenoyer, the Chief Technical Officer and Secretary of ViaVideo,
in San Jose, California. The parties discussed the terms of potential employment
agreements for certain key employees of ViaVideo and financial terms of a
proposed business combination.
Between May 1, 1997 and May 4, 1997, there were numerous telephone
conferences between the companies and Polycom's financial advisors regarding
potential financial terms of a transaction, including maximum and minimum
valuations for ViaVideo and breakup fees, as well as the terms of potential
employment agreements and structural issues to the proposed business
combination.
On May 5, 1997, Messrs. Hinman and Hagerty met with Mr. Malloy in San Jose,
California to prepare a presentation regarding the proposed merger to the
Polycom Board. On May 6, 1997, the Polycom Board held a regular meeting. The
senior management of Polycom presented a strategic overview and financial models
of the potential business combination, possible alternative structures of the
transaction, and organizational assimilation issues involved with the
combination of the two companies, including a summary of the findings of the Red
Team. The Polycom Board then held a lengthy and detailed discussion of these
issues, focusing on the various strategic options and alternatives available to
Polycom. At the conclusion of the meeting, the Polycom Board directed Polycom's
senior management to continue negotiating with ViaVideo. ViaVideo's senior
management made a similar presentation to the ViaVideo Board on May 13, 1997.
After much discussion, the ViaVideo Board instructed ViaVideo's senior
management to continue negotiating with Polycom.
Between May 14, 1997 and May 22, 1997, Messrs. Hinman and Kourey met several
times with Mr. Malloy and other representatives of ViaVideo in Austin, Texas.
These meetings included discussions regarding potential terms of a
reorganization agreement including termination clauses and conditions to
closing, as well as discussions of financial terms. Mr. Hinman and Mr. Malloy
discussed a fixed exchange ratio deal that would result in approximately 10
million Polycom shares being issued in exchange for outstanding ViaVideo shares
and options, including options available for grant. The value of the transaction
was based on Polycom's internal reviews of ViaVideo's business, both strategic
and financial. During this period, Mr. Malloy and Mr. Hinman also discussed
walk-away rights for ViaVideo as well as adjustments to the exchange ratio if
Polycom's share price exceeded certain limits. Both parties indicated that
acceptance of such a deal would be subject to due diligence reviews and input
from their respective financial advisors.
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Between June 3, 1997 and June 5, 1997, and on June 10, 1997, representatives
of the management of Polycom and ViaVideo and their legal advisors met to
negotiate the terms of a definitive acquisition agreement.
The Polycom Board held a special meeting on June 11, 1997 at which following
presentations by its financial and legal advisors, the Polycom Board, among
other things, (i) determined that it would be in the best interests of the
Polycom stockholders to consummate the Merger, (ii) approved the form and terms
of the Reorganization Agreement and (iii) authorized Polycom's officers to
undertake all acts necessary or desirable to effectuate the Merger.
The ViaVideo Board held a special meeting on June 11, 1997 at which
following presentations by its legal advisors, the ViaVideo Board, among other
things, (i) determined that it would be in the best interests of the ViaVideo
stockholders to consummate the Merger, (ii) approved the form and terms of the
Reorganization Agreement and (iii) authorized ViaVideo's officers to undertake
all acts necessary or desirable to effectuate the Merger.
Following the Polycom and ViaVideo Board meetings, the Reorganization
Agreement was signed.
On June 11, 1997, Polycom and ViaVideo issued a joint news release
announcing the Merger.
REASONS FOR THE MERGER
POLYCOM'S REASONS FOR THE MERGER.
The Polycom Board has identified several potential benefits of the Merger
that it believes will contribute to the success of the Combined Company. These
potential benefits include the ability to (i) combine ViaVideo's lead in next
generation videoconferencing technologies and ViaVideo's technical and
professional resources with Polycom's strong distribution channels to embed
leading edge technologies into future products, (ii) to create a highly
recognized brand name, and (iii) to capitalize upon the technological lead of
ViaVideo in order to introduce technologically advanced new products into the
market prior to the competition, and (iv) to be the only manufacturer of
teleconferencing products in all media: audio, video and data.
In the course of its discussions and formal meetings, the Polycom Board
reviewed with Polycom's management a number of factors relevant to the Merger,
including the strategic overview and prospects for Polycom, its products and its
finances. The Polycom Board also considered, among other matters, (i)
information concerning Polycom's and ViaVideo's respective businesses,
prospects, financial performance and condition, operations, technology,
management and competitive position; (ii) the financial condition, results of
operations and businesses of Polycom and ViaVideo before and after giving effect
to the Merger; (iii) the opinion of Montgomery rendered at the June 11, 1997
meeting of the Polycom Board that the consideration to be paid for the ViaVideo
Common Stock pursuant to the Merger is fair, from a financial point of view, to
Polycom as of the date of such opinion; (iv) current financial market conditions
and historical market prices, volatility and trading information with respect to
Polycom Common Stock; (v) the consideration to be received by ViaVideo
stockholders in the Merger and the relationship between the market value of
Polycom Common Stock to be issued in exchange for each share of ViaVideo Common
Stock and Polycom's per share reported earnings, earnings before interest and
taxes and certain other measures; (vi) a comparison of selected recent
acquisition and merger transactions involving high-technology companies; (vii)
the belief that the terms of the Reorganization Agreement, including the
parties' respective representations, warranties and covenants, and the
conditions to their respective obligations, are reasonable; (viii) the ability
of Polycom to devote management time and energy to the integration and
assimilation of ViaVideo's business and organization should the Merger be
consummated; (ix) the fact that the Merger is expected to be accounted for as a
pooling of interests and that no goodwill is expected to be created on the
financial statements of Polycom as a result thereof; and (x) reports from
management, financial advisors and legal advisors as to the results of their due
diligence investigation of
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ViaVideo. The Polycom Board also considered a number of potentially negative
factors in its deliberations concerning the Merger, including, but not limited
to (i) the risk that the benefits sought to be achieved in the Merger will not
be so achieved, and (ii) the other risks described above under "Risk Factors."
In view of the wide variety of factors considered by the Polycom Board, the
Polycom Board did not find it practicable to quantify or otherwise assign
relative weights to the specific factors considered in approving the
Reorganization Agreement and Merger. However, after taking into account all of
the factors set forth above, the Polycom Board determined that the
Reorganization Agreement and Merger were in the best interests of Polycom and
its stockholders and that Polycom should proceed with the Reorganization
Agreement and the Merger.
VIAVIDEO'S REASONS FOR THE MERGER.
ViaVideo's reasons for the Merger include, among others, the opportunity to
(i) leverage Polycom's infrastructure and distribution channels to obtain
faster, broader and more efficient development, production, sales and support
for its products, while avoiding duplication of costly infrastructures, reducing
administrative expenses, creating instant brand-name recognition of a leading
teleconferencing equipment provider, integrating with dataconferencing products,
and other factors; (ii) focus on core competencies of research and development
and marketing; (iii) share in the benefits of Polycom's existing and new
products while reducing risks inherent in start-up companies; (iv) allow for
technological collaboration with Polycom with regard to new and existing
products; (v) to capitalize on Polycom's expertise in global homologation
issues; and (ivi) realize market synergies by forming a company with the
potential to offer a complete line of products to meet a customer's audio, video
and data conferencing needs.
OPERATIONS FOLLOWING THE MERGER
Following the Merger, ViaVideo will continue its operations as a
wholly-owned subsidiary of Polycom. Upon consummation of the Merger, the members
of ViaVideo's Board will be Messrs. Brian L. Hinman, Michael R. Kourey and
Robert C. Hagerty. The membership of the Polycom Board will remain unchanged as
a result of the Merger. The stockholders of ViaVideo will become stockholders of
Polycom, and their rights as stockholders will be governed by Polycom's
Certificate of Incorporation and Bylaws and the laws of the State of Delaware.
See "Comparison of Rights of Stockholders of Polycom and ViaVideo."
FAIRNESS OPINION OF FINANCIAL ADVISOR
Pursuant to an engagement letter dated May 23, 1997 (the "ENGAGEMENT
LETTER"), Polycom retained Montgomery to render a fairness opinion in connection
with the consideration by Polycom of the Merger. Montgomery is a nationally
recognized firm and, as part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
merger transactions and other types of acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Polycom selected Montgomery to
render such an opinion on the basis of Montgomery's experience and expertise in
transactions similar to the Merger and its reputation in the networking and
telecommunications and the investment community.
On June 11, 1997, Montgomery delivered to the Polycom Board its oral
opinion, subsequently confirmed in writing as of the same date, that the
consideration to be paid by Polycom in the Merger was fair to Polycom from a
financial point of view, as of that date. The amount of such consideration was
determined pursuant to negotiations between Polycom and ViaVideo and not
pursuant to recommendations of Montgomery. No limitations were imposed by
Polycom on Montgomery with respect to the investigations made or procedures
followed in rendering its opinion.
THE FULL TEXT OF MONTGOMERY'S WRITTEN OPINION TO THE POLYCOM BOARD IS
ATTACHED HERETO AS APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE. THE
FOLLOWING SUMMARY OF THE MONTGOMERY OPINION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPINION. THE MONTGOMERY OPINION IS DIRECTED TO
THE POLYCOM
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BOARD AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF POLYCOM OR
VIAVIDEO AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER. THE
MONTGOMERY OPINION ADDRESSES ONLY THE FINANCIAL FAIRNESS TO POLYCOM OF THE
CONSIDERATION TO BE PAID BY POLYCOM AND DOES NOT ADDRESS THE RELATIVE MERITS OF
THE MERGER OR ANY ALTERNATIVES TO THE MERGER, POLYCOM'S UNDERLYING DECISION TO
PROCEED WITH OR EFFECT THE MERGER OR ANY OTHER ASPECT OF THE MERGER. IN
FURNISHING ITS OPINION, MONTGOMERY DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE
MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT, OR THAT ITS OPINION
CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE
SECURITIES ACT, AND STATEMENTS TO SUCH EFFECT ARE INCLUDED IN THE TEXT OF THE
MONTGOMERY OPINION.
In connection with its opinion, Montgomery, among other things: (i) reviewed
certain publicly available financial and other data with respect to Polycom,
including the consolidated financial statements for recent years and interim
periods to March 31, 1997, and certain other relevant financial and operating
data relating to Polycom and ViaVideo, including financial statements of
ViaVideo for the period January 1 through March 31, 1997, made available to
Montgomery from published sources and from the internal records of Polycom and
ViaVideo; (ii) reviewed the financial terms and conditions of the June 10, 1997
draft of the Reorganization Agreement; (iii) reviewed certain publicly available
information concerning the trading of, and the trading market for, Polycom
Common Stock; (iv) compared ViaVideo from a financial point of view with certain
other companies in the teleconferencing and related telecommunications equipment
industry which Montgomery deemed to be relevant; (v) considered the financial
terms, to the extent publicly available, of selected recent business
combinations of companies in the networking and communications industry which
Montgomery deemed to be comparable, in whole or in part, to the Merger; (vi)
reviewed and discussed with representatives of the management of Polycom and
ViaVideo certain information of a business and financial nature regarding
Polycom and ViaVideo, furnished to Montgomery by them, including financial
forecasts and related assumptions of ViaVideo furnished to Montgomery by
management of ViaVideo (the "VIAVIDEO FORECASTS"), including base case forecasts
("VIAVIDEO FORECASTS BASE CASE"), downside case forecasts and upside case
forecasts prepared by ViaVideo in consultation with Polycom, and financial
forecasts and related assumptions of Polycom furnished to Montgomery by Polycom
or obtained from a Montgomery research report (the "POLYCOM FORECASTS"); (vii)
made inquiries regarding and discussed the Merger and the Reorganization
Agreement and other matters related thereto with Polycom's counsel; and (viii)
performed such other analyses and examinations as Montgomery deemed appropriate.
In connection with its review, Montgomery did not assume any obligation
independently to verify such information and assumed and relied on its being
accurate and complete in all material respects. With respect to the ViaVideo
Forecasts provided to Montgomery by ViaVideo's management and the financial
forecasts for Polycom obtained by Montgomery from Polycom and from a Montgomery
research report, upon the advice of management of Polycom and with the consent
of the Polycom Board, Montgomery assumed for purposes of its opinion that the
forecasts (including ViaVideo's assumption regarding product commercialization
and shipment) have been reasonably prepared and provide a reasonable basis upon
which Montgomery could form its opinion and that, in the case of the ViaVideo
Forecasts provided by ViaVideo and the Polycom Forecasts provided by Polycom,
they have been prepared on bases reflecting the best available estimates and
judgments of Polycom's and ViaVideo's respective managements at the time of
preparation as to the future financial performance of Polycom and ViaVideo,
respectively. Neither Polycom nor ViaVideo publicly discloses internal
management forecasts of the type provided to Montgomery by the managements of
Polycom and ViaVideo in connection with Montgomery's review of the Merger. Such
forecasts were not prepared with a view toward public disclosure. In addition,
such forecasts were based upon numerous variables and assumptions that are
inherently uncertain, including, without limitation, factors related to general
economic and competitive conditions. Accordingly, actual results could vary
significantly from those set forth in such forecasts. Montgomery has assumed no
liability for such forecasts. Montgomery also assumed that there have been no
material changes in Polycom's or ViaVideo's respective assets, financial
condition, results of operations, business or prospects since the respective
dates of their last financial statements made available to Montgomery.
Montgomery relied on advice of counsel and independent accountants to Polycom as
to all legal and financial reporting matters with respect to
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Polycom, the Merger and the Reorganization Agreement. Montgomery assumed that
the Merger will be consummated in a manner that complies in all respects with
the applicable provisions of the Securities Act, the Exchange Act and all other
applicable federal and state statutes, rules and regulations. In addition,
Montgomery did not assume responsibility for making an independent evaluation,
appraisal or physical inspection of any of the assets or liabilities (contingent
or otherwise) of Polycom or ViaVideo, nor was Montgomery furnished with any such
appraisals. Montgomery also assumed that the Merger will be recorded as a
pooling of interests under generally accepted accounting practices. Finally,
Montgomery's opinion is based on economic, monetary and market and other
conditions, including the price per share of Polycom Common Stock as in effect
on, and the information made available to Montgomery as of, June 11, 1997.
Set forth below is a brief summary of the report presented by Montgomery to
the Polycom Board on June 11, 1997 in connection with its opinion.
COMPARABLE COMPANY ANALYSIS. Based on public and other available
information, Montgomery calculated the multiples of aggregate value (defined as
equity value plus net debt, cash consideration and deferred taxes) to estimated
calendar year 1998 revenue for six companies in the teleconferencing and related
telecommunications equipment industry: CIDCO, Inc.; Coherent Communications
Systems Corp.; PictureTel Corporation; VTEL Corporation; Videoserver, Inc. and
Polycom. Such analysis indicated a mean and median multiple of estimated
calendar year revenue of 1.5x and 1.0x, respectively, with an assessed range of
0.7x to 1.7x, implying ranges of the aggregate value of ViaVideo of $21.9 to
$53.2 million based on the ViaVideo Forecast Base Case.
COMPARABLE TRANSACTIONS ANALYSIS. Montgomery reviewed the consideration
paid in 111 acquisitions of networking and communications companies announced
since January 1993. Montgomery analyzed the aggregate value of the consideration
paid in such transactions as a multiple of the target companies' last twelve
months ("LTM") revenues and LTM net income. Such analysis yielded the following
mean and median multiples: 7.1x and 3.5x LTM revenue, and 44.8 and 40.5 LTM net
income, respectively. However, because the ViaVideo Forecasts provided by
management of ViaVideo indicate that ViaVideo is not expected to generate
significant revenue until 1998 or to be profitable until 1999, Montgomery deemed
this method not meaningful in deriving a valuation for ViaVideo.
No other company or transaction used in the comparable company or comparable
transactions analysis as a comparison is identical to Polycom, ViaVideo or the
Merger. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the public trading value of the
companies to which Polycom and the Merger are being compared.
DISCOUNTED CASH FLOW ANALYSIS. Montgomery applied a discounted cash flow
analysis to the financial cash flow forecasts for ViaVideo for calendar years
1997 through 2001, based on the ViaVideo Forecasts. In conducting this analysis,
Montgomery first calculated the present values of the forecasted cash flows.
Second, Montgomery estimated the aggregate value of ViaVideo at the end of 2001
by applying multiples to ViaVideo's estimated 2001 net income and revenue, which
multiples ranged from 20x to 24x in the case of net income and 1.0x to 2.0x in
the case of revenue. Such cash flows and aggregate values were discounted to
present values using discount rates ranging from 30% to 40%, chosen to reflect
different assumptions regarding ViaVideo's cost of capital, and such present
values were then increased by ViaVideo's net cash. This analysis indicated
imputed equity value ranges of ViaVideo of $21.7 to $68.6 million based on the
ViaVideo Forecast Base Case.
PRIVATE PLACEMENT VALUATION ANALYSIS. Montgomery reviewed the theoretical
valuations of ViaVideo in a private placement based on the return that a private
equity investor would likely require. In performing this analysis, Montgomery
reviewed ViaVideo's estimated net income in calendar year 2000, as
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set forth in the ViaVideo Forecasts, and conservatively discounted such net
income by factors ranging from 10% to 20%. Montgomery then applied to such
discounted net income internal rates of return ranging from 30% to 40%,
representing the anticipated returns that would be required by private equity
investors, and to such result applied price to earnings multiples ranging from
14.0x to 18.0x. Such analysis indicated, based on the ViaVideo Forecast Base
Case, equity valuations of ViaVideo ranging from $44.9 to 75.4 million.
PRO FORMA EARNINGS ANALYSIS. Using the ViaVideo Forecasts with respect to
ViaVideo and estimates with respect to Polycom obtained from a Montgomery
research report, Montgomery compared estimated earnings per share on a
stand-alone basis for Polycom to the estimated EPS of the Combined Company for
calendar year 1998. Montgomery noted that, based on such forecasts and estimates
(and assuming 9,760,300 shares of Polycom Common Stock are issued in connection
with the Merger), the Merger would be dilutive to EPS by $0.01 per share in
calendar year 1998, based on the ViaVideo Forecast Base Case.
CONTRIBUTION ANALYSIS. Using estimates obtained from a Montgomery research
report with respect to Polycom and the ViaVideo Forecasts provided by ViaVideo
management with respect to ViaVideo, Montgomery reviewed the estimated
contribution of each of Polycom and ViaVideo to estimated calendar year revenue,
earnings before interest and taxes ("EBIT") and net income for the Combined
Company. Montgomery then compared such contributions to the pro forma share
ownership of the Combined Company to be owned by the stockholders of each of
Polycom and ViaVideo, assuming consummation of the Merger as described in
Reorganization Agreement (and assuming 9,760,300 shares of Polycom Common Stock
are issued in connection with the Merger). Such analysis indicated that Polycom
stockholders own approximately 66.6% of the Combined Company. Such analysis also
indicated that, based on the ViaVideo Forecasts Base Case, Polycom would
contribute approximately 97.3% of the Combined Company's estimated 1997 revenue,
and approximately 68.0%, 61.2% and 69.2% of the Combined Company's estimated
1998 revenue, EBIT and net income, respectively.
While the foregoing summary describes all analyses and examinations that
Montgomery deems material to its opinion, it is not a comprehensive description
of all analyses and examinations actually conducted by Montgomery. The
preparation of a fairness opinion necessarily is not susceptible to partial
analysis or summary description. Montgomery believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and of the factors considered, without considering all
analyses and factors, would create an incomplete view of the process underlying
the analyses set forth in its presentation to Polycom. Accordingly, the ranges
of valuations resulting from any particular analysis described above should not
be taken to be Montgomery's view of the actual value of Polycom or ViaVideo.
In performing its analyses, Montgomery made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Polycom and ViaVideo. The
analyses performed by Montgomery are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
those suggested by such analyses. Such analyses were prepared solely as part of
Montgomery's analysis of the financial fairness to Polycom of the consideration
to be paid by Polycom in the Merger and were provided to the Polycom Board in
connection with the delivery of Montgomery's opinion. The analyses do not
purport to be appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at any time in
the future. Montgomery used in its analyses various projections of future
performance prepared by a third party research report and by the managements of
Polycom and ViaVideo. The projections are based on numerous variables and
assumptions which are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those set forth in such projections. Montgomery's opinion
addresses only the financial fairness of the consideration to be paid by Polycom
pursuant to the Merger and does not address the relative merits of the Merger
and any alternatives to the Merger, Polycom's underlying decision to proceed
with or affect the Merger or any other aspect of the Merger.
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As described above, Montgomery's opinion and presentation to Polycom were
among the many factors taken into consideration by Polycom in making its
determination to approve, and to recommend that its stockholders approve, the
Merger.
Pursuant to the Engagement Letter, Polycom engaged Montgomery to render a
fairness opinion in connection with the Merger. Pursuant to the Engagement
Letter, Polycom agreed to pay Montgomery a fee of $200,000 upon delivery of its
opinion. The fee payable to Montgomery was not conditioned on the outcome of
Montgomery's opinion or whether or not such opinion was deemed to be favorable
for any party's purposes. The Polycom Board was aware of this fee structure and
took it into account in considering Montgomery's opinion and in approving the
Reorganization Agreement and the transactions contemplated thereby. The
Engagement Letter also calls for Polycom to reimburse Montgomery for its
reasonable out-of-pocket expenses. Pursuant to a separate letter agreement,
Polycom has agreed to indemnify Montgomery, its affiliates, and their respective
partners, directors, officers, agents, consultants, employees and controlling
persons against certain liabilities, including liabilities under the federal
securities laws.
In the ordinary course of its business, Montgomery actively trades the
equity securities of Polycom for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
THE REORGANIZATION AGREEMENT
REPRESENTATIONS, WARRANTIES AND COVENANTS
The Reorganization Agreement contains various representations and warranties
of the parties, including representations by Polycom, ViaVideo and Merger Sub as
to their organization and capitalization, their authority to enter into the
Reorganization Agreement and to consummate the transactions contemplated
thereby, the existence of certain liabilities and the absence of certain
material undisclosed liabilities, changes in their businesses and ownership of
their intellectual properties. The representations, warranties and agreements
set forth in the Reorganization Agreement shall survive after the Effective Time
and shall terminate at the earlier of (i) twelve months after the Effective Time
or (ii) the issuance of Polycom's audited financial statements for the year
ending December 31, 1997 or December 31, 1998, depending on the Effective Date,
which include the results of ViaVideo.
Under the terms of the Reorganization Agreement, for the period from the
date of the Reorganization Agreement and continuing until the earlier of the
termination of the Reorganization Agreement or the Effective Time, Polycom has
agreed not to cause or permit, without prior written consent of ViaVideo, the
following: (i) declare or pay any dividends on or make any distributions
(whether in cash, stock or property) with respect to any of its capital stock,
or split, combine or reclassify any of its capital stock, or issue or authorize
the issuance of any securities in respect of, in lieu of or in substitution for
shares of its capital stock, or repurchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service to it or its
subsidiaries; (ii) acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial portion of the assets of, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to its and its
subsidiaries' business, taken as a whole, or acquire or agree to acquire any
equity securities of any corporation, partnership, association or business
organization (any of the foregoing referred to herein as a "MATERIAL
ACQUISITION") which Material Acquisition would require Polycom to file a Form
8-K pursuant to Item 2 of Form 8-K under Section 13 or 15(d) of the Exchange
Act; (iii) grant in excess of 1,300,000 options under the Polycom 1996 Stock
Incentive Plan; (iv) take, or agree in writing or otherwise to take, any action
which would make any of its representations or warranties contained in the
Reorganization Agreement untrue or incorrect or prevent it from performing or
cause it not to perform its covenants pursuant to the Reorganization Agreement.
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ViaVideo has agreed for the period from the date of the Reorganization
Agreement and continuing until the earlier of the termination of the
Reorganization Agreement or the Effective Time (except to the extent expressly
contemplated by the Reorganization Agreement or as consented to in writing by
Polycom), to carry on its business in the usual, regular and ordinary course in
substantially the same manner as conducted prior to execution of the
Reorganization Agreement, to pay debts and taxes when due subject to good faith
disputes over such debts or taxes and to pay or perform other obligations when
due, and to use its reasonable efforts consistent with past practice and
policies to preserve intact its present business organizations, keep available
the services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it, to the end that its goodwill and
ongoing businesses shall be materially unimpaired at the Effective Time. Each of
Polycom and ViaVideo has also agreed to promptly notify each other of (i) any
event or occurrence not in the ordinary course of its or its subsidiaries'
business, (ii) any event which would have a material adverse effect on it and
its subsidiaries and (iii) any material change in its capitalization. In
addition, ViaVideo has agreed that it will not, among other things, do, cause or
permit any of the following, without the prior written consent of Polycom: (a)
cause or permit any amendments to its certificate of incorporation or bylaws;
(b) declare or pay any dividend on or make any other distributions (whether in
cash, stock or property) in respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or repurchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service to it; (c)
accelerate, amend or change the period of exercisability or vesting of options
or other rights granted under its stock plans or authorize cash payments in
exchange for any options or other rights granted under any such plans; (d) take
any action which would interfere with Polycom's ability to account for the
Merger as a pooling of interests; or (e) take, or agree to take any action which
would cause a material breach of its representations or warranties contained in
the Reorganization Agreement or prevent it from performing or cause it not to
perform its covenants pursuant to the Reorganization Agreement.
Moreover, under the terms of the Reorganization Agreement, ViaVideo has
agreed that, during the period from the date of the Reorganization Agreement and
continuing until the earlier of the termination of the Reorganization Agreement
or the Effective Time, and except as expressly contemplated by the
Reorganization Agreement, it will not, among other things, do, cause or permit
any of the following, without the prior written consent of Polycom which consent
shall not be unreasonably withheld: (a) enter into any contract or commitment,
or violate, amend or otherwise modify or waive any of the terms of any of its
contracts, other than in the ordinary course of business; (b) issue, deliver,
sell, authorize or propose the issuance, delivery, sale of, purchase or propose
the purchase of, any shares of its capital stock or securities convertible into,
or subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities, other than the issuance of shares of its Common Stock
pursuant to the exercise of stock options, warrants or other rights therefor
outstanding as of the date of the Reorganization Agreement, or the grant of
stock options to service providers provided that the aggregate of all options
issued to such service providers shall not exceed 127,000 shares after the date
of the Reorganization Agreement; (c) transfer to any person or entity any rights
to its intellectual property other than in the ordinary course of business
consistent with past practice; (d) enter into or amend any agreements pursuant
to which any other party is granted exclusive marketing or distribution rights
with respect to any of its products or technology; (e) sell, lease, license or
otherwise dispose of or encumber any of its properties or assets which are
material, individually or in the aggregate, to its and its subsidiaries'
business, taken as a whole, except in the ordinary course of business; (f) incur
any indebtedness for borrowed money or guarantee any such indebtedness or issue
or sell any debt securities or guarantee any debt securities in excess of
$1,000,000 at an interest rate of no greater than prime rate plus 1%; (g) enter
into any operating lease in excess of $50,000; (h) pay, discharge or satisfy in
an amount in excess of $10,000 in any one case or $50,000 in the aggregate, any
claim, liability
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or obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise) arising other than in the ordinary course of business, other than the
payment, discharge or satisfaction of liabilities reflected or reserved against
in ViaVideo's financial statements; (i) make any capital expenditures, capital
additions or capital improvements except in the ordinary course of business; (j)
materially reduce the amount of any material insurance coverage provided by
existing insurance policies; (k) terminate or waive any right of substantial
value, other than in the ordinary course of business; (l) adopt or amend any
employee benefit plan, except if such plan, as adopted or amended, is not
materially more favorable than Polycom's benefit plans, or adopt or amend any
stock purchase or option plan, or hire any new officer-level employee (except
that it may hire a replacement for any current director-level or officer-level
employee if it first provides Polycom advance notice regarding such hiring
decision), pay any special bonus or special remuneration to any employee or
director (except payments made pursuant to written agreements outstanding on the
date of the Reorganization Agreement), or increase the salaries or wage rates of
its employees except in the ordinary course of business; (m) grant any severance
or termination pay (i) to any director or officer or (ii) to any other employee
except (A) payments made pursuant to written plans or agreements outstanding on
the date of the Reorganization Agreement or (B) grants which are made in the
ordinary course of business in accordance with its standard past practice; (n)
commence a lawsuit other than (i) for the routine collection of bills, (ii) in
such cases where it in good faith determines that failure to commence suit would
result in the material impairment of a valuable aspect of its business, provided
that it consults with Polycom prior to the filing of such a suit, or (iii) for a
breach of the Reorganization Agreement or otherwise in connection with
interpretation or enforcement of any provision of the Reorganization Agreement
or any agreement or transaction contemplated thereby; (o) acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to its business, taken as a whole; (p) other
than in the ordinary course of business, make or change any material election in
respect of taxes, adopt or change any accounting method in respect of taxes,
file any material tax return or amendment to a material tax return, enter into
any closing agreement, settle any claim or assessment in respect of taxes, or
consent to any extension or waiver of the limitation period applicable to any
material claim or assessment in respect of taxes; (q) revalue any of its assets,
including without limitation, writing down the value of inventory or writing off
notes or accounts receivable other than in the ordinary course of business; (r)
take, or agree in writing or otherwise to take, any of the actions described in
(a) through (q) above, or any action which would make any of its representations
or warranties contained in the Reorganization Agreement untrue or incorrect or
prevent it from performing or cause it not to perform its covenants thereunder.
NO SOLICITATION OF TRANSACTIONS
ViaVideo has further agreed that ViaVideo and its officers, directors,
employees or other agents will not, directly or indirectly, (i) take any action
to solicit, initiate or encourage any Takeover Proposal (defined below) or (ii)
engage in negotiations with, or disclose any nonpublic information relating to
ViaVideo to, or afford access to the properties, books or records of ViaVideo
to, any person that has advised ViaVideo that it may be considering making, or
that has made, a Takeover Proposal. ViaVideo will promptly notify Polycom after
receipt of any Takeover Proposal or any notice that any person is considering
making a Takeover Proposal or any request for nonpublic information relating to
ViaVideo for access to the properties, books or records of ViaVideo by any
person that has advised ViaVideo that it may be considering making, or that has
made, a Takeover Proposal and will keep Polycom fully informed of the status and
details of any such Takeover Proposal notice or request. "Takeover Proposal"
means any offer or proposal for, or any indication of interest in 15% or more of
the outstanding shares of capital stock of ViaVideo, a merger or other business
combination involving ViaVideo or the acquisition of any significant equity
interest in, or a significant portion of the assets of, ViaVideo other than the
transactions contemplated by the Reorganization Agreement. Notwithstanding the
foregoing, if on or after December 31, 1997
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ViaVideo delivers a written notice to Polycom (with appropriate backup
documentation provided) which states that ViaVideo projects that it will run out
of cash and cash equivalents on or before June 1, 1998, ViaVideo may initiate
discussions with venture funds and other non-corporate investors for the purpose
of raising equity funding for ViaVideo's operations. ViaVideo may not close any
of such transactions prior to March 31, 1998, and must keep Polycom fully
informed of the details of such discussions, including, without limitation, the
identities of all parties with whom ViaVideo has such discussions. The foregoing
shall in no way limit any of ViaVideo's other obligations and covenants in the
Reorganization Agreement. The foregoing restrictions on ViaVideo's activities
are waivable by Polycom.
CONDITIONS TO THE MERGER
Each party's respective obligation to effect the Merger is subject to, among
other things, the approval of the Reorganization Agreement and the Merger by the
requisite votes of the stockholders of Polycom and ViaVideo, the Commission
having approved the Proxy Statement, and the satisfaction prior to the Effective
Time of the additional following conditions: (a) the absence of (i) any
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger, (ii) any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing, (iii) the pendancy of any proceeding in (ii) above, and (iv) any
action taken, or any statute, rule, regulation or order enacted, enforced or
deemed applicable to the Merger, which makes the consummation of the Merger
illegal; (b) Polycom, ViaVideo and Merger Sub and their respective subsidiaries
timely obtaining from each governmental entity all approvals, waivers and
consents, if any, necessary for consummation of or in connection with the Merger
and the transactions contemplated thereby, including such approvals, waivers and
consents as may be required under the Securities Act, state Blue Sky laws and
HSR, other than filings and approvals relating to the Merger or affecting
Polycom's ownership of ViaVideo or any of its properties if failure to obtain
such approval, waiver or consent would not have a material adverse effect to
either party; (c) Polycom, ViaVideo, Escrow Agent and the Stockholder's Agent
entering into the Escrow Agreement; (d) each of Polycom and ViaVideo receiving
substantially identical written opinions from their respective counsel, in form
and substance reasonably satisfactory to them, to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code; (e) the filing with the Nasdaq National Market of a Notification Form for
Listing of Additional Shares with respect to the shares of Polycom Common Stock
issuable upon conversion of the ViaVideo Common Stock in the Merger and upon
exercise of the options under the ViaVideo 1996 Stock Option/Stock Issuance Plan
assumed by Polycom, and the listing of such shares; and (f) each of Polycom and
ViaVideo receiving from Coopers & Lybrand L.L.P., independent auditors of both
parties, a letter confirming that the Merger qualifies for pooling of interests
accounting treatment if consummated in accordance with the Reorganization
Agreement.
In addition, the obligations of ViaVideo to effect the Merger are subject
to, among other things, the satisfaction at or prior to the Effective Time of
each of the following conditions, unless waived in writing by ViaVideo: (a) the
representations and warranties of Polycom and Merger Sub in the Reorganization
Agreement shall be true and correct in all material respects as of the Effective
Time as though such representations and warranties were made on and as of such
time, except for such inaccuracies which would not reasonably be expected to
have a material adverse effect on Polycom and ViaVideo shall have received a
certificate to such effect signed on behalf of Polycom by its President and
Chief Financial Officer; (b) Polycom and Merger Sub shall have performed or
complied in all material respects with all covenants, obligations and agreements
required by them as of the Effective Time and ViaVideo shall have received a
certificate executed on behalf of Polycom by its President and Chief Financial
Officer to such effect; (c) there shall not have occurred any material adverse
change in the financial condition, properties, assets (including intangible
assets), liabilities, business, operations or results of operations of Polycom
and its subsidiaries, taken as a whole; (d) ViaVideo shall have received a
letter from its independent auditors, confirming that the Merger qualifies for
pooling of interest accounting treatment if consummated in
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accordance with the Reorganization Agreement; (e) ViaVideo shall have received
from each of the Affiliates (as defined below) of Polycom an executed Affiliates
Agreement; (f) the Closing Price of Polycom Common Stock immediately preceding
the Closing Date shall be at least $3.00 per share, as adjusted for any stock
splits, stock dividends or recapitalizations, and (g) ViaVideo shall have been
furnished with evidence satisfactory to it of the consent or approval of those
persons whose consent or approval shall be required in connection with the
Merger under any material contract of Polycom except where the failure to obtain
such consent or approval would not have a material adverse effect on Polycom.
In addition, the obligations of Polycom and Merger Sub to effect the Merger
are subject to, among other things, the satisfaction at or prior to the
Effective Time of each of the following conditions, unless waived in writing by
Polycom: (a) the representations and warranties of ViaVideo in the
Reorganization Agreement shall be true and correct in all material respects as
of the Effective Time as though such representations and warranties were made on
and as of such time, except for such inaccuracies would not have a material
adverse effect on ViaVideo and Polycom shall have received a certificate to such
effect signed on behalf of ViaVideo by its President and Chief Financial
Officer; (b) ViaVideo shall have performed or complied in all material respects
with all covenants, obligations and agreements required by it as of the
Effective Time and Polycom shall have received a certificate executed on behalf
of ViaVideo by its President and Chief Financial Officer to such effect; (c)
Polycom shall have been furnished with evidence satisfactory to it of the
consent or approval of those persons whose consent or approval shall be required
in connection with the Merger under any material contract of ViaVideo except
where the failure to obtain such consent or approval would not have a material
adverse effect on ViaVideo; (d) no temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint limiting or restricting
Polycom's conduct or operation of the business of ViaVideo following the Merger
shall be in effect, nor shall any proceeding brought by an administrative agency
or commission or other governmental entity, domestic or foreign, seeking the
foregoing be pending; (e) there shall not have occurred any material adverse
change in the financial condition, properties, assets (including intangible
assets), liabilities, business, operations or results of operations of ViaVideo;
(f) Polycom shall have received a letter from its independent auditors,
confirming that the Merger qualifies for pooling of interest accounting
treatment if consummated in accordance with the Reorganization Agreement; (g)
Polycom shall have received from each of the Affiliates of ViaVideo an executed
Affiliates Agreement; (h) ViaVideo shall have provided Polycom with a properly
executed FIRPTA Notification Letter; (i) Polycom shall have received from
holders of at least ninety percent (90%) of the Target Common Stock and Target
Preferred Stock outstanding immediately prior to the Effective Time, a duly
executed and delivered Stockholder's Representation Agreement regarding
transferability of the Polycom Common Stock to be received by such Stockholder;
(j) the directors of ViaVideo in office immediately prior to the Effective Time
shall have resigned as directors of ViaVideo effective as of the Effective Time;
(k) certain employees of ViaVideo shall have accepted employment with Polycom
and shall have entered into an employment and non-competition agreement as
described in the Reorganization Agreement; (l) Polycom shall have received from
ViaVideo a statement of all out-of-pocket expenses incurred by ViaVideo; (m)
ViaVideo shall have terminated any and all rights granted by that certain
Amended and Restated Investors' Rights Agreement, dated May 28, 1997, as
amended; (n) all holders of ViaVideo Preferred Stock shall have converted such
shares into ViaVideo Common Stock prior to the Effective Time; and (o) ViaVideo
shall have made customer shipments of its initial videoconferencing system,
which meets previously agreed upon specifications, resulting in revenues of at
least $75,000 (which condition is waivable by Polycom).
CLOSING
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Reorganization Agreement, Merger Sub and ViaVideo
will file certificates of merger with the Secretary of State of Delaware. The
Merger will become effective upon such filing. It is anticipated that, assuming
all conditions are met, the Merger will occur and a closing will be held on or
before March 31, 1998.
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REGISTRATION RIGHTS
The shares of Polycom Common Stock to be issued in the Merger will be issued
in a transaction exempt from the registration requirements of the Securities
Act. Polycom has granted registration rights to the holders of ViaVideo Common
Stock and has covenanted to file a registration statement on Form S-3 within
thirty (30) days of the Effective Time in order to register the Polycom Common
Stock to be issued in the Merger for resale. If Form S-3 (or a successor form)
is not available for use by Polycom, Polycom will file a registration statement
on Form S-1 to satisfy the registration obligations. The Registration Rights,
among other things, include an obligation by Polycom to keep the Registration
Statement effective for a period of two (2) years as well as cross
indemnification provisions whereby Polycom and the ViaVideo stockholders agree
to indemnify each other for any liability that might arise from any untrue
statement contained in the Registration Statement made by that party.
TERMINATION, AMENDMENT AND WAIVER
The Reorganization Agreement may be amended by the parties at any time by
execution of an instrument in writing signed on behalf of each of the parties
thereto; provided that an amendment made subsequent to adoption of the
Reorganization Agreement by the stockholders of ViaVideo or Merger Sub shall not
(i) alter or change the amount or kind of consideration to be received on
conversion of the ViaVideo Common Stock; (ii) alter or change any term of the
Certificate of Incorporation of ViaVideo after the Merger; or (iii) alter or
change any of the terms and conditions of the Reorganization Agreement if such
alteration or change would adversely affect the holders of ViaVideo Common Stock
or Merger Sub Common Stock.
The Reorganization Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the Polycom stockholders,
(a) by the mutual consent of the Boards of Directors of Polycom and ViaVideo;
(b) by either Polycom or ViaVideo if: (i) without fault of the terminating
party, the Merger is not consummated on or before March 31, 1998 (provided a
later date may be agreed upon in writing by the parties); (ii) any permanent
injunction or other order of a court or other competent authority preventing the
consummation of the Merger shall have become final and nonappealable; (iii) any
required approval of the stockholders of ViaVideo shall not have been obtained
by reason of failure to obtain the required vote upon a vote held at a duly held
meeting of stockholders or by written consent; (iv) Polycom or ViaVideo breaches
any of its representations, warranties or obligations in any material respect
under the Reorganization Agreement and such breach is not cured within ten (10)
business days of receipt by Polycom or ViaVideo, as the case may be, of written
notice of such breach; (v) the Board of Directors of either Polycom or ViaVideo
shall have withdrawn or modified its recommendation of the Reorganization
Agreement or the Merger in a manner adverse to Polycom or ViaVideo, as the case
may be, or shall have resolved to do any of the foregoing; or (vi) Polycom or
ViaVideo fails to call and hold the Polycom Stockholder Meeting or ViaVideo
Stockholder Meeting, respectively, or obtain appropriate consent by March 31,
1998; (c) by Polycom, if holders of more than nine percent (9%) of ViaVideo
capital stock have not voted in favor of the Merger by March 31, 1998; (d) by
ViaVideo, if Polycom's stockholders do not approve the Merger and the
Reorganization Agreement by the requisite vote at the Polycom Stockholders
Meeting; (e) by ViaVideo in the event (i) of the acquisition, by any person or
group of persons (other than persons or groups of persons who (A) acquired
shares of Polycom Common Stock pursuant to any merger of Polycom in which
Polycom was the surviving corporation or any acquisition by Polycom of all or
substantially all of the capital stock or assets of another person or (B)
disclose their beneficial ownership of shares of Polycom Common Stock on
Schedule 13G under the Exchange Act), of beneficial ownership of 30% or more of
the outstanding shares of Polycom Common Stock (the terms "person," "group" and
"beneficial ownership" having the meanings ascribed thereto in Section 13(d) of
the Exchange Act and the regulations promulgated thereunder), or (ii) the
Polycom Board accepts or publicly recommends acceptance of an offer from a third
party to acquire 50% or more of the outstanding shares of Polycom Common Stock
or of Polycom's consolidated assets.
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As used in the Reorganization Agreement, a "Trigger Event" shall occur if
any Person (as that term is defined in Section 13(d) of the Exchange Act and the
regulations promulgated thereunder) acquires securities representing 15% or
more, or commences a tender or exchange offer following the successful
consummation of which the offeror and its affiliate would beneficially own
securities representing 15% or more, of the voting power of ViaVideo; PROVIDED,
HOWEVER, a Trigger Event shall not be deemed to include the acquisition by any
Person of securities representing 15% or more of ViaVideo if such Person has
acquired such securities not with the purpose nor with the effect of changing or
influencing the control of ViaVideo, nor in connection with or as a participant
in any transaction having such purpose or effect, including without limitation
not in connection with such Person (i) making any public announcement with
respect to the voting of such shares at any meeting to consider any merger,
consolidation, sale of substantial assets or other business combination or
extraordinary transaction involving ViaVideo, (ii) making, or in any way
participating in, any "solicitation" of "proxies" (as such terms are defined or
used in Regulation 14A under the Exchange Act) to vote any voting securities of
ViaVideo (including, without limitation, any such solicitation subject to Rule
14a-11 under the Exchange Act) or seeking to advise or influence any Person with
respect to the voting of any voting securities of ViaVideo or the sale or
transfer of a significant portion of assets (excluding the sales or disposition
of assets in the ordinary course of business) of ViaVideo, (iii) forming,
joining or in any way participating in any "group" within the meaning of Section
13(d)(3) of the Exchange Act with respect to any voting securities of ViaVideo,
directly or indirectly, relating to a merger or other business combination
involving ViaVideo or the sale or transfer of a significant portion of assets
(excluding the sale or disposition of assets in the ordinary course of business)
of ViaVideo, or (iv) otherwise acting, alone or in concert with others, to seek
control of ViaVideo or to seek to control or influence the management or
policies of ViaVideo.
At any time prior to the Effective Time, either of Polycom or ViaVideo may,
to the extent legally allowed, by execution of an instrument in writing signed
on behalf of such party (a) extend the time for the performance of any of the
obligations or acts of the other parties set forth in the Reorganization
Agreement; (b) waive any inaccuracies in the representations and warranties made
to such party in the Reorganization Agreement or in any document delivered
pursuant to the Reorganization Agreement; and (c) waive compliance with any of
the agreements or conditions for the benefit of such party under the
Reorganization Agreement.
FEES AND EXPENSES; TERMINATION FEE
Subject to the provisions described below regarding reimbursement of
expenses and payment of termination fees, whether or not the Merger is
consummated, all costs and expenses incurred in connection with the
Reorganization Agreement and the transactions contemplated thereby shall be paid
by the party incurring such expense; provided, however, that any out-of-pocket
expenses incurred by ViaVideo (including, without limitation, fees and expenses
of one legal counsel to ViaVideo, financial advisors and accountants) in excess
of $175,000 (which amount shall be subject to reasonable increases in the event
of unexpected and material changes in the scope of work required by such
counsel, advisors or accountants, approval of which shall not be unreasonably
withheld) in addition to fees and expenses of more than one legal counsel shall
remain an obligation of ViaVideo's Stockholders.
In the event ViaVideo shall terminate the Reorganization Agreement on
account of (a) a material breach of the representations, warranties, or
obligations of Polycom; (b) Polycom's Board withdrawing or modifying its
recommendation of the Reorganization Agreement or the Merger; (c) the failure of
the Polycom Board to call and hold the Polycom Meeting or obtain appropriate
written consent by March 31, 1998; (d) Polycom fails to obtain the requisite
vote at the Meeting; or (e) a Person or Group obtains Beneficial Ownership (as
defined in Section 13(d) of the Exchange Act and the regulations promulgated
thereunder) of 30% or more of the outstanding shares of Polycom Stock or
Polycom's Board accepts or publicly recommends acceptance of an offer from a
third party to acquire 50% or more of the outstanding
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shares of Polycom's Common Stock or of Polycom's consolidated assets, Polycom
shall reimburse ViaVideo for all of the out-of-pocket costs and expenses
incurred by ViaVideo in connection with the Reorganization Agreement and the
transactions contemplated thereby (including without limitation the fees and
expenses of its advisors, accountants and legal counsel).
In the event that (a) either Polycom or ViaVideo terminates the
Reorganization Agreement following a failure of ViaVideo to obtain the requisite
stockholder vote to approve the Reorganization Agreement there shall have been a
Trigger Event with respect to ViaVideo or a Takeover Proposal which at the time
of the meeting of ViaVideo's stockholders shall not have been (i) rejected by
ViaVideo and (ii) withdrawn by the third party or, (b) Polycom terminates the
Reorganization Agreement because (i) ViaVideo breached its representations,
warranties or obligations under the Reorganization Agreement in any material
respect; (ii) the ViaVideo Board withdrew or modified its recommendation of the
Reorganization Agreement or the Merger in a manner adverse to Polycom or shall
have resolved to do any of the foregoing; (iii) ViaVideo failed to call and hold
the ViaVideo stockholders meeting by March 31, 1998; or (iv) holders of more
than nine percent of ViaVideo's capital stock have not voted in favor of the
Merger by March 31, 1998, ViaVideo will be required to pay to Polycom $4,000,000
and reimburse reasonable out-of-pocket costs and expenses incurred by Polycom in
connection with the Reorganization Agreement and the transactions contemplated
thereby (including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel).
In the event that Polycom terminates the Reorganization Agreement on account
of (a) a material breach of the representations, warranties or obligations of
ViaVideo, (b) an action of ViaVideo that precludes accounting for the Merger as
a pooling of interest, (c) the ViaVideo Board shall have withdrawn or modified
its recommendation of the Reorganization Agreement or the Merger in a manner
adverse to Polycom or shall have resolved to do any of the foregoing, (d)
ViaVideo fails to call and hold the ViaVideo stockholders meeting by March 31,
1998, (e) holders of more than nine percent (9%) of ViaVideo Common Stock and
ViaVideo Preferred Stock shall have not voted in favor of the Merger by March
31, 1998, or (f) any required approval of the stockholders of ViaVideo shall
have not been obtained by reason of the failure to obtain the required vote upon
a vote held at a duly held meeting of stockholders or at any adjournment thereof
or by written consent, ViaVideo will be required to reimburse Polycom for all
reasonable out-of-pocket costs and expenses incurred by Polycom in connection
with the Reorganization Agreement and the transactions contemplated thereby
(including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel); and, in the event any Takeover Proposal or
Trigger Event is consummated within six months of the later of (x) termination
of the Reorganization Agreement and (y) the payment of the above-described costs
and expenses, ViaVideo will be required to promptly pay Polycom an additional
$4,000,000 (provided that no termination fee had been previously paid).
Pursuant to a letter agreement dated June 11, 1997, Polycom engaged
Montgomery to provide financial advice and assistance in connection with the
acquisition of ViaVideo, and to render a fairness opinion in connection with the
proposed merger of ViaVideo with a subsidiary of Polycom. Polycom has agreed to
pay Montgomery a Transaction Fee of $200,000 for its services pursuant to the
terms of the Engagement Letter and has agreed to reimburse Montgomery for its
reasonable out-of-pocket expenses.
ESCROW AND INDEMNIFICATION
At the Effective Time, Polycom will deposit into escrow the Escrow Shares
representing 10% of the shares of Polycom Common Stock otherwise issuable to the
holders of ViaVideo Common Stock in the Merger on a pro rata basis. The Escrow
Shares will be registered in the name of and deposited with the Escrow Agent
pursuant to the Reorganization Agreement and an Escrow Agreement to constitute
the Escrow Fund. The Escrow Fund will be available to provide a fund against
which Polycom, its affiliates and their officers, directors, employees and
attorneys may assert indemnification claims for losses, damages, costs and
expenses (including reasonable legal fees and expenses) that an indemnified
party has incurred by reason of (i) any inaccuracy in or breach of any
representation, warranty or covenant of ViaVideo
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contained in the Reorganization Agreement or (ii) a breach of the
confidentiality agreement between ViaVideo and Polycom (collectively, "POLYCOM
LOSSES"). The indemnification period will end on the earlier of (i) the date 12
months following the Effective Time or (ii) the date on which Polycom releases
its audited consolidated financial statements for the fiscal year ending
December 31, 1997 or December 31, 1998, depending on the Effective Date. Any
Escrow Shares available for distribution at the end of the indemnification
period will be issued to the former stockholders of ViaVideo on a pro rata
basis.
Notwithstanding the indemnification provisions described above,
indemnification will not be available unless and until the aggregate amount of
Polycom Losses exceeds $100,000. To receive any Escrow Shares, notice of the
Polycom Loss must be delivered to the Escrow Agent and the Stockholder's Agent.
If the Stockholder's Agent disputes the claim, the matter must be resolved by
binding arbitration. For the purpose of compensating Polycom for its Polycom
Losses, the Escrow Shares shall be valued at a price equal to the average
closing price of Polycom Common Stock for the 10 trading days immediately
preceding (and including) the second trading day prior to the Effective Date. In
no event shall Polycom receive more than the number of Escrow Shares then
remaining in the Escrow Fund at the time of Polycom's claim, and the maximum
liability of all ViaVideo Stockholders under the indemnity provisions of the
Reorganization Agreement shall not exceed the forfeiture of the Escrow Shares in
the Escrow Fund. Except with respect to claims based on willful fraud or
intentional misrepresentation or claims arising under state or federal
securities laws, Polycom's sole recourse with respect to Polycom Losses is
limited to the Escrow Fund.
INDEMNIFICATION BY POLYCOM
Polycom has agreed that, from and after the Effective Time, Polycom will
cause ViaVideo to indemnify and hold harmless the present and former officers,
directors, employees and agents of ViaVideo in respect of acts or omissions
occurring on or prior to the Effective Time to the extent provided under
ViaVideo's then effective Certificate of Incorporation and Bylaws or any
indemnification agreement with ViaVideo officers and directors to which ViaVideo
is a party, in each case in effect on March 1, 1997.
RELATED AGREEMENTS
VOTING AGREEMENTS
In connection with the Merger, certain stockholders of Polycom and ViaVideo
have entered into Voting Agreements. The terms of the Voting Agreements provide
(i) that such stockholders will not transfer (except as may be specifically
required by court order or by operation of law), sell, exchange, pledge (except
in connection with a bona fide loan transaction) or otherwise dispose of or
encumber their shares of Polycom or ViaVideo Common Stock beneficially owned by
them, or any new shares of such stock they may acquire, at any time prior to the
Expiration Date (as defined herein), (ii) that such stockholders will vote all
shares of Polycom or ViaVideo Common Stock beneficially owned by them (a) in
favor of the approval of the Reorganization Agreement and approval of the Merger
and any matter that could reasonably be expected to facilitate the Merger and
(b) against any other action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or agreement of
Polycom or ViaVideo under the Reorganization Agreement or which could result in
any of the conditions to Polycom's or ViaVideo's obligations under the
Reorganization Agreement not being fulfilled, and (iii) that each holder of
Series A Preferred Stock and/or Series B Preferred Stock of ViaVideo shall elect
to convert such shares into ViaVideo Common Stock immediately prior to the
effectiveness of the Merger. Such voting agreements are accompanied by
irrevocable proxies whereby such stockholders provide to Polycom or ViaVideo, as
the case may be, the right to vote their shares on the proposals relating to the
Reorganization Agreement and the Merger at the Polycom Meeting and the ViaVideo
Meeting, as appropriate, and on any competing proposal at a Polycom or ViaVideo
stockholder meeting. Holders of approximately 41% and 100% of the shares of
Polycom Common Stock and ViaVideo Common Stock, respectively, entitled to vote
at the stockholder meeting have entered into Voting Agreements and
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irrevocable proxies. The Voting Agreements and proxies shall terminate on the
Expiration Date. As used herein, the term "Expiration Date" shall mean the
earlier to occur of (i) such date and time as the Merger shall become effective
in accordance with the terms and provisions of the Reorganization Agreement and
(ii) the date of termination of the Reorganization Agreement.
AFFILIATES AGREEMENTS
It is a condition to the obligations of ViaVideo and Polycom to effect the
Merger that in accordance with the requirements of the Commission's accounting
rules for pooling of interests, each person who is identified as an Affiliate
(as such term is defined for purposes of Rule 145 of the Securities Act ("RULE
145")) of each party execute and deliver, at or prior to the Effective Time, an
agreement that such persons will not offer to sell, sell or otherwise dispose of
Polycom Common Stock or ViaVideo Common Stock during the thirty (30) day period
prior to the Effective Time or after the Effective Time until financial results
covering at least thirty (30) days of the combined operations of Polycom and
ViaVideo have been published (the "AFFILIATES AGREEMENT"). The Affiliates
Agreement also requires ViaVideo Affiliates not to make any public sale of any
Polycom Common Stock received upon consummation of the Merger, except in
compliance with Rule 145, pursuant to another exemption from the registration
requirements of the Securities Act or in a registered offering. In addition, the
Affiliates Agreements executed by ViaVideo Affiliates provide that, as of the
date of the Affiliates Agreement and as of the Effective Time, such Affiliate
has no present plan or intent to engage in any transaction that results in a
reduction in the risk of ownership with respect to more than 50% of the shares
of Polycom Common Stock acquired by such Affiliate in the Merger.
STOCKHOLDER'S REPRESENTATION AGREEMENTS
Prior to the Effective Time, Polycom shall enter into Stockholder's
Representation Agreements with the non-Affiliate stockholders of ViaVideo which,
among other things, confirms that each such stockholder does not currently, and
will not at the Effective Time, have a plan to dispose of more than fifty
percent (50%) of the shares of Polycom Common Stock to be received by such
stockholder pursuant to the Merger, and which also appoints Craig B. Malloy as
Stockholder's Agent and to be bound by the terms of the Escrow Agreement and
Article VIII.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
Polycom has entered into employment and non-competition agreements with each
of Craig B. Malloy, Michael J. Hogan, Michael L. Kenoyer, Patrick D. Vanderwilt,
Errol R. Williams and David N. Hein (each, an "Employee," and collectively, the
"EMPLOYEES"). The employment and non-competition agreements are contingent upon
the occurrence of the closing of the Merger and will become effective upon the
Effective Time. The terms of the employment agreements are three years from the
Effective Time unless terminated earlier by either party for any reason, with or
without cause, by giving written notice of such termination. If Employee's
employment is terminated "Without Cause" or if Employee resigns from employment
for "Good Reason" prior to eighteen (18) months after the Effective Time, then
Polycom will pay Employee a lump sum payment equal to six (6) times Employee's
monthly base salary less applicable deductions as severance. If Polycom
terminates Employee's employment "Without Cause" or if Employee resigns from
employment for "Good Reason" after eighteen (18) months but prior to three (3)
years after the Effective Time, Polycom will pay Employee all of the remaining
salary that would have been owed from the date of termination through the entire
three (3) year term in one lump sum payment, however all other benefits shall
terminate as of the date of termination. If Employee resigns "Without Good
Reason" or the employment is terminated for "Cause" within three (3) years of
the Effective Time, then Employee will be paid all salary and benefits through
the date of termination, but nothing else.
The employment and non-competition agreements require, until the later of
termination of employment or the three (3) years after the Effective Time, that
Employee (i) will not participate or engage in the
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design, development, manufacture, production, marketing, sale or servicing of
any product, or the provision of any service, that directly relates to the
teleconferencing or electronic presentation equipment business (the "BUSINESS")
in the United States or Canada, and (ii) will not permit Employee's name to be
used in connection with a competitive Business. If Employee's employment is
terminated "Without Cause" or Employee resigns for 'Good Reason" more than
eighteen (18) months but less than three (3) years after the Effective Time,
then such non-competition will expire upon the earlier of three (3) years
following the Effective Time, or nine (9) months from the date of termination.
For a period of eighteen (18) months following the termination of employment,
Employee will not solicit, encourage or induce any employee or consultant of
Polycom to end their relationship with Polycom. There can be no assurance that
such non-competition and non-solicitation provisions will be enforceable under
California law.
FEDERAL SECURITIES LAW CONSEQUENCES
The Polycom Common Stock issuable in the Merger will be issued in a
transaction exempt from the registration requirements of the Securities Act.
Polycom has agreed to use its best efforts to file a registration statement
within 30 days of the Effective Time thereby allowing those shares to be traded
without restriction, except for those shares held by stockholders who are deemed
to control or be under common control with Polycom ("AFFILIATES"). Affiliates of
Polycom may not sell any shares of Polycom Common Stock except pursuant to an
effective registration statement under the Securities Act covering such shares
or an applicable exemption from the registration requirements of the Securities
Act. In general, Rule 144 promulgated under the Securities Act, as currently in
effect, imposes restrictions on the manner in which such Affiliates may make
resales of Polycom Common Stock and also on the number of shares of Polycom
Common Stock that such Affiliates, and others (including persons with whom the
Affiliates act in concert), may sell within any three-month period.
The Reorganization Agreement requires ViaVideo to cause its affiliates to
enter into agreements not to make any public sale of any Polycom Common Stock
received upon consummation of the Merger, except in compliance with Rule 145,
pursuant to another exemption from the registration requirements of the
Securities Act or in a registered offering. See "The Merger and Related
Transactions--Related Agreements--Affiliate Agreements."
REGULATORY MATTERS
Neither Polycom nor ViaVideo is aware of any regulatory approvals necessary
for the consummation of the Merger.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations relevant to the exchange of shares of ViaVideo Common Stock for
Polycom Common Stock pursuant the Merger that are generally applicable to
holders of ViaVideo Common Stock. This discussion is based on currently existing
provisions of the Code, existing and proposed Treasury Regulations thereunder
and current administrative rulings and court decisions, all of which are subject
to change. Any such change, which may or may not be retroactive, could alter the
tax consequences as described herein.
The Merger is intended to constitute a Reorganization for federal income tax
purposes. Provided that the Merger does so qualify as a Reorganization, then,
subject to the limitations and qualifications referred to herein, the Merger
will generally result in the following federal income tax consequences:
(a) No gain or loss will be recognized by holders of ViaVideo Common Stock
solely upon their receipt in the Merger of Polycom Common Stock in exchange
therefor (except to the extent of cash received in lieu of a fractional share of
Polycom Common Stock).
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(b) The aggregate tax basis of the Polycom Common Stock received by ViaVideo
stockholders in the Merger (including any fractional share of Polycom Common
Stock not actually received) will be the same as the aggregate tax basis of the
ViaVideo Common Stock surrendered in exchange therefor.
(c) The holding period of the Polycom Common Stock received by each ViaVideo
stockholder in the Merger will include the period for which the ViaVideo Common
Stock surrendered in exchange therefor was considered to be held, provided that
the ViaVideo Common Stock so surrendered is held as a capital asset at the time
of the Merger.
(d) Cash payments received by holders of ViaVideo Common Stock in lieu of a
fractional share will be treated as if such fractional share of Polycom Common
Stock had been issued in the Merger and then redeemed by Polycom. A ViaVideo
stockholder receiving such cash will recognize gain or loss, upon such payment,
measured by the difference (if any) between the amount of cash received and the
basis in such fractional share.
(e) A stockholder who exercises appraisal rights with respect to a share of
ViaVideo Common Stock and who receives payment for such stock in cash should
generally recognize gain or loss measured by the difference between the
stockholder's basis in such share and the amount of cash received, provided that
such payment is neither essentially equivalent to a dividend nor has the effect
of a distribution of a dividend (a "DIVIDEND EQUIVALENT TRANSACTIONS") (See
Sections 302 and 356(A)(2) of the Code). A sale of ViaVideo Common Stock
pursuant to an exercise of appraisal rights will generally not be a Dividend
Equivalent Transaction if, as a result of such exercise, the stockholder
exercising appraisal rights owns no shares of Polycom Stock (either actually or
constructively within the meaning of Section 318 of the Code.) If, however, a
stockholder's sale for cash of ViaVideo Common Stock pursuant to an exercise of
appraisal rights is a Dividend Equivalent Transaction, then such stockholder
will generally recognize income for federal income tax purposes in an amount up
to the entire amount of cash so received.
(f) Neither of Polycom, Merger Sub nor ViaVideo will recognize material
amounts of gain solely as a result of the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of shares of
Polycom Common Stock could recognize gain, if any, to the extent that such
shares are considered to be received in exchange for services or property other
than solely ViaVideo Common Stock. All or a portion of such gain could be
taxable as ordinary income. Gain could also have to be recognized to the extent
that a ViaVideo stockholder is treated as receiving (directly or indirectly)
consideration other than Polycom Common Stock in exchange for the stockholder's
ViaVideo Common Stock. In addition, regardless of whether the Merger constitutes
a Reorganization, the Internal Revenue Service ("IRS") may assert that the
difference between (i) the amount of Polycom Common Stock that holders of
ViaVideo Preferred Stock would have received in the Merger had ViaVideo
Preferred Stock not been converted into common stock prior to the Merger and
(ii) the amount of Polycom Common Stock that such holders actually received in
the Merger should be treated as constructively received by such former holders
of ViaVideo Preferred Stock and then transferred by them in a fully taxable
transaction to the other ViaVideo stockholders (the "OTHER VIAVIDEO
STOCKHOLDERS"). In the event that the IRS were to prevail in such position, the
Other ViaVideo Stockholders would recognize income in an amount equal to the
value of the Polycom Common Stock that they are treated as having received
pursuant to such constructive transfer and the former holders of ViaVideo
Preferred Stock would be treated as recognizing gain in an amount equal to the
excess of the value of the Polycom Common Stock that they constructively
transferred and the basis that they would have had in such stock immediately
following the Merger had they actually received such stock in the Merger. There
can be no assurance the that the IRS would not be successful in any such
assertion.
The parties are not requesting and will not request a ruling from the IRS in
connection with the Merger. However, it is a condition to the Merger that
Polycom and ViaVideo each receives an opinion from its respective counsel to the
effect that the Merger will constitute a Reorganization (the "TAX OPINIONS").
Polycom and ViaVideo stockholders should be aware that the Tax Opinions will not
bind the
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IRS, and the IRS is therefore not precluded from successfully asserting a
contrary position. The Tax Opinions will be subject to certain assumptions and
qualifications, including but not limited to the truth and accuracy of certain
representations made by Polycom, ViaVideo, Merger Sub, and certain stockholders
of ViaVideo. Of particular importance are certain representations relating to
the Code's "continuity of interest" requirement.
To satisfy the continuity of interest requirement, ViaVideo stockholders
must not, pursuant to a plan or intent existing at or prior to the Merger,
dispose of or transfer so much of either (i) their ViaVideo Common Stock in
anticipation of the Merger or (ii) the Polycom Common Stock to be received in
the Merger (collectively, "PLANNED DISPOSITIONS"), such that ViaVideo
stockholders, as a group, no longer have a significant equity interest in the
ViaVideo business being conducted after the Merger. ViaVideo stockholders will
generally be regarded as having a significant equity interest as long as the
number of shares of Polycom Common Stock received in the Merger less the number
of shares subject to Planned Dispositions (if any) represents, in the aggregate,
a substantial portion of the entire consideration received by the ViaVideo
stockholders in the Merger. No assurance can be made that the "continuity of
interest" requirement will be satisfied, and if such requirement is not
satisfied, the Merger would not be treated as a Reorganization.
A successful IRS challenge to the Reorganization status of the Merger (as a
result of a failure to satisfy the "continuity of interest" requirement or
otherwise) would result in ViaVideo stockholders recognizing taxable gain or
loss with respect to each share of Common Stock of ViaVideo surrendered equal to
the difference between the stockholder's basis in such share and the fair market
value, as of the Effective Time, of the Polycom Common Stock received in
exchange therefor. In such event, a stockholder's aggregate basis in the Polycom
Common Stock so received would equal its fair market value, and the
stockholder's holding period for such stock would begin the day after the
Merger.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
purposes. Under this accounting treatment, the recorded assets and liabilities
and the operating results of both Polycom and ViaVideo are carried forward to
the combined operations of the Combined Company at their recorded amounts. No
recognition of goodwill in the combination is required of either party to the
Merger. To support the treatment of the Merger as a pooling of interests, the
affiliates of Polycom and ViaVideo have entered into agreements imposing certain
resale limitations on their stock. See "The Merger and Related
Transactions--Related Agreements--Affiliate Agreements." It is a condition to
Polycom's and ViaVideo's obligations to consummate the Merger that, among other
things, Polycom and ViaVideo receive a letter from Coopers & Lybrand L.L.P., the
independent accountants for Polycom and ViaVideo, with respect to Polycom's and
ViaVideo's ability to participate in a pooling-of-interests transaction.
APPRAISAL RIGHTS
Section 262 of the DGCL ("SECTION 262") appraisal rights are not available
to stockholders of a corporation, such as Polycom, (a) whose securities are
listed on a national securities exchange or are designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. ("NASD") and (b) whose stockholders are not required
to accept in exchange for their stock anything other than stock of another
corporation listed on a national securities exchange or on an interdealer
quotation system by the NASD and cash in lieu of fractional shares. Because
Polycom's Common Stock is traded on such a system, the Nasdaq National Market,
and because the ViaVideo stockholders are being offered stock of Polycom, and
cash in lieu of fractional shares, stockholders of Polycom will not have
appraisal rights with respect to the Merger.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Polycom Board with respect to the
Merger, stockholders of Polycom should be aware that certain officers, directors
and legal counsel of Polycom have interests in the Merger, including those
referred to below, that presented them with potential conflicts of interests.
The Polycom Board was aware of these potential conflicts and considered them
along with the other matters described in "The Polycom Meeting--Board
Recommendation" and "The Merger and Related Transactions--Reasons for the
Merger."
Polycom has entered into employment and non-competition agreements with
certain ViaVideo executive officers and employees in positions comparable to
such employee's current position with ViaVideo. These agreements provide that if
the contract is terminated without cause or if Employee resigns from employment
for Good Reason prior to eighteen (18) months after the Closing Date, then
Polycom will pay Employee a lump sum payment equal to six (6) times Employee's
monthly base salary less applicable deductions as severance. If Polycom
terminates Employee's employment greater than eighteen (18) months but prior to
three (3) years after the Closing Date, Polycom will pay all salary owed from
the date of termination through the three year term of the Employment Agreement.
If Employee resigns Without Good Reason or the employment is terminated for
Cause within three (3) years of the Closing Date, then Employee will be paid all
salary and benefits through the date of termination of employment, but nothing
else. These agreements have been entered into with Craig B. Malloy, Michael J.
Hogan, Michael L. Kenoyer, Patrick D. Vanderwilt, Errol R. Williams and David N.
Hein. See "The Merger and Related Transactions--Related Agreements--Employment
and Non-Competition Agreements." Mr. Bandel Carano is a member of both the
Polycom and ViaVideo Boards, and as such Mr. Carano left the Polycom Board
meeting prior to the discussions regarding approval of the Merger and abstained
from voting on the Merger in his capacity as a director of Polycom. Mr. Carano
is a general partner of Oak Investment Partners which is a significant
stockholder in both Polycom and ViaVideo. Mr. Swartz was a member of the
PictureTel Board of Directors as well as the Polycom Board at the time of
approval of the Merger and abstained from voting on the Merger in his capacity
as a director of Polycom. Mr. Swartz has subsequently resigned from the
PictureTel Board of Directors.
The Reorganization Agreement provides that, after the Effective Time,
Polycom will cause ViaVideo to indemnify and hold harmless the present and
former officers, directors, employees and agents of ViaVideo in respect of acts
or omissions occurring on or prior to the Effective Time to the extent provided
under ViaVideo's then effective Certificate of Incorporation and Bylaws or any
indemnification agreement with ViaVideo officers and directors to which ViaVideo
is a party, in each case in effect on March 1, 1997.
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BUSINESS OF POLYCOM
BUSINESS
Polycom develops, manufactures and markets audioconferencing and
dataconferencing products that facilitate meetings at a distance. With its
SoundStation product line, Polycom believes it has established itself as a
leading provider of audioconferencing equipment designed for group use.
SoundStation is a high quality, full-duplex, easy-to-use audioconferencing
solution. The SoundStation products are designed to operate with local telephone
systems throughout the world and Polycom has obtained regulatory approval for
SoundStation's use in 25 countries. Polycom's technologies permit its
SoundStation products to achieve audioconferencing communications quality that
approaches handset communications quality. More than 150,000 SoundStation
systems had been shipped as of September 30, 1997, and Polycom believes
SoundStation is the best selling product in the group audioconferencing market.
Polycom's innovative ShowStation dataconferencing product, introduced in
November 1995, enables real-time exchange of data and other images over ordinary
phone lines via the rapidly emerging T.120 dataconferencing protocol standard.
ShowStation is a cost-effective, easy-to-use, high resolution dataconferencing
solution that enables groups in multiple locations to simultaneously view, edit
and annotate paper or electronic documents and data in a lights-on environment.
Polycom's products integrate advanced telecommunications, acoustic, image
capture and processing technologies. Polycom sells its products globally through
its direct sales force and maintains marketing and sales relationships with
Lucent, MCI, 3M, ConferTech, British Telecom, Siemens, Sprint, SKC, GBH, Unitel,
PictureTel, Hibino, and Hello Direct, which collectively represented
approximately 64% of Polycom's net revenues in the first half of 1997, and with
other resellers and OEMs.
Polycom was incorporated in December 1990 in Delaware and has a wholly-owned
subsidiary, Polyspan Teleconferencing B.V., a corporation organized under the
laws of the Netherlands. Polycom's principal executive offices are located at
2584 Junction Avenue, San Jose, California 95134. Its telephone number is (408)
526-9000.
INDUSTRY BACKGROUND. The telecommunications industry has experienced
substantial growth in recent years. Voice communications have expanded with the
proliferation of cellular phones and voice mail and the emergence of high speed
switching technologies, while the data communications infrastructure has been
widely expanded through the implementation of fax machines, corporate WANs and
the growing use of the Internet. One of the fastest growing segments of the
telecommunications market is equipment and services for teleconferencing, which
includes audioconferencing, videoconferencing and dataconferencing.
Dataconferencing is the sharing of data and documents by groups in multiple
locations over standard telephone lines which has been enabled by the recent
adoption of the T.120 protocol standard.
Numerous factors are driving the growth of the teleconferencing market,
including the development of a global economy, the internationalization of
business organizations, the development of "extended enterprises" of companies
and their suppliers, customers and other business partners and the increasing
corporate emphasis on team projects and group and interoffice communication. As
a result, tools such as voicemail, E-mail and fax machines that allow workers to
communicate more effectively and facilitate business interactions have become
vital to improving productivity in most organizations. To enhance the real-time
exchange of information when face-to-face meetings are not possible or
practical, companies are increasingly seeking advanced teleconferencing
solutions to facilitate meetings at a distance.
The relative utility of different teleconferencing media for a particular
type of group interaction depends on the importance of information content and
relationship building for that interaction.
Audioconferencing is the essential component of all teleconferencing. In the
audioconferencing market, key enablers such as the audio bridging services
provided by AT&T, MCI, Sprint and other carriers are expanding the use of
audioconferencing as a medium for meetings at a distance and have increased
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demand for high quality audioconferencing equipment. For instance, a fifty-point
analyst call that would not have been contemplated only a few years ago is now
commonplace in the investor community. However, despite the widespread adoption
of audioconferencing, the equipment used for audioconferencing has generally
suffered from technology and performance weaknesses. Desktop and built-in
speakerphones, which are the most widely used audioconferencing devices, often
fail to provide clear verbal information exchange as voice transmissions echo,
are distorted and are frequently clipped due to a lack of full-duplex technology
(the ability for both parties to talk and be heard simultaneously). Early
conference speakerphones designed for group use suffer from these same quality
shortcomings. Businesses and other organizations need audioconferencing
equipment that provides high quality, full-duplex sound, is easy to install and
use and is compliant with telecommunications protocols in business centers
around the world.
Since the adoption of the H.320 videoconferencing protocol standard in 1990,
organizations have further accelerated the adoption of videoconferencing as a
way to conduct group meetings at a distance. Videoconferencing enhances remote
meetings by permitting groups in disparate locations to see each other and by
making body language visible. However, videoconferencing equipment is not
designed to be optimal for data exchange. The relatively poor resolution
provided by current videoconferencing technology limits its effectiveness for
meetings where the real-time exchange and annotation of printed or
computer-generated information such as graphs, spreadsheets, engineering
diagrams or other detailed data is required.
The T.120 dataconferencing protocol is now emerging and being implemented as
an industry standard. Although the T.120 standard has been adopted by a large
number of the world's leading technology and telecommunications companies, such
as AT&T, British Telecom, IBM, Intel, Microsoft and NEC, many of which are
currently in the process of implementing the standard in their products or
services, the market has historically lacked equipment implementing the standard
that solves growing dataconferencing needs. Businesses and other organizations
require affordable, easy-to-use, high resolution dataconferencing solutions that
enable groups in multiple locations to simultaneously view, edit and annotate
paper or electronic documents and data in a lights-on environment.
THE POLYCOM SOLUTION. Polycom develops, manufactures and markets
audioconferencing and dataconferencing products that facilitate meetings at a
distance. Polycom's SoundStation product line is a
family of audioconferencing products that provide near handset quality
communications. SoundStation products are easy-to-use, and Polycom's echo
cancellation and acoustic technologies minimize background echoes, word clipping
and distortion. Users can engage in natural, free-flowing discussions without
having to shout to be heard or strain to hear what others are saying. Because of
Polycom's patented full-duplex, echo cancellation technology and the distinctive
triangular design of the SoundStation products, Polycom believes SoundStation is
the best selling product in the group audioconferencing market. The SoundStation
is configurable, and has been approved for use with the local telephone systems
in 25 countries.
Polycom's ShowStation dataconferencing products enable real-time exchange of
data and other images between groups or individuals engaged in an audio
conference or videoconference. ShowStation provides a cost-effective method for
two or more groups or individuals that are separated by a distance to view, edit
and annotate paper and electronic documents and data in real-time over standard
telephone lines in a lights-on environment. ShowStation incorporates high
resolution imaging, data compression and communications technology in a compact,
easy-to-use unit that includes pen-based editing capabilities and supports
mouse-based editing from remote personal computers.
PRODUCTS
AUDIOCONFERENCING
Polycom's audioconferencing products are designed to overcome the poor audio
problems associated with traditional speaker phones by providing high quality,
full-duplex, easy-to-use audio.
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SOUNDSTATION. SoundStation, Polycom's first product, which was introduced
in September 1992, is a high quality, digital, full-duplex audioconferencing
system that operates over ordinary telephone lines. It provides clear, two-way
voice communications with no echoes, clipping or distortion. Users can engage in
natural, free-flowing discussions without having to shout to be heard or strain
to hear what others are saying. SoundStation's three built-in unidirectional
microphones pick up sound from around the room while limiting reverberation. The
unit's central foam-encased speaker and advanced digital signal processing
("DSP") and integrated software technology eliminate acoustic feedback while
broadcasting sound at sufficient volume and clarity to be heard up to 30 feet
away.
SoundStation has a distinctive design which Polycom believes is widely
associated with high-quality audioconferencing. SoundStation is connected via a
single cord to a power transformer that plugs into a standard electrical outlet
and a telephone cord that connects to a standard telephone outlet. Due to its
inherent simplicity, customers are able to self-install and immediately begin
using the SoundStation. The North American list price for SoundStation is $499.
SOUNDSTATION EX. SoundStation EX contains all of the technology and
physical elements of the SoundStation but also offers two connectors for
extendible microphones. The microphones can extend up to six feet in each
direction allowing the SoundStation EX to accommodate larger conference rooms.
Each extended microphone also contains a mute button and LED mute indicator. An
optional wireless lapel microphone is available for the SoundStation EX that
provides flexibility for stand-up presenters. The North American list price for
SoundStation EX ranges from $799 to $1,299, depending on options.
Polycom also manufactures private label versions of its SoundStation
products for Lucent, British Telecom and KPN Royal PTT Nederland, N.V. pursuant
to OEM relationships.
SOUNDSTATION PREMIER. Incorporating the latest in DSP technology, the
SoundStation Premier is designed with a 70 MIP DSP. This allows individually
echo-canceled microphones, thereby lowering conference room reverberation or the
echo experienced with most speakerphones. The SoundStation Premier's microphone
switching technology turns on and off each microphone depending on who is
talking. With the additions of an LCD display, caller ID, and infrared remote
control, the SoundStation Premier provides a complete full duplex business
conference phone solution. The North American list price for SoundStation
Premier ranges from $1,295 to $1,895, depending on options.
SOUNDPOINT AND SOUNDPOINT PC. SoundPoint, Polycom's first desktop
conference phone adjunct product is designed for the office environment. The
SoundPoint product is connected between the telephone line and an analog
telephone set, and provides near handset quality full duplex conversations. A
special version of this SoundPoint is manufactured for direct communication to
Lucent's Definity telephone sets, pursuant to the Lucent OEM relationship. The
SoundPoint PC variant is designed for desktop videoconferencing and Internet
telephony applications. The SoundPoint PC is connected to a personal computer
video codec or sound card, through a standard set of audio jacks and includes a
handset when more privacy is desired. The North American list price for
SoundPoint and SoundPoint PC is $299.
Sales of the SoundStation product line have accounted for substantially all
of Polycom's net revenues through December 31, 1996, and Polycom anticipates
that such sales will continue to account for a substantial majority of its net
revenues at least through the year ending December 31, 1997. The market for
Polycom's SoundStation products is subject to technological change, new product
introductions by Polycom or its competitors, and continued market acceptance of
the SoundStation product line. Any factor adversely affecting the demand or
supply for the SoundStation product line could materially adversely affect
Polycom's business, financial condition or results of operations.
DATACONFERENCING
Polycom's dataconferencing products are designed to allow for the real-time
exchange of data and other images between groups or individuals engaged in an
audioconference or videoconference. By
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integrating audioconferencing and dataconferencing, Polycom's products are
designed to significantly enhance the productivity of workers, allowing them to
conduct meetings remotely with a level of data exchange that Polycom believes
has traditionally been possible only through a personal meeting.
SHOWSTATION. ShowStation, Polycom's first dataconferencing product, is a
fully integrated, easy-to-use unit that can exchange and project data, documents
and images using ordinary telephone lines between ShowStations or exchange data,
documents and images using ordinary telephone lines with any personal computers
that utilize T.120 dataconferencing protocol software, such as the DataBeam
software that is distributed by Polycom. Working in tandem with the
SoundStation, ShowStation provides a cost-effective method for two or more
groups or individuals that are separated by a distance to simultaneously view,
discuss, edit and annotate paper or electronic documents and data in a lights-on
environment. Multipoint dataconferences are possible through connections
generally established by a dataconferencing bridge service, such as ConferTech
or MCI, that merge multiple network connections so that each participant can
communicate with all other participants. ShowStation incorporates advanced
imaging, data compression and communications technology utilizing over 250,000
lines of code into a compact and easy-to-use unit. Polycom is in the process of
introducing its next generation of ShowStation products with enhanced features
which are planned to begin shipping in the fourth quarter of 1997.
ShowStation captures an image of the original document using an integrated
camera or receives data from a personal computer and displays a high-resolution
image on a flat-panel LCD display. Light is then projected through the LCD panel
and onto a screen for local viewing, without having to dim conference room
lights. Simultaneously, the image is compressed and transmitted over a standard
telephone line using the T.120 open standard protocol to other ShowStations or
certain T.120-compliant computer or projection devices where the image is
decompressed and projected. The images can then be annotated in real-time by the
transmitting person or any of the document recipients using an integrated
computer pen or mouse-based editing from remote personal computers and saved in
memory for review and printing. Pen or mouse annotations can be seen
simultaneously by all parties participating in the dataconference and each
ShowStation can print the image and all annotations on a printer connected via a
serial cable.
To facilitate PC-connectivity to ShowStation products, Polycom supplies, for
a fee, copies of DataBeam's T.120 communications software, which can then be
loaded onto a PC. Polycom anticipates that the T.120 protocol will be
incorporated into future versions of Windows and other operating systems so that
any computer running such operating system will be able to participate in a
dataconference with a ShowStation over an ordinary telephone line. The North
American list price for the first generation of the ShowStation product ranges
from $9,995 to $11,995 depending on options. The North American list price for
the next generation of ShowStation products has been announced as starting at
$12,999.
Polycom's future growth is substantially dependent on net revenues generated
from sales of Polycom's next generation of ShowStation products. In November
1995, Polycom began customer shipments of its first generation ShowStation
products. Dataconferencing is an emerging market and there can be no assurance
that it will develop sufficiently to enable Polycom to achieve broad commercial
acceptance of its ShowStation products. Because the dataconferencing market is
relatively new and evolving, and because current and future competitors are
likely to introduce competing dataconferencing products, it is difficult to
predict the rate at which demand for Polycom's next generation of ShowStation
products will grow, if at all, or to predict the level of future growth, if any,
of the dataconferencing market. If the dataconferencing market fails to grow, or
grows more slowly than anticipated, Polycom's business, operating results and
financial condition will be materially adversely affected. Although there are
currently no products in the dataconferencing market that offer all of the same
functions and features as the next generation of ShowStation products, there are
products that enable users to participate in a dataconference and other
products, such as multimedia presentation products, that are not designed
primarily for dataconferencing but can be used to provide a dataconferencing
solution. There can be no assurance that the market for dataconferencing
products with the functions and features of the next generation of ShowStation
products
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will achieve broad commercial acceptance or that the market for Polycom's new
ShowStation product will grow.
Even if the market for dataconferencing products does develop, there can be
no assurance that Polycom's next generation of ShowStation products will achieve
commercial success within such market. Due to the unique nature of the new
ShowStation products, Polycom believes it will be required to incur significant
expenses for sales and marketing, including advertising, to educate potential
customers as to the desirability of ShowStation. Polycom also expects to incur
substantially longer sales cycles with respect to its ShowStation products than
has been the case for the SoundStation products. In addition, the list price of
the ShowStation products, which is significantly higher than the SoundStation
product, could significantly limit consumer acceptance of the ShowStation
products. Furthermore, given the significant differences between the
SoundStation and ShowStation products, Polycom is developing new distribution
channels for the ShowStation products and there can be no assurance that Polycom
will be successful selling the next generation of ShowStation through these
distribution channels. In addition, Polycom's ShowStation products comply with
certain layers of the emerging T.120 standard. Increasing market acceptance and
longevity of the T.120 standard is in part a function of user acceptance and the
incorporation of the T.120 standard into personal computer operating systems,
teleconferencing appliances and the network infrastructure and is therefore
difficult to predict. Because of Polycom's focus on the T.120 standard,
Polycom's operating results would be materially adversely affected if another
technology were to significantly challenge or replace the emerging T.120
industry standard. Broad commercialization of Polycom's next generation of
ShowStation products will require Polycom to overcome significant technological
and market development obstacles, many of which may not be currently foreseen.
Polycom's new ShowStation products are extremely complex and because of the
recent introduction of these products, Polycom has had limited experience with
respect to the performance and reliability of these products. Polycom is in the
process of finalizing negotiations with a potential contract manufacturer of its
next generation of ShowStation Products. If Polycom's new ShowStation products
have performance, reliability or quality problems or shortcomings, then Polycom
may experience reduced orders, higher manufacturing costs and additional
warranty and service expenses which would have a material adverse effect on
Polycom's business, financial condition and results of operations. For example,
Polycom chose to stop shipments of its ShowStation products from mid-January
1996 through the end of February 1996 to correct software and other technical
problems identified by initial customers. There can be no assurance that the new
ShowStation will be able to achieve or sustain commercial acceptance, that sales
of the new ShowStation products will account for a material part of Polycom's
net revenues or that Polycom will be able to achieve volume manufacturing.
Failure of the next generation of ShowStation products to achieve or sustain
commercial acceptance, or of Polycom or its contract manufacturer to achieve
volume manufacturing would have a material adverse effect on Polycom's business,
financial condition and results of operations.
TECHNOLOGY
Polycom intends to continue to invest in and leverage its core technologies
to develop and introduce audioconferencing and dataconferencing product
enhancements and new products. Polycom's core technologies include the
following:
ECHO CANCELLATION. Traditional speakerphone architectures employ
suppression technology to compensate for the echo problems resulting from the
feedback caused by microphones and speakers being located in close proximity.
Suppressors solve the problem by only allowing one side of the telephone
connection to talk at a time. Historically, this has been done by using simple
metrics to locally determine which side is speaking more loudly. This often
causes numerous problems during the course of a natural conversation such as
words or even entire phrases being clipped off because both ends of the call
were speaking simultaneously. Polycom's patented DSP software solves this
problem by building and continually updating a model of how the sound waves
reflect off the walls and obstructions in a room. This software,
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comprised of over 10,000 lines of assembly microcode, then calculates an echo
canceling signal that is subtracted from the microphone signal, thereby removing
the echoes while still allowing both the speaker and the microphone to remain on
a the same time.
ACOUSTICS TECHNOLOGY. The design and interaction of transducers within a
full-duplex audio device significantly impacts the effectiveness of the digital
echo canceling systems and the sound quality. Working with carefully designed
algorithms and electronics, Polycom develops and designs proprietary speaker and
microphone enclosure systems that are a critical part of high-clarity,
audioconferencing systems.
IMAGE PROCESSING TECHNOLOGY. Polycom has invested a significant amount of
its research and development efforts on the design and implementation of high
resolution document cameras that provide XGA resolution (1024 x 768 pixels)
images in a compact package. XGA resolution was achieved by developing a method
by which two television resolution charge coupled devices ("CCDS") are seamed
together to form a single high resolution image. Significant advancements in
fine scale device alignment and mounting as well as in high speed DSP software
to compensate for lens blurring, non-uniform lighting conditions and natural CCD
device variations were required to achieve the target. The result is a cost
effective document scanning system that captures and displays type sizes as
small as 10 points.
IMAGE COMPRESSION TECHNOLOGY. Polycom uses the international standard known
as Joint Bi-Level Image Group ("JBIG") to achieve rapid image transmission
rates. Polycom employs certain modes of this algorithm to enable images to be
transmitted incrementally, allowing an image to achieve legibility within a
minimum time. Polycom was the editor of, and principal contributor to, the T.126
layer of the T.120 protocol for still-image transfer that incorporated JBIG and
optimizations utilized in ShowStation. Polycom developed a high performance
implementation of this algorithm for incorporation into DataBeam's standard
T.120 toolkit to enable throughput to be achieved even if a low-end computer is
used to compress and send images over standard telephone lines. DataBeam's T.120
toolkit has been licensed by numerous other software and hardware providers.
OPTO-MECHANIC TECHNOLOGY. To achieve "lights on" LCD projection and high
resolution image capture, Polycom has developed core technologies in optical
systems, including LCD cooling for uniformity, light collection efficiency and
light source cooling for extended lamp life with minimal sound. This has
resulted in a projected image that is uniformly illuminated and viewable with
normal room lighting.
COMMUNICATION PROTOCOLS. Polycom is a leader in the development and
adoption of the T.120 protocol standard for dataconferencing devices. The T.120
protocol standard separates multipoint conferencing services into several layers
that address data conferencing through various communications networks. These
layers are generally implemented in software and control the manner in which
data is communicated and is processed and presented to the end user. Layers of
T.120 functionality are being developed and deployed by numerous major
international communications companies. In conjunction with this standardization
process, Polycom co-founded the Consortium for Audiographic Teleconferencing
Standards in order to encourage broad industry coordination and advocacy of
T.120 technology, thereby encouraging the development of the availability of
desktop software and bridging services to support Polycom's product offerings.
This organization was merged with the advocacy body for H.320, the video
conferencing standard, to become the International Multimedia Teleconferencing
Consortium ("IMTC") with the broader goal of insuring industry-wide H.320 and
T.120 interoperability, integration and advocacy. Additionally, the Personal
Conferencing Work Group ("PCWG") recently merged into the IMTC. A representative
of Polycom sits on the board of directors of this consortium, which includes
companies such as AT&T, IBM, Intel, Microsoft and PictureTel, each of which has
incorporated, or announced its intention to incorporate, various layers of the
T.120 standard into their products.
TELEPHONY INTERFACES. Polycom has developed a single telephone network
interface circuit that is configurable either by Polycom or its resellers so
that Polycom's products will comply with various international telephone network
requirements. Polycom's SoundStation product is currently approved for
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use in 25 countries. Polycom believes this will expedite the regulatory approval
of new audio conferencing and dataconferencing products globally.
SALES AND DISTRIBUTION
Polycom markets its SoundStation and ShowStation products primarily to
Fortune 1000 companies through a national account program both directly and in
coordination with its resellers and also markets its products directly to
certain U.S. government organizations through a General Services Administration
("GSA") contract. Polycom believes that most of its national account customers
have placed multiple orders for products from Polycom. As of September 30, 1997,
Polycom had approximately 315 signed national accounts. Polycom believes that it
is important to maintain a close working relationship with these large customers
in order to meet their demands for sales and support on a multinational basis.
Polycom sells its products in North America through a select group of
approximately 41 resellers, including Lucent, ConferTech, MCI, Hello Direct,
Sprint, 3M, British Telecom, Siemens, SKC, GBH, Unitel, PictureTel and Hibino.
Many of these resellers sell a variety of teleconferencing products and/or
services and, with Polycom's products, offer a complete teleconferencing product
portfolio. One of these resellers, Hello Direct, sells a competing
audioconferencing product which it purchases from Gentner and relabels under the
Hello Direct name. In addition to working through resellers, Polycom also sells
its products directly through a sales force comprised of a national account
group and an inside sales group. The national account managers focus on
strategic selling and the development of major account relationships, while
inside sales representatives devote time to pursuing the sales opportunities
within a signed national account. In order to minimize channel conflict with
resellers, the national account managers are compensated on a channel-neutral
basis and are responsible for resolving any channel conflict in the field. To
complement its direct sales efforts, Polycom runs direct response advertising in
in-flight magazines and selected business publications. Polycom maintains North
American sales offices in the metropolitan areas of Boston, Chicago, Cleveland,
Dallas, New York and San Jose.
Polycom sells its SoundStation and ShowStation products primarily through
resellers. Polycom's resellers accounted for approximately 74%, 71%, 67% and 71%
of Polycom's net revenues in 1994, 1995, 1996 and for the nine months ended
September 30, 1997, respectively. ConferTech International, Inc. accounted for
14% and 11% of net revenues in 1994 and 1995, respectively, and Confer/Mutare,
Inc. accounted for 11% in 1994. No other customer or reseller accounted for more
than 10% of Polycom's net revenues during the periods indicated and no customer
or reseller accounted for more than 10% of net revenues in 1996. Resellers
generally offer products of several different companies, including products that
compete with Polycom's products. Accordingly, these resellers may give higher
priority to products of other suppliers, thus reducing their efforts to sell
Polycom's products. Agreements with resellers may be terminated at any time. A
reduction in sales effort or termination of a distribution relationship by one
of Polycom's resellers could have a material adverse effect on future operating
results. Use of resellers also entails the risk that resellers will build up
inventories in anticipation of a growth in sales. If such sales growth does not
occur as anticipated by these resellers, these resellers may substantially
decrease the amount of product ordered in subsequent quarters, causing or
contributing to fluctuations in Polycom's future operating results. Furthermore,
although Polycom takes steps to reduce channel conflict, sales by Polycom's
direct sales force to potential and current customers of these resellers could
have an adverse effect on Polycom's reseller relationships. The teleconferencing
distribution industry has historically been characterized by rapid change,
including consolidations and financial difficulties of certain resellers and the
emergence of alternative distribution channels. In addition, there is an
increasing number of companies competing for access to these channels. The loss
or ineffectiveness of any of Polycom's major resellers could have a material
adverse effect on Polycom's operating results. There can be no assurance that
Polycom will be able to successfully sell its products through any new channels
that Polycom may be required to develop as a result of the foregoing or any
other factors. Polycom commenced customer shipments of its first generation of
ShowStation products in November 1995 and continues to develop a distribution
network for this product. Polycom is in the process of finalizing negotiations
with distributors
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of its next generation of ShowStation products. There can be no assurance that
Polycom will be able to successfully develop a distribution network for its next
generation of ShowStation products.
Polycom has historically focused its international sales efforts in regions
of the world where it believes customers have begun to invest significantly in
teleconferencing equipment and services. These regions currently include the
United Kingdom, France, Germany, Italy, Japan, Australia and parts of Southeast
Asia. Polycom intends to significantly expand its international distribution
network. The principal international resellers of Polycom's products currently
include British Telecom, Unitel, Dynamic Communications, Ltd., Genedis, Hibino
Corporation, PTT Telecom, Siemens, Singapore Telecom and Telenor.
Polycom's net revenues from international sales represented approximately
23%, 24%, 23% and 23% of Polycom's total net revenues in the years ended
December 31, 1994, 1995, 1996 and the nine months ended September 30, 1997,
respectively. Polycom is planning to establish product distribution centers in
the European and Asia Pacific markets in order to better serve its international
customers which will increase the costs associated with such international
operations. International sales are subject to a number of risks, including
changes in foreign government regulations and telecommunications standards,
export license requirements, tariffs and taxes, other trade barriers,
fluctuations in currency exchange rates, difficulty in collecting accounts
receivable, difficulty in staffing and managing foreign operations and political
and economic instability. Sales to international resellers are usually made in
U.S. dollars in order to minimize the risks associated with fluctuating foreign
currency exchange rates. To date, a substantial majority of Polycom's
international sales have been denominated in U.S. currency, however, Polycom
expects that in the future more international sales may be denominated in local
currency. Fluctuations in currency exchange rates could cause Polycom's products
to become relatively more expensive to customers in a particular country,
leading to a reduction in sales or profitability in that country. In addition,
the costs associated with developing international sales may not be offset by
increased sales in the short term, or at all.
CUSTOMER SERVICE AND SUPPORT
Polycom believes that service and support are critical components of
customer satisfaction. Polycom maintains and supports products sold directly by
Polycom to its North American customers, while resellers maintain and provide
technical support to their end-user customers. Polycom operates a toll-free
Technical Service Center "hotline" to provide a full range of telephone support
to its North American resellers and to Polycom's end-user customers. If an issue
cannot be resolved remotely or through product repair and return, Polycom or its
reseller may dispatch a service engineer to the customer site. Internationally,
customer service is provided to the end-user by either Polycom or local
resellers.
Polycom generally warrants its products for 12 months and offers 24-month
dataconferencing and 60-month audioconferencing warranties to national accounts.
As of December 31, 1996, Polycom's warranty expense has not been significant,
although Polycom may experience higher warranty claims in the future especially
with new data products. Polycom offers a variety of installation, maintenance
and extended warranty services that are fulfilled either directly by Polycom or
by an authorized reseller.
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RESEARCH AND DEVELOPMENT
Polycom believes that its future success depends in part on its ability to
continue to enhance its existing products and to develop new products that
maintain technological competitiveness. Polycom's current development efforts
are focused on both the audioconferencing and dataconferencing businesses. In
the audioconferencing market, Polycom is developing SoundStation and
SoundStation Premier product line extensions into the higher and the lower end
of the market. In the dataconferencing market, Polycom is devoting significant
resources to developing a next generation of its ShowStation products. Polycom
intends to expand upon this new product platform through the development of
ShowStation options, upgrades and future product generations. There can be no
assurance, however, that these products will be made commercially available as
expected or otherwise on a timely and cost-effective basis or that, if
introduced, these products will achieve market acceptance. Furthermore, there
can be no assurance that these products will not be rendered obsolete by
changing technology or new product announcements by other companies.
Polycom believes that the structure of its development group represents a
significant competitive advantage for Polycom. The development staff includes
product marketing personnel in order to maintain channel and customer input
throughout the development phase. This team structure is the basis for an
integrated process designed to enable Polycom to develop superior products with
minimum time-to-market. Additionally, the development staff focuses on Polycom's
core technologies and outsources other development tasks such as industrial
design. This structure is designed to enable Polycom to devote its key resources
to technological advancement in its primary areas of business.
Research and development expenses were approximately $7.6 million, $6.9
million and $5.3 million for the years ended 1996, 1995 and 1994, respectively.
Polycom believes that significant investments in research and development are
required to remain competitive since technological competitiveness is key to its
future success. As a consequence, Polycom intends to continue to make
substantial investments in product and technology development. Polycom also
intends to continue to drive the adoption of the emerging T.120 protocol and
other teleconferencing industry standards.
The audioconferencing and dataconferencing markets are subject to rapid
technological change, frequent new product introductions and enhancements,
changes in end-user requirements and evolving industry standards. Polycom's
ability to remain competitive in this market will depend in significant part
upon its ability to successfully develop, introduce and sell new products and
enhancements on a timely and cost-effective basis. The success of Polycom in
developing new and enhanced products depends upon a variety of factors,
including new product selection, timely and efficient completion of product
design, timely and efficient implementation of manufacturing, assembly and test
processes, product performance at customer locations and development of
competitive products and enhancements by competitors. Polycom is currently
engaged in the development of several new products and extensions of the
SoundStation, SoundStation Premier and ShowStation products into both the higher
and lower ends of the market, and expects to continue to invest significant
resources in new product development and enhancements to current and future
products. In addition, Polycom's introduction of next generation ShowStation and
other new products could result in higher warranty claims, product returns and
manufacturing, sales and marketing and other expenses that could materially
adversely affect Polycom's business, financial condition, cash flows or results
of operations. There can be no assurance that Polycom will be successful in
selecting, developing, manufacturing and marketing, or recognize a return on,
new products or enhancements. The inability of Polycom to introduce new products
or enhancements on a timely and cost-effective basis that contribute
significantly to net revenues could have a material adverse effect on Polycom's
business, financial condition, cash flows or results of operations. In the past,
Polycom has experienced delays from time to time in the introduction of certain
of its products. In particular, the introduction of Polycom's first generation
of ShowStation products was delayed by approximately eighteen months from the
originally anticipated date of introduction because of unforeseen technical
challenges and difficulties in building core technologies and for approximately
six weeks in the first quarter of 1996 shipments were interrupted in order to
correct software and other technical problems identified by initial customers.
Polycom's future growth is substantially dependent on net revenues generated
from sales of Polycom's next
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generation of ShowStation products. In November 1995, Polycom began customer
shipments of its first generation ShowStation products. Dataconferencing is an
emerging market and there can be no assurance that it will develop sufficiently
to enable Polycom to achieve broad commercial acceptance of its ShowStation
products. Because the dataconferencing market is relatively new and evolving,
and because current and future competitors are likely to introduce competing
dataconferencing products, it is difficult to predict the rate at which demand
for Polycom's next generation of ShowStation products will grow, if at all, or
to predict the level of future growth, if any, of the dataconferencing market.
If the dataconferencing market fails to grow, or grows more slowly than
anticipated, Polycom's business, operating results and financial condition will
be materially adversely affected. Although there are currently no products in
the dataconferencing market that offer all of the same functions and features as
the next generation of ShowStation products, there are products that enable
users to participate in a dataconference and other products, such as multimedia
presentation products, that are not designed primarily for dataconferencing but
can be used to provide a dataconferencing solution. There can be no assurance
that the market for dataconferencing products with the functions and features of
the next generation of ShowStation products will achieve broad commercial
acceptance or that the market for Polycom's new ShowStation product will grow.
In addition, new product or technology introductions by Polycom's competitors
could cause a decline in sales or loss of market acceptance of Polycom's
existing products or new products. Further, from time to time, Polycom may
announce new products, capabilities or technologies that have the potential to
replace Polycom's existing product or future products. There can be no assurance
that announcements of product enhancements or new product offerings by Polycom
or its competitors will not cause customers to defer or stop purchasing
Polycom's products.
In March 1997, the Company entered into a joint marketing and development
agreement (the "FIRST AGREEMENT") with 3M. Under the agreement, 3M has provided
$3.0 million in funding to Polycom for certain deliverables related to the
development of the next generation dataconferencing product and will also
provide shared technology resources for the development of future products.
Polycom will grant 3M exclusive private-label rights in certain distribution
channels to the products developed under this agreement subject to certain
minimum volumes. In addition, 3M received warrants to purchase up to 2,000,000
shares of the Company's common stock at an exercise price of $7.50 per share.
The warrants expire in March 1999, which may be extended until March 2000
depending on the delivery of Polycom's first product developed under the
agreement. 3M also has certain rights of first offer under its stock warrant
agreement with Polycom which will give 3M the right, for a period of 45 days
after the Effective Time, to purchase approximately 877,000 shares of Polycom
Common Stock at a purchase price of $7.50 per share.
COMPETITION
The market for teleconferencing products is highly competitive and subject
to rapid technological change, regulatory developments and emerging industry
standards. Polycom expects competition to persist and increase in the future. In
the audioconferencing market segment, Polycom's major competitors include
Coherent Communications Systems Corporation, NEC, Lucent (one of Polycom's
resellers), Gentner, Panasonic and other companies that offer lower cost full
duplex speakerphones such as 3Com/USR and Hello Direct (one of Polycom's
resellers). Hello Direct offers a competitive product under the Hello Direct
name through an OEM relationship with Gentner. Most of these companies have
substantially greater financial resources and production, marketing, engineering
and other capabilities than Polycom with which to develop, manufacture, market
and sell their products. In addition, all major telephony manufacturers produce
hands-free speakerphone units that are a lower cost, lower quality alternative
to Polycom's audioconferencing products.
In the dataconferencing market segment, Polycom's major competitors include
Microfield Graphics, Inc. and SMART Technologies, Inc., which have substantially
greater financial resources and production, marketing, engineering and other
capabilities than Polycom with which to develop, manufacture,
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market and sell their products. In addition, in this market segment,
videoconferencing, PC-based communications solutions and multimedia presentation
products may be an alternative for certain applications.
Polycom believes its ability to compete depends on such factors as
reputation, quality, customer support and service, price, features and functions
of products, ease of use, reliability, and marketing and distribution channels.
Polycom believes it competes favorably with respect to each of these factors.
There can be no assurance that Polycom will be able to compete successfully in
the future with respect to any of the above factors.
Polycom expects its competitors to continue to improve the performance of
their current products and to introduce new products or new technologies that
provide improved performance characteristics. New product introductions by
Polycom's competitors could cause a significant decline in sales or loss of
market acceptance of Polycom's existing products and future products. For
example, 3Com/USR introduced an audioconferencing product that is being sold at
a price substantially lower than Polycom's list price for SoundStation. Polycom
believes that the possible effects from this ongoing competition may be the
reduction in the prices of its products and its other competitors' products or
the introduction of additional lower priced competitive products. Although such
reduction was not in direct response to the introduction of a lower priced
audioconferencing product by 3Com/USR, Polycom reduced the North American list
price of its SoundStation product line by 37% which resulted in lower gross
margins. Polycom expects this increased competitive pressure may lead to
intensified price-based competition, resulting in lower prices and gross margins
which would materially adversely affect Polycom's business, financial condition
and results of operations. There can be no assurance that Polycom will be able
to compete successfully.
MANUFACTURING
Polycom's manufacturing operations consist primarily of materials planning
and procurement, test development and manufacturing engineering. Polycom
subcontracts the manufacture of its SoundStation products to IMS of Thailand, a
global third party contract manufacturer, and is in the process of transferring
the manufacturing of the SoundStation Premier products to IMS. IMS is ISO 9002
approved and has BABT registration. Polycom's products are quality tested by
automated test equipment with final functional tests performed on equipment and
with processes developed or approved by Polycom.
Polycom has recently transferred the manufacturing of its SoundStation
Premier product lines to IMS. Polycom manufactures its SoundPoint product
through General Electronics (H.K.) Ltd., a Hong Kong based contract
manufacturer. Polycom is in the process of finalizing negotiations with a
contract manufacturer for its next generation of ShowStation products. Polycom
ships its products to its customers from either its distribution center located
in Livermore, CA, or from its contract manufacturers. Certain Polycom facilities
are located in the San Francisco Bay Area, which has in the past and may in the
future experience significant, destructive seismic activity that could damage,
destroy or disrupt Polycom's facilities or its operations. Polycom maintains no
earthquake insurance for damages or business interruptions. In the event that
Polycom or its contract manufactures were to experience financial or operational
difficulties that are not covered by insurance, it would adversely affect
Polycom's results of operations until Polycom could establish sufficient
manufacturing supply through an alternative source, and the effect of such
reduction or interruption in supply on results of operations would be material.
Polycom believes that there are a number of alternative contract manufacturers
that could produce Polycom's products, but in the event of a reduction or
interruption of supply, for any reason, it would take a significant period of
time to qualify an alternative subcontractor and commence manufacturing, which
would have a material adverse effect on Polycom's business, financial condition,
cash flows and results of operations.
Certain key components used in Polycom's products are currently available
from only one source and others are available from only a limited number of
sources. Components currently available from only one source include certain key
integrated circuits and optical elements. Polycom also obtains certain plastic
housings, metal castings and other components from suppliers located in Hong
Kong and China, and any political or economic instability in that region in the
future, or future import restrictions, may cause delays or an inability to
obtain such supplies. Polycom has no supply commitments from its suppliers and
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generally purchases components on a purchase order basis either directly or
through its contract manufacturer. Polycom and Polycom's contract manufacturers
have had limited experience purchasing volume supplies of components for its
SoundStation and ShowStation products, and some of the components included in
these products, such as microprocessors and other integrated circuits, have from
time to time been subject to limited allocations by suppliers, and there can be
no assurance that Polycom will not in the future be subject to component supply
allocations that would adversely affect Polycom's operating results. In the
event that Polycom or its contract manufacturer were unable to obtain sufficient
supplies of components or develop alternative sources as needed, Polycom's
operating results could be materially adversely affected. Moreover, operating
results could be materially adversely affected by receipt of a significant
number of defective components, an increase in component prices or the inability
of Polycom to obtain lower component prices in response to competitive price
reductions.
Because of the generally short cycle between order and shipment and because
the majority of Polycom's net revenues in each quarter results from orders
booked in that quarter, Polycom generally operates with minimal backlog and does
not believe it is indicative of future sales levels.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
While Polycom relies on a combination of patent, copyright, trademark and
trade secret laws and confidentiality procedures to protect its proprietary
rights, Polycom believes that factors such as technological and creative skills
of its personnel, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are more essential to establishing
and maintaining a technology leadership position. Polycom currently has seven
United States patents issued covering the SoundStation and ShowStation designs,
the concept and function of the ShowStation and certain echo cancellation
technology that expire in 2007, 2010, 2011, 2012, 2013 and 2015. In addition,
Polycom currently has six United States patents pending, five foreign patents
issued, which expire in 2001, 2003, 2010, 2016 and 2017, and sixteen foreign
patent applications pending. Polycom, SoundStation, SoundStation Premier,
ShowStation, SoundPoint and Polycom are registered trademarks of Polycom in the
U.S. and various countries. According to federal and state law, Polycom's
trademark protection will continue for as long as Polycom continues to use its
trademark in connection with the products and services of Polycom. Polycom seeks
to protect its software, documentation and other written materials under trade
secret and copyright laws, which only afford limited protection. There can be no
assurance that others will not independently develop similar proprietary
information and techniques or gain access to Polycom's intellectual property
rights or disclose such technology or that Polycom can meaningfully protect its
intellectual property rights. In addition, there can be no assurance that any
patent or registered trademark owned by Polycom will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to Polycom or that any of Polycom's pending or future
patent applications will be issued with the scope of the claims sought by
Polycom, if at all. Furthermore, there can be no assurance that others will not
develop similar products, duplicate Polycom's products or design around the
patents owned by Polycom. In addition, there can be no assurance that foreign
intellectual property laws will protect Polycom's intellectual property rights.
Litigation may be necessary to enforce Polycom's patents and other
intellectual property rights, to protect Polycom's trade secrets, to determine
the validity of and scope of the proprietary rights of others, or to defend
against claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on Polycom's business, financial condition, cash flows or results of
operations. There can be no assurance that infringement or invalidity claims by
third parties or claims for indemnification resulting from infringement claims
will not be asserted in the future or that such assertions, if proven to be
true, will not materially adversely affect Polycom's business, financial
condition, cash flows and results of operations. If any claims or actions are
asserted against Polycom, Polycom may seek to obtain a license under a third
party's intellectual property rights. There can be no assurance, however, that a
license will be available under reasonable terms or at all. In addition, Polycom
could decide to litigate such claims, which could be extremely expensive and
time
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consuming and could materially adversely affect Polycom's business, financial
condition, cash flows or results of operations.
Polycom incorporates into its ShowStation products software licensed from
third parties, including certain communications software which is licensed from
DataBeam, digitizer and pen software which is licensed from Scriptel and Windows
from Microsoft. The DataBeam license agreement will terminate in March 2001 if
either party has given notice at least 90 days prior to that time of its desire
to terminate the agreement. The Scriptel agreement terminates June 30, 1998 but
may be extended for six month periods upon mutual agreement of the parties.
There can be no assurance that these third-party software licenses will continue
to be available to Polycom on commercially reasonable terms. The termination or
impairment of these software licenses could result in delays or reductions in
new product introductions or product shipments until equivalent software could
be developed, licensed and integrated, which would materially adversely affect
Polycom's business, financial condition, cash flows, and results of operations.
EMPLOYEES
As of September 30, 1997 Polycom employed a total of 167 persons, including
53 in sales, marketing and customer support, 53 in product development, 31 in
manufacturing and 30 in finance and administration. Of these, five employees
were located in the U.K., two were located in Singapore, two were located in
Hong Kong and the remainder were located in the United States. None of Polycom's
employees is represented by a labor union. Polycom has experienced no work
stoppages and believes its relationship with its employees is good.
Polycom believes that its future success will depend in part on its
continued ability to hire, assimilate and retain qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
Polycom will be successful in attracting or retaining such personnel. The loss
of any key employee, the failure of any key employee to perform in his or her
current position or Polycom's inability to attract and retain skilled employees,
as needed, could materially adversely affect Polycom's business, financial
condition, cash flows or results of operations.
PROPERTIES
Polycom's headquarters are located in a 52,000 square foot facility in San
Jose, California pursuant to a lease which expires in December 1998. Polycom has
two options to extend the lease for terms of one (1) year. This facility
accommodates corporate administration, research and development, marketing,
sales and customer support as well as a new product manufacturing area. Polycom
also leases, on a short term basis, sales office space in the metropolitan areas
of Boston, Chicago, Dallas, New York, London, Munich, Hong Kong and Singapore.
Polycom believes that its current facilities are adequate to meet its needs for
the foreseeable future. Polycom believes that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.
LEGAL PROCEEDINGS
On September 3, 1997, VTEL filed a lawsuit in the District Court in Travis
County, Texas against ViaVideo and its founders (who were formerly employed by
VTEL). In the lawsuit, VTEL alleges breach of contract, breach of confidential
relationship, disclosure of proprietary information, and related allegations.
The management of ViaVideo believes that these claims are without merit and
intends to defend them vigorously. Also, the management of ViaVideo, after
consultation with outside legal counsel, believes that the likelihood of an
unfavorable outcome arising from the adjudication of this lawsuit is remote.
Nevertheless, the costs of defense, regardless of outcome, could have an adverse
effect on the results of operations and financial condition of the Combined
Company. If ViaVideo were found to have infringed upon the proprietary rights of
VTEL or any other third party, it could be required to pay damages, cease sales
of the infringing products, discontinue such products or such other injunctive
relief a court may determine, any of which, subsequent to the Merger, could have
a material adverse effect on Polycom's business, operating results and financial
condition. An adverse development in the VTEL litigation could cause the
termination of the Reorganization Agreement.
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PRINCIPAL STOCKHOLDERS OF POLYCOM
The following table sets forth certain information known to Polycom with
respect to the beneficial ownership of Polycom's Common Stock as of October 28,
1997 by (i) all persons who are beneficial owners of five percent (5%) or more
of Polycom's Common Stock, (ii) each director, (iii) the executive officers, and
(iv) all directors and executive officers as a group. Unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned, subject to community property laws,
where applicable.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF SHARES PERCENTAGE OF SHARES
NAME AND ADDRESS (IF BENEFICIALLY BENEFICIALLY OWNED BENEFICIALLY OWNED
APPLICABLE) BENEFICIAL OWNER OWNED PRIOR TO THE MERGER AFTER THE MERGER
- ----------------------------------------------------------- ----------- --------------------- ---------------------
<S> <C> <C> <C>
Accel III, L.P. and its related entities(1)................ 2,633,398 13.7% 9.5%
One Palmer Square
Princeton, NJ 08542
Oak Investment Partners IV, L.P. and its related
entities(2).............................................. 2,705,398 14.1% 19.6%(3)
525 University Avenue, Suite 1300
Palo Alto, CA 94301
Institutional Venture Partners V and its related
entities(4).............................................. 2,126,976 11.1% 7.7%
Building Two, Suite 290
3000 Sand Hill Road
Menlo Park, CA 94025
Brian L. Hinman(5)......................................... 1,911,317 9.9% 6.9%
2584 Junction Avenue
San Jose, CA 95134
Minnesota Mining and Manufacturing Company(6).............. 2,000,000 9.42% 9.62%
3M Austin Center
6801 River Place Boulevard
Austin, TX 78726-9000
Norwest Capital LLC........................................ 1,159,341 6.0% 4.2%
Sixth and Marquette
Minneapolis, MN 55479
Brentwood Associates V, L.P................................ 1,012,846 5.3% 13.2%(7)
2730 Sand Hill Road, Suite 250
Menlo Park, CA 94025
Robert C. Hagerty.......................................... 1,750 * *
Michael R. Kourey(8)....................................... 239,834 1.0% *
Ardeshir Falaki(9)......................................... 86,000 * *
Gilbert J. Pearson(10)..................................... 91,917 * *
Alan D. Hagedorn(11)....................................... 51,473 * *
Bandel Carano(2)........................................... 2,725,398 14.2% 9.9%
Stanley J. Meresman(12).................................... 34,000 * *
John P. Morgridge(12)...................................... 40,338 * *
James R. Swartz(1)......................................... 2,653,398 13.8% 9.6%
</TABLE>
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<TABLE>
<CAPTION>
SHARES PERCENTAGE OF SHARES PERCENTAGE OF SHARES
NAME AND ADDRESS (IF BENEFICIALLY BENEFICIALLY OWNED BENEFICIALLY OWNED
APPLICABLE) BENEFICIAL OWNER OWNED PRIOR TO THE MERGER AFTER THE MERGER
- ----------------------------------------------------------- ----------- --------------------- ---------------------
<S> <C> <C> <C>
Dale A. Bastian............................................ 10,800 * *
All directors and officers as a group (11 persons)(13)..... 7,846,225 40.9% 28.4%
</TABLE>
- ------------------------
* Less than 1%
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock subject to options which are currently
exercisable or convertible or which will become exercisable or convertible
within sixty (60) days after October 28, 1997 are deemed outstanding for
computing the beneficial ownership of the person holding such options but are
not deemed outstanding for computing the beneficial ownership of any other
person.
(1) Includes 2,317,391 shares held by Accel III, L.P. ("ACCEL III"), 210,671
shares held by Accel Japan, L.P. ("ACCEL JAPAN") and 105,336 shares held by
Accel Investors' 91, L.P. ("ACCEL INVESTORS"). Mr. Swartz, a director of
Polycom, is a General Partner of Accel III, Accel Japan and Accel Investors.
Mr. Swartz disclaims beneficial ownership of the shares held by these
entities except to the extent of his pecuniary interest therein arising from
his general partnership interests in Accel III, Accel Japan and Accel
Investors. The shares beneficially owned by Mr. Swartz consist of 16,000 and
4,000 shares granted in April 1996 and June 1997, respectively, in the form
of immediately exercisable options, some of which, if exercised and issued,
would be unvested and subject to a repurchase right of Polycom that lapses
over time.
(2) Includes 2,595,022 shares held by Oak Investment Partners IV, L.P. ("OAK
IV") and 110,376 shares held by Oak IV Affiliates Fund, L.P. ("OAK IV
AFFILIATES"). Mr. Carano, a director of Polycom, is a General Partner of Oak
IV and Oak IV Affiliates. Mr. Carano disclaims beneficial ownership of the
shares held by these entities except to the extent of his pecuniary interest
therein arising from his general partnership interests in Oak IV and Oak IV
Affiliates. The shares beneficially owned by Mr. Carano consist of options
to purchase 16,000 and 4,000 shares of Common Stock granted in April 1996
and June 1997, respectively, in the form of immediately exercisable options,
some of which, if exercised and issued, would be unvested and subject to a
repurchase right of Polycom that lapses over time.
(3) Includes 2,229,238 and 52,012 shares of ViaVideo Common Stock held by Oak IV
and Oak IV Affiliates, respectively, which, based on an exchange ratio of
1.183684, will convert into 2,638,713 and 61,565 shares of Polycom Common
Stock, respectively.
(4) Includes 2,093,186 shares held by Institutional Venture Partners V and
33,790 shares held by Institutional Venture Management V. Institutional
Venture Management V is the General Partner of Institutional Venture
Partners V.
(5) Includes 6,667 shares owned by Mr. Hinman in the form of immediately
exercisable options, some of which, if exercised and issued, would be
unvested and subject to a repurchase right of Polycom that lapses over time.
(6) Includes 2,000,000 shares subject to a warrant exercisable at $7.50 per
share held by Minnesota Mining and Manufacturing Company ("3M"). Percentage
of Shares Beneficially Owned After the Merger includes a right to acquire
approximately 950,000 shares at an exercise price of $7.50 per share as a
result of a right of first offer held by 3M.
(7) Includes 2,140,000 and 78,750 shares of ViaVideo Common Stock held by
Brentwood Associates VII, L.P. and Brentwood Affiliates Fund, L.P.,
respectively, which, based on an exchange ratio of 1.183684, will convert
into 2,533,083 and 93,215 shares of Polycom Common Stock, respectively.
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(8) Includes 33,334 shares owned by Mr. Kourey in the form of immediately
exercisable options, some of which, if exercised and issued, would be
unvested and subject to a repurchase right of Polycom that lapses over time.
(9) Includes options to purchase 69,500 shares of Common Stock.
(10) Includes 28,542 shares owned by Mr. Pearson in the form of immediately
exercisable options, some of which, if exercised and issued, would be
unvested and subject to a repurchase right of Polycom that lapses over time.
(11) Includes options to purchase 32,500 shares of Common Stock.
(12) Includes 4,000 shares owned by Mr. Meresman and Mr. Morgridge in the form
of immediately exercisable options, some of which, if exercised, would be
unvested and subject to a repurchase right of Polycom that lapses over time.
(13) Includes options to purchase 218,543 shares of Common Stock, 61,334 shares
of which are in the form of immediately exercisable options, some of which,
if exercised and issued, would be unvested and subject to a repurchase right
of Polycom that lapses over time.
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BUSINESS OF VIAVIDEO
BUSINESS
ViaVideo was founded in September 1996 to design and develop high quality,
low cost, easy-to-use, group videoconferencing systems that utilize advanced
video and audio compression technologies along with Internet/Web-based features.
ViaVideo believes that these technologies and features will permit users to
replicate the dynamics and effectiveness of face-to-face meetings and
presentations from remote locations through the transmission of color motion
video integrated with full duplex audio at data rates as low as 56 kilobits per
second (Kbps). The videoconferencing system being developed by ViaVideo
incorporates the latest advances in video processor technology and uses a new
generation, non-PC based platform. ViaVideo anticipates commencing a beta
testing program of its first product in the fourth quarter of 1997.
INDUSTRY BACKGROUND
Face-to-face meetings maximize the exchange of information, including
written, oral, and non-verbal communication, and provide the intimate
environment necessary to build relationships among people. Communication in
face-to-face meetings is generally more effective and comprehensive than
communicating solely over the telephone, via e-mail, or via facsimile
transmissions. When communicating with others in remote locations, it is often
impractical and too costly to travel to a common site to have a face-to-face
meeting. A convenient, less costly alternative to traveling to remote locations
is videoconferencing. Videoconferencing allows groups or individuals separated
by a great or small distance to hold face-to-face meetings over digital
telephone lines. Videoconferencing not only reduces the cost, time and
inconvenience of traveling, but it can also improve the timeliness, accuracy,
and effectiveness of information exchanges, leverage the utilization of
expertise and experience resident in personnel resources, and facilitate
relationship building among dispersed groups or individuals.
The first videoconferencing products were introduced in the late 1970's.
Early videoconferencing products were costly and usually required dedicated
transmission facilities, specially trained operators, and specialized rooms.
Although there was broad interest in videoconferencing as a means of eliminating
travel time and expenses, most potential users could not justify the high cost
of investing in videoconferencing technology given the level of quality and
performance of the products at that time. However, improved technology,
implementation of industry standards, lower costs, and greater connectivity and
bandwidth have improved the quality and price/performance relationship of
videoconferencing and driven its evolutionary growth.
Technology advances in compression algorithms have helped fuel the growth of
the industry. Videoconferencing consists of transmitting video and audio data
signals between two or more locations over digital telephone lines. Video and
audio signals contain large amounts of information and must be digitized or
compressed to fit the capacity or bandwidth of the telephone lines over which
they are transmitted. As the signals are compressed, information related to them
is eliminated which impacts the quality of the video image and audio sound. If
the compression does not eliminate much information, the amount of data
transmitted will be so large that the quality of the video image and audio sound
will also suffer due to the limited bandwidth of the telephone lines.
Videoconferencing quality, therefore, depends upon compression algorithms which
determine how much and which data will be transmitted and the bandwidth of the
telephone lines over which it is transmitted. Today's advanced compression
technologies can provide virtually broadcast quality full motion video and audio
fidelity that sounds as if the people talking are in the same room as the
listener.
Improvements in connectivity have also led to growth in the
videoconferencing industry. The worldwide proliferation of switched digital
networks over which video and audio signals are transmitted has eliminated the
need for dedicated lines between fixed locations and enabled a videoconference
to be initiated in a manner comparable to a traditional telephone call. Greater
availability of and accessibility to
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higher bandwidth digital lines have also made videoconferencing more convenient
and much more of a mainstream communication tool.
Another contributing factor driving the growth and evolution of
videoconferencing has been the emergence and adoption of industry standards from
the International Telecommunications Union. These standards define audio and
video telephone protocols which enable interoperability of videoconferencing
systems manufactured by different vendors. Prior to these standards,
videoconferences generally could occur only among products manufactured by the
same vendor. Some of the key standards include:
- H.320--standard for coding and decoding video and audio signals
transmitted over digital networks at rates between 64 Kbps and 2.048 Mbps
(million bits per second)
- H.323--standard for coding and decoding video and audio signals
transmitted over LANs and other packet based networks
- H.324--standard for coding and decoding video and audio signals
transmitted over regular telephone lines (POTS)
- T.120--standard for coding and decoding still frame, annotation, and data
files over digital networks
With the expansion of videoconferencing, the market has evolved into two
distinct segments--group systems and desktop or personal systems. The group
system is further segmented into large group systems and small group systems.
The large group system market segment is characterized by high performance, high
quality videoconferencing systems designed for groups of five or more people.
These systems can cost as much as $50,000 or higher and include a broad range of
features and functionality. The small group system market segment is also
characterized by high performance, high quality videoconferencing systems which
are designed for use by groups of two or more people. These systems typically
cost from $10,000 to $30,000 and generally have fewer features and capabilities
and, to some extent, less performance than the large group systems. The desktop
or personal system market segment is characterized by videoconferencing products
designed for one-to-one communication and typically do not have the performance,
quality, features, and capabilities to be effective in conducting business
meetings involving several people. The desktop systems are typically PC-based
and require a hardware and software component to be added to a personal
computer. Intel's development of the MMX video technology in PC processors has
stimulated Microsoft and other software vendors to develop software only
solutions for desktop videoconferencing. In addition, several companies offer
personal videoconferencing products that utilize televisions and telephones
rather than a PC to conduct videoconferencing. Personal videoconferencing
products currently range in price from a few hundred dollars to a few thousand
dollars.
VIAVIDEO'S STRATEGY
ViaVideo believes a significant opportunity within the videoconferencing
industry lies with developing an easy-to-install, easy-to-use, low-cost
videoconferencing product that has the features, functions, capabilities,
performance, and quality of current systems that cost $40,000 or more. ViaVideo
believes such a product will significantly improve the value proposition of
videoconferencing and, therefore, expand the overall market size by attracting
new videoconferencing users and achieving greater penetration of existing users.
Such a product would continue the evolution of videoconferencing towards
smaller, easier to use, and lower cost products that deliver high quality and a
broad range of functionality. ViaVideo's product development efforts have
focused on leveraging its knowledge in audio and video compression algorithms
and other videoconferencing technologies to develop a family of high
performance, cost-effective videoconferencing systems that deliver a level of
price/performance that will accelerate the global expansion of the
videoconferencing market and establishment of videoconferencing as a mainstream
communication tool.
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TECHNOLOGY
ViaVideo is incorporating advanced, proprietary technologies into its
videoconferencing products under development including those related to:
- Video compression
- Audio compression
- Automatic gain control
- Noise suppression
- Echo cancellation
- Camera tracking
- Graphical presentation capabilities
- LAN/Internet connectivity
- Communications algorithms and protocols
- System architecture
VIDEO COMPRESSION
ViaVideo has hired video compression experts in writing, porting, and
optimizing standards based video algorithms for use in videoconferencing
systems. When implementing standards based algorithms, various pre- and
post-processing techniques can yield a substantially better picture than those
currently offered by ViaVideo's competitors. ViaVideo believes its intellectual
property in advanced video compression techniques is among the best in the
industry.
One of the most unnatural characteristics of a videoconference is the long
delay in data transmission resulting in a lack of lip-synch or unnatural
conversation patterns where one side "talks over" the other. ViaVideo has
pioneered unique ways to reduce the delay inherent in a videoconferencing system
to a less intrusive, more natural level.
AUDIO COMPRESSION
As important as video quality, audio quality is one of the key indicators of
a high performance videoconferencing system. ViaVideo has expended considerable
resources on the development and implementation of differentiated high quality
echo-cancellation, automatic gain control and automatic noise suppression
algorithms. ViaVideo believes that these new generation algorithms will provide
at least equivalent audio quality to those systems currently on the market and
when combined with ViaVideo's current development efforts for a next generation
of table top microphone which utilizes the latest hyper-cartoid microphone
technology which, ViaVideo believes, should provide better audio pickup coverage
than competitive systems.
LAN/INTERNET CONNECTIVITY
Within the next several years, industry analysts believe that a significant
percentage of high-quality business oriented videoconferences will take place
over packet switched rather than circuit switched networks (i.e. Intranets vs.
The public telephone networks). Some of the advantages of the new approach are
greater bandwidth availability which allows for better audio and video quality,
lower transmission costs, and the ability to install and manage one network for
audio, video, and data rather than utilizing separate networks. ViaVideo is
enabling its initial product to operate over such networks utilizing standard
Ethernet LAN and TCP/IP protocols.
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SYSTEM ARCHITECTURE
ViaVideo believes that its proprietary new system architecture allows for a
very high performance but low cost videoconferencing product. This system
architecture is a non-PC based embedded system utilizing the TM-1000
programmable DSP from Philips. The proprietary application specific software
developed for the system addresses the unique system requirements of the various
end-user conferencing markets as well as international video telephony
standards. This software is primarily compiled in C code, which through
refinement, can enhance picture quality, audio quality, address new standards
and add significant user features.
In addition to proprietary technology, ViaVideo also licenses some source
code from various suppliers to deliver certain standard features and
capabilities, such as compliance with various videoconferencing and
teleconferencing standards.
PATENTS AND TRADEMARKS
The success and ability of ViaVideo to compete is dependent in part upon its
proprietary technology. While ViaVideo relies on trademark, trade secret and
copyright laws to protect its technology, ViaVideo believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and customer
support are essential to establishing and maintaining a leadership position.
There can be no assurance that others will not develop technologies that are
similar or superior to ViaVideo's technology. ViaVideo has fourteen (14) patent
applications in process but not yet filed, and one (1) application filed related
to its videoconferencing technology and two (2) trademark applications filed.
There can be no assurance that patents will issue with the scope of claims
sought by ViaVideo, if at all. Once a patent issues there can be no assurance
that it will not be invalidated, circumvented or challenged, or that the rights
granted thereunder will provide competitive advantages to ViaVideo. There can be
no assurance that others will not develop technologies that are similar or
superior to ViaVideo's technology.
PRODUCTS
ViaVideo is currently developing a videoconferencing system designed for use
by small to large groups in a business environment. ViaVideo believes that this
product will be compliant with the H.320 standard and will be interoperable with
competitive videoconferencing systems. Key features of the product will include:
- Full-duplex audio
- Up to 30 frames per second video if used over a network providing 384 Kbps
or greater bandwidth
- 15 frames per second video over a standard 128 Kbps ISDN line
- Automatic gain control
- Noise suppression
- Echo cancellation
- Camera tracking
- Compact footprint that is placed upon a TV monitor
- Minimal video delay
- Input for second monitor, second camera, or document camera
- Ease of installation and use
- Non-PC based system architecture
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Competitive systems with some or all of the features above are priced as
high as $50,000. Although pricing of ViaVideo's product has not been finalized,
it is currently anticipated to be significantly below its competitors.
Future generations of ViaVideo's products will continue to focus on those
factors that will increase the price/performance relationship in
videoconferencing and drive the global expansion of the videoconferencing
market. ViaVideo believes some of those key factors to be:
- Lower cost
- Enhanced performance through higher bandwidth video transmissions
- Connectivity to other network communication protocols (e.g. ATM, PRI,
xDSL, T1/E1, multiple BRI, V.35)
- Connectivity and integration with other peripheral conferencing equipment
- Increased functionality through the additions of features and capabilities
that further ease the use of videoconferencing and more closely replicate
the dynamics and environment of a face-to-face meeting.
ViaVideo also intends to offer various accessories and peripherals in
conjunction with its videoconferencing products.
RESEARCH AND DEVELOPMENT
ViaVideo believes that successful videoconferencing products in the future
will be characterized by the following characteristics:
- Lower cost
- Smaller size
- Increased performance and quality
- Improved functionality
- Greater ease of use and installation
- Lower operating and maintenance requirements
ViaVideo's research and development efforts focus and will continue to focus
on these product characteristics. By doing so, ViaVideo believes that the
videoconferencing price/performance relationship will significantly improve,
thereby expanding the market. ViaVideo may also enter into development
agreements with future OEM partners to tailor ViaVideo's products or technology
exclusively for those partners.
SALES AND MARKETING
ViaVideo currently intends to sell and market its products worldwide through
various indirect channels of distribution, including original equipment
manufacturing relationships with third parties. Currently, ViaVideo has one
committed reseller resulting from the OEM technology agreement executed by
Polycom, for the benefit of ViaVideo, and 3M on June 10, 1997. ViaVideo's
results of operations with respect to its first videoconferencing product, at
least in the near term, will be dependent on the success of 3M as a reseller of
ViaVideo's first videoconferencing product.
ViaVideo and Polycom entered into a general services agreements with each
other in May 1997 and July 1997 whereby each company will provide consulting and
administrative support services, upon request, to the other for a fee. In
addition to reducing the duplication of the companies' sales and administrative
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resources, ViaVideo believes that this agreement will allow it to leverage
Polycom's existing relationships with potential distributors of ViaVideo's
products, as well as Polycom's logistics, customer service and repair
infrastructure to more quickly establish distribution channels and customer
support capabilities.
MANUFACTURING
ViaVideo is still in the development stage with respect to its first
videoconferencing product and therefore has no manufacturing experience.
ViaVideo is currently in negotiations with potential contract manufacturers, but
no assurance can be given that such negotiations will be concluded successfully.
There can be no assurance that ViaVideo will be able to manufacture its products
in commercial quantities or at acceptable cost structures, if at all.
ViaVideo currently procures from single sources certain key components for
its video conferencing product, including certain parts from Sony and Philips.
ViaVideo purchases these components on a purchase order basis, does not carry
significant inventories of these components and does not have any long-term
supply contracts with its sole source vendors. ViaVideo's reliance on sole
sources entails certain risks, including reduced control over the price, timely
delivery, reliability and quality of the components. ViaVideo has designed its
products to be compatible with certain integrated circuits produced by Philips.
If ViaVideo could no longer obtain such integrated circuits, ViaVideo would
incur substantial expense and take substantial time in redesigning its products
to be compatible with integrated circuits from other manufacturers.
Additionally, both Sony and Philips are potential competitors of ViaVideo in the
video conferencing market which may adversely affect ViaVideo's ability to
obtain necessary components. Failure to obtain adequate supplies could prevent
or delay product shipments which could materially and adversely affect
ViaVideo's business, financial condition and results of operations.
COMPETITION
The videoconferencing industry is highly competitive and is characterized by
regular introductions of new, more advanced, and lower cost products. ViaVideo
believes the industry's primary competitive factors are video and audio quality,
price, ease-of-use, ease-of-installation, features and functionality, and market
visibility and recognition.
There are a number of companies, both domestically and internationally
based, that offer products that will compete with ViaVideo's products. Most
notable is PictureTel, which dominates the group videoconferencing market. Other
manufacturers and providers of competitive group videoconferencing systems
include, among others, VTEL, CLI (recently acquired by VTEL), Intel, Sony
Corporation, NEC, Tandberg, Mitsubishi, Panasonic, Fujitsu, British Telecom,
General Plesey Telecommunications and Vista Communications Instruments. In
addition, with advances in telecommunications standards, connectivity, and video
processing technology and the increasing market acceptance of videoconferencing,
other established or new companies may develop or market products competitive
with ViaVideo's products.
Significant manufacturers and suppliers of personal videoconferencing
products, including many of the companies mentioned above, as well as Creative
Labs, Inc., 8X8, Inc., Netscape Communications, Inc., Microsoft, VSI, RSI, and
White Pine, could expand their product lines into competitive group
videoconferencing systems or enhance the performance and functionality of
personal videoconferencing products to the point where they are more directly
competitive with ViaVideo's products.
Most of ViaVideo's competitors and potential competitors are substantially
larger than ViaVideo and benefit from greater financial, marketing,
manufacturing, and other resources, greater market presence, recognition, and
share, more established distribution channels, and broader product offerings.
Although ViaVideo believes it will be positioned well to compete with these
companies, there can be no assurance that ViaVideo will be able to compete
successfully against current and future competitors and the failure to do so
successfully will have a material adverse effect upon ViaVideo's business,
operating results and financial condition.
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EMPLOYEES
As of September 22, 1997, ViaVideo had 36 full time employees including, 19
in research and development, 8 in sales and marketing, 4 in manufacturing, and 5
in administration. ViaVideo also utilizes temporary workers, independent
contractors, and consultants when needed.
None of ViaVideo's employees are represented by a labor union or party to a
collective bargaining agreement. ViaVideo believes its relations with its
employees to be good.
PROPERTIES
ViaVideo's principal offices are located in Austin, Texas. ViaVideo
currently leases approximately 8,300 square feet of office space. The lease
expires in April 1998 and provides ViaVideo no rights to renewal.
LEGAL PROCEEDINGS
On September 3, 1997, VTEL filed a lawsuit in the District Court in Travis
County, Texas against ViaVideo and its founders. In the lawsuit, VTEL alleges
breach of contract, breach of confidential relationship, disclosure of
proprietary information, and related allegations arising from the former
employment of ViaVideo's founders by VTEL. The management of ViaVideo believes
that these claims are without merit and intends to defend them vigorously. Also,
the management of ViaVideo, after consultation with outside legal counsel,
believes that the likelihood of an unfavorable outcome arising from the
adjudication of this lawsuit is remote. Nevertheless, the costs of defense,
regardless of outcome, could have an adverse effect on the results of operations
and financial condition of the Combined Company. If ViaVideo were found to have
infringed upon the proprietary rights of VTEL or any other third party, it could
be required to pay damages, cease sales of the infringing products, discontinue
such products or such other injunctive relief a court may determine, any of
which could have a material adverse effect on ViaVideo's business, operating
results and financial condition. An adverse development in the VTEL litigation
could cause the termination of the Reorganization Agreement.
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UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements,
including the notes thereto, are qualified in their entirety by reference to,
and should be read in conjunction with, the historical consolidated financial
statements of Polycom and ViaVideo, including the notes thereto, which are
included herein.
The unaudited pro forma condensed combined financial statements assume a
business combination between Polycom and ViaVideo accounted for on a
pooling-of-interests basis and are based on each company's respective historical
consolidated financial statements and notes thereto, which are included herein.
The unaudited pro forma condensed combined balance sheet combines Polycom's
consolidated condensed balance sheet as of September 30, 1997 with ViaVideo's
condensed balance sheet as of September 30, 1997, giving effect to the Merger as
if it had occurred on September 30, 1997. The unaudited pro forma condensed
combined statements of operations combine Polycom's historical results for the
nine months ended September 30, 1997 and the year ended December 28, 1996, with
ViaVideo's historical results for the nine months ended September 30, 1997 and
the period from September 10, 1996 (inception) to December 31, 1996,
respectively, giving effect to the Merger as if it had occurred at September 10,
1996 and January 1, 1997, the earliest period presented. The 1994 and 1995
periods are not presented due to the fact that ViaVideo began operations on
September of 1996 and therefore the 1994 and 1995 pro forma information for such
periods would be the same as the historical information of Polycom only.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated at the beginning of the
earliest period presented, nor is it necessarily indicative of future operating
results or financial position.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
POLYCOM AT VIAVIDEO AT
SEPTEMBER 30, SEPTEMBER 30, PRO FORMA PRO FORMA
1997 1997 ADJUSTMENTS COMBINED
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 16,664 $ 4,589 $ 21,253
Short-term investments............................................. 1,752 1,752
Accounts receivable, net........................................... 7,395 (215) 7,180
Inventories........................................................ 9,023 203 9,226
Prepaids and other current assets.................................. 1,180 240 (65) 1,355
------------- ------------- ----- -----------
Total current assets............................................. 36,014 5,032 (280) 40,766
Property and equipment, net.......................................... 3,647 554 4,201
Deposits and other assets............................................ 359 359
------------- ------------- ----- -----------
Total assets..................................................... $ 40,020 $ 5,586 $ (280) $ 45,326
------------- ------------- ----- -----------
------------- ------------- ----- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit..................................................... 400 400
Accounts payable................................................... $ 6,900 $ 1,124 (280) $ 7,744
Accrued and other current liabilities.............................. 2,657 432 3,089
------------- ------------- ----- -----------
Total current liabilities........................................ 9,557 1,956 (280) 11,233
Stockholders' equity:
Preferred stock, series A.......................................... 3 (3)
Preferred stock, series B.......................................... 2 (2)
Common stock....................................................... 10 2 5 17
Additional paid-in capital......................................... 42,828 9,514 52,342
Notes receivable from stockholders................................. (22) (22)
Accumulated deficit................................................ (12,353) (5,891) (18,244)
------------- ------------- ----- -----------
Total stockholders' equity....................................... 30,463 3,630 34,093
------------- ------------- ----- -----------
$ 40,020 $ 5,586 $ (280) $ 45,326
------------- ------------- ----- -----------
------------- ------------- ----- -----------
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
VIAVIDEO
FOR THE PERIOD PRO FORMA
POLYCOM FROM SEPTEMBER 10, COMBINED
FOR THE YEAR 1996 (INCEPTION) FOR THE YEAR
ENDED TO ENDED
DECEMBER 31, DECEMBER 31, PRO FORMA DECEMBER 31,
1996 1996 ADJUSTMENTS 1996
------------- ------------------ ----------------- -------------
<S> <C> <C> <C> <C>
Net revenues..................................... $ 37,032 $ 37,032
Cost of net revenues............................. 17,698 17,698
------------- -------------
Gross profit................................. 19,334 19,334
------------- -------------
Operating expenses:
Sales and marketing............................ 9,095 9,095
Research and development....................... 7,574 $ 308 7,882
General and administrative..................... 2,148 61 2,209
------------- ------------------ -------------
Total operating expenses..................... 18,817 369 19,186
------------- ------------------ -------------
Operating income (loss).................... 517 (369) 148
------------- ------------------ -------------
Interest income.................................. 784 12 796
Litigation settlement income, net................ 303 303
Other income (expense)........................... (13) (13)
------------- ------------------ -------------
Income (loss) before provision for income
taxes...................................... 1,591 (357) 1,234
Provision for income taxes....................... 108 108
------------- ------------------ -------------
Net income (loss).......................... $ 1,483 $ (357) $ 1,126
------------- ------------------ -------------
------------- ------------------ -------------
Net income (loss) per share...................... $ 0.08 $ (0.16) $ 0.05
------------- ------------------ -------------
------------- ------------------ -------------
Shares used in per share computation............. 18,898 2,179 22,936
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
POLYCOM VIAVIDEO COMBINED
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, PRO FORMA SEPTEMBER 30,
1997 1997 ADJUSTMENTS 1997
------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Net revenues.......................................... $ 34,517 $ 34,517
Cost of net revenues.................................. 18,556 18,556
------------- -------------
Gross profit...................................... 15,961 15,961
------------- -------------
Operating expenses:
Sales and marketing................................. 8,110 $ 1,045 9,155
Research and development............................ 6,768 3,358 10,126
General and administrative.......................... 2,370 1,026 3,396
Acquisition expenses................................ 473 473
Manufacturing start-up.............................. 213 213
------------- ------------- -------------
Total operating expenses.......................... 17,721 5,642 23,363
------------- ------------- -------------
Operating Income (loss)......................... (1,760) (5,642) (7,402)
------------- ------------- -------------
Interest income, net.................................. 688 108 796
------------- ------------- -------------
Net loss........................................ $ (1,072) $ (5,534) $ (6,606)
------------- ------------- -------------
------------- ------------- -------------
Net loss per share.................................... $ (0.06) $ (2.53) $ (0.26)
------------- ------------- -------------
------------- ------------- -------------
Shares used in per share computation.................. 19,053 2,191 25,743
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
NOTE A: The Polycom consolidated statement of operations for the year ended
December 31, 1996 has been combined with ViaVideo consolidated statement of
operations for the period from September 10, 1996 ("inception") to December 31,
1996. Additionally, the Polycom statement of operations for the nine months
ended September 30, 1997 has been combined with ViaVideo's statement of
operations for the nine months ended September 30, 1997. This method of
combining the two companies is for the presentation of unaudited pro forma
condensed combined financial statements only. The unaudited pro forma condensed
combined financial statements, including the notes thereto, should be read in
conjunction with the historical consolidated financial statements of Polycom and
ViaVideo which are included elsewhere in this document.
NOTE B: The unaudited pro forma condensed combined statements of operations
for Polycom and ViaVideo has been prepared as if the Merger was completed at the
beginning of the earliest period presented. The unaudited pro forma combined net
income (loss) per share is based on the combined weighted average number of
common and common equivalent shares of Polycom Common Stock and ViaVideo's
Common Stock for each period, based upon the Exchange Ratio of 1.183684 shares
of Polycom Common Stock for each share of ViaVideo's Common Stock. The unaudited
pro forma condensed combined financial statements assume that all of ViaVideo's
Preferred Stock will convert into shares of ViaVideo Common Stock on a one for
one basis.
NOTE C:
1. PRO FORMA BASIS OF PRESENTATION
These unaudited pro forma condensed combined financial statements reflect
the issuance of 8,402,023 shares of Polycom Common Stock in exchange for an
aggregate of 2,190,554 shares of ViaVideo Common Stock and 4,907,644 shares of
ViaVideo Preferred Stock (outstanding as of September 30, 1997) in connection
with the Merger based on the Exchange Ratio of 1.183684 share of Polycom Common
Stock for every 1.0 share of ViaVideo's Common Stock. Prior to the Merger, all
of ViaVideo's Preferred Stock will convert into shares of ViaVideo Common Stock
on a one for one basis.
The following table details the pro forma share issuances in connection with
the Merger:
<TABLE>
<CAPTION>
PREFERRED NUMBER OF SHARES
SHARES COMMON SHARES EXCHANGE OF POLYCOM
OUTSTANDING OUTSTANDING RATIO COMMON STOCK
--------------- --------------- ---------- -----------------
<S> <C> <C> <C> <C>
ViaVideo....................................... 4,907,644 2,190,554
Polycom........................................ 1.183684 8,402,023
Number of Shares of Polycom Common Stock
Outstanding at September 30, 1997............ 19,179,387
-----------------
Total Number of Shares of Polycom Common
Stock Outstanding After Completion of
Merger..................................... 27,581,410
-----------------
-----------------
</TABLE>
The actual number of shares of Polycom Common Stock to be issued will be
determined at the effective time of the Merger based on the number of shares of
ViaVideo Common Stock outstanding at such time.
The pro forma adjustments consist of the elimination of intercompany
accounts and transactions.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (CONTINUED)
2. TRANSACTION COSTS
Polycom and ViaVideo estimated they will incur direct transaction costs of
approximately $737,000 associated with the Merger consisting of transaction fees
for investment bankers, attorneys, accountants, financial printing and other
related charges. At September 30, 1997, approximately $610,000 of transaction
related costs had been incurred. These nonrecurring transaction costs will be
charged to operations through the quarter ending March 31, 1998.
The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect to
estimated direct transaction costs and merger related expenses incurred as of
September 30, 1997. Any additional costs and expenses not incurred through
September 30, 1997 are not reflected in the Unaudited Pro Forma Condensed
Combined Statements of Income.
NOTE D: No adjustments have been made to conform the accounting policies of
the combined companies. The nature and extent of such adjustments, if any, will
be based upon further study and analysis and are not expected to be significant.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF POLYCOM
The following selected consolidated historical financial data should be read
in conjunction with the Polycom Consolidated Financial Statements and related
notes thereto and "POLYCOM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" appearing elsewhere in this Proxy
Statement. The consolidated statement of operations data for each of the three
years in the period ended December 31, 1996 and the consolidated balance sheet
data at December 31, 1995 and 1996 are derived from consolidated financial
statements of Polycom which have been audited by Coopers & Lybrand, L.L.P,
independent accountants, and are included elsewhere in this Proxy Statement.
Polycom's unaudited historical financial statement data as of and for the nine
months ended September 30, 1997 and 1996 has been prepared on the same basis as
the historical financial information and, in the opinion of Polycom's
management, contains all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations for such periods. See "POLYCOM'S MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
POLYCOM SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- --------------------
1996 1995 1994 1993 1992 1997 1996
--------- ---------- ---------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net revenues................................. $ 37,032 $ 24,944 $ 15,025 $ 8,669 $ 1,398 $ 34,517 $ 26,990
Operating income (loss)...................... 517 (1,659) (3,160) (3,027) (3,825) (1,760) 484
Income (loss) before income taxes............ 1,591 (1,602) (2,963) (2,997) (3,741) (1,072) 948
Net income (loss)............................ 1,483 (1,602) (2,963) (2,997) (3,741) (1,072) 948
Net income (loss) per share.................. $ 0.08 $ (0.37) $ (0.73) $ (0.79) $ (1.09) $ (0.06) $ 0.05
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
AS OF DECEMBER 31,
------------------------------------------------------- --------------------
1996 1995 1994 1993 1992 1997 1996
--------- ---------- ---------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital.............................. $ 27,957 $ 7,829 $ 5,442 $ 8,273 $ 5,518 $ 26,457 $ 27,342
Total assets................................. 37,720 18,000 10,778 11,888 7,261 40,020 37,254
Notes payable, less current portion.......... 0 1,178 757 494 126 0 0
Stockholders' equity (deficit)............... 31,221 (12,640) (11,088) (8,169) (5,175) 30,463 30,648
</TABLE>
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POLYCOM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Polycom was incorporated in December 1990 to develop, manufacture and market
audioconferencing and dataconferencing products that facilitate meetings at a
distance. Polycom was engaged principally in research and development from
inception through September 1992, when it began volume shipments of its first
audioconferencing product, SoundStation. As of September 30, 1997, Polycom's
audioconferencing product line consisted of the SoundStation, SoundStation EX,
SoundStation Premier and SoundPoint. Polycom began shipping its first
dataconferencing product, ShowStation, in November 1995. In October 1997,
Polycom announced enhancements to its audio and dataconferencing product lines
and its first videoconferencing product, the ViewStation, a videoconferencing
product by ViaVideo, which are discussed later in this section. Polycom markets
its products domestically and internationally through a direct sales force and a
network of value-added resellers ("VARS"), original equipment manufacturers
("OEMS") and retail channels. Through September 30, 1997, Polycom has derived a
substantial majority of its net revenues from sales of its SoundStation
products. Polycom anticipates that sales of its SoundStation product line will
continue to account for a substantial majority of net revenues at least through
the year ending December 31, 1997. Any factor adversely affecting the demand or
supply for the SoundStation product line could materially adversely affect
Polycom's business, financial condition, cash flows or results of operations.
From inception through the nine month period ended September 30, 1995,
Polycom incurred losses from operations, primarily as a result of its
investments in the development of its products and the expansion of its sales
and marketing, manufacturing and administrative organizations. Polycom achieved
profitability in the fourth quarter of 1995 and generated a small operating
income in each quarter of fiscal 1996. Although Polycom incurred operating
losses in the first, second and third quarters of 1997 and intends to continue
to invest significantly in research and development, Polycom plans to generate
operating income, excluding acquisition expenses, in the fourth quarter of 1997
assuming that the proposed acquisition of ViaVideo does not close in that
quarter. If the proposed acquisition of ViaVideo does close in the fourth
quarter of 1997, Polycom will have a significant net loss for the period due to
the expected impact of ViaVideo's operating expenses, offset only marginally, if
at all, by small initial net video revenues at the end of the period. There can
be no assurance that Polycom will achieve its operating plans or achieve
profitable operations in the fourth quarter or in any subsequent period.
In January 1997, Polycom announced plans to divisionalize Polycom along its
two lines of business: audioconferencing and dataconferencing. Polycom named a
general manager for each division and formally restructured Polycom's research
and development organization into two separate divisions, reporting to each
business' general manager. Business unit alignments were also made in Polycom's
sales, marketing and general and administrative organizations. In the second
quarter of 1997, business unit alignments were also made in the manufacturing
organization. In June 1997, Polycom announced an agreement to acquire ViaVideo,
a company based in Austin, Texas, dedicated to the development of
videoconferencing equipment. This acquisition, if completed, is expected to
establish Polycom in the videoconferencing market and will form Polycom's third
division. As of this date, the merger is still pending. See the discussion below
for further details on this transaction.
In March 1997, Polycom entered into a joint marketing and development
agreement (the "FIRST AGREEMENT") with 3M. Under the agreement, 3M provides $3.0
million in funding to Polycom for certain deliverables related to the
development of the next generation dataconferencing product and will also
provide shared technology resources for the development of future products.
Through September 30, 1997, Polycom recorded the $3.0 million as revenue, $1.0
million in each of the first three quarters of 1997, based on delivery of the
items specified in the contract. The amounts recognized as revenue approximates
the amount that would have been recognized using the percentage of completion
methodology. Additionally,
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Polycom will grant 3M exclusive private-label rights in certain distribution
channels to the products developed under this agreement subject to certain
minimum volumes. Further, 3M received warrants to purchase up to 2,000,000
shares of Polycom's common stock at an exercise price of $7.50 per share. The
warrants expire in March 1999, which may be extended until March 2000 depending
on the delivery of Polycom's first product developed under the agreement. The
warrants were valued using the Black-Scholes model and were determined to have
an insignificant impact for financial reporting purposes. 3M also has certain
rights of first offer under its stock warrant agreement with Polycom which will
give 3M the right, for a period of 45 days after the Effective Time, to purchase
approximately 950,000 shares of Polycom Common Stock at a purchase price of
$7.50 per share.
In June 1997, Polycom entered into a second joint marketing and development
agreement (the "SECOND AGREEMENT") with 3M. Under this agreement, 3M provides
$2.5 million in funding to Polycom for certain deliverables related to the
development of videoconferencing products and may also provide shared technology
resources for the development of future products. Polycom will grant 3M
exclusive private-label rights in certain distribution channels to the products
developed under this agreement. As of September 30, 1997, Polycom has not
recognized any revenue under this agreement.
As mentioned above, in June 1997 Polycom signed an agreement under which
Polycom may acquire ViaVideo. This acquisition of ViaVideo, a development stage
company with its initial videoconferencing product targeted to be released by
the end of 1997, is intended to add a videoconferencing product and engineering
team to Polycom's audioconferencing and dataconferencing product portfolio.
Under the terms of the agreement with ViaVideo, 9.7 million shares of
Polycom Common Stock, plus up to an additional 300,000 shares based on future
option grants by ViaVideo, will be exchanged for all outstanding shares and
options of ViaVideo. Depending on the average price of Polycom's shares during a
specified period preceding the acquisition, the total number of Polycom shares
to be issued may be reduced so in no event will the total acquisition
consideration exceed $90 million. It is expected that the transaction will be
accounted for as a pooling of interests and will qualify as a tax-free
reorganization. The transaction is expected to be completed during the fourth
quarter of 1997 or the first quarter of 1998 and is subject to various
conditions which include first customer shipment by ViaVideo of its initial
videoconferencing system no later than March 31, 1998 and Polycom's share price
preceding the acquisition to be at or above $3.00 per share. There can be no
guarantee that ViaVideo will meet the required milestones, that the shareholders
will approve the merger, that there will be market acceptance of the ViaVideo
videoconferencing product, that the transaction will be accounted for as a
pooling of interests, that the products, technology and personnel of ViaVideo
can be successfully integrated into Polycom, or that the future of the business
will be profitable.
In October 1997, Polycom announced a new set of data, video and
audioconferencing products to add to its existing line. In the dataconferencing
market, Polycom announced its new ShowStation IP product which is its next
generation conference room projector. The ShowStation IP is targeted to be
available in North America in December 1997 and in Europe and Asia Pacific on a
country-by-country basis over the following several months. Attaining operating
profitability in the fourth quarter of 1997 and beyond is dependent on meeting
these targeted release dates for the ShowStation IP product. In the
videoconferencing arena, Polycom introduced the new ViewStation, a
videoconferencing product by ViaVideo. ViewStation is targeted to be available
in North America at the end of 1997 and its availability through Polycom is
entirely dependent on the closing of the expected merger between Polycom and
ViaVideo. In the audioconferencing market, Polycom introduced the SoundStation
Premier Satellite which is a unique enhanced system that works in conjunction
with Polycom's SoundStation Premier conference phone. The SoundStation Premier
satellite is targeted to be available in North America in December 1997. There
can be no assurance that any products not yet commercially available will be
available by Polycom's targeted dates and the lack of availability of these
products will materially affect Polycom's financial results.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues, condensed
consolidated statements of operations data for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues...................................................... 100% 100% 100% 100%
Cost of net revenues.............................................. 54% 49% 54% 47%
----- ----- ----- -----
Gross profit.................................................. 46% 51% 46% 53%
----- ----- ----- -----
Operating expenses:
Sales and marketing............................................. 22% 24% 23% 24%
Research and development........................................ 17% 20% 20% 21%
General and administrative...................................... 8% 6% 7% 6%
Acquisition expenses............................................ 1% 0% 1% 0%
----- ----- ----- -----
Total operating expenses...................................... 48% 50% 51% 51%
----- ----- ----- -----
Operating income/(loss)........................................... (2%) 1% (5%) 2%
Interest income, net.............................................. 2% 3% 2% 2%
Other expense, net................................................ 0% 0% 0% 0%
----- ----- ----- -----
Net income/(loss)................................................. 0% 4% (3%) 4%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
The following table sets forth net revenues by line of business for the
periods indicated (amounts in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- --------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1997 1996
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Audioconferencing:
Net revenues..................................................... $ 11,082 $ 8,051 $ 28,848 $ 23,308
Cost of net revenues............................................. 5,897 2,902 14,901 8,792
--------- ----------- --------- ---------
Gross profit................................................... $ 5,185 $ 5,149 $ 13,947 $ 14,516
--------- ----------- --------- ---------
--------- ----------- --------- ---------
Gross margin %................................................. 47% 64% 48% 62%
Dataconferencing:
Net revenues..................................................... $ 1,425 $ 1,451 $ 5,669 $ 3,682
Cost of net revenues............................................. 858 1,717 3,655 3,886
--------- ----------- --------- ---------
Gross profit................................................... $ 567 $ (266) $ 2,014 $ (204)
--------- ----------- --------- ---------
--------- ----------- --------- ---------
Gross margin %................................................. 40% (18%) 36% (6%)
</TABLE>
NET REVENUES
Total net revenues were $12.5 million in the third quarter of 1997 compared
to $9.5 million in the third quarter of 1996, an increase of 32%. Within the
audioconferencing product line, net revenues were $11.1 million in the third
quarter of 1997, an increase of $3.0 million or 38%, when compared to the same
period for 1996. The increase was due to the impact of unit sales growth of the
SoundStation product as well as the SoundPoint product and SoundStation Premier
introduced in the third and fourth quarters of 1996, respectively. This was
partially offset by a 37% price reduction on SoundStation product sold in North
America effective January 1997 and a 30% price reduction on international
SoundStation sales effective
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April 1997. Dataconferencing net revenues in the third quarter of 1997 were $1.4
million compared to $1.5 million for the same period of 1996, a decrease of 2%.
The decrease was due to a significant unit volume decrease which was almost
entirely offset by the $1.0 million payment associated with the First Agreement
with 3M which did not occur in the third quarter of 1996. No such payment will
occur in the fourth quarter of 1997, or any subsequent quarter, under the First
Agreement with 3M as Polycom has completed the deliverables related to this
agreement.
For the first nine months of 1997, total net revenues were $34.5 million, an
increase of $7.5 million or 28%, compared to the same period in 1996. The
audioconferencing net revenues for the first nine months of 1997 were up $5.5
million, or 24%, when compared to the first nine months of 1996. This increase
was due to the introduction of the new product lines in this division, which was
partially offset by the price reductions for the SoundStation product line. For
the first nine months of 1997, SoundStation unit sales increased over the same
period in 1996, offsetting the impact of the price reduction. Additionally,
although the SoundPoint product revenue was up over the same period in 1996,
revenue for this product was down in comparison to the second quarter of 1997
due to lower unit sales and the market mix. Specifically, sales to the adjunct
PBX market performed well in the current quarter, but sales of the SoundPoint
were off in the desktop videoconferencing market. Dataconferencing revenues were
$5.7 million for the first nine months of 1997 versus $3.7 million in the first
nine months of 1996. This increase was due entirely to the revenue associated
with the First Agreement with 3M which offset ShowStation unit volume decreases.
Polycom will not recognize any further revenue from the First Agreement with 3M.
During the third quarters of 1997 and 1996 and for the first nine months of
1997 and 1996, Polycom derived a majority of its net revenues from sales of its
SoundStation product family. However, no customer or reseller accounted for more
than 10% of Polycom's net revenues during these same periods for either 1997 or
1996. Further, Polycom received, and recorded as revenue, $3.0 million under the
First Agreement with 3M during the first nine months of 1997.
International net revenues for the third quarter of 1997 accounted for 25%
of total net revenues for Polycom, up slightly from 24% in the third quarter of
1996. This increase was due to a significant increase in the Europe and
Asia-Pacific regions for the audioconferencing business which was offset by a
reduction in the dataconferencing business. The decline in the dataconferencing
business was attributable to significant international OEM sales in the third
quarter of 1996 which did not occur in the third quarter of 1997. For the first
nine months of 1997, international net revenues were 23% of total net revenues
compared to 22% in the same period of 1996. Again, increases in the
audioconferencing business were offset by decreases in the dataconferencing
business. Polycom anticipates that international sales will continue to account
for a significant portion of total net revenues for the foreseeable future.
However, international net revenues may fluctuate in the future as Polycom
introduces new products, since Polycom expects to initially introduce such
products in North America and also because of the additional time required for
product homologation and regulatory approvals of new products in international
markets. In addition, the implementation of the international price reduction
for SoundStation products effective April 1997 will affect international
revenues in future quarters. To the extent Polycom is unable to expand
international sales in a timely and cost-effective manner, Polycom's business,
financial condition or results of operations could be adversely affected. There
can be no assurance that Polycom will be able to maintain or increase
international market demand for Polycom's products. To date, a substantial
majority of Polycom's international sales has been denominated in U.S. currency,
however, Polycom expects that in the future more international sales may be
denominated in local currencies.
COST OF NET REVENUES
Cost of net revenues consists primarily of Polycom's manufacturing
organization, contract manufacturers, tooling depreciation, warranty expense and
an allocation of overhead expenses. The cost of net revenues represented 54% and
49% of net revenues for the third quarters of 1997 and 1996, respectively. By
division, audioconferencing cost of net revenues was 53% in the third quarter of
1997 versus 36% in the
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1996 third quarter, while dataconferencing cost of net revenues was 60% in the
third quarter of 1997 compared to 118% in the third quarter of 1996. The
increase in audioconferencing cost of net revenue percentage is primarily
attributable to the SoundStation price reduction implemented in North America in
January 1997 and in the International regions in April 1997. Also, the costs
associated with the transition to a manufacturer in Thailand and the
introduction of a lower margin audio product contributed to the higher cost of
net revenues percentage. It is expected that the transition costs associated
with the transition to the Thailand manufacturer will not recur in the future.
Additionally, Polycom offered deeper discounts in the third quarter of 1997 than
in previous quarters in its quarter-end distributor incentive program which
negatively affected the cost of net revenues percentage. These discounts were
particularly significant in the SoundStation Premier product line as Polycom
strives to increase the market mix of this product. In the dataconferencing
division, the decrease in the cost of net revenues percentage was primarily due
to the revenue received under the First Agreement with 3M, which had very low
associated costs. Because Polycom will not receive revenue from the First
Agreement with 3M in the fourth quarter of 1997, the dataconferencing cost of
net revenues are expected to increase leading to a low to negative gross margin
percentage for the dataconferencing business in the fourth quarter.
For the first nine months of 1997 the cost of net revenues percentage was
54%, compared to 47% for the same period in 1996. The audioconferencing cost of
net revenues was 52% in the first nine months of 1997 versus 38% in the first
nine months of 1996. This increase was due to the price reductions in the
SoundStation product family mentioned above as well as the introduction of a
lower margin audio product in the third quarter of 1996. The dataconferencing
cost of net revenues was 64% in the first nine months of 1997 versus 106% in the
same period of 1996. This decrease was due primarily to the revenues received
under the First Agreement with 3M.
Polycom's historical price reductions have been driven by Polycom's desire
to expand the market for its products, and Polycom may further reduce prices or
introduce new products that carry higher costs in order to further expand the
market or to respond to competitive pricing pressures, although there can be no
assurance that such actions by Polycom will expand the market for its products
or be sufficient to meet competitive pricing pressures. In the future, the cost
of net revenue percentage may be affected by price competition and changes in
unit volume shipments, product cost and warranty expenses. The cost of net
revenues percentage may also be impacted by the mix of distribution channels
used by Polycom, the mix of products sold and the mix of International versus
North American revenues. Polycom typically realizes lower cost of net revenue
percentages on direct sales than on sales through indirect channels and lower
cost of net revenues percentage on International revenues than on North American
revenues. If sales through resellers, especially OEMs, increase as a percentage
of total revenues, Polycom's cost of net revenues percentage will be adversely
impacted.
In June 1997, Polycom began manufacturing the SoundStation products at a
manufacturing contractor based in Thailand. During the third quarter of 1997,
this same manufacturer also began producing the Premier product family. Although
the transition of the manufacturing process to the Thailand manufacturer caused
an unfavorable cost variance in the third quarter of 1997, Polycom expects that
this change will lower audioconferencing cost of net revenues in the fourth
quarter of 1997 and beyond, although there can be no assurances that this will
occur. In July 1997, Polycom moved its distribution and product repair center to
a new location in Livermore, California. This move is expected to provide
Polycom with better control over its distribution and repair activities and may
improve overall warranty and service costs, although there are no assurances
that this will happen.
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SALES AND MARKETING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
SEPT. 30, SEPT. 30, INCREASE/ SEPT. 30, SEPT. 30, INCREASE/
DOLLARS IN THOUSANDS 1997 1996 (DECREASE) 1997 1996 (DECREASE)
- ------------------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Expenses........................................ $ 2,724 $ 2,245 21.3% $ 8,110 $ 6,515 24.5%
% of Net Revenues............................... 21.8% 23.6% (1.8%) 23.5% 24.1% (0.6%)
</TABLE>
Sales and marketing expenses consist primarily of salaries and commissions,
advertising and promotional expenses, an allocation of overhead expenses and
customer service and support costs. The increase in expenses of the third
quarter of 1997 compared to the third quarter of 1996 was primarily related to
the expansion of Polycom's sales and marketing organizations, particularly in
the international and retail sales channels. An increase in advertising and
promotions also contributed to the overall increase. For the first nine months
of 1997 compared to the same period for 1996, the increase was due to the
expansion of the marketing organization and the sales effort in the
international regions, particularly Europe and Asia Pacific.
Polycom expects to continue to increase its sales and marketing expenses in
absolute dollar amounts in an effort to expand North American and international
markets, market new products and establish and expand distribution channels. In
particular, due to the innovative nature of the ShowStation, ShowStation IP and
ViewStation, a videoconferencing product by ViaVideo, products, Polycom believes
it will be required to incur significant additional expenses for sales and
marketing, including advertising, to educate potential customers as to the
desirability of ShowStation, ShowStation IP and ViewStation. Also, compensation
and benefits for the new Vice President of Marketing will cause an increase in
Marketing and Sales expense in the future. Further, although sales and marketing
expenses will likely increase in absolute dollars, the effects the proposed
merger with ViaVideo will have on its percentage of net revenues and on the
profitability of Polycom are difficult to predict, if not impossible, at this
time.
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
SEPT. 30, SEPT. 30, INCREASE/ SEPT. 30, SEPT. 30, INCREASE/
DOLLARS IN THOUSANDS 1997 1996 (DECREASE) 1997 1996 (DECREASE)
- ------------------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Expenses........................................ $ 2,167 $ 1,930 12.2% $ 6,768 $ 5,723 18.3%
% of Net Revenues............................... 17.3% 20.3% (3.0%) 19.6% 21.2% (1.6%)
</TABLE>
Research and development expenses consist primarily of compensation costs,
consulting fees, an allocation of overhead expense, supplies and depreciation.
The expense increases for the third quarter of 1997 versus the third quarter of
1996 and for the first nine months of 1997 compared to the same period of 1996
were primarily attributable to increased staffing and associated support to
expand and enhance Polycom's product lines, particularly in the dataconferencing
division. Also, in compliance with a joint services agreement with ViaVideo,
Polycom incurred and billed out, as a credit to its expense, charges related to
development work done on behalf of ViaVideo.
Polycom believes that technological leadership is critical to its success
and is committed to continuing a high level of research and development.
Consequently, Polycom intends to increase its research and development expenses
in absolute dollars in the future. Further, although research and development
expenses will likely increase in absolute dollars, the effects the proposed
merger with ViaVideo will have on its percentage of net revenues and on the
profitability of Polycom are difficult to predict, if not impossible, at this
time.
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GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
SEPT. 30, SEPT. 30, INCREASE/ SEPT. 30, SEPT. 30, INCREASE/
DOLLARS IN THOUSANDS 1997 1996 (DECREASE) 1997 1996 (DECREASE)
- ------------------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Expenses........................................ $ 917 $ 552 66.1% $ 2,370 $ 1,590 49.1%
% of Net Revenues............................... 7.3% 5.8% 1.5% 6.9% 5.9% 1.0%
</TABLE>
General and administrative expenses consist primarily of compensation costs,
an allocation of overhead expense, and outside legal and accounting expenses.
The increase in general and administrative expenses, both in absolute dollars
and as a percentage of net revenues, for the third quarter of 1997 when compared
to the same period of 1996 was primarily due to increased staffing, including
the hiring of a president, to support Polycom's growth and an increased focus in
both the audioconferencing and dataconferencing divisions. The increase in
expenses for the first nine months of 1997 over the first nine months of 1996
was due again to increased staffing to support the growth of Polycom.
Polycom believes that its general and administrative expenses will increase
in absolute dollar amounts in the future primarily as a result of expansion of
Polycom's administrative staff and costs related to being a public company.
Further, although general and administrative expenses will likely increase in
absolute dollars, the effects the proposed merger with ViaVideo will have on its
percentage of net revenues and on the profitability of Polycom are difficult to
predict, if not impossible, at this time.
ACQUISITION EXPENSES
For the third quarter of 1997, Polycom incurred expenses totaling $0.1
million related to the pending acquisition of ViaVideo. For the first nine
months of 1997, these acquisition expenses were $0.5 million. A significant
portion of these charges were for outside legal, accounting and consulting
services. Management believes the acquisition related expenses will be less
throughout the remainder of this fiscal year; however, there can be no
assurances that this will happen, that the future charges will not be material
or that the merger will ever be completed.
There can be no assurances that Polycom will complete the proposed merger or
that Polycom will not incur additional charges in subsequent quarters associated
with the merger or that management will be successful in its efforts to
integrate the operations of the acquired company. Although Polycom believes the
proposed acquisition described above is in the best interest of Polycom and its
stockholders, there are significant risks associated with this transaction,
including but not limited to: (i) difficulties in integration of the companies,
(ii) difficulties in maintaining revenue levels during product transitions,
(iii) difficulties or delays in achieving product and technology integration
benefits, and (iv) increased competition from other videoconferencing companies.
Further, the proposed acquisition described above relates to a company that is
in its early stage of development. As a result, Polycom believes that the
increases in costs of net revenues and in operating expenses associated with the
development and integration of these technologies will, in the near term,
greatly exceed any associated increases in net revenues, which will have an
adverse impact on operating results.
INTEREST INCOME, NET AND OTHER EXPENSES, NET
Interest income, net consists of interest earned on Polycom's cash
equivalents and short-term investments net of any interest expense. For the
third quarter of 1997, interest income, net was $0.2 million, a decrease of 20%
from the third quarter of 1996. This decrease was due to a lower level of cash
available for investment. For the first nine months of 1997, interest income,
net was $0.8 million compared to $0.5 million in the same period of 1996. This
increase was due to the increase in Polycom's cash equivalents and short-term
investments as a result of its initial public offering in the second quarter of
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1996. In addition, interest expense recorded in 1997 is insignificant due to the
reduction in debt after the initial public offering.
Polycom accounts for income taxes in accordance with the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." The current quarter's break-even results
generated minimal federal and state income taxes in 1997. In the fourth quarter
of 1997 and beyond, Polycom expects to realize increasingly profitable results
which will generate higher federal and state income tax expense, although there
can be no assurance Polycom will achieve profitable results. As of December 31,
1996, Polycom had approximately $6.4 million in federal net operating loss
carryforwards and $790,000 in tax credit carryforwards. The future utilization
of Polycom's net operating loss carryforwards may be subject to certain
limitations upon certain changes in ownership.
Polycom has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluates the recoverability of the deferred tax assets and the level
of the valuation allowance on a quarterly basis. At such time it is determined
that it is more likely than not that deferred tax assets are realizable, the
valuation allowance will be appropriately reduced.
OTHER FACTORS AFFECTING FUTURE OPERATIONS
Polycom's net revenues have grown primarily through increased market
acceptance of its established audioconferencing product line, new product
introductions and, to a lesser extent, through the expansion of Polycom's North
American and International distribution networks. While Polycom has experienced
growth in net revenues in recent quarters, it does not believe that the
historical growth rates in net revenues will be sustainable nor are they
indicative of future operating results. For example, Polycom believes that the
37% price reduction in the North American list price of its SoundStation product
line, effective December 1996 for resellers and January 1997 for end user
customers, and the 30% price reduction for SoundStation products sold
internationally effective April 1997, negatively impacted Polycom's net revenues
and gross margins in the third quarter and first nine months of 1997 and will
continue to negatively impact net revenues and gross margins throughout 1997.
Polycom believes that gross margins could continue to be negatively affected in
the future as a result of several factors including low to negative gross
margins for Polycom's ShowStation and ShowStation IP dataconferencing products,
inventory value loss related to the ShowStation inventory if it is determined
that the units cannot be sold for at least carrying cost, the reduction in the
list prices of the SoundStation product line, the introduction of the lower
margin SoundPoint desktop product line and continuing competitive price pressure
in the audioconferencing and dataconferencing markets. Although price reductions
have been driven by Polycom's desire to expand the market for its products, and
Polycom expects that in the future it may further reduce prices or introduce new
products that carry lower margins in order to further expand the market or to
respond to competitive pricing pressures, there can be no assurance that such
actions by Polycom will expand the market for its products or be sufficient to
meet competitive pricing pressures. In addition, costs related to the merger
with ViaVideo, expense growth related to the activities of the combined entities
and costs related to the introduction of the new ShowStation IP, ViewStation, a
videoconferencing product by ViaVideo, and SoundStation Satellite products could
negatively impact future profitability. Also, the impact of pending or future
litigation against Polycom or ViaVideo, including the suit filed by VTEL against
ViaVideo as mentioned in Polycom's Form 8-K filed on September 9, 1997, is
difficult to predict at this time. Further, Polycom's limited operating history
and limited resources, among other factors, make the prediction of future
operating results difficult if not impossible.
In the past Polycom has experienced delays from time to time in the
introduction of certain new products and enhancements and expects that such
delays may occur in the future. For instance, the introduction of ShowStation
was delayed by approximately eighteen months from the originally anticipated
date of introduction because of unforeseen technical challenges and difficulties
in building core technologies and, for approximately nine weeks in the first
quarter of 1996, shipments were interrupted in order to
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correct software and other technical problems identified by initial customers.
In addition, SoundStation Premier first customer shipments were delayed from its
original shipment target of September 1996 to November 1996 and ShowStation IP
was delayed from September 1997 to its targeted first customer shipment date of
December 1997 due to engineering issues. Any similar delays could have a
material adverse effect on Polycom's results of operations.
Polycom's operating results have fluctuated in the past and may fluctuate in
the future as a result of a number of factors, including market acceptance of
the ShowStation, ShowStation IP and ViewStation, a videoconferencing product by
ViaVideo, products and other new product introductions and product enhancements
by Polycom or its competitors, the prices of Polycom's or its competitors'
products, the mix of products sold, the mix of products sold directly and
through resellers, fluctuations in the level of international sales, the cost
and availability of components, manufacturing costs, the level of warranty
claims, changes in Polycom's distribution network, the level of royalties to
third parties and changes in general economic conditions. In addition,
competitive pressure on pricing in a given quarter could adversely affect
Polycom's operating results for such period, and such price pressure over an
extended period could materially adversely affect Polycom's long-term
profitability. Polycom's ability to maintain or increase net revenues will
depend upon its ability to increase unit sales volumes of its SoundStation,
SoundStation Premier and SoundPoint families of audioconferencing products, the
dataconferencing line of products, comprised of the ShowStation and ShowStation
IP products, and the videoconferencing line of products, currently comprised of
ViewStation, a videoconferencing product by ViaVideo, and any new products or
product enhancements. There can be no assurance that Polycom will be able to
increase unit sales volumes of existing products, introduce and sell new
products or reduce its costs as a percentage of net revenues.
Polycom typically ships products within a short time after receipt of an
order, does not usually have a significant backlog and backlog fluctuates
significantly from period to period. As a result, backlog at any point in time
is not a good indicator of future net revenues and net revenues for any
particular quarter cannot be predicted with any degree of accuracy. Accordingly,
Polycom's expectations for both short- and long-term future net revenues are
based in large part on its own estimate of future demand and not on firm
customer orders. In addition, Polycom has in the past received orders and
shipped a substantial percentage of the total products sold during a particular
quarter in the last several weeks of the quarter. In some cases, these orders
have consisted of distributor stocking orders and Polycom has from time to time
provided special incentives for distributors to purchase more than the minimum
quantities required under their agreements with Polycom. Therefore, Polycom has
been uncertain, even during most of the quarter, what level of revenues it will
achieve in the quarter and the impact that distributor stocking orders will have
on revenues and gross margins in that quarter and subsequent quarters. In
addition, because a substantial percentage of product sales occur at the end of
the quarter, product mix and therefore gross margins are difficult to predict.
Further, there can be no guarantee that Polycom's contracted manufacturers will
be able to meet product demand before the quarter ends. Polycom anticipates that
this pattern of sales will continue in the future. Expense levels are based, in
part, on these estimates and, since Polycom is limited in its ability to reduce
expenses quickly if orders and net revenues do not meet expectations in a
particular period, operating results would be adversely affected. In addition, a
seasonal demand may develop for Polycom's products in the future. Due to all of
the foregoing factors, it is likely that in some future quarter Polycom's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of Polycom's Common Stock would likely be
materially adversely affected.
Polycom's operations are vulnerable to interruption by fire, earthquake,
power loss, telecommunications failure and other events beyond Polycom's
control. Additionally, most of Polycom's operations are currently located in the
San Francisco Bay Area, an area that is susceptible to earthquakes. Polycom does
not carry sufficient business interruption insurance to compensate Polycom for
losses that may occur, and any losses or damages incurred by Polycom could have
a material adverse effect on its business, financial condition or operating
results.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, Polycom's principal sources of liquidity included
cash, cash equivalents and short-term investments of $18.4 million, a decrease
of $1.2 million from December 31, 1996. Additionally, on October 17, 1997,
Polycom re-established a $5.0 million revolving bank line of credit from Silicon
Valley Bank which had previously expired on April 15, 1997. This line of credit
allows for an additional facility of $5.0 million available upon request by
Polycom and contingent upon payment of associated fees.
Polycom generated $0.3 million in cash from operating activities for the
first nine months of 1997 versus a use of $1.5 million in cash for the same
period in 1996. The improvement in cash from operating activities was due
primarily to improved collections of accounts receivable and larger accounts
payable and accrued liability balances, offset somewhat by a net loss in the
first nine months of 1997 compared to net income in the same period of 1996 and
an increase in prepaid assets.
The total net change in cash and cash equivalents for the first nine months
of 1997 was an increase of $7.1 million. The primary sources of cash were $0.3
million from operating activities, and net sales of investments of $8.3 million.
The positive cash flow from operating activities was the result of higher
accounts payable and accrued liability balances and a positive net income before
non-cash items such as depreciation and increases to inventory reserves, offset
by an increase in inventories, prepaid assets and accounts receivable. The
primary uses of cash during the first nine months of 1997 were purchases of
property, plant and equipment of $1.8 million. Polycom expects to continue to
purchase additional equipment throughout the remainder of 1997.
Polycom's material commitments consist of obligations under its revolving
bank line of credit, operating leases and a $200,000 stand-by letter of credit
which has been issued to guarantee certain of Polycom's contractual obligations.
Polycom estimates that 1997 capital expenditures will total approximately $3.0
million.
Polycom believes that its available cash, cash equivalents and bank line of
credit will be sufficient to meet Polycom's operating expenses and capital
requirements through at least December 31, 1997. Thereafter, Polycom may require
additional funds to support its working capital requirements or for other
purposes and may seek to raise such additional funds through public or private
equity financing or from other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to Polycom and would not be
dilutive. Polycom's future liquidity and cash requirements will depend on
numerous factors, including introduction of new products and potential product
family or technology acquisitions.
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<PAGE>
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
The following table sets forth, as a percentage of net revenues,
consolidated statement of operations data for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................................................. 100% 100% 100%
Cost of net revenues......................................................................... 41 44 48
--- --- ---
Gross profit............................................................................... 59 56 52
--- --- ---
Operating expenses:
Sales and marketing........................................................................ 35 28 25
Research and development................................................................... 37 28 20
General and administrative................................................................. 8 7 6
--- --- ---
Total operating expenses................................................................. 80 63 51
--- --- ---
Operating income (loss)...................................................................... (21) (7) 1
Interest income, net......................................................................... 1 1 2
Litigation settlement income, net............................................................ -- -- 1
Other income (expense)....................................................................... -- -- --
--- --- ---
Income (loss) before provision for income taxes.............................................. (20) (6) 4
Provision for income taxes................................................................... -- -- --
--- --- ---
Net income (loss)............................................................................ (20)% (6)% 4%
--- --- ---
--- --- ---
</TABLE>
The following table sets forth net revenues, by line of business, for the
periods indicated (amounts in thousands.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Audioconferencing:
Net revenues..................................................................... $ 15,025 $ 23,814 $ 32,242
Cost of net revenues............................................................. 6,211 9,906 12,629
--------- --------- ---------
Gross profit................................................................... $ 8,814 $ 13,908 $ 19,613
--------- --------- ---------
--------- --------- ---------
Gross margin................................................................... 59% 58% 61%
Dataconferencing:
Net revenues..................................................................... n/a $ 1,130 $ 4,790
Cost of net revenues............................................................. n/a 953 5,069
--------- --------- ---------
Gross profit................................................................... n/a $ 177 $ (279)
--------- ---------
--------- ---------
Gross margin................................................................... 16% (6)%
</TABLE>
NET REVENUES. Polycom's net revenues increased 66% from $15.0 million in
1994 to $24.9 million in 1995 and increased 49% to $37.0 million in 1996. Net
revenues increased in each period primarily due to increased unit sales,
resulting primarily from new product introductions and the increased market
acceptance of Polycom's audioconferencing product line, and, to a lesser extent,
through the expansion of Polycom's North American and international distribution
networks, offset in part by a decline in the list price of its SoundStation
products. Polycom reduced the list price for its SoundStation products three
separate times, effective July 1, 1994, January 1, 1996, and January 1, 1997,
and expects increased competitive pressure to lead to intensified price-based
competition, resulting in lower prices that could
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<PAGE>
materially adversely affect Polycom's net revenues. During 1996, Polycom derived
a substantial majority of its net revenues from sales of its SoundStation
product family. ConferTech accounted for 14% and 11% of net revenues in 1994 and
1995, respectively, and 2Confer/Mutare, Inc. accounted for 11% of net revenues
in 1994. No other customer or reseller accounted for more than 10% of Polycom's
net revenues during the periods indicated and no customer or reseller accounted
for more than 10% of net revenues in 1996. International net revenues accounted
for 23%, 24%, and 23% of total net revenues for 1994, 1995, and 1996,
respectively. See Note 13 of Notes to Consolidated Financial Statements for
business segment information. The reduction in the percentage of international
net revenues for 1996 from 1995 resulted from initial sales of the SoundPoint
and SoundStation Premier product families, which were introduced first in North
America. Polycom anticipates that international sales will continue to account
for a significant portion of total net revenues for the foreseeable future.
However, international net revenues may fluctuate in the future as Polycom
introduces new products, since Polycom expects to initially introduce such
products in North America and also because of the additional time required for
product homologation and regulatory approvals of new products in international
markets. To the extent Polycom is unable to expand international sales in a
timely and cost-effective manner, Polycom's business, financial condition, or
results of operations could be adversely affected. There can be no assurance
that Polycom will be able to maintain or increase international market demand
for Polycom's products. To date, a substantial majority of Polycom's
international sales have been denominated in U.S. currency; however, Polycom
expects that in the future more international sales may be denominated in local
currencies.
Net revenues by division: Polycom's audioconferencing net revenues increased
58% from $15.0 million in 1994 to $23.8 million in 1995 and increased 35% to
$32.2 million in 1996. Polycom's dataconferencing net revenues increased 336%
from $1.1 million in 1995 to $4.8 million in 1996. Polycom's first
dataconferencing products began shipping in November 1995 and did not have any
net revenues prior to this time.
GROSS PROFIT. Cost of net revenues consists primarily of manufacturing
costs of Polycom and Polycom's contract manufacturer, warranty expense, and
allocation of overhead expenses. Gross margin represented 59%, 56%, and 52% of
net revenues for 1994, 1995, and 1996, respectively. The decrease in gross
margins for 1995 and for 1996 was principally due to the shift in product mix
from the higher margin SoundStation product family to the lower margin
ShowStation and, in 1996, the SoundStation Premier and SoundPoint product family
introductions. The audioconferencing gross margin was positively impacted by
cost reductions in the manufacturing cost of the SoundStation product line,
partially offset by the negative impact of the reduction in the price of
Polycom's SoundStation product line announced in the first quarter of 1996 and
the price reduction of the SoundStation product line to the resellers in
December 1996. Gross margins on the dataconferencing product line were
negatively impacted by manufacturing start-up costs associated with the launch
of the ShowStation product in 1995 through mid-1996, at which point the
manufacture of the product was transferred to Polycom's contract manufacturer.
Gross margins on the dataconferencing product line were also negatively impacted
by the lower than planned unit volume and significant manufacturing variances
through the fourth quarter of 1996. Polycom expects that gross margins will
continue to decline significantly in the future as a result of several factors,
including low to negative gross margins for Polycom's dataconferencing products
during the manufacturing ramp-up of the first-generation ShowStation products,
the 37% reduction in the list price of the SoundStation product line, the
introduction of the lower margin SoundPoint desktop product line, and continuing
competitive price pressure in the audioconferencing and dataconferencing
markets. Polycom's historical price reductions have been driven by competitive
price pressures and Polycom's desire to expand the market for its products, and
Polycom expects that in the future it may further reduce prices or introduce new
products that carry lower margins in order to further expand the market or to
respond to competitive pricing pressures, although there can be no assurance
that such actions by Polycom will expand the market for its products or be
sufficient to meet competitive pricing pressures. In the future, gross margin
may be affected by price competition and changes in unit volume, product cost,
and warranty expenses. Gross margin may also be impacted by the mix of
distribution channels used by Polycom, the mix of products sold, and the
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<PAGE>
mix of international versus North American revenues. Polycom typically realizes
higher gross margin on direct sales than on sales through indirect channels and
higher gross margin on international revenues than on North American revenues.
If sales through resellers, especially OEMs, increase as a percentage of total
revenues, Polycom's gross margin will be adversely impacted.
Gross profit by division: Polycom's audioconferencing gross margin
represented 59%, 58%, and 61% of net revenues for 1994, 1995, and 1996,
respectively. Polycom's dataconferencing gross margin represented 16% and (6)%
of net revenues for 1995 and 1996, respectively. Polycom's first
dataconferencing products began shipping in November 1995 and did not have any
cost of net revenues prior to this time.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and commissions, advertising and promotional expenses, allocation of
overhead expenses, and customer service and support costs. Sales and marketing
expenses were $5.3 million, $7.1 million, and $9.1 million for 1994, 1995, and
1996, respectively, representing 35%, 28%, and 25% of net revenues for each
respective period. The increase in absolute dollars in each of these periods was
primarily related to the expansion of Polycom's sales and marketing
organization, particularly the increase in the direct sales and associated
costs, and increased commission expenses related to higher sales volumes and the
launch of Polycom's dataconferencing business. Polycom expects to continue to
increase its sales and marketing expenses in absolute dollar amounts in an
effort to expand North American and international markets, market new products,
and establish and expand distribution channels. In particular, due to the
innovative nature of the ShowStation products, Polycom incurred significant
expenses during 1996 to develop a worldwide sales presence for the ShowStation
product and believes it will be required to incur significant additional
expenses for sales and marketing, including advertising, to educate potential
customers as to the desirability of ShowStation. In addition, Polycom is
continuing to invest in the market launch of its new SoundPoint and SoundStation
Premier product lines. In order to improve its sales processing systems, Polycom
plans to make a significant investment to implement a new sales and service
information system over the next two fiscal years.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation costs, consulting fees, allocation of overhead
expense, supplies, depreciation of equipment, and product marketing expenses.
Research and development expenses were $5.5 million, $6.9, million and $7.6
million for 1994, 1995, and 1996, respectively, representing 37%, 28%, and 20%
of net revenues for each respective period. The increase in dollar amount in
research and development expenses in each of these periods was primarily
attributable to increased staffing and associated support required to expand and
enhance Polycom's dataconferencing and audioconferencing product lines. As of
December 31, 1996, all research and development costs have been expensed as
incurred. Polycom believes that technological leadership is critical to its
success and is committed to continuing a high level of research and development,
especially in the development of the planned, next generation ShowStation
product. As a consequence, Polycom intends to significantly increase the
absolute amount of its research and development expenses in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
compensation costs, allocation of overhead expense, and outside legal and
accounting expenses. General and administrative expenses were $1.1 million, $1.8
million, and $2.1 million for 1994, 1995, and 1996, respectively, representing
8%, 7%, and 6% of net revenues for each respective period. The increase in
dollar amount in each period was primarily due to increased staffing to support
Polycom's growth and, during 1996, to costs related to the patent litigation.
Polycom believes that its general and administrative expenses will increase in
absolute dollar amounts in the future primarily as a result of expansion of
Polycom's administrative staff and costs related to being a public company.
INTEREST INCOME, NET. Interest income consists of interest earned on
Polycom's cash equivalents and short-term investments, net of interest expense
for Polycom's bank debt facilities. Interest income, net was $175,000, $189,000,
and $784,000 for 1994, 1995, and 1996, respectively, representing 1%, 1%, and 2%
of
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net revenues for each respective period. The increase in interest income, net in
1996 over the prior two years was primarily due to the increase in Polycom's
cash equivalents and short-term investments resulting from Polycom's initial
public offering.
PROVISION FOR INCOME TAXES. Polycom accounts for income taxes in accordance
with the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes." Polycom incurred a
net loss and consequently paid no federal or state income taxes in either 1994
or 1995. In 1996 Polycom provided for income tax of $108,000 for federal and
certain foreign alternative minimum taxes. As of December 31, 1996, Polycom had
approximately $6.4 million in federal net operating loss carryforwards and
$790,000 in federal tax credit carryforwards. The future utilization of
Polycom's net operating loss carryforwards may be subject to certain limitations
upon certain changes in ownership. Polycom believes that its initial public
offering on April 29, 1996, triggered a change in ownership pursuant to the
Internal Revenue Code of 1986, as amended, such that the annual limitation for
utilization of federal net operating loss carryforwards is approximately $7.1
million.
Polycom has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluates on a quarterly basis the recoverability of the deferred tax
assets and the level of the valuation allowance. At such time as it is
determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced. See Note 11
of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES FOR THE THREE YEARS ENDED DECEMBER 31, 1996
As of December 31, 1996, Polycom's principal sources of liquidity included
cash and cash equivalents of $9.5 million, short-term investments of $10.1
million, and a $4.0 million revolving bank line of credit from Silicon Valley
Bank (of which $3.3 million was available as of December 31, 1996) which expires
on April 15, 1997. Polycom is negotiating an extension term to the line of
credit although there can be no assurance that Polycom will be successful in
extending the term of the line of credit. The line of credit was modified in
December 1995 and currently provides for borrowings up to the lesser of (i) $4.0
million, or (ii) the sum of 80% of eligible domestic and government accounts
receivable and 50% of eligible foreign accounts receivable minus the sum of the
aggregate outstanding face amount of all letters of credit issued under the
line. Eligible accounts receivable are defined as receivables outstanding less
than 90 days. Borrowings under the line bear interest at the bank's prime rate
plus 1.0% (9.25% at December 31, 1996), and are collateralized by substantially
all of Polycom's assets. The line of credit facility contains provisions that
require the maintenance of certain financial ratios and profitability
requirements. As of December 31, 1996, Polycom was in compliance with these
covenants. See Note 8 of Notes to Consolidated Financial Statements.
Polycom used cash in operating activities totaling $2.3 million, $3.3
million, and $2.3 million for the years ended 1994, 1995, and 1996,
respectively. The use of cash in 1994 and 1995 was primarily attributable to
operating losses and increased levels of accounts receivable and inventories,
partially offset by an increase in accounts payable and accrued liabilities. The
use of cash in 1996 was attributable to increased levels of accounts receivable
and inventories, partially offset by an increase in accounts payable and accrued
liabilities. The increase in accounts receivable in 1994 and 1995 was primarily
due to increased revenues. In addition, the 1995 and 1996 increase in accounts
receivable was impacted by the concentration of sales late in the quarter
resulting from a number of factors, including Polycom's decision to interrupt
shipments of ShowStation products for a six-week period, delays in the
production and shipment of SoundStation products during Polycom's transition to
a new contract manufacturer in 1995 and the introduction of the SoundStation
Premier in the fourth quarter of 1996. Inventories increased in each of the last
three years as Polycom built up its finished goods inventory of its
audioconferencing product lines to support increased sales levels and its raw
materials inventory in support of the introduction and launch of the
dataconferencing product line and the transfer of the SoundStation product line
manufacturing to
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Flextronics in the first quarter of 1996. The increase in provision for excess
and obsolete inventories in 1996 was directly related to increased inventory
levels.
Polycom used $41,000, $3.5 million, and $9.1 million of net cash in
investing activities during 1994, 1995, and 1996, respectively, to purchase
property and equipment and during 1995 and 1996 to purchase short-term
investments. Financing activities provided $4.5 million and $17.4 million of net
cash during 1995 and 1996, respectively, due primarily to the issuance of
Preferred Stock in 1995 and the issuance of Common Stock in Polycom's initial
public offering in 1996. Financing activities used $28,000 in 1994 due primarily
to the repayment of notes payable and capital lease obligations, offset in part
by the issuance of notes payable.
Polycom has no material commitments other than obligations under its
revolving bank line of credit facility and operating leases. Polycom estimates
that 1997 capital expenditures will be approximately $4.5 million. See Notes 7
and 8 of Notes to Consolidated Financial Statements.
Polycom may in the future require additional funds to support its working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financings or from other sources. There
can be no assurance that additional financing will be available at all or that,
if available, such financing will be obtainable on terms favorable to Polycom
and would not be dilutive. Polycom's future liquidity and cash requirements will
depend on numerous factors, including introduction of new products and potential
product family or technology acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
SFAS No. 128 establishes a different method of computing net income/(loss) per
share than is currently required under Accounting Principles Board Opinion No.
15. Under SFAS No. 128, Polycom will be required to present both basic net
income/(loss) per share and diluted net income/(loss) per share. Basic and
diluted net loss per share is expected to approximate the currently presented
net loss per share. However, basic net income per share is expected to be higher
than net income per share as currently computed because the effect of dilutive
stock options will not be considered in computing basic net income per share.
Diluted net income per share is expected to be comparable to the currently
presented net income per share. Polycom will adopt SFAS No. 128 in its fiscal
quarter ending December 31, 1997 and at that time all historical net
income/(loss) per share data will be restated to conform to the provisions of
SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The impact of adopting SFAS No. 130, which
is effective for Polycom in 1998, has not been determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for Polycom in 1998 and the impact of adoption has not been
determined.
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF VIAVIDEO
The following selected historical financial data should be read in
conjunction with the ViaVideo Financial Statements and related notes thereto and
"VIAVIDEO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" appearing elsewhere in this Proxy Statement. The
statement of operations data for the period ended December 31, 1996 and the
balance sheet data at December 31, 1996 are derived from the audited financial
statements of ViaVideo which have been audited by Coopers & Lybrand, L.L.P.,
independent accountants, and are included elsewhere in this Proxy Statement.
ViaVideo's unaudited historical financial statement data as of and for the nine
months ended September 30, 1997 has been prepared on the same basis as the
historical financial information and, in the opinion of ViaVideo's management,
contains all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the financial position and results of
operations for such periods. See "VIAVIDEO'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
VIAVIDEO SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE
PERIOD
SEPTEMBER 10
(INCEPTION)
THROUGH
DECEMBER 31,
-------------
1996
------------- NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
1997
-------------
(UNAUDITED)
<S> <C> <C>
Statement of Operations:
Operating loss................................................................... $ (369) $ (5,642)
Net loss......................................................................... (357) (5,534)
Net loss per share............................................................... $ (0.16) $ (2.53)
Weighted average shares outstanding.............................................. 2,179 2,191
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------
1996
------------- AS OF
SEPTEMBER 30,
-------------
1997
-------------
(UNAUDITED)
<S> <C> <C>
Historical Balance Sheet Data:
Cash and cash equivalents......................................................... $ 1,705 $ 4,589
Working capital................................................................... 1,567 3,076
Total assets...................................................................... 1,790 5,586
Total stockholders' equity........................................................ 1,640 3,630
</TABLE>
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VIAVIDEO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ViaVideo was founded in September 1996 to design and develop high quality,
easy-to-use, low cost, group videoconferencing systems that utilize advanced
video and audio compression technologies along with Internet/Web-based features.
ViaVideo believes that these technologies and features will permit users to
replicate the dynamics and effectiveness of face-to-face meetings and
presentations from remote locations through the transmission of color motion
video integrated with full duplex audio at data rates as low as 56 kilobits per
second (Kbps). The videoconferencing system being developed by ViaVideo
incorporates the latest advances in video processor technology and uses a new
generation, non-PC based platform. ViaVideo anticipates commencing a beta
testing program of its first product in the fourth quarter of 1997.
ViaVideo has had no revenues since its inception. ViaVideo's expenses have
been associated with the research and development of its products. ViaVideo
anticipates commencing a beta testing program of its first product, which is
still under development, in the fourth quarter of 1997. Although ViaVideo
anticipates introducing its first product for sale following the successful
completion of its beta testing program, there can be no assurance that
ViaVideo's product will be successful or that ViaVideo will attain profitability
on a quarterly or an annual basis. Potential risks and uncertainties include,
among others, the timing of the introduction, market acceptance of its product,
reviews in the industry press concerning ViaVideo's product and products of its
competitors, fluctuations in the volume and timing of product orders, the
introduction of products by ViaVideo's competitors and those discussed elsewhere
in this Proxy Statement, particularly in "Risk Factors."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
ViaVideo had a net loss of approximately $5,534,000 for the nine months
ended September 30, 1997. Research and development expenses, consisting
primarily of employee costs, contract labor, industrial design, software license
and development supplies and prototypes, accounted for approximately $3,358,000
of the loss. ViaVideo also incurred approximately $1,045,000 of sales and
marketing expenses, which consisted primarily of employee related costs and
travel, as well as market research, incurred in preparation for the commercial
sale of ViaVideo's product. Manufacturing start-up costs of $213,000 consisted
primarily of employee costs, consulting fees, and travel expenses incurred in
connection for preparing ViaVideo's product for manufacture. General and
administrative expenses of $1,026,000 consisted primarily of employee costs,
telecommunications, travel and legal expenses, and general services procured
from Polycom, as well as $137,000 of Merger related expenses. Total operating
expenses were offset by interest income of approximately $120,000 from a money
market account and investments in U.S. Treasury bills and other liquid money
market instruments, less approximately $12,000 in interest charges.
PERIOD FROM INCEPTION (SEPTEMBER 10, 1996) THROUGH DECEMBER 31, 1996
ViaVideo had a net loss of approximately $357,000 for the period from
inception (September 10, 1996) through the end of its fiscal year, December 31,
1996. Research and development expenses, consisting primarily of employee costs,
contract labor, industrial design, and development supplies, accounted for
approximately $307,000 of the loss. ViaVideo also incurred approximately $62,000
for general and administrative expenses related to personnel, lease payments,
and travel. These costs which were partially offset by interest income of
$13,000 from investments in U.S. Treasury bills, less $1,000 in interest
charges.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, ViaVideo has financed its operations primarily through the
sale of equity securities and, to a lesser extent, through advances on
ViaVideo's available line of credit. As of December 31, 1996 and September 30,
1997, ViaVideo had approximately $1,705,000 and $4,589,000, respectively, of
cash and cash equivalents.
Since ViaVideo's inception, the principal uses of cash have been to finance
operating losses related to the development of its products and establishment of
its business and products in the marketplace. In addition, ViaVideo expended
approximately $69,000 and $659,000 during 1996 and the first nine months of
1997, respectively, for capital equipment.
ViaVideo has a bank credit agreement which provides for a revolving line of
credit of up to $400,000 through May 9, 1997 and up to $750,000 through November
9, 1998. The outstanding balances on the line of credit at December 31, 1996 and
September 30, 1997 were $50,000 and $400,000, respectively, with an interest
rate equal to the bank's prime rate plus 1.5% and 0.75%, respectively (9.75% and
9.25% at December 31, 1996 and September 30, 1997, respectively). The line of
credit is collateralized by substantially all of the assets of ViaVideo. The
line of credit agreement includes a term debt provision which allows ViaVideo to
convert line of credit advances to term financing for approved equipment
purchases made during the period from May 9, 1997 to November 9, 1997. The
unpaid principal balance of equipment advances at November 9, 1997 shall be
repaid over a term of 36 months. Monthly principal and interest payments on
approved equipment advances commence on December 9, 1997. At September 30, 1997,
there were no term debt balances under this provision.
ViaVideo believes that existing cash and cash equivalent balances and the
remaining availability under its line of credit with Silicon Valley Bank
($350,000 as of September 30, 1997) will be sufficient to support its operations
and meet its outstanding commitments for long lead time inventory components,
operating leases, and manufacturing tooling until it is acquired by Polycom
pursuant to the Merger, at which time it will rely on Polycom to support its
growth and funding requirements. If the Merger should not occur or is delayed
significantly, it will be necessary for ViaVideo to seek additional equity or
debt financing to support its growth. ViaVideo is currently exploring funding
alternatives, including bank facilities, in the event additional availability of
funds prior to the merger are needed. There can be no assurance that ViaVideo
will not require additional financing or will not in the future seek to raise
additional funds through bank facilities, debt or equity offerings or other
sources of capital. Additional funding may not be available when needed or on
terms acceptable to ViaVideo, which would have a material adverse effect on
ViaVideo's business, financial condition and results of operations.
INFLATION
ViaVideo believes that the effect of inflation has not had, and for the
foreseeable future will not have, a material impact on the results of its
operations.
NEW ACCOUNTING STANDARDS
For information on the impact of future changes in accounting standards see
note 2 to the ViaVideo financial statements appearing elsewhere herein.
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STOCKHOLDER PROPOSALS
As described in Polycom's proxy statement relating to its 1997 Annual
Meeting of Stockholders, stockholder proposals for inclusion in the Polycom
proxy statement and form of proxy relating to the Polycom 1998 Annual Meeting of
Stockholders must be received by Polycom by January 11, 1998.
EXPERTS
The consolidated balance sheets of Polycom as of December 31, 1995 and 1996
and the consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1996, included in this Proxy Statement have been audited by Coopers & Lybrand
L.L.P., independent accountants as set forth in their report thereon, appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of that firm as experts in accounting and auditing.
The balance sheet of ViaVideo at December 31, 1996 and the statements of
operations, changes in stockholders' equity and cash flows for the period from
September 10, 1996 ("inception") to December 31, 1996, included in this Proxy
Statement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby, the federal
income tax consequences in connection with the Merger and certain other matters
relating to the Merger and the transactions contemplated thereby will be passed
upon for Polycom by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian
LLP, Menlo Park, California. Certain legal matters with respect to federal
income tax consequences in connection with the Merger and certain other legal
matters relating to the Merger and the transactions contemplated thereby will be
passed upon for ViaVideo by Brobeck, Phleger & Harrison LLP, Austin, Texas.
Brobeck, Phleger & Harrison LLP represented Polycom in the negotiation of the
Reorganization Agreement and is representing ViaVideo with respect to matters
required to close the transactions contemplated thereby. Gunderson Dettmer
Stough Villaneuve Franklin and Hachigian LLP represented ViaVideo in the
negotiation of the Reorganization Agreement and is representing Polycom with
respect to matters required to close the transactions contemplated thereby.
Brobeck, Phleger & Harrison LLP is currently representing ViaVideo in pending
litigation.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
POLYCOM, INC.
<S> <C>
Report of Independent Accountants.................................................... F-2
Consolidated Balance Sheets.......................................................... F-3
Consolidated Statements of Operations................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)............................ F-5
Consolidated Statements of Cash Flows................................................ F-6
Notes to Consolidated Financial Statements........................................... F-7
Condensed Consolidated Balance Sheet as of September 30, 1997........................ F-18
Condensed Consolidated Statement of Operations for the three and nine months ended
September 30, 1997 and 1996........................................................ F-19
Condensed Consolidated Statement of Cash Flows for the nine months ended September
30, 1997 and 1996.................................................................. F-20
Notes to Condensed Consolidated Financial Statements as of September 30, 1997........ F-21
VIAVIDEO COMMUNICATIONS, INC.
Report of Independent Accountants.................................................... F-25
Balance Sheets....................................................................... F-26
Statements of Operations............................................................. F-27
Statements of Changes in Stockholders' Equity........................................ F-28
Statements of Cash Flows............................................................. F-29
Notes to Financial Statements........................................................ F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Polycom, Inc.:
We have audited the accompanying consolidated balance sheets of Polycom,
Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Polycom, Inc. and subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Coopers & Lybrand LLP
San Jose, California
January 24, 1997
F-2
<PAGE>
POLYCOM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 9,548 $ 3,539
Short-term investments................................................................. 10,101 2,722
Accounts receivable, net of allowance for doubtful accounts of $443 and $448 in 1996
and 1995, respectively............................................................... 6,965 3,171
Inventories............................................................................ 7,458 5,308
Prepaid expenses and other current assets.............................................. 384 191
--------- ---------
Total current assets............................................................... 34,456 14,931
Fixed assets, net........................................................................ 3,164 2,970
Deposits and other assets................................................................ 100 99
--------- ---------
Total assets....................................................................... $ 37,720 $ 18,000
--------- ---------
--------- ---------
LIABILITIES, CONVERTIBLE REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable.......................................................................... $ -- $ 1,485
Accounts payable....................................................................... 4,307 3,852
Accrued payroll and related liabilities................................................ 880 777
Other accrued liabilities.............................................................. 1,312 988
--------- ---------
Total current liabilities.......................................................... 6,499 7,102
Notes payable, less current portion...................................................... -- 1,178
--------- ---------
Total liabilities........................................................................ 6,499 8,280
--------- ---------
Commitments (Note 7).
Convertible redeemable preferred stock:
Series A through D, $.001 par value:
Authorized: none in 1996 and 13,200,244 shares in 1995
Issued and outstanding: none in 1996 and 13,069,857 shares in 1995 (Liquidation
value: $22,462).................................................................... -- 22,360
--------- ---------
Stockholders' equity (deficit):
Preferred stock, $.001 par value:
Authorized: 5,000,000 shares
Issued and outstanding: none in 1996 and 1995........................................ -- --
Common stock, $0.0005 par value:
Authorized: 50,000,000 shares in 1996 and 20,000,000 shares in 1995
Issued and outstanding: 19,144,058 shares in 1996 and 3,670,046 in 1995.............. 10 2
Additional paid-in capital............................................................... 42,521 285
Notes receivable from stockholders....................................................... (29) (163)
Accumulated deficit...................................................................... (11,281) (12,764)
--------- ---------
Total stockholders' equity (deficit)............................................... 31,221 (12,640)
--------- ---------
Total liabilities, convertible redeemable preferred stock and stockholders'
equity (deficit)............................................................... $ 37,720 $ 18,000
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net revenues..................................................................... $ 37,032 $ 24,944 $ 15,025
Cost of net revenues............................................................. 17,698 10,859 6,211
--------- --------- ---------
Gross profit................................................................. 19,334 14,085 8,814
--------- --------- ---------
Operating expenses:
Sales and marketing.......................................................... 9,095 7,073 5,307
Research and development..................................................... 7,574 6,852 5,527
General and administrative................................................... 2,148 1,819 1,140
--------- --------- ---------
Total operating expenses................................................... 18,817 15,744 11,974
--------- --------- ---------
Operating income (loss).................................................... 517 (1,659) (3,160)
Interest income.................................................................. 884 361 283
Interest expense................................................................. (100) (172) (108)
Litigation settlement income, net................................................ 303 -- --
Other income (expense)........................................................... (13) (132) 22
--------- --------- ---------
Income (loss) before provision for income taxes............................ 1,591 (1,602) (2,963)
Provision for income taxes....................................................... 108 -- --
--------- --------- ---------
Net income (loss).......................................................... $ 1,483 $ (1,602) $ (2,963)
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share...................................................... $ 0.08 $ (0.37) $ (0.73)
--------- --------- ---------
--------- --------- ---------
Shares used in per share calculation............................................. 18,898 4,332 4,054
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
------------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT TOTAL
------------ ----------- ----------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993........... 2,613,595 $ 1 $ 29 $ (8,199) $ (8,169)
Issuance of common stock under stock
option plan......................... 385,206 -- 60 $ (9) -- 51
Repurchase of common stock............ (42,751) -- (7) -- -- (7)
Net loss.............................. -- -- -- -- (2,963) (2,963)
------------ --- ----------- --- ------------ ----------
Balances, December 31, 1994........... 2,956,050 1 82 (9) (11,162) (11,088)
Issuance of common stock under stock
option plan......................... 720,591 1 204 (154) -- 51
Repurchase of common stock............ (6,595) -- (1) -- -- (1)
Net loss.............................. -- -- -- -- (1,602) (1,602)
------------ --- ----------- --- ------------ ----------
Balances, December 31, 1995........... 3,670,046 2 285 (163) (12,764) (12,640)
Issuance of common stock through:
Initial public offering, net of
issuance cost of $996............. 2,500,000 2 19,927 -- -- 19,929
Conversion of preferred shares...... 13,069,857 6 22,354 -- -- 22,360
Exercise of stock options under
stock option plan................. 138,738 -- 68 (17) -- 51
Exercise of warrants.............. 22,500 -- -- -- -- --
Payment of stockholder notes
receivable.......................... -- -- -- 151 -- 151
Repurchase of common stock............ (257,083) -- (113) -- -- (113)
Net income............................ -- -- -- -- 1,483 1,483
------------ --- ----------- --- ------------ ----------
Balances, December 31, 1996........... 19,144,058 $ 10 $ 42,521 $ (29) $ (11,281) $ 31,221
------------ --- ----------- --- ------------ ----------
------------ --- ----------- --- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
POLYCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................................................... $ 1,483 $ (1,602) $ (2,963)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Loss on disposition of fixed assets........................................... -- -- 10
Depreciation and amortization................................................. 1,513 944 701
Provision for doubtful accounts............................................... 1 255 102
Provision for excess and obsolete inventories................................. 560 561 77
Changes in assets and liabilities:
Accounts receivable......................................................... (3,795) (1,459) (309)
Inventories................................................................. (2,710) (4,570) (1,046)
Prepaid expenses and other current assets................................... (193) (78) 58
Deposits and other assets................................................... (1) (36) (34)
Accounts payable............................................................ 455 1,876 522
Accrued liabilities......................................................... 427 823 547
--------- --------- ---------
Net cash used in operating activities..................................... (2,260) (3,286) (2,335)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of fixed assets..................................................... (1,707) (758) (44)
Proceeds from disposition of fixed assets....................................... -- -- 3
Purchase of short-term investments.............................................. (9,964) (2,722) --
Sale of short-term investments.................................................. 2,585 -- --
--------- --------- ---------
Net cash used in investing activities..................................... (9,086) (3,480) (41)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from initial public offering, net of issuance costs.................... 19,929 -- --
Net proceeds from sale of convertible redeemable preferred stock................ -- 4,980 --
Proceeds from issuance of notes payable......................................... 4,314 1,470 290
Repayment of notes payable and capital lease obligation......................... (6,977) (1,987) (362)
Repayment of stockholder notes receivable....................................... 151 -- --
Proceeds from issuance of common stock, net of repurchases...................... (62) 50 44
--------- --------- ---------
Net cash provided by (used in) financing activities....................... 17,355 4,513 (28)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 6,009 (2,253) (2,404)
Cash and cash equivalents, beginning of period.................................... 3,539 5,792 8,196
--------- --------- ---------
Cash and cash equivalents, end of period.......................................... $ 9,548 $ 3,539 $ 5,792
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 121 $ 170 $ 110
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING:
Fixed assets financed by notes payable.......................................... $ -- $ 1,612 $ 812
Common stock issued for notes receivable........................................ $ 17 $ 154 $ 9
Conversion of preferred shares to common stock.................................. $ 22,360 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Polycom, Inc. and subsidiary (the "Company"), a Delaware corporation, is
engaged in the development, manufacturing and marketing of teleconferencing
equipment. The Company's products are distributed and serviced globally. The
Company sells its products through its direct salesforce and maintains marketing
and sales relationships with major telecommunications carriers, value-added
resellers, telecommunications supply and catalog distributors, a leading
videoconferencing equipment supplier, and telecommunications specialists.
2. SUMMARY OF SELECTED ACCOUNTING POLICIES:
FISCAL YEAR:
The Company uses a 52-53 week fiscal year. Each reporting period ends on the
last Sunday of a month. As a result, a fiscal year may not end as of the same
day as the calendar year. For convenience of presentation, the accompanying
consolidated financial statements have been shown as ending on December 31 of
each applicable period.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with original maturities
of 90 days or less at the time of purchase to be cash equivalents.
SHORT-TERM INVESTMENTS:
Short-term investments are classified as available for sale and are carried
at fair value. Unrealized holding gains and losses on such securities are
reported net of related taxes as a separate component of stockholders' equity.
Realized gains and losses on sales of all such securities are reported in
earnings and computed using the specific identification cost method.
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined on
a standard cost basis which approximates the first-in, first-out ("FIFO")
method. Appropriate consideration is given to obsolescence, excessive levels,
deterioration and other factors in evaluating net realizable value.
F-7
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SELECTED ACCOUNTING POLICIES: (CONTINUED)
FIXED ASSETS:
Fixed assets are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which is two to three years. Amortization
of leasehold improvements is computed using the straight-line method over the
shorter of the remaining lease term or the estimated useful life of the related
assets, typically three to five years.
Disposals of capital equipment are recorded by removing the costs and
accumulated depreciation from the accounts. Gains or losses are included in the
results of operations.
CARRYING VALUE OF LONG-LIVED ASSETS:
The Company writes-off the carrying value of long-lived assets to the extent
estimated future undiscounted cash flows are not sufficient to recover the
carrying value of these assets over their remaining useful lives.
REVENUE RECOGNITION:
The Company recognizes revenue from gross product sales, less a provision
for estimated future customer returns, upon shipment to the customer, upon
fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain outstanding.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are charged to operations as incurred.
ADVERTISING:
The Company expenses the production costs of advertising as the expenses are
incurred. The production costs of advertising consist primarily of magazine
advertisements, agency fees and other direct production costs.
The advertising expense for the years ended December 31, 1996, 1995 and 1994
was $1,570,000, $1,281,000 and $1,094,000, respectively.
CAPITALIZED SOFTWARE:
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred between completion of the working model and the
point at which the product is ready for initial shipment have been
insignificant. Accordingly, all software development costs have been expensed as
incurred.
INCOME TAXES:
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes". Under SFAS
No. 109, deferred tax assets and liabilities are
F-8
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SELECTED ACCOUNTING POLICIES: (CONTINUED)
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
TRANSLATION OF FOREIGN CURRENCIES:
The Company's foreign consolidated subsidiary is considered to be an
extension of the U.S. operation and the functional currency is the U.S. dollar.
Accordingly, monetary assets and liabilities are translated at year-end exchange
rates while nonmonetary items are translated at historical rates. Income and
expense accounts are translated at the average rates in effect during the year,
except for depreciation and cost of revenue which are translated at historical
rates. Foreign exchange gains and losses have not been significant to date and
have been recorded in results of operations.
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares (including shares issued under the stock option plan
which were subject to repurchase) are excluded from the computation of net loss
per share as their effect is antidilutive. For those periods prior to the
initial public offering date, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued at prices
below the public offering price during the 12 months immediately preceding the
offering date have been included in the calculation as if they were outstanding
for all periods prior to the offering date (using the treasury stock method and
the initial public offering price).
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable and other
accrued liabilities approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with similar
terms, the carrying value of notes payable approximates fair value. Estimated
fair values for short-term investments, which are separately disclosed
elsewhere, are based on quoted market prices for the same or similar
instruments.
STOCK BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation cost for stock-based compensation plans at fair
value. The Company has chosen to continue to account for employee stock options
using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
F-9
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SELECTED ACCOUNTING POLICIES: (CONTINUED)
RECENT PRONOUNCEMENTS:
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS No. 125), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides accounting and reporting standards for, among other things,
the transfer and servicing of financial assets, such as factoring receivables
with recourse. This statement is effective for transfers and servicing of
financial assets occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The Company
believes the adoption of this statement will not have an impact on the financial
condition or results of operations of the Company, as the Company does not
factor its receivables.
3. SHORT-TERM INVESTMENTS:
Short-term investments at December 31, 1996 and 1995 comprise (in
thousands):
<TABLE>
<CAPTION>
FAIR COST
VALUE BASIS MATURITY DATES
--------- --------- ----------------------------------
<S> <C> <C> <C>
Commercial paper....................................... $ 1,676 $ 1,676 February 1997 - March 1997
Corporate notes........................................ 8,425 8,425 January 1997 - December 1997......
--------- ---------
Balance at December 31, 1996........................... $ 10,101 $ 10,101
--------- ---------
--------- ---------
Commercial paper....................................... $ 1,103 $ 1,103 April 1996
Corporate notes........................................ 1,619 1,619 April 1996 - July 1996
--------- ---------
Balance at December 31, 1995........................... $ 2,722 $ 2,722
--------- ---------
--------- ---------
</TABLE>
During 1996 and 1995, there were no realized gains or losses on the disposal
of short-term investments.
4. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Raw materials.......................................................... $ 3,252 $ 2,355
Work in process........................................................ -- 650
Finished goods......................................................... 4,206 2,303
--------- ---------
$ 7,458 $ 5,308
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FIXED ASSETS:
Fixed assets, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Computer equipment and software...................................... $ 2,980 $ 2,096
Equipment, furniture and fixtures.................................... 1,600 1,187
Tooling equipment.................................................... 1,944 1,426
Leasehold improvements............................................... 401 509
--------- ---------
6,925 5,218
Less accumulated depreciation and amortization....................... (3,761) (2,248)
--------- ---------
$ 3,164 $ 2,970
--------- ---------
--------- ---------
</TABLE>
6. BUSINESS RISKS AND CREDIT CONCENTRATION:
The Company has four product lines, the SoundStation, SoundStation Premier,
SoundPoint and the ShowStation, which serve the audioconferencing and
dataconferencing markets, respectively. Virtually all of the Company's net
revenues are derived from sales of the SoundStation products. Any factor
adversely affecting demand or supply for the SoundStation products could
materially adversely affect the Company's business and financial performance.
Although the Company began volume shipments of the ShowStation products in
November 1995, the market for dataconferencing products is only beginning to
emerge, and there can be no assurance that it will develop sufficiently to
enable the Company to achieve broad commercial acceptance of its ShowStation
products.
Currently, the Company subcontracts the manufacturing of its SoundStation,
SoundStation Premier, and ShowStation products through one U.S. Subcontractor
and SoundPoint products through a Hong Kong Subcontractor. The Company believes
that there are a number of alternative contract manufacturers that could produce
the Company's products, but in the event of a reduction or interruption of
supply it could take a significant period of time to qualify an alternative
subcontractor and commence manufacturing. The effect of such reduction or
interruption in supply on results of operations would be material.
The Company's cash and cash equivalents are maintained with two
international investment management companies, and are invested in the form of
demand deposit accounts, money market accounts, commercial paper and government
securities.
The Company markets its products to distributors and end-users throughout
the world. Management performs ongoing credit evaluations of the Company's
customers and maintains an allowance for potential credit losses, but
historically has not experienced any significant losses related to individual
customers or group of customers in any particular geographic area.
7. COMMITMENTS:
LICENSE AGREEMENT:
The Company entered into an agreement to license software to be incorporated
into its ShowStation products. Under the agreement, the Company is obligated to
pay quarterly minimum license fees, ranging from $15,000 to $35,000 through the
year 2001. The Company may cancel the agreement at any time,
F-11
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS: (CONTINUED)
provided the Company has paid a minimum of $200,000 in connection with the
agreement. As of December 31, 1996, the Company had paid $100,000 of the minimum
license fees.
LEASES:
The Company leases certain office facilities and equipment under
noncancelable leases expiring between 1997 and 1998. Future minimum lease
payments are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
1997............................................................................... $ 458
1998............................................................................... 442
1999............................................................................... 11
-----
Minimum future lease payments...................................................... $ 911
-----
-----
</TABLE>
In December 1994, the Company amended its headquarters office lease
agreement and expanded its facilities. The lease on the expanded facilities can
be terminated sooner under an option which may be exercised by the Company any
time after January 1997. Under the terms of the lease, the Company is
responsible for related maintenance, taxes and insurance.
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$475,000, $433,000 and $205,000, respectively.
8. CREDIT ARRANGEMENTS:
The Company has available a revolving line of credit with a bank for the
lesser of $4,000,000 or the sum of 80% of eligible domestic trade accounts
receivable and 50% of foreign trade accounts receivable, as defined, less the
sum of the aggregate outstanding face amount of all letters of credit issued
under the line. The line of credit expires in April 1997. Borrowings under the
line of credit bear interest at the lender's current index rate plus 1% (9.25%
at December 31, 1996). The weighted average interest rates for the years ended
December 31, 1996 and 1995 were 9.5% and 9.24%, respectively.
Additionally, the Company may borrow under its term loan facilities with a
bank, of which no amounts were available or utilized as of December 31, 1996. At
December 31, 1995, the Company had borrowings of $2,663,000. Borrowings under
these facilities are payable in monthly installments and bear interest ranging
from 8.00% to 11.50%.
All borrowings are collateralized by substantially all assets of the
Company. The Company must meet certain financial ratios, as well as maintain
minimum tangible net worth and quarterly maximum cumulative losses. The
agreements also require that the Company provide certain financial information
to the lender on a periodic basis and restrict the Company from paying any cash
dividends without the bank's consent.
F-12
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CONVERTIBLE REDEEMABLE PREFERRED STOCK:
In 1995, convertible redeemable preferred stock comprised the series
designated as follows (in thousands, except share data):
<TABLE>
<CAPTION>
NUMBER OF COMMON
NUMBER OF SHARES SHARES
SHARES ISSUED AND RESERVED FOR LIQUIDATION
AUTHORIZED OUTSTANDING CONVERSION VALUE
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Series A................................................... 5,050,244 5,032,189 5,032,189 $ 5,032
Series B................................................... 4,300,000 4,246,000 4,246,000 6,369
Series C................................................... 2,700,000 2,691,668 2,691,668 6,056
Series D................................................... 1,150,000 1,100,000 1,100,000 5,005
------------ ------------ ------------ -----------
13,200,244 13,069,857 13,069,857 $ 22,462
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
The Convertible redeemable preferred stock had certain rights, preferences
and privileges. All of these preferred shares were converted to common stock as
of the Initial Public Offering on April 29, 1996.
10. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
In March 1996, the Company authorized 5,000,000 shares of preferred stock.
The Board of Directors has the authority to establish all rights and terms with
respect to the preferred stock without future vote or action by the
shareholders.
INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK:
In April 1996, the Company and a principal stockholder issued 2,500,000 and
150,000 shares of common stock, respectively, in an initial public offering. In
connection with the initial public offering, all outstanding shares of preferred
stock were converted into an aggregate of 13,069,857 shares of common stock.
Additionally 22,500 shares of common stock were issued upon the net exercise of
warrants for preferred stock.
STOCK OPTION PLAN:
The Board of Directors has reserved 3,125,000 shares of common stock under
its 1996 Stock Option Plan (the "Plan") for issuance to employees and directors
of the Company. The 1996 Plan supersedes the 1991 Stock Option Plan.
Under the terms of the Plan, options may be granted at prices not lower than
fair market value at date of grant as determined by the Board of Directors. The
options are immediately exercisable upon the vesting, expire ten years from date
of grant and the shares issued upon exercise of the options are generally
subject to a right of repurchase by the Company upon termination of employment
with the Company. Option shares subject to repurchase normally vest at 20% after
completing one year of service to the Company and the remaining amount equally
over 48 months, until fully vested after five years. Certain shares held by a
founder of the Company vest as follows: 20% on date of grant and 6.25% of the
remaining shares in equal installments upon the expiration of each three months
of service completed thereafter.
F-13
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY: (CONTINUED)
Activity under the Plan is as follows (in thousands, except share and per
share data):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------
<S> <C> <C> <C> <C>
SHARES NUMBER
AVAILABLE OF EXERCISE
FOR GRANT SHARES PRICE TOTAL
------------ ----------- -------------- ---------
Balances, December 31, 1993................................. 395,205 931,980 $ 0.01-$0.225 $ 126
Options granted........................................... (422,775) 422,775 $ 0.225 95
Options exercised......................................... -- (385,206) $ 0.01-$0.225 (60)
Options canceled.......................................... 156,520 (156,520) $ 0.01-$0.225 (26)
------------ ----------- ---------
Balances, December 31, 1994................................. 128,950 813,029 $ 0.01-$0.225 135
Options reserved.......................................... 601,971
Options granted........................................... (820,819) 820,819 $ 0.225-$4.75 1,062
Options exercised......................................... -- (720,591) $ 0.01-$1.00 (205)
Options canceled.......................................... 112,382 (112,382) $ 0.01-$2.00 (19)
------------ ----------- ---------
Balances, December 31, 1995................................. 22,484 800,875 $ 0.01-$4.75 973
Options reserved.......................................... 2,361,072
Options granted........................................... (1,035,829) 1,035,829 $ 4.75-$9.00 7,049
Options exercised......................................... -- (138,738) $ 0.15-$7.20 (68)
Options canceled.......................................... 202,803 (202,803) $ 0.15-$9.00 (705)
------------ ----------- ---------
Balances, December 31, 1996................................. 1,550,530 1,495,163 $ 0.01-$9.00 $ 7,249
------------ ----------- ---------
------------ ----------- ---------
</TABLE>
At December 31, 1996, 1,951,821 outstanding options were vested and 216,359
shares of common stock acquired under the Plan were subject to repurchase.
Consistent with the provisions of SFAS No. 123, the Company's net income or
loss and net income or loss per share would have been adjusted to the pro forma
amounts indicated below (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net income (loss)--as reported........................................ $ 1,483 $ (1,602)
Net income (loss)--pro forma.......................................... $ 572 $ (1,690)
Net income (loss) per share--as reported.............................. $ 0.08 $ (0.37)
Net income (loss) per share--pro forma................................ $ 0.03 $ (0.39)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following weighted average assumptions by
subgroup:
<TABLE>
<CAPTION>
GROUP A GROUP B
--------------- ---------------
<S> <C> <C>
Risk-free interest rate................................. 4.98%-6.70% 4.98%-6.70%
Expected life........................................... 2 1
Expected dividends...................................... -- --
Expected volatility..................................... 0.50-0.88 0.50-0.88
</TABLE>
The weighted average expected life was calculated based on the vesting
period and the exercise behavior of each subgroup. Group A represents higher
paid employees, while Group B represents lower
F-14
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY: (CONTINUED)
paid employees. The risk-free interest rate was calculated in accordance with
the grant date and expected life calculated for each subgroup.
The options outstanding and currently exercisable by exercise price at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY
- -------------------------------------------------------- EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE EXERCISABLE LIFE PRICE NUMBER PRICE
- ------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.15-$0.34 325,767 7.53 $ 0.23 325,767 $ 0.23
$1.00-$4.88 261,496 8.90 $ 3.41 228,746 $ 3.20
$6.13-$6.13 325,050 9.85 $ 6.13 -- --
$6.25-$6.38 339,750 9.62 $ 6.34 -- --
$7.20-$9.00 243,100 9.32 $ 8.78 58,600 $ 8.18
</TABLE>
WARRANTS:
The Company had issued warrants to purchase up to 17,500 shares of Series A
preferred stock and 8,333 shares of Series B preferred stock as partial
consideration to obtain equipment lines of credit. The warrants for Series A and
Series B preferred stock were all exercised in conjunction with the Initial
Public Offering. There were no warrants outstanding as of December 31, 1996.
11. INCOME TAXES:
The Company's tax provision differs from the provision computed using
statutory increased tax rates as follow (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal tax at statutory rate.............................. $ 541 $ (545) $ (1,007)
Permanent difference due to non-deductible expenses........ 23 21 9
Foreign taxes.............................................. 45 -- --
State taxes, net of federal benefit........................ 93 (98) (181)
Research credit............................................ (197) (254) (360)
Net operating losses and research credits not benefited
(benefited).............................................. (460) 876 1,539
Alternative minimum tax.................................... 63 -- --
--------- --------- ---------
$ 108 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-15
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES: (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Fixed assets, principally due to differences in
depreciation......................................... $ 141 $ (105) $ 23
Other accrued liabilities.............................. 1,127 1,089 451
State taxes (net of federal benefit)................... 239 179 40
Capitalized research expenditures...................... 419 547 293
Net operating loss carryforwards....................... 2,190 2,835 3,031
Tax credit carryforwards............................... 1,200 943 510
Valuation allowance.................................... (5,316) (5,488) (4,348)
--------- --------- ---------
Net deferred tax asset................................. $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets. The valuation
allowance decreased in 1996 by $172,000 and increased $1,140,000 and $1,344,100
in 1995 and 1994, respectively.
As of December 31, 1996, the Company has federal tax net operating loss
carryforwards for tax purposes of approximately $6,400,000 and Federal tax
credit carryforwards of $790,000. These net operating loss carryforwards expire
in the years 2007 through 2009 and the tax credit carryforwards expire in the
years 2007 through 2011. The Company has a state net operating loss carryover of
approximately $164,000 which expires in 2001, and state tax credit carryforwards
of approximately $410,000, which expires in the years 2007 through 2011.
The future utilization of the Company's net operating loss carryforwards may
be subject to certain limitations upon certain changes in ownership.
12. NOTES RECEIVABLE FROM STOCKHOLDERS:
During 1996, 1995 and 1994, the Company issued five notes receivable for
purchases of common stock under its stock option plan totaling $17,000, $154,000
and $9,000, respectively. As of December 31, 1996, the remaining balance of
these notes was $29,000. The loans bear interest ranging from 6.25% to 7.53% per
annum and mature from July 2004 to July 2005.
F-16
<PAGE>
POLYCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT INFORMATION:
The Company operates in one industry segment and markets its products in
North America and in foreign countries through its own direct sales organization
and resellers. The Company's export net revenues are all denominated in U.S.
dollars, and are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Europe....................................................... $ 5,159 $ 3,560 $ 1,984
Asia Pacific and rest of world............................... 3,399 2,391 1,529
--------- --------- ---------
$ 8,558 $ 5,951 $ 3,513
--------- --------- ---------
--------- --------- ---------
</TABLE>
Individual customers which comprise 10% or more of the Company's net
revenues are as follows:
<TABLE>
<CAPTION>
CUSTOMERS: 1995 1994
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
A.......................................................................... 11% 14%
B.......................................................................... -- 11
--- ---
11% 25%
--- ---
--- ---
</TABLE>
During 1996, there were no individual customers which comprised 10% or more
of the Company's net revenues.
F-17
<PAGE>
POLYCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
SEPTEMBER 30, ------------
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 16,664 $ 9,548
Short-term investments............................................................ 1,752 10,101
Accounts receivable, net of allowance for doubtful accounts of $438 at September
30, 1997 and $443 at December 31, 1996.......................................... 7,395 6,965
Inventories....................................................................... 9,023 7,458
Other current assets.............................................................. 1,180 384
------------- ------------
Total current assets............................................................ 36,014 34,456
Fixed assets, net................................................................... 3,647 3,164
Other assets........................................................................ 359 100
------------- ------------
Total assets.................................................................. $ 40,020 $ 37,720
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 6,900 $ 4,307
Accrued and other current liabilities............................................. 2,657 2,192
------------- ------------
Total current liabilities....................................................... 9,557 6,499
------------- ------------
Stockholders' equity:
Common stock...................................................................... 10 10
Additional paid-in capital........................................................ 42,828 42,521
Notes receivable from stockholders................................................ (22) (29)
Accumulated deficit............................................................... (12,353) (11,281)
------------- ------------
Total stockholders' equity...................................................... 30,463 31,221
------------- ------------
Total liabilities and stockholders' equity.................................... $ 40,020 $ 37,720
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
POLYCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues......................................... $ 12,507 $ 9,502 $ 34,517 $ 26,990
Cost of net revenues................................. 6,755 4,619 18,556 12,678
------------- ------------- ------------- -------------
Gross profit..................................... 5,752 4,883 15,961 14,312
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing................................ 2,724 2,245 8,110 6,515
Research and development........................... 2,167 1,930 6,768 5,723
General and administrative......................... 917 552 2,370 1,590
Acquisition expenses............................... 133 -- 473 --
------------- ------------- ------------- -------------
Total operating expenses......................... 5,941 4,727 17,721 13,828
------------- ------------- ------------- -------------
Operating income/(loss).............................. (189) 156 (1,760) 484
Interest income, net................................. 233 292 785 516
Other expense, net................................... 30 23 97 52
------------- ------------- ------------- -------------
Net income/(loss).................................... $ 14 $ 425 $ (1,072) $ 948
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income/(loss) per share.......................... $ 0.00 $ 0.02 $ (0.06) $ 0.05
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding.................. 19,783 19,833 19,053 18,657
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
POLYCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss)................................................................... $ (1,072) $ 948
Adjustments to reconcile net income/(loss) to net cash provided by/(used in)
operating activities:
Depreciation and amortization..................................................... 1,354 1,112
Provision for excess and obsolete inventories..................................... 493 205
Changes in assets & liabilities:
Accounts receivable............................................................. (430) (2,669)
Inventories..................................................................... (2,058) (1,927)
Prepaid expenses and other assets............................................... (1,055) (198)
Accounts payable................................................................ 2,593 562
Accrued and other liabilities................................................... 465 427
------------- -------------
Net cash provided by/(used in) operating activities 290 (1,540)
------------- -------------
Cash flows from investing activities:
Acquisition of fixed assets....................................................... (1,837) (1,044)
Proceeds from sale and maturity of short term investments......................... 11,154 116,027
Purchases of short term investments............................................... (2,805) (132,694)
------------- -------------
Net cash provided by/(used in) investing activities................................. 6,512 (17,711)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable........................................... -- 2,974
Repayment of notes payable and capital leases..................................... -- (5,966)
Proceeds from issuance of common stock, net of repurchases........................ 307 19,920
Proceeds from repayment of notes receivable from stockholders..................... 7 60
------------- -------------
Net cash provided by financing activities........................................... 314 16,988
------------- -------------
Net increase/(decrease) in cash and cash equivalents................................ 7,116 (2,263)
Cash and cash equivalents, beginning of year........................................ 9,548 3,539
------------- -------------
Cash and cash equivalents, end of period............................................ $ 16,664 $ 1,276
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................................ $ -- $ 108
Supplemental schedule of noncash investing and financing:
Fixed assets financed by notes payable............................................ $ -- $ 329
Common stock issued for notes from shareholders................................... $ -- $ 17
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
POLYCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1997 and the
condensed consolidated statements of operations for the three and nine month
periods ending September 30, 1997 and 1996 and condensed consolidated statements
of cash flows for the nine month periods ending September 30, 1997 and 1996,
have been prepared by the Company without audit.
The preparation of financial statements in conformity with United States'
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1997 and for all periods
presented have been made. The condensed consolidated balance sheet at December
31, 1996 has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. These condensed financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Report on Form 10-K dated March 26, 1997, as amended
on May 6, 1997, and filed with the Securities and Exchange Commission.
The Company uses a 52-53 week fiscal year. Each reporting period ends on the
last Sunday of a month. As a result, a fiscal year may not end as of the same
day as the calendar period. For convenience of presentation, the accompanying
consolidated financial statements have been shown as ending on September 30 and
December 31 of each applicable period.
This Report on Form 10-Q contains forward looking statements that involve
risks and uncertainties, including possible fluctuations in quarterly results;
the market acceptance of ShowStation and the risks associated with this emerging
market; the acceptance of SoundPoint, SoundStation Premier and other new
products; the timely launch of the color ShowStation product; the success of the
manufacturing transfer of the SoundStation Premier product line; the impact of
competitive products and pricing; the completion of the potential merger with
ViaVideo Communications, Inc. and the risks associated with integrating the two
companies; the profitability of the videoconferencing division; and the other
risks detailed from time to time in the Company's SEC reports, including the
Form 10-K dated March 26, 1997, as amended on May 6, 1997, and the Form 10-Qs.
F-21
<PAGE>
POLYCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined in
a manner which approximates the first-in, first-out ("FIFO") method. Inventories
consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DEC 31,
1997 1996
------------- ---------
<S> <C> <C>
Raw Materials........................................................ $ 4,471 $ 3,252
Finished Goods....................................................... 4,552 4,206
------ ---------
$ 9,023 $ 7,458
------ ---------
------ ---------
</TABLE>
3. BANK LINE OF CREDIT
On October 31, 1997, the Company signed an agreement with Silicon Valley
Bank for a $5.0 million bank revolving line of credit which replaces the line of
credit that expired on April 15, 1997 but was extended until July 31, 1997.
Borrowings under the line are unsecured and bear interest at the bank's prime
rate (currently 8.5%). Borrowings under the line are subject to certain
financial covenants and restrictions on indebtedness, equity distributions,
financial guarantees, business combinations and other related items. The line
expires in October 1999.
4. STOCK OPTION REPRICING
In March 1997, the Company implemented an option cancellation and regrant
program for employees (other than executive officers) holding stock options with
exercise prices per share in excess of $4.50. Outstanding options covering an
aggregate of 223,200 shares with exercise prices in excess of $4.50 per share
were canceled and new options for the same number of shares were granted with an
exercise price of $4.375 per share. The new options will vest over a five-year
period beginning on March 5, 1997.
5. PER SHARE INFORMATION
Net income/(loss) per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of shares issuable upon the exercise of stock
options, using the treasury stock method. Common stock issued under a stock
option plan which are subject to repurchase are excluded from shares issued in
the computation of net loss per share as their effect is antidilutive.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
SFAS No. 128 establishes a different method of computing net income/(loss) per
share than is currently required under Accounting Principles Board Opinion No.
15. Under SFAS No. 128, the Company will be required to present both basic net
income/ (loss) per share and diluted net income/(loss) per share. Basic and
diluted net loss per share is expected to approximate the currently presented
net loss per share. However, basic net income per share is expected to be higher
than net income per share as currently computed because the effect of dilutive
stock options will not be considered in computing basic net income per share.
Diluted net income per share is expected to be comparable to the currently
presented net income per share. The Company will adopt SFAS No. 128 in its
F-22
<PAGE>
POLYCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
fiscal quarter ending December 31, 1997 and at that time all historical net
income/(loss) per share data will be restated to conform to the provisions of
SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The impact of adopting SFAS No. 130, which
is effective for the Company in 1998, has not been determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company in 1998 and the impact of adoption has not been
determined.
7. FIRST AGREEMENT WITH 3M
In March 1997, the Company entered into a joint marketing and development
agreement with Minnesota Mining and Manufacturing Company (3M). Under the
agreement, 3M provides $3.0 million in funding to Polycom for certain
deliverables related to the development of dataconferencing products and may
also provide shared technology resources for the development of future products.
Through September 30, 1997, Polycom recorded $3.0 million as revenue, $1.0
million in each of the first three quarters of 1997, based on delivery of the
items specified in the contract. The amounts recognized as revenue approximates
the amount that would have been recognized using the percentage of completion
methodology. Additionally, Polycom will grant 3M exclusive private-label rights
in certain distribution channels to the products developed under this agreement
subject to certain minimum volumes. Further, 3M received warrants to purchase up
to 2,000,000 shares of the Company's common stock at an exercise price of $7.50
per share. The warrants expire in March 1999, which may be extended until March
2000 depending on the delivery of Polycom's first product developed under the
agreement. The warrants were valued using the Black-Scholes model and were
determined to have an insignificant impact for financial reporting purposes. 3M
also has certain rights of first offer under its stock warrant agreement with
Polycom which will give 3M the right, for a period of 45 days after the
effective time of the Merger, to purchase approximately 950,000 shares of
Polycom Common Stock at a purchase price of $7.50 per share.
8. SECOND AGREEMENT WITH 3M
In June 1997, the Company entered into a second joint marketing and
development agreement with Minnesota Mining and Manufacturing Company (3M).
Under this agreement, 3M provides $2.5 million in funding to Polycom for certain
deliverables related to the development of videoconferencing products and may
also provide shared technology resources for the development of future products.
Polycom will grant 3M exclusive private-label rights in certain distribution
channels to the products developed under this agreement.
F-23
<PAGE>
POLYCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. RELATED PARTY TRANSACTION
In March 1997, the Company loaned $250,000 to an officer of the Company
under the terms of a note receivable which is due in March 2002. The note is
secured by shares of the Company's stock owned by the officer.
10. LEASE COMMITMENTS
On May 12, 1997, the Company entered into a three year operating lease for
19,890 square feet of a building in Livermore, California. The space is being
used as the Company's distribution and repair center. The lease associated with
this building will expire on May 31, 2000 and the minimum annual payments under
this lease are as follows: 1997--$69,615; 1998--$126,302; 1999--$138,235;
2000--$59,670.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
ViaVideo Communications, Inc.
We have audited the accompanying balance sheet of ViaVideo Communications, Inc.
("ViaVideo") (a Company in the development stage), formerly known as What a View
Software, Inc., as of December 31, 1996 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
September 10, 1996 ("inception") to December 31, 1996. These financial
statements are the responsibility of ViaVideo's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ViaVideo (a Company in the
development stage) as of December 31, 1996, and the results of its operations
and its cash flows for the period from inception to December 31, 1996, in
conformity with generally accepted accounting principles.
Coopers & Lybrand LLP
Austin, Texas
August 21, 1997
F-25
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------ SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 1,704,936 $ 4,589,207
Inventory......................................................................... -- 202,222
Prepaids and other current assets................................................. 12,065 239,985
------------ -------------
Total current assets.......................................................... 1,717,001 5,031,414
Property and equipment:
Furniture and fixtures............................................................ 3,966 8,029
Equipment......................................................................... 65,004 584,345
Leasehold improvements............................................................ -- 22,111
------------ -------------
68,970 614,485
Less accumulated depreciation..................................................... (4,171 ) (60,306 )
------------ -------------
Net property and equipment...................................................... 64,799 554,179
Other assets, net................................................................... 7,747 --
------------ -------------
Total assets.................................................................. $ 1,789,547 $ 5,585,593
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................................................... $ 50,000 $ 400,000
Accounts payable.................................................................. 34,517 1,124,060
Accrued expenses.................................................................. 65,291 431,821
------------ -------------
Total current liabilities..................................................... 149,808 1,955,881
------------ -------------
Commitments and contingencies (Notes 4 and 10)
Stockholders' equity:
Convertible preferred stock, $.001 par value, 5,000,000 and 6,000,000 shares
authorized, respectively
Series A preferred, 2,019,448 and 2,574,310 shares issued and outstanding,
respectively, aggregate liquidation preference of $2,019,448 and $2,574,310,
respectively.................................................................. 2,019 2,574
Series B preferred, 2,333,334 shares issued and outstanding at September 30,
1997, aggregate liquidation preference of $7,000,002.......................... -- 2,333
Common stock, $.001 par value, 8,000,000 and 14,000,000 shares authorized,
respectively, 2,190,554 shares issued and outstanding........................... 2,191 2,191
Additional paid-in capital........................................................ 1,993,004 9,513,758
Deficit accumulated during the development stage.................................. (357,475 ) (5,891,144 )
------------ -------------
Total stockholders' equity...................................................... 1,639,739 3,629,712
------------ -------------
Total liabilities and stockholders' equity.................................... $ 1,789,547 $ 5,585,593
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM CUMULATIVE
SEPTEMBER 10, FOR THE
1996 FOR THE PERIOD FROM
(INCEPTION) NINE MONTHS SEPTEMBER 10,
TO ENDED 1996
DECEMBER 31, SEPTEMBER 30, (INCEPTION) TO
1996 1997 SEPTEMBER 30, 1997
------------- ------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Operating expenses:
Research and development...................................... $ 307,576 $ 3,357,691 $ 3,665,267
Sales and marketing........................................... -- 1,044,745 1,044,745
Manufacturing start-up........................................ -- 212,916 212,916
General and administrative.................................... 61,751 1,026,061 1,087,812
------------- ------------- ------------------
Total operating expenses................................ 369,327 5,641,413 6,010,740
------------- ------------- ------------------
Operating loss.................................................. (369,327) (5,641,413) (6,010,740)
Other income (expense):
Interest expense.............................................. (650) (12,239) (12,889)
Interest income............................................... 12,502 119,983 132,485
------------- ------------- ------------------
Net loss $ (357,475) $(5,533,669) $ (5,891,144)
------------- ------------- ------------------
------------- ------------- ------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 10, 1996 (INCEPTION) TO DECEMBER 31, 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL TOTAL
---------------------- ---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ----------- --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of founders stock, September
10, 1996............................. 2,160,030 $ 2,160 $ (1,160) $ 1,000
Issuance of shares of Series A
preferred stock at $1 per share, net
of issuance costs, on October 24,
1996................................. 1,960,000 $ 1,960 1,931,754 1,933,714
Conversion of promissory note into
common and preferred shares at $0.10
and $1 per share, respectively, on
October 24, 1996..................... 59,448 59 30,524 31 62,410 62,500
Net loss............................... $ (357,475) (357,475)
--------- ----------- --------- ----------- ----------- ------------ ------------
Balance, December 31, 1996............. 2,019,448 2,019 2,190,554 2,191 1,993,004 (357,475) 1,639,739
Issuance of shares of Series A
preferred stock at $1 per share, on
January 29, 1997 (unaudited)......... 40,000 40 39,960 40,000
Issuance of shares of Series A
preferred stock at $1 per share, net
of issuance costs, on April 4, 1997
(unaudited).......................... 514,862 515 508,588 509,103
Issuance of shares of Series B
preferred stock at $3 per share, net
of issuance costs, on May 28, 1997
(unaudited).......................... 2,333,334 2,333 6,969,974 6,972,307
Issuance of non-qualified options on
August 27, 1997 (unaudited).......... 2,232 2,232
Net loss (unaudited)................... (5,533,669) (5,533,669)
--------- ----------- --------- ----------- ----------- ------------ ------------
Balance, September 30, 1997
(unaudited).......................... 4,907,644 $ 4,907 2,190,554 $ 2,191 $9,513,758 $(5,891,144) $3,629,712
--------- ----------- --------- ----------- ----------- ------------ ------------
--------- ----------- --------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM CUMULATIVE
SEPTEMBER 10, FOR THE
1996 PERIOD FROM
(INCEPTION) FOR THE NINE SEPTEMBER 10,
TO MONTHS ENDED 1996
DECEMBER 31, SEPTEMBER 30, (INCEPTION) TO
1996 1997 SEPTEMBER 30, 1997
------------- ------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (357,475) $(5,533,669) $ (5,891,144)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 4,735 75,135 79,870
Loss on write-off of assets................................. -- 102,693 102,693
Issuance of non-qualified options........................... -- 2,232 2,232
Changes in assets and liabilities:
Prepaids and other current assets......................... (12,065) (227,920) (239,985)
Inventory................................................. -- (202,222) (202,222)
Accounts payable and accrued expenses..................... 99,808 1,456,073 1,555,881
------------- ------------- ------------------
Net cash used in operating activities................... (264,997) (4,327,678) (4,592,675)
------------- ------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment........................... (68,970) (659,461) (728,431)
Other expenditures............................................ (8,311) -- (8,311)
------------- ------------- ------------------
Net cash used in investing activities................... (77,281) (659,461) (736,742)
------------- ------------- ------------------
Cash flows from financing activities:
Net borrowings on line of credit.............................. 50,000 350,000 400,000
Proceeds from issuance of convertible promissory note......... 62,500 -- 62,500
Proceeds from issuance of common stock........................ 1,000 -- 1,000
Proceeds from issuance of preferred stock..................... 1,933,714 7,521,410 9,455,124
------------- ------------- ------------------
Net cash provided by financing activities............... 2,047,214 7,871,410 9,918,624
------------- ------------- ------------------
Net increase in cash and cash equivalents....................... 1,704,936 2,884,271 4,589,207
Cash and cash equivalents at beginning of period................ -- 1,704,936 --
------------- ------------- ------------------
Cash and cash equivalents at end of period...................... $ 1,704,936 $ 4,589,207 $ 4,589,207
------------- ------------- ------------------
------------- ------------- ------------------
Supplemental cash flow information:
Interest paid................................................. $ 230 $ 9,559 $ 9,789
Non-cash financing activities:
Conversion of promissory note for common stock.............. $ 3,052 -- $ 3,052
Conversion of promissory note for preferred stock........... $ 59,448 -- $ 59,448
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
ViaVideo Communications, Inc. ("ViaVideo"), a Delaware corporation, formerly
known as What a View Software, Inc., was founded on September 10, 1996. ViaVideo
is developing videoconferencing hardware and software that incorporates patented
technology. ViaVideo's products will allow businesses to conduct face-to-face
meetings among dispersed groups without the cost and inconvenience of traveling
to remote locations. ViaVideo intends to market its videoconferencing products
through various worldwide distribution channels and broadly target businesses
that have a need for meeting and communicating with employees, other individuals
or organizations in remote locations.
ViaVideo is devoting substantially all of its present efforts to the design,
testing, production and marketing of its initial product, and to the
establishment of its business. To date ViaVideo has not recognized any revenue
from the sale of any products, licenses, services or merchandise. ViaVideo has
incurred losses from operations since inception. Accordingly, ViaVideo is a
development stage enterprise as defined in Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage
Enterprises."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH EQUIVALENTS
For the purpose of the statement of cash flows, ViaVideo's management
considers all highly liquid investments purchased with an original maturity date
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Expenditures for normal maintenance of property and equipment are charged
against income as incurred. Expenditures which significantly extend the useful
lives of the assets are capitalized. The costs of assets retired or otherwise
disposed of and the related accumulated depreciation balance are removed from
the accounts and any resulting gain or loss is included in income. Equipment is
depreciated over three years using the straight-line method and furniture and
fixtures are depreciated over five years using the straight-line method.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
F-30
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
ViaVideo accounts for its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which deferred tax assets or liabilities
are computed based on the difference between the financial statement and income
tax bases of assets and liabilities using the enacted marginal tax rate.
Deferred income tax expenses or credits are based on the changes in the assets
or liabilities from period to period.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128 "Earnings per Share" and No. 129 "Disclosure of Information about
Capital Structure." SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share and is designed to improve
earnings per share information by simplifying the existing computational
guidelines and revising the previous disclosure requirements. SFAS No. 129
consolidates the existing disclosure requirements to disclose certain
information about an entity's capital structure. Both statements are effective
for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements
. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Restated Information," which establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997.
Management does not believe the implementation of these recent accounting
pronouncements will have a material effect on its financial statements.
3. CONCENTRATIONS OF CREDIT RISK:
ViaVideo's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and letters of
credit. ViaVideo's cash and cash equivalents are maintained in demand deposit
accounts and investment accounts with financial institutions in amounts that may
exceed federally insured limits and are invested in securities of the United
States government. Management does not believe there is undue risk of loss
inasmuch as, in management's opinion, the financial institutions in which cash
is deposited are high credit quality institutions and the securities are
obligations of the United States government. However, management estimates that
approximately $144,000 and $4,621,000 of its cash and cash equivalent balances
at December 31, 1996 and September 30, 1997, respectively, were not covered by
federal insurance programs or obligations of the United States government, and
therefore, were subject to potential loss.
F-31
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CONCENTRATIONS OF CREDIT RISK: (CONTINUED)
During May 1997, a bank issued a standby letter of credit to one of
ViaVideo's major suppliers for $335,000. The letter of credit expires in April
1998 and is collateralized by ViaVideo's certificate of deposit for a similar
amount deposited with the bank. Also, during August 1997, a bank issued a
standby letter of credit to one of ViaVideo's major suppliers for $75,000. The
letter of credit expires in July 1998 and is collateralized by ViaVideo's
certificate of deposit for a similar amount deposited with the bank. As of
September 30, 1997, the suppliers had not made any draws against the letters of
credit.
4. COMMITMENTS:
ViaVideo leases its facilities and certain other equipment for its
operations. Rental expense for the period from September 10, 1996 (inception) to
December 31, 1996 and the nine months ended September 30, 1997 was $12,015 and
$92,284, respectively. Future minimum rental payments under operating leases
that have initial or remaining noncancelable lease terms in excess of one year
as of September 30, 1997 are not significant.
5. INCOME TAXES:
At December 31, 1996 and September 30, 1997, ViaVideo has net deferred tax
assets of approximately $132,000 and $2,093,000, respectively, arising primarily
from cumulative net operating loss carryforwards and investment tax credits. In
accordance with the provisions of SFAS No. 109, the net deferred tax assets are
fully offset by valuation allowances at December 31, 1996 and September 30, 1997
due to uncertainty of realization of the assets, which has resulted in an
increase to the valuation account at September 30, 1997 of approximately
$1,961,000. At December 31, 1996 and September 30, 1997, ViaVideo had net
operating loss carryforwards of approximately $357,000 and $5,881,000,
respectively, which expire beginning 2011 through 2012. The difference between
ViaVideo's federal income tax at the statutory rate and the effective tax rate
is due primarily to the change in the valuation allowance.
6. DEBT:
ViaVideo has a bank credit agreement which provides for a revolving line of
credit of up to $400,000 through May 9, 1997 and up to $750,000 through November
9, 1998. The outstanding balance on the line of credit at December 31, 1996 and
September 30, 1997 was $50,000 and $400,000, respectively, with an interest rate
equal to the bank's prime rate plus 1.5% and 0.75%, respectively (9.75% and
9.25% at December 31, 1996 and September 30, 1997, respectively). The line of
credit is collateralized by substantially all of the assets of ViaVideo. The
line of credit agreement includes a term debt provision which allows ViaVideo to
convert line of credit advances to term financing for approved equipment
purchases made during the period from May 9, 1997 to November 9, 1997. The
unpaid principal balance of equipment advances at November 9, 1997 shall be
repaid over a term of 36 months. Monthly principal and interest payments on
approved equipment advances commence on December 9, 1997. At September 30, 1997,
there were no term debt balances under this provision.
In September 1996, ViaVideo issued a promissory note for $62,500, bearing
interest at a rate of 6% per annum and convertible into ViaVideo's capital stock
upon completion of an equity financing. The note was converted into 30,524
shares of common stock at a conversion rate of $0.10 per share and 59,448 shares
of Series A preferred stock at a conversion rate of $1.00 per share in October
1996.
F-32
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
ViaVideo's preferred stock consists of Series A and B, which were initially
issued in 1996 and 1997, respectively. Of the 6,000,000 shares of preferred
stock authorized at September 30, 1997, 2,574,310 shares are designated as
Series A and 2,500,000 shares are designated as Series B. The Series A and B
preferred stocks have no mandatory dividend requirement and have a liquidation
preference to any payment on the common stock of $1 and $3, respectively, per
share plus any accrued but unpaid dividends. In the event of the liquidation of
ViaVideo prior to May 31, 1998, and after all other liquidation preferences have
been paid to the Series A and B preferred stockholders, the Series A preferred
stockholders will share ratably, on an as converted basis, in the remaining
assets of ViaVideo with the common stockholders, with the Series A preferred
stockholders receiving up to an aggregate amount of $3.50 per share and
thereafter at a reduced rate equivalent to 50 percent of their ratable share up
to an aggregate amount of $4.75 per share. In the event of the liquidation of
ViaVideo after May 31, 1998, and after all other liquidation preferences have
been paid to the Series A and B preferred stockholders, the Series A and B
preferred stockholders will share ratably, on an as converted basis, in the
remaining assets of ViaVideo with the common stockholders, with the Series A
preferred stockholders receiving up to an aggregate amount of $3.50 per share
and thereafter at a reduced rate equivalent to 50 percent of their ratable share
up to an aggregate amount of $4.75 per share, and with the Series B preferred
stockholders receiving up to an aggregate amount of $9 per share. The Series A
and B preferred stocks are not redeemable but may be converted at the option of
the holder into common stock at the ratio of one share of preferred stock for
one share of common stock, subject to adjustment for dilutive events, with such
conversion occurring automatically upon the occurrence of a public offering of
ViaVideo's common stock, subject to certain requirements. In effecting such
conversion, ViaVideo shall pay any accrued but unpaid dividends on the shares
being converted. The Series A and B preferred stocks have voting rights equal to
common stock voting rights.
COMMON STOCK SPLIT
On October 23, 1996, ViaVideo's Board of Directors approved a 2.16 for 1
stock split of ViaVideo's common stock. Accordingly, all share and share amounts
of common stock for all periods presented have been retroactively adjusted to
reflect the stock split.
STOCK OPTION PLAN
ViaVideo sponsors the 1996 Stock Option/Stock Issuance Plan (the "Plan"),
which is a stock-based incentive compensation plan as described below. ViaVideo
applies Accounting Principles Board ("APB") Opinion No. 25 and related
Interpretations in accounting for the Plan. In 1995, the Financial Accounting
Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation"
which, if fully adopted by ViaVideo, would change the method ViaVideo applies in
recognizing the cost of the Plan. Adoption of the cost recognition provisions of
SFAS No. 123 is optional and ViaVideo has decided not to elect these provisions
of SFAS No. 123. However, pro forma disclosures as if ViaVideo adopted the cost
recognition provisions of SFAS No. 123 are required, if material.
The Plan provides for the grant of stock options to officers, key employees
and consultants of ViaVideo to purchase shares of ViaVideo's common stock, to
receive restricted stock, and to receive stock bonuses. As of December 31, 1996
and September 30, 1997, ViaVideo has reserved 750,000 and 1,350,000
F-33
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY: (CONTINUED)
shares, respectively, of common stock for grant under the Plan. Options granted
may be either incentive stock options or nonqualified stock options, as defined
by the Internal Revenue Code. Incentive stock options cannot be granted with an
exercise price of less than 100% of the fair market value of the stock or 110%
of the fair market value of the stock in the case of a 10% or more stockholder
of ViaVideo. The options granted under the Plan are exercisable at anytime on or
after the grant date, vest as determined by the Board of Directors of ViaVideo
on the grant date and expire 10 years from the grant date. In the event the
optionee ceases to provide services to ViaVideo while holding unvested shares,
ViaVideo has the right to repurchase the unvested shares at the exercise price.
In the event the options granted are forfeited or expire, the shares of common
stock subject to those rights will again be available for issuance under the
Plan.
A summary of the status of ViaVideo's stock options as of December 31, 1996
and September 30, 1997, and the changes during the period from September 10,
1996 (inception) to December 31, 1996 and the nine months ended September 30,
1997, is presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICES
SHARES PER SHARE
---------- -----------------
<S> <C> <C>
Balance, September 10, 1996 (Inception)...................... --
----------
Balance, December 31, 1996................................... --
Granted.................................................... 1,167,250 $ 0.46
----------
Balance, September 30, 1997.................................. 1,167,250 $ 0.46
---------- -----
---------- -----
Exercisable at December 31, 1996............................. --
Exercisable at September 30, 1997............................ 1,167,250 $ 0.46
</TABLE>
The weighted-average fair value of options granted during the nine months ended
September 30, 1997 was $0.12. The fair value of each stock option granted during
the nine months ended September 30, 1997 is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions: no
dividend yield; risk-free interest rate of 6.35%; the expected lives of options
are five years.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------- ---------------------------------
NUMBER NUMBER
RANGE OF OUTSTANDING WTGD. AVG. WTGD/ AVG. EXERCISABLE WTGD. AVG.
EXERCISE AT SEPTEMBER 30, REMAINING EXERCISE AT SEPTEMBER 30, EXERCISE
PRICES 1997 CONTR. LIFE PRICE 1997 PRICE
- -------------- -------------------- ----------- ----------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
$.10 - $1.00 1,047,750 10 years $ 0.20 1,047,750 $ 0.20
$2.03 - $3.03 119,500 10 years $ 2.78 119,500 $ 2.78
Total 1,167,250 10 years $ 0.46 1,167,250 $ 0.46
</TABLE>
During the nine months ended September 30, 1997, ViaVideo did not incur any
compensation costs for the Plan under APB Opinion No. 25 and, if ViaVideo had
fully adopted SFAS No. 123, the compensation costs that would have been incurred
would not have been significant. This may not be
F-34
<PAGE>
VIAVIDEO COMMUNICATIONS, INC.
(FORMERLY KNOWN AS WHAT A VIEW SOFTWARE, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY: (CONTINUED)
indicative of the effect in future periods. ViaVideo anticipates making awards
in the future under its stock-based compensation plan.
8. MERGER AGREEMENT:
On June 11, 1997, ViaVideo entered into a definitive merger agreement with
Polycom, Inc. ("Polycom"), a publicly held company. Once all of the conditions
for closing have been satisfied by ViaVideo, Polycom will issue 1.183684 shares
of Polycom common stock or stock options (subject to adjustment if Polycom's
share price exceeds $9.00 at the time of closing) in exchange for each share of
ViaVideo's common stock or stock options. In addition, immediately prior to the
merger, each share of ViaVideo preferred stock will be converted into one (1)
share of ViaVideo common stock. Among the various conditions for closing that
must be met by March 31, 1998 are: development and completion of products in
compliance with agreed upon specifications, at least $75,000 in product sales, a
Polycom share price of at least $3.00 per share, and the ability to account for
the merger under the pooling of interests method.
9. SERVICES AGREEMENTS:
During May 1997, ViaVideo entered into a services agreement with Polycom. At
ViaVideo's request, Polycom provides consulting and administrative support
services to ViaVideo that are primarily related to research and development,
sales, business development and manufacturing. Polycom charges ViaVideo for its
actual cost for the services rendered plus 10 percent of its costs. The services
agreement will expire when mutually terminated. From May 1997 through September
30, 1997, ViaVideo incurred approximately $284,000 in expenses for services
received pursuant to this agreement.
During July 1997, Polycom entered into a services agreement with ViaVideo.
At Polycom's request, ViaVideo will provide consulting and administrative
support services to Polycom that are primarily related to marketing, business
development, sales engineering, public relations and office space for one of
Polycom's employees. ViaVideo charges Polycom for its actual costs for the
services rendered plus 10 percent of its costs. The services agreement can be
terminated upon 30 days notice from either party. From July 1997 through
September 1997, ViaVideo billed Polycom approximately $65,000 for services
provided pursuant to this agreement.
10. SUBSEQUENT EVENT:
LITIGATION
ViaVideo and its founders, who are former employees of VTEL, are defendants
in a lawsuit filed by VTEL in September 1997 whereby VTEL is alleging that
ViaVideo and its founders are wrongfully using VTEL's trade secrets and
proprietary information and are engaging in other conduct in violation of
employment agreements that the founders had signed with VTEL when they were
employees of VTEL. The management of ViaVideo believes that these claims are
without merit and intends to defend them vigorously. Also, the management of
ViaVideo, after consultation with outside legal counsel, believes that the
likelihood of an unfavorable outcome arising from the adjudication of this
lawsuit is remote. Management has not recorded any liability in the financial
statements that may arise from the adjudication of this lawsuit.
F-35
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
POLYCOM, INC.,
VENICE ACQUISITION CORPORATION
AND
VIAVIDEO COMMUNICATIONS, INC.
JUNE 11, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE I THE MERGER.............................................................................. A-1
1.1 The Merger.............................................................................. A-1
1.2 Closing; Effective Time................................................................. A-1
1.3 Effect of the Merger.................................................................... A-2
1.4 Certificate of Incorporation; Bylaws.................................................... A-2
1.5 Directors and Officers.................................................................. A-2
1.6 Effect on Capital Stock................................................................. A-2
1.7 Surrender of Certificates............................................................... A-4
1.8 No Further Ownership Rights in Target Capital Stock..................................... A-5
1.9 Lost, Stolen or Destroyed Certificates.................................................. A-5
1.10 Tax and Accounting Consequences......................................................... A-5
1.11 Taking of Necessary Action; Further Action.............................................. A-5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET................................................ A-6
2.1 Organization, Standing and Power........................................................ A-6
2.2 Capital Structure....................................................................... A-6
2.3 Authority............................................................................... A-7
2.4 Financial Statements.................................................................... A-7
2.5 Absence of Certain Changes.............................................................. A-8
2.6 Absence of Undisclosed Liabilities...................................................... A-8
2.7 Litigation.............................................................................. A-8
2.8 Restrictions on Business Activities..................................................... A-8
2.9 Governmental Authorization.............................................................. A-9
2.10 Title to Property....................................................................... A-9
2.11 Intellectual Property................................................................... A-9
2.12 Environmental Matters................................................................... A-10
2.13 Taxes................................................................................... A-11
2.14 Employee Benefit Plans.................................................................. A-12
2.15 Certain Agreements Affected by the Merger............................................... A-13
2.16 Employee Matters........................................................................ A-13
2.17 Interested Party Transactions........................................................... A-14
2.18 Insurance............................................................................... A-14
2.19 Compliance With Laws.................................................................... A-14
2.20 Minute Books............................................................................ A-14
2.21 Complete Copies of Materials............................................................ A-14
2.22 Pooling of Interests.................................................................... A-14
2.23 Brokers' and Finders' Fees.............................................................. A-14
2.24 Registration Statement; Proxy Statement/Prospectus...................................... A-14
2.25 Affiliate's Agreement; Stockholder's Representation Agreement; Irrevocable Proxies...... A-15
2.26 Vote Required........................................................................... A-15
2.27 Board Approval.......................................................................... A-15
2.28 Inventory............................................................................... A-15
2.30 Preliminary Pooling Letter.............................................................. A-16
2.31 Representations Complete................................................................ A-16
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB............................... A-16
3.1 Organization, Standing and Power........................................................ A-16
3.2 Capital Structure....................................................................... A-17
3.3 Authority............................................................................... A-17
3.4 SEC Documents; Financial Statements..................................................... A-18
3.5 Absence of Certain Changes.............................................................. A-18
3.6 Absence of Undisclosed Liabilities...................................................... A-19
3.7 Litigation.............................................................................. A-19
3.8 Restrictions on Business Activities..................................................... A-19
3.9 Opinion of Financial Advisor............................................................ A-19
3.10 Intellectual Property................................................................... A-19
3.11 Governmental Authorization.............................................................. A-19
3.12 Compliance With Laws.................................................................... A-20
3.13 Pooling of Interests.................................................................... A-20
3.14 Broker's and Finders' Fees.............................................................. A-20
3.15 Registration Statement; Proxy Statement/Prospectus...................................... A-20
3.16 Vote Required........................................................................... A-20
3.17 Board Approval.......................................................................... A-20
3.18 Preliminary Pooling Letter.............................................................. A-20
3.19 Representations Complete................................................................ A-20
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME..................................................... A-21
4.1 Conduct of Business of Acquiror......................................................... A-21
4.2 Conduct of Business of Target........................................................... A-21
4.3 Limitations on Business of Target....................................................... A-22
4.4 No Solicitation......................................................................... A-24
ARTICLE V ADDITIONAL AGREEMENTS................................................................... A-24
5.1 Proxy Statement/Prospectus; Registration Statement...................................... A-24
5.2 Meeting of Stockholders................................................................. A-25
5.3 Access to Information................................................................... A-25
5.4 Confidentiality......................................................................... A-25
5.5 Public Disclosure....................................................................... A-25
5.6 Consents; Cooperation................................................................... A-26
5.7 Pooling Accounting...................................................................... A-27
5.8 Affiliate Agreements.................................................................... A-27
5.9 Voting Agreement........................................................................ A-27
5.10 Legal Requirements...................................................................... A-27
5.11 Blue Sky Laws........................................................................... A-27
5.12 Employee Benefit Plans.................................................................. A-28
5.13 Escrow Agreement........................................................................ A-28
5.14 Letter of Acquiror's and Target's Accountants........................................... A-28
5.15 Form S-8................................................................................ A-29
5.16 Stockholder's Representation Agreements................................................. A-29
5.17 Listing of Additional Shares............................................................ A-29
5.18 Employees............................................................................... A-29
5.19 Pooling Letters......................................................................... A-29
5.20 Indemnification......................................................................... A-29
5.21 Reorganization.......................................................................... A-29
5.22 Expenses................................................................................ A-29
</TABLE>
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<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
5.23 Termination of Registration Rights...................................................... A-30
5.24 Services Agreement...................................................................... A-30
5.25 Employee Benefit Plans.................................................................. A-30
5.26 Reasonable Commercial Efforts and Further Assurances.................................... A-30
ARTICLE VI CONDITIONS TO THE MERGER................................................................ A-30
6.1 Conditions to Obligations of Each Party to Effect the Merger............................ A-30
6.2 Additional Conditions to Obligations of Target.......................................... A-31
6.3 Additional Conditions to the Obligations of Acquiror and Merger Sub..................... A-32
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER....................................................... A-34
7.1 Termination............................................................................. A-34
7.2 Effect of Termination................................................................... A-35
7.3 Expenses and Termination Fees........................................................... A-35
7.4 Amendment............................................................................... A-36
7.5 Extension; Waiver....................................................................... A-37
ARTICLE VIII ESCROW AND INDEMNIFICATION.............................................................. A-37
8.1 Escrow Fund............................................................................. A-37
8.2 Indemnification......................................................................... A-37
8.3 Damage Threshold........................................................................ A-38
8.4 Escrow Period........................................................................... A-38
8.5 Claims upon Escrow Fund................................................................. A-38
8.6 Objections to Claims.................................................................... A-38
8.7 Resolution of Conflicts; Arbitration.................................................... A-39
8.8 Stockholders' Agent..................................................................... A-39
8.9 Actions of the Stockholders' Agent...................................................... A-40
8.10 Third-Party Claims...................................................................... A-40
ARTICLE IX GENERAL PROVISIONS...................................................................... A-40
9.1 Survival at Effective Time.............................................................. A-40
9.2 Notice.................................................................................. A-40
9.3 Interpretation.......................................................................... A-41
9.4 Counterparts............................................................................ A-41
9.5 Entire Agreement; Nonassignability; Parties in Interest................................. A-42
9.6 Severability............................................................................ A-42
9.7 Remedies Cumulative..................................................................... A-42
9.8 Governing Law........................................................................... A-42
9.9 Rules of Construction................................................................... A-42
</TABLE>
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<TABLE>
<S> <C> <C>
SCHEDULES
Target Disclosure Schedule
Acquiror Disclosure Schedule
Schedule 1.6 -- Exchange Ratio
Schedule 2.10 -- Target Real Property
Schedule 2.11 -- Target Intellectual Property
Schedule 2.14 -- Target Employee Benefit Plans
Schedule 2.21 -- Material Agreements
Schedule 5.8(a) -- Target Affiliates
Schedule 5.8(b) -- Acquiror Affiliates
Schedule 5.9(a) -- Target Voting Agreement Signatories
Schedule 5.9(b) -- Acquiror Voting Agreement Signatories
Schedule 5.13 -- Outstanding Options
Schedule 5.18 -- List of Employees
Schedule 6.2(g) -- Acquiror Third Party Consents
Schedule 6.3(c) -- Target Third Party Consents
EXHIBITS
Exhibit A -- Certificate of Merger
Exhibit B-1 -- Target's Affiliate Agreement
Exhibit B-2 -- Acquiror's Affiliate Agreement
Exhibit C-1 -- Target Voting Agreement
Exhibit C-2 -- Acquiror Voting Agreement
Exhibit D -- FIRPTA Notice
Exhibit E -- Escrow Agreement
Exhibit F -- Stockholder's Representation Agreement
Exhibit G-1, et.
seq. -- Form of Employment Agreements
Exhibit H -- Services Agreement
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of June 11, 1997, by and among Polycom, Inc., a Delaware
corporation ("Acquiror"), Venice Acquisition Corporation, a Delaware corporation
and wholly-owned subsidiary of Acquiror ("Merger Sub"), and ViaVideo
Communications, Inc., a Delaware corporation ("Target").
RECITALS
A. The Boards of Directors of Target, Acquiror and Merger Sub believe it is
in the best interests of their respective companies and stockholders that Target
and Merger Sub combine into a single company through the statutory merger of
Merger Sub with and into Target (the "Merger") and, in furtherance thereof, have
approved the Merger.
B. Pursuant to the Merger, among other things, the outstanding shares of
Target Common Stock (assuming the conversion of all outstanding Target Preferred
Stock into Common Stock prior to the Effective Time, as defined below) shall be
converted into shares of Acquiror Common Stock, $.0005 par value ("Acquiror
Common Stock"), and all outstanding options to purchase Target Common Stock
shall be assumed by Acquiror and shall be exercisable into Acquiror Common Stock
at the rate set forth herein. Target Common Stock (assuming the conversion of
all outstanding Target Preferred Stock into Common Stock prior to the Effective
Time) and all outstanding options to purchase Target Common Stock shall
hereinafter to referred to as Target Capital Stock.
C. Target, Acquiror and Merger Sub desire to make certain representations
and warranties and other agreements in connection with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code.
E. The parties intend to cause the Merger to be accounted for as a pooling
of interests pursuant to APB Opinion No. 16, Staff Accounting Series Releases
130, 135 and 146 and Staff Accounting Bulletins Topic Two.
F. Concurrent with the execution of this Agreement and as an inducement to
Acquiror and Merger Sub to enter into this Agreement, certain of the affiliates
of Target who are stockholders, officers or directors have on the date hereof
entered into an agreement to vote the shares of Target's Common Stock owned by
such persons to approve the Merger and against any competing proposals.
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement, the Certificate
of Merger attached hereto as EXHIBIT A (the "Certificate of Merger") and the
applicable provisions of the Delaware General Corporation Law ("Delaware Law"),
Merger Sub shall be merged with and into Target, the separate corporate
existence of Merger Sub shall cease and Target shall continue as the surviving
corporation. Target as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "Surviving Corporation."
1.2 CLOSING; EFFECTIVE TIME. The closing of the transactions contemplated
hereby (the "Closing") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in
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Article VI hereof or at such other time as the parties hereto agree (the
"Closing Date"). The Closing shall take place at the offices of Brobeck, Phleger
& Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California, or
at such other location as the parties hereto agree. In connection with the
Closing, the parties hereto shall cause the Merger to be consummated by filing
the Certificate of Merger with the Secretary of State of the State of Delaware,
in accordance with the relevant provisions of Delaware Law (the time of such
filing being the "Effective Time").
1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Target and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Target and
Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
1.4 CERTIFICATE OF INCORPORATION; BYLAWS.
(a) At the Effective Time, the Certificate of Incorporation of Merger Sub,
as in effect immediately prior to the Effective Time, shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter amended as
provided by Delaware Law and such Certificate of Incorporation; provided,
however, that Article I of the Certificate of Incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the corporation is
Acquiror, Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 DIRECTORS AND OFFICERS. At the Effective Time, the directors of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the
directors of the Surviving Corporation, until their respective successors are
duly elected or appointed and qualified. The officers of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the initial officers of
the Merger Sub, until their respective successors are duly elected or appointed
and qualified.
1.6 EFFECT ON CAPITAL STOCK. By virtue of the Merger and without any
action on the part of Merger Sub, Target or the holders of any of the following
securities:
(a) SHARES TO BE ISSUED; CONVERSION OF TARGET COMMON STOCK. The number
of shares of Acquiror Common Stock to be issued (including Acquiror Common
Stock to be reserved for issuance upon exercise of Target options assumed by
Acquiror and all ungranted options under the Target Stock Option Plan, as
defined below) in exchange for the acquisition by Acquiror of all
outstanding Target Capital Stock and all reserved but ungranted options to
acquire Target Common Stock shall be Ten Million (10,000,000) shares of
Acquiror Common Stock, reduced as a result of any Dissenting Shares. At the
Effective Time, each share of Target Common Stock (assuming the conversion
of all outstanding Target Preferred Stock into Common Stock prior to the
Effective Time) issued and outstanding immediately prior to the Effective
Time will be canceled and extinguished and be converted automatically into
the right to receive that number of shares of Acquiror Common Stock obtained
by dividing Ten Million (10,000,000) by the total amount of shares of Target
Capital Stock, plus all reserved but ungranted options to purchase Target
Common Stock, issued and outstanding immediately prior to the Effective Time
as set forth on SCHEDULE 1.6 hereto (the "Exchange Ratio"). Notwithstanding
the foregoing, if, based on the average of the closing prices of Acquiror's
Common Stock as quoted on the Nasdaq National Market System for the ten (10)
trading days immediately preceding (and including) the second trading day
prior to the Effective Time (the "Closing Price"), the product of (x) the
total number of shares of Acquiror Common Stock to be issued (including
Acquiror Common Stock to be reserved for issuance upon exercise of Target
options issued by Acquiror under the Target Stock Option Plan) and (y) the
Closing Price (such product defined herein as the "Total Value") exceeds
$87,015,303, the Exchange Ratio shall be reduced such that the Total
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Value shall be $87,015,303. The limit on the Total Value herein shall be
recalculated in accordance with the preceding formula based upon the total
number of shares of Acquiror Common Stock to be issued (including Acquiror
Common Stock to be reserved for issuance upon exercise of Target options
issued by Acquiror under the Target Stock Option Plan) as calculated
immediately prior to the Effective Time; in no event shall the Total Value
exceed $90,000,000. No other adjustment shall be made in the Exchange Ratio
as a result of any cash proceeds received by Target from the date hereof to
the Closing Date pursuant to the exercise of currently outstanding options
to acquire Target Common Stock.
(b) CANCELLATION OF TARGET COMMON STOCK OWNED BY ACQUIROR OR
TARGET. At the Effective Time, all shares of Target Common Stock that are
owned by Target as treasury stock and each share of Target Common Stock
owned by Acquiror or any direct or indirect wholly-owned subsidiary of
Acquiror or of Target immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof.
(c) TARGET STOCK OPTION PLANS. At the Effective Time, Target's 1996
Stock Option/Stock Issuance Plan (the "Target Stock Option Plan") and all
options to purchase Target Common Stock then outstanding under the Target
Stock Option Plan shall be assumed by Acquiror in accordance with Section
5.13.
(d) CAPITAL STOCK OF MERGER SUB. At the Effective Time, each share of
Common Stock, $.0001 par value, of Merger Sub ("Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, $.0001 par value, of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing ownership of
any such shares shall continue to evidence ownership of such shares of
capital stock of the Surviving Corporation.
(e) ADJUSTMENTS TO EXCHANGE RATIO. The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities
convertible into Acquiror Common Stock or Target Common Stock),
reorganization, recapitalization or other like change with respect to
Acquiror Common Stock or Target Common Stock occurring after the date hereof
and prior to the Effective Time.
(f) FRACTIONAL SHARES. No fraction of a share of Acquiror Common Stock
will be issued, but in lieu thereof each holder of shares of Target Common
Stock who would otherwise be entitled to a fraction of a share of Acquiror
Common Stock (after aggregating all fractional shares of Acquiror Common
Stock to be received by such holder) shall receive from Acquiror an amount
of cash (rounded to the nearest whole cent) equal to the product of (i) such
fraction, multiplied by (ii) the average of the closing prices of a share of
Acquiror Common Stock for the ten most recent days that Acquiror Common
Stock has traded ending on the trading day immediately prior to the
Effective Time, as reported on the Nasdaq National Market.
(g) DISSENTERS' RIGHTS. Any shares held by persons who have not voted
in favor of the Merger and with respect to which such persons shall become
entitled to exercise dissenters' rights under Delaware Law ("Dissenting
Shares") shall not be converted into Acquiror Common Stock but shall instead
be converted into the right to receive such consideration as may be
determined to be due with respect to such Dissenting Shares pursuant to
Delaware Law. Target agrees that, except with the prior written consent of
Acquiror, which shall not be unreasonably withheld, or as required under
Delaware Law, it will not voluntarily make any payment with respect to, or
settle or offer to settle, any such purchase demand. Each holder of
Dissenting Shares ("Dissenting Stockholder") who, pursuant to the provisions
of Delaware Law, becomes entitled to payment of the fair value for shares of
Target Capital Stock shall receive payment therefor (but only after the
value therefor shall have been agreed upon or finally determined pursuant to
such provisions). If, after the Effective Time, any Dissenting Shares shall
lose their status as Dissenting Shares, Acquiror shall issue and deliver,
upon surrender by such
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<PAGE>
stockholder of certificate or certificates representing shares of Target
Capital Stock, the number of shares of Acquiror Common Stock to which such
stockholder would otherwise be entitled under this Section 1.6 and the
Certificate of Merger less the number of shares allocable to such
stockholder that have been deposited in the Escrow Fund (as defined below)
in respect of such shares of Acquiror Common Stock pursuant to Section
2.2(c) and Article VIII hereof.
1.7 SURRENDER OF CERTIFICATES.
(a) EXCHANGE AGENT. The First National Bank of Boston shall act as
exchange agent (the "Exchange Agent") in the Merger.
(b) ACQUIROR TO PROVIDE COMMON STOCK AND CASH. Promptly after the
Effective Time, Acquiror shall make available to the Exchange Agent for exchange
in accordance with this Article I, through such reasonable procedures as
Acquiror may adopt, (i) the shares of Acquiror Common Stock issuable pursuant to
Section 1.6(a) in exchange for shares of Target Capital Stock outstanding
immediately prior to the Effective Time less the number of shares of Acquiror
Common Stock to be deposited into an escrow fund (the "Escrow Fund") pursuant to
the requirements of Article VIII and (ii) cash in an amount sufficient to permit
payment of cash in lieu of fractional shares pursuant to Section 1.6(g).
(c) EXCHANGE PROCEDURES. Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of Target Capital Stock, whose shares were
converted into the right to receive shares of Acquiror Common Stock (and cash in
lieu of fractional shares) pursuant to Section 1.6, (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon receipt of the Certificates by the
Exchange Agent, and shall be in such form and have such other provisions as
Acquiror may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Acquiror Common Stock (and cash in lieu of fractional shares). Upon surrender
of a Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Acquiror, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Acquiror Common Stock less the number of shares of Acquiror Common
Stock to be deposited in the Escrow Fund on such holder's behalf pursuant to
Article VIII hereof and payment in lieu of fractional shares which such holder
has the right to receive pursuant to Section 1.6, and the Certificate so
surrendered shall forthwith be canceled. Until so surrendered, each outstanding
Certificate that, prior to the Effective Time, represented shares of Target
Capital Stock will be deemed from and after the Effective Time, for all
corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of Acquiror Common Stock into which such
shares of Target Capital Stock shall have been so converted and the right to
receive an amount in cash in lieu of the issuance of any fractional shares in
accordance with Section 1.6. As soon as practicable after the Effective Time,
and subject to and in accordance with the provisions of Article VIII hereof,
Acquiror shall cause to be distributed to the Escrow Agent (as defined in
Article VIII hereof) a certificate or certificates representing shares of
Acquiror Common Stock which shall be registered in the name of the Escrow Agent
as nominee for the holders of Certificates cancelled pursuant to this Section
1.7. Such shares shall be beneficially owned by such holders and shall be held
in escrow and shall be available to compensate Acquiror for certain damages as
provided in Article VIII. To the extent not used for such purposes, such shares
shall be released, all as provided in Article VIII hereof.
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions with respect to Acquiror Common Stock with a record date
after the Effective Time will be paid to the holder of any unsurrendered
Certificate with respect to the shares of Acquiror Common Stock represented
thereby until the holder of record of such Certificate shall surrender such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
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<PAGE>
representing whole shares of Acquiror Common Stock issued in exchange therefor,
without interest, at the time of such surrender, the amount of any such
dividends or other distributions with a record date after the Effective Time
theretofore payable (but for the provisions of this Section 1.7(d)) with respect
to such shares of Acquiror Common Stock.
(e) TRANSFERS OF OWNERSHIP. If any certificate for shares of Acquiror
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Acquiror or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Acquiror Common Stock in any name other than that of the registered holder of
the Certificate surrendered, or established to the satisfaction of Acquiror or
any agent designated by it that such tax has been paid or is not payable.
(f) NO LIABILITY. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person for any amount properly paid to a public official
pursuant to and in compliance with any applicable abandoned property, escheat or
similar law.
(g) DISSENTING SHARES. The provisions of this Section 1.7 shall also apply
to Dissenting Shares that lose their status as such, except that the obligations
of Acquiror under this Section 1.7 shall commence on the date of loss of such
status and the holder of such shares shall be entitled to receive in exchange
for such shares the number of shares of Acquiror Common Stock to which such
holder is entitled pursuant to Section 1.6 hereof.
1.8 NO FURTHER OWNERSHIP RIGHTS IN TARGET CAPITAL STOCK. All shares of
Acquiror Common Stock issued upon the surrender for exchange of shares of Target
Capital Stock in accordance with the terms hereof (including any cash paid in
lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Capital Stock and
there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Target Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.9 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Acquiror Common
Stock (and cash in lieu of fractional shares) as may be required pursuant to
Section 1.6; provided, however, that Acquiror may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Acquiror, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
1.10 TAX AND ACCOUNTING CONSEQUENCES. It is intended by the parties hereto
that the Merger shall (i) constitute a reorganization within the meaning of
Section 368 of the Code and (ii) qualify for accounting treatment as a pooling
of interests.
1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Target and Merger Sub, the officers and directors of Target
and Merger Sub are fully authorized in the name of third respective corporations
or otherwise to take, and will take, all such lawful and necessary action, so
long as such action is not inconsistent with this Agreement.
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<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET
In this Agreement, any reference to any event, change, condition or effect
being "material" with respect to any entity or group of entities means any
material event, change, condition or effect related to the financial condition,
properties, assets (including intangible assets), liabilities, business,
operations or results of operations of such entity or group of entities. In this
Agreement, any reference to a "Material Adverse Effect" with respect to any
entity or group of entities means any event, change or effect that is materially
adverse to the financial condition, properties, assets, liabilities, business,
operations or results of operations of such entity and its subsidiaries, taken
as a whole.
In this Agreement, any reference to a party's "knowledge" means such party's
actual knowledge after due and diligent inquiry of officers, directors and other
employees of such party reasonably believed to have knowledge of such matters.
Except as disclosed in a document of even date herewith and delivered by
Target to Acquiror prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Target
Disclosure Schedule"), Target represents and warrants to Acquiror and Merger Sub
as follows:
2.1 ORGANIZATION, STANDING AND POWER. Target is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Target has the corporate power to own its
properties and to carry on its business as now being conducted and as proposed
to be conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified and in good standing
would have a Material Adverse Effect on Target. Target has delivered a true and
correct copy of the Certificate of Incorporation and Bylaws or other charter
documents, as applicable, of Target, each as amended to date, to Acquiror.
Target is not in violation of any of the provisions of its Certificate of
Incorporation or Bylaws or equivalent organizational documents. Target does not
directly or indirectly own any equity or similar interest in, or any interest
convertible or exchangeable or exercisable for, any equity or similar interest
in, any corporation, partnership, joint venture or other business association or
entity.
2.2 CAPITAL STRUCTURE. The authorized capital stock of Target consists of
14,000,000 shares of Common Stock and 6,000,000 shares of Preferred Stock, of
which there were issued and outstanding as of the close of business on June 10,
1997, 2,190,554 shares of Common Stock, 2,574,310 shares of Series A Preferred
Stock (the "Series A Preferred") that are convertible into 2,574,310 shares of
Common Stock, and 2,333,334 shares of Series B Preferred Stock (the "Series B
Preferred") that are convertible into 2,333,334 shares of Common Stock. There
are no other outstanding shares of capital stock or voting securities and no
outstanding commitments to issue any shares of capital stock or voting
securities after June 10, 1997 other than pursuant to the exercise of options
outstanding as of such date under the Target Stock Option Plan. All outstanding
shares of Target Capital Stock are duly authorized, validly issued, fully paid
and non-assessable and are free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof, and are
not subject to preemptive rights or rights of first refusal created by statute,
the Certificate of Incorporation or Bylaws of Target or any agreement to which
Target is a party or by which it is bound. As of the close of business on June
10, 1997, Target has reserved (i) 1,350,000 shares of Target Common Stock for
issuance to employees, officers, directors and consultants pursuant to the
Target Stock Option Plan, of which no shares have been issued pursuant to option
exercises or direct stock purchases, 1,069,833 shares are subject to
outstanding, unexercised options, and no shares are subject to outstanding stock
purchase rights. Since June 10, 1997, Target has not (i) issued or granted
additional options under the Target Stock Option Plan or (ii) granted additional
warrants or options (other than Target Options) to acquire Target Capital Stock.
Except for (i) the rights created pursuant to this Agreement and the Target
Stock Option Plan, (ii) Target's right to repurchase any unvested shares under
the Target Stock Option Plan and (iii) options and warrants referred to in this
Section 2.2, there are no other options, warrants, calls, rights, commitments or
agreements of any character to which Target is a
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party or by which it is bound obligating Target to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of capital stock of Target or obligating Target to grant,
extend, accelerate the vesting of, change the price of, or otherwise amend or
enter into any such option, warrant, call, right, commitment or agreement. There
are no other contracts, commitments or agreements relating to voting, purchase
or sale of Target's capital stock (i) between or among Target and any of its
stockholders and (ii) to Target's knowledge, between or among any of Target's
stockholders, except for the stockholders delivering Irrevocable Proxies (as
defined below). The terms of the Target Stock Option Plan permit the assumption
or substitution of options or warrants, as applicable, to purchase Acquiror
Common Stock as provided in this Agreement, without the consent or approval of
the holders of such securities, the Target stockholders, or otherwise and
without any acceleration of the exercise schedule or vesting provisions in
effect for those options. True and complete copies of all agreements and
instruments relating to or issued under the Target Stock Option Plan have been
made available to Acquiror and such agreements and instruments have not been
amended, modified or supplemented, and there are no agreements to amend, modify
or supplement such agreements or instruments in any case from the form made
available to Acquiror. All outstanding Target Capital Stock was issued in
compliance with all applicable federal and state securities laws.
2.3 AUTHORITY. Target has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target, subject only to the approval of the
Merger by Target's stockholders as contemplated by Section 6.1(a). This
Agreement has been duly executed and delivered by Target and constitutes the
valid and binding obligation of Target enforceable against Target in accordance
with its terms, except that such enforceability may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to creditors'
rights generally, and is subject to general principles of equity. The execution
and delivery of this Agreement by Target does not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any material obligation or loss of any material benefit under (i) any provision
of the Certificate of Incorporation or Bylaws of Target or any of its
subsidiaries, as amended, or (ii) any material mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Target or any of its subsidiaries or any of their properties or
assets except where such conflict, violation, default, termination, cancellation
or acceleration with respect to the foregoing provisions of (ii) would not be
reasonably expected to have a Material Adverse Effect on Target. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality ("Governmental Entity") is required by or with
respect to Target or any of its subsidiaries in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) the filing of the Certificate of Merger as
provided in Section 1.2, (ii) the filing with the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers, Inc.
(the "NASD") of the Proxy Statement (as defined in Section 2.24) relating to the
Acquiror Stockholders Meeting (as defined in Section 2.24) and the Target
Stockholders Meeting (as defined in Section 2.24), (iii) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable state securities laws and the securities laws
of any foreign country; (iv) such filings as may be required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR"); and
(v) such other consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not have a Material Adverse Effect on
Target and would not prevent, or materially alter or delay any of the
transactions contemplated by this Agreement or the Option Agreement.
2.4 FINANCIAL STATEMENTS. Target has delivered to Acquiror its unaudited
financial statements for the fiscal year ended December 31, 1996, and its
unaudited financial statements (balance sheet, statement
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of operations and statement of cash flows) on a consolidated basis as at, and
for the five-month period ended May 31, 1997 (collectively, the "Financial
Statements"). The Financial Statements are complete and correct in all material
respects and have been prepared in accordance with generally accepted accounting
principles (except that the unaudited financial statements do not have notes
thereto) applied on a consistent basis throughout the periods indicated and with
each other. The Financial Statements fairly present the financial condition and
operating results of Target as of the dates, and for the periods, indicated
therein, subject to normal year-end audit adjustments. Target maintains a
standard system of accounting established and administered in accordance with
generally accepted accounting principles.
2.5 ABSENCE OF CERTAIN CHANGES. Since May 31, 1997 (the "Target Balance
Sheet Date"), Target has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
night reasonably be expected to result in, a Material Adverse Effect on Target;
(ii) any acquisition, sale or transfer of any material asset of Target or any of
its subsidiaries other than in the ordinary course of business and consistent
with past practice; (iii) any change in accounting methods or practices
(including any change in depreciation or amortization policies or rates) by
Target or any revaluation by Target of any of its or any of its subsidiaries'
assets; (iv) any declaration, setting aside, or payment of a dividend or other
distribution with respect to the shares of Target, or any direct or indirect
redemption, purchase or other acquisition by Target of any of its shares of
capital stock; (v) any material contract entered into by Target or any of its
subsidiaries, other than in the ordinary course of business and as provided to
Acquiror, or any material amendment or termination of, or default under, any
material contract to which Target or any of its subsidiaries is a party or by
which it is bound; (vi) any amendment or change to the Certificate of
Incorporation or Bylaws of Target; (vii) any increase in or modification of the
compensation or benefits payable or to become payable by Target to any of its
directors or employees or (viii) any negotiation or agreement by Target to do
any of the things described in the preceding clauses (i) through (vii) (other
than negotiations with Acquiror and its representatives regarding the
transactions contemplated by this Agreement).
2.6 ABSENCE OF UNDISCLOSED LIABILITIES. Target has no material obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) other
than (i) those set forth or adequately provided for in the Balance Sheet for the
period ended May 31, 1997 (the "Target Balance Sheet"), (ii) those incurred in
the ordinary course of business and not required to be set forth in the Target
Balance Sheet under generally accepted accounting principles, (iii) those
incurred in the ordinary course of business since the Target Balance Sheet Date
and consistent with past practice, and (iv) those incurred in connection with
the execution of this Agreement.
2.7 LITIGATION. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Target or any of its
subsidiaries, threatened against Target or any of its subsidiaries or any of
their respective properties or any of their respective officers or directors (in
their capacities as such) that, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on Target. There is no
judgment, decree or order against Target or any of its subsidiaries, or, to the
knowledge of Target and its subsidiaries, any of their respective directors or
officers (in their capacities as such), that could prevent, enjoin, or
materially alter or delay any of the transactions contemplated by this
Agreement, or that could reasonably be expected to have a Material Adverse
Effect on Target. All litigation to which Target is a party (or, to the
knowledge of Target, threatened to become a party) is disclosed in the Target
Disclosure Schedule.
2.8 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement, judgment,
injunction, order or decree binding upon Target which has or could reasonably be
expected to have the effect of prohibiting or materially impairing any current
or future business practice of Target, any acquisition of property by Target or
the conduct of business by Target as currently conducted or as proposed to be
conducted by Target.
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2.9 GOVERNMENTAL AUTHORIZATION. Target has obtained each federal, state,
county, local or foreign governmental consent, license, permit, grant, or other
authorization of a Governmental Entity (i) pursuant to which Target currently
operates or holds any interest in any of its properties or (ii) that is required
for the operation of Target's business or the holding of any such interest ((i)
and (ii) herein collectively called "Target Authorizations"), and all of such
Target Authorizations are in full force and effect, except where the failure to
obtain or have any such Target Authorizations could not reasonably be expected
to have a Material Adverse Effect on Target.
2.10 TITLE TO PROPERTY. Target has good and marketable title to all of its
properties, interests in properties and assets, real and personal, reflected in
the Target Balance Sheet or acquired after the Target Balance Sheet Date (except
properties, interests in properties and assets sold or otherwise disposed of
since the Target Balance Sheet Date in the ordinary course of business), or with
respect to leased properties and assets, valid leasehold interests in, free and
clear of all mortgages, liens, pledges, charges or encumbrances of any kind or
character, except (i) the lien of current taxes not yet due and payable, (ii)
such imperfections of title, liens and easements as do not and will not
materially detract from or interfere with the use of the properties subject
thereto or affected thereby, or otherwise materially impair business operations
involving such properties and (iii) liens securing debt which is reflected on
the Target Balance Sheet. The plants, property and equipment of Target and its
subsidiaries that are used in the operations of their businesses are in all
material respects in good operating condition and repair subject to reasonable
wear and tear. All properties used in the operations of Target are reflected in
the Target Balance Sheet to the extent generally accepted accounting principles
require the same to be reflected. SCHEDULE 2.10 identifies each parcel of real
property owned or leased by Target.
2.11 INTELLECTUAL PROPERTY.
(a) Target owns, licenses or otherwise possesses legally enforceable rights
to use all patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, maskworks, net lists, schematics, technology, know-how,
trade secrets, inventory, ideas, algorithms, processes, computer software
programs or applications (in both source code and object code form), and
tangible or intangible proprietary information or material ("Intellectual
Property") that are used or currently proposed to be used in the business of
Target as currently conducted or as proposed to be conducted by Target, except
to the extent that the failure to have such rights have not had and would not
reasonably be expected to have a Material Adverse Effect on Target.
(b) SCHEDULE 2.11 lists (i) all patents and patent applications and all
registered and unregistered trademarks, trade names and service marks,
registered copyrights, included in the Intellectual Property, including the
jurisdictions in which each such Intellectual Property right has been issued or
registered or in which any application for such issuance and registration has
been filed, (ii) all licenses, sublicenses and other agreements as to which
Target is a party and pursuant to which any person is authorized to use any
Intellectual Property of Target, and (iii) all licenses, sublicenses and other
agreements as to which Target is a party and pursuant to which Target is
authorized to use any third party patents, trademarks or copyrights, including
software ("Third Party Intellectual Property Rights") which are incorporated in,
are, or form a part of any Target product that is material to its business.
(c) There is no material unauthorized use, disclosure, infringement or
misappropriation of any Intellectual Property rights of Target, any trade secret
material to Target, or any Intellectual Property right of any third party to the
extent licensed by or through Target, by any third party, including any employee
or former employee of Target. Target has not entered into any agreement to
indemnify any other person against any charge of infringement of any
Intellectual Property, other than indemnification provisions contained in sales
invoices arising in the ordinary course of business.
(d) Target is not, nor will it be as a result of the execution and delivery
of this Agreement or the performance of its obligations under this Agreement, in
breach of any license, sublicense or other agreement relating to the
Intellectual Property or Third Party Intellectual Property Rights, the breach of
which would have a Material Adverse Effect on Target.
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(e) All patents, registered trademarks, service marks and copyrights held by
Target are valid and subsisting. Target (i) has not been sued in any suit,
action or proceeding which involves a claim of infringement of any patents,
trademarks, service marks, copyrights or violation of any trade secret or other
proprietary right of any third party; and (ii) has not brought any action, suit
or proceeding for infringement of Intellectual Property or breach of any license
or agreement involving Intellectual Property against any third party. The
manufacturing, marketing, licensing or sale of its product does not infringe any
patent, trademark, service mark, copyright, trade secret or other proprietary
right of any third party, where such infringement would have a Material Adverse
Effect on Target.
(f) Target has secured valid written assignments from all consultants and
employees who contributed to the creation or development of Intellectual
Property of the rights to such contributions that Target does not already own by
operation of law, the absence of which would have a Material Adverse Effect on
Target.
(g) All use, disclosure or appropriation of Intellectual Property not
otherwise protected by patents, patent applications or copyright ("Confidential
Information"), owned by Target by or to a third party has been pursuant to the
terms of a written agreement between Target and such third party. All use,
disclosure or appropriation of Confidential Information not owned by Target has
been pursuant to the terms of a written agreement between Target and the owner
of such Confidential Information, or is otherwise lawful.
2.12 ENVIRONMENTAL MATTERS.
(a) The following terms shall be defined as follows:
(i) "Environmental and Safety Laws" shall mean any federal, state or
local laws, ordinances, codes, regulations, rules, policies and orders that
are intended to assure the protection of the environment, or that classify,
regulate, call for the remediation of, require reporting with respect to, or
list or define air, water, groundwater, solid waste, hazardous or toxic
substances, material, wastes, pollutants or contaminants, or which are
intended to assure the safety of employees, workers or other persons,
including the public.
(ii) "Hazardous Materials" shall mean any toxic or hazardous substance,
material or waste or any pollutant or contaminant, or infectious or
radioactive substance or material, including without limitation, those
substances, materials and wastes defined in or regulated under any
Environmental and Safety Laws.
(iii) "Property" shall mean all real property leased or owned by Target
or its subsidiaries either currently or in the past.
(iv) "Facilities" shall mean all buildings and improvements on the
Property of Target or its subsidiaries.
(b) Except in all cases as, in the aggregate, have not had and would not be
reasonably expected to have a Material Adverse Effect on Target, Target
represents and warrants as follows: (i) to Target's knowledge, no methylene
chloride or asbestos is contained in or has been used at or released from the
Facilities; (ii) to Target's knowledge, all Hazardous Materials and wastes have
been disposed of in accordance with all Environmental and Safety Laws; and (iii)
Target and its subsidiaries have received no written notice of any noncompliance
of the Facilities or its past or present operations with Environmental and
Safety laws; (iv) no notices, administrative actions or suits are pending, or,
to Target's knowledge, threatened relating to a violation of any Environmental
and Safety Laws; (v) to Target's knowledge, neither Target nor its subsidiaries
are a potentially responsible party under the federal Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), or state analog
statute, arising out of events occurring prior to the Closing Date; (vi) to
Target's knowledge, there have not been in the past, and are not now, any
Hazardous Materials on, under or migrating to or from the Facilities or
Property; (vii) to Target' s knowledge, there have not been in the past, and are
not now, any underground tanks or underground improvements at, on or under the
Property including without limitation, treatment or storage tanks, sumps, or
water, gas or oil wells; (viii) Target has not deposited, stored, disposed of or
located polychlorinated biphenyls (PCB) on the Property or Facilities or any
equipment on the Property containing PCBs at levels in excess of 50 parts
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per million; (ix) to Target' s knowledge, there is no formaldehyde on the
Property or in the Facilities, nor any insulating material containing urea
formaldehyde in the Facilities; (x) to Target's knowledge the Facilities and
Target's and its subsidiaries uses and activities therein have at all times
complied with all Environmental and Safety Laws; and (xi) Target and its
subsidiaries have all the permits and licenses required to be issued and are in
full compliance with the terms and conditions of those permits.
2.13 TAXES.
(a) Target and any consolidated, combined or unitary group for Tax purposes
of which Target is or has been a member have timely filed all Tax Returns
required to be filed by them and have paid all Taxes shown thereon to be due.
The Financial Statements (i) fully accrue all actual and, except in the case of
unaudited Financial Statements, contingent liabilities for Taxes with respect to
all periods through May 31, 1997 and Target has not and will not incur any Tax
liability in excess of the amount reflected on the Financial Statements with
respect to such periods. No material Tax liability has accrued or been incurred
or will be accrued or incurred by Target for periods after May 31, 1997, through
the Effective Time, other than in the ordinary course of business. The Financial
Statements and the Target Closing Disclosure Schedule properly reflects the
amount of any net operating loss and tax credit carryforwards available with
respect to Target and a limitation on the use of such losses or credits, subject
to any limitations arising from the Merger. Target has withheld and paid to the
applicable financial institution or Tax Authority all amounts required to be
withheld. No notice of deficiency or similar document of any Tax Authority has
been received by Target, and there are no liabilities for Taxes with respect to
the issues that have been raised (and are currently pending) by any Tax
Authority that could, if determined adversely to Target, materially and
adversely affect the liability of Target for Taxes. There is (i) no material
claim for Taxes that is a lien against the property of Target other than liens
for Taxes not yet due and payable, (ii) Target has received no notification of
any audit of any Tax Return of Target being conducted pending or threatened by a
Tax authority, (iii) no extension or waiver of the statute of limitations on the
assessment of any Taxes granted by Target and currently in effect, and (iv) no
agreement, contract or arrangement to which Target is a party that may result in
the payment of any material amount that would not be deductible by reason of
Sections 162(m), 280G or 404 of the Code. Target will not be required to include
any material adjustment in Taxable income for any Tax period (or portion
thereof) pursuant to Section 481 or 263A of the Code or any comparable provision
under state or foreign Tax laws as a result of transactions, events or
accounting methods employed prior to the Merger. Target is not a party to any
tax sharing or tax allocation agreement nor does Target owe any amount under any
such agreement. For purposes of this Agreement, the following terms have the
following meanings: "Tax" (and, with correlative meaning, "Taxes" and "Taxable")
means (i) any net income, alternative or add-on minimum tax, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property, environmental or windfall profit tax, customs duty or other tax
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or any penalty, addition to tax or additional amount
imposed by any Governmental Entity (a "Tax Authority") responsible for the
imposition of any such tax (domestic or foreign), (ii) any liability for the
payment of any amounts of the type described in (i) as a result of being a
member of an affiliated, consolidated, combined or unitary group for any Taxable
period and (iii) any liability for the payment of any amounts of the type
described in (i) or (ii) as a result of any express or implied obligation to
indemnify any other person. As used herein, "Tax Return" shall mean any return,
statement, report or form (including, without limitation,) estimated Tax returns
and reports, withholding Tax returns and reports and information reports and
returns required to be filed with respect to Taxes. Target and each of its
subsidiaries are in full compliance with all terms and conditions of any Tax
exemptions or other Tax-sparing agreement or order of a foreign government
applicable to them and the consummation of the Merger shall not have any adverse
effect on the continued validity and effectiveness of any such Tax exemptions or
other Tax-sparing agreement or order.
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2.14 EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 2.14 lists, with respect to Target and any trade or business
(whether or not incorporated) which is treated as a single employer with Target
(an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of
the Code, (i) all material employee benefit plans (as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), (ii)
each loan to a non-officer employee in excess of $10,000, loans to officers and
directors and any stock option, stock purchase, phantom stock, stock
appreciation right, supplemental retirement, severance, sabbatical, medical,
dental, vision care, disability, employee relocation, cafeteria benefit (Code
section 125) or dependent care (Code section 129), life insurance or accident
insurance plans, programs or arrangements, (iii) all bonus, pension, profit
sharing, savings, deferred compensation or incentive plans, programs or
arrangements, (iv) other fringe or employee benefit plans, programs or
arrangements that apply to senior management of Target and that do not generally
apply to all employees, and (v) any current or former employment or executive
compensation or severance agreements, written or otherwise, as to which
unsatisfied obligations of Target of greater than $10,000 remain for the benefit
of, or relating to, any present or former employee, consultant or director of
Target (together, the "Target Employee Plans").
(b) Target has furnished to Acquiror a copy of each, if any, of the Target
Employee Plans and related plan documents (including trust documents, insurance
policies or contracts, employee booklets, summary plan descriptions and other
authorizing documents, and, to the extent still in its possession, any material
employee communications relating thereto) and has, with respect to each Target
Employee Plan which is subject to ERISA reporting requirements, provided copies
of the Form 5500 reports filed for the last three plan years. Any Target
Employee Plan intended to be qualified under Section 401(a) of the Code has
either obtained from the Internal Revenue Service a favorable determination
letter as to its qualified status under the Code, including all amendments to
the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or
has applied to the Internal Revenue Service for such a determination letter
prior to the expiration of the requisite period under applicable Treasury
Regulations or Internal Revenue Service pronouncements in which to apply for
such determination letter and to make any amendments necessary to obtain a
favorable determination, or has been established under a standardized prototype
plan for which an Internal Revenue Service opinion letter has been obtained by
the plan sponsor and is valid as to the adopting employer. Target has also
furnished Acquiror with the most recent Internal Revenue Service determination
or opinion letter issued with respect to each such Target Employee Plan, and
nothing has occurred since the issuance of each such letter which could
reasonably be expected to cause the loss of the tax-qualified status of any
Target Employee Plan subject to Code Section 401(a).
(c) (i) None of the Target Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person, except as required by
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"); (ii) there
has been no "prohibited transaction," as such term is defined in Section 406 of
ERISA and Section 4975 of the Code, with respect to any Target Employee Plan,
which could reasonably be expected to have, in the aggregate, a Material Adverse
Effect on Target; (iii) each Target Employee Plan has been administered in
accordance with its terms and in compliance with the requirements prescribed by
any and all statutes, rules and regulations (including ERISA and the Code),
except as would not have, in the aggregate, a Material Adverse Effect on Target,
and Target and each ERISA Affiliate have performed all material obligations
required to be performed by them under, are not in any material respect in
default under or violation of, and have no knowledge of any material default or
violation by any other party to, any of the Target Employee Plans; (iv) neither
Target nor any ERISA Affiliate is subject to any liability or penalty under
Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any
of the Target Employee Plans which have a Material Adverse Effect on any
parties; (v) all material contributions required to be made by Target or any
ERISA Affiliate to any Target Employee Plan have been made on or before their
due dates and a reasonable amount has been accrued for contributions to each
Target Employee Plan for the current plan years; (vi) with respect to each
Target Employee Plan, no "reportable event" within the meaning of Section 4043
of ERISA (excluding any such
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event for which the thirty (30) day notice requirement has been waived under the
regulations to Section 4043 of ERISA) nor any event described in Section 4062,
4063 or 4041 or ERISA has occurred; and (vii) no Target Employee Plan is covered
by, and neither Target nor any ERISA Affiliate has incurred or expects to incur
any liability under Title IV of ERISA or Section 412 of the Code. With respect
to each Target Employee Plan subject to ERISA as either an employee pension plan
within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan
within the meaning of Section 3(l) of ERISA, Target has prepared in good faith
and timely filed all requisite governmental reports (which were true and correct
as of the date filed) and has properly and timely filed and distributed or
posted all notices and reports to employees required to be filed, distributed or
posted with respect to each such Target Employee Plan except as would not have a
Material Adverse Effect. No suit, administrative proceeding, action or other
litigation has been brought, or to the knowledge of Target is threatened,
against or with respect to any such Target Employee Plan, including any audit or
inquiry by the IRS or United States Department of Labor. Neither Target nor any
Target subsidiary or other ERISA Affiliate is a party to, or has made any
contribution to or otherwise incurred any obligation under, any "multiemployer
plan" as defined in Section 3(37) of ERISA.
(d) With respect to each Target Employee Plan, Target has complied with (i)
the applicable health care continuation and notice provisions of COBRA and the
proposed regulations thereunder and (ii) the applicable requirements of the
Family and Medical Leave Act of 1993 and the regulations thereunder, except to
the extent that such failure to comply would not, in the aggregate, have a
Material Adverse Effect on Target.
(e) The consummation of the transactions contemplated by this Agreement will
not (i) entitle any current or former employee or other service provider of
Target or any other ERISA Affiliate to severance benefits or any other payment
(including, without limitation, unemployment compensation, golden parachute or
bonus), except as expressly provided in this Agreement, or (ii) accelerate the
time of payment or vesting of any such benefits, or increase the amount of
compensation due any such employee or service provider.
(f) There has been no amendment to, written interpretation or announcement
(whether or not written) by Target or other ERISA Affiliate relating to, or
change in participation or coverage under, any Target Employee Plan which would
materially increase the expense of maintaining such Plan above the level of
expense incurred with respect to that Plan for the most recent fiscal year
included in Target's financial statements.
2.15 CERTAIN AGREEMENTS AFFECTED BY THE MERGER. Neither the execution and
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of Target, (ii) materially increase any benefits
otherwise payable by Target or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
2.16 EMPLOYEE MATTERS. Target is in compliance in all material respects
with all currently applicable laws and regulations respecting employment,
discrimination in employment, terms and conditions of employment, wages, hours
and occupational safety and health and employment practices, and are not engaged
in any unfair labor practice, except where failure to be in compliance or the
engagement in such unfair labor practices would not reasonably be expected to
have a Material Adverse Effect on Target. There are no pending claims against
Target under any workers compensation plan or policy or for long term
disability. Target has no material obligations under COBRA with respect to any
former employees or qualifying beneficiaries thereunder except for obligations
that would not reasonably be expected to have a Material Adverse Effect on
Target. There are no proceedings pending or, to the knowledge of Target,
threatened, between Target and its employees, which proceedings have or could
reasonably be expected to have a Material Adverse Effect on Target. Target is
not a party to any collective bargaining agreement or other labor unions
contract nor does Target know of any activities or proceedings of any labor
union to
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organize any such employees. In addition, Target has provided all employees,
with all relocation benefits, stock options, bonuses and incentives, and all
other compensation that such employee has earned up through the date of this
Agreement or that such employee was otherwise promised in their employment
agreements with Target.
2.17 INTERESTED PARTY TRANSACTIONS. Target is not indebted to any
director, officer, employee or agent of Target (except for amounts due as normal
salaries and bonuses and in reimbursement of ordinary expenses), and no such
person is indebted to Target.
2.18 INSURANCE. Target has policies of insurance and bonds of the type and
in amounts customarily carried by persons conducting businesses or owning assets
similar to those of Target. There is no material claim pending under any of such
policies or bonds as to which coverage has been questioned, denied or disputed
by the underwriters of such policies or bonds. All premiums due and payable
under all such policies and bonds have been paid and Target is otherwise in
compliance with the terms of such policies and bonds. Target has no knowledge of
any threatened termination of, or material premium increase with respect to, any
of such policies.
2.19 COMPLIANCE WITH LAWS. Target has complied with, is not in violation
of, and has not received any notices of violation with respect to, any federal,
state, local or foreign statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for such
violations or failures to comply as could not be reasonably expected to have a
Material Adverse Effect on Target.
2.20 MINUTE BOOKS. The minute books of Target made available to Acquiror
contain a complete and accurate summary of all meetings of directors and
stockholders or actions by written consent since the time of incorporation of
Target through the date of this Agreement, and reflect all transactions referred
to in such minutes accurately in all material respects.
2.21 COMPLETE COPIES OF MATERIALS. Target has delivered or made available
true and complete copies of each document which has been requested by Acquiror
or its counsel in connection with their legal and accounting review of Target.
All the material contracts and agreements (as such terms are defined in
Regulation S-K promulgated under the Act) to which Target is a party are listed
in SCHEDULE 2.21 hereto.
2.22 POOLING OF INTERESTS. Neither Target nor, to the knowledge of Target,
any of its respective directors, officers or stockholders, has taken any action
which would interfere with Acquiror's ability to account for the Merger as a
pooling of interests.
2.23 BROKERS' AND FINDERS' FEES. Target has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
2.24 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The information
supplied by Target for inclusion in the registration statement on Form S-4 (or
such other or successor form as shall be appropriate) pursuant to which the
shares of Acquiror Common Stock to be issued in the Merger will be registered
with the SEC (the "Registration Statement") shall not, at the time the
Registration Statement (including any amendments or supplements thereto) is
declared effective by the SEC, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The information supplied by Target for inclusion
in the proxy statement/prospectus to be sent to the stockholders of Target and
Acquiror in connection with the meeting of Target's stockholders to consider the
Merger (the "Target Stockholders Meeting") and in connection with the meeting of
Acquiror's stockholders to consider the Merger (the "Acquiror Stockholders
Meeting") (such proxy statement/prospectus as amended or supplemented is
referred to herein as the "Proxy Statement") shall not, on the date the Proxy
Statement is first mailed to Target's stockholders and Acquiror's stockholders,
at the time of the Target Stockholders Meeting, at the time of the Acquiror
Stockholders Meeting and at the
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Effective Time, contain any statement which, at such time, is false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Target
Stockholders Meeting or the Acquiror Stockholders Meeting which has become false
or misleading. Notwithstanding the foregoing, Target makes no representation,
warranty or covenant with respect to any information supplied by Acquiror or
Merger Sub which is contained in any of the foregoing documents.
2.25 AFFILIATE'S AGREEMENT; STOCKHOLDER'S REPRESENTATION AGREEMENT;
IRREVOCABLE PROXIES. All of the persons and/or entities deemed "Affiliates" of
Target within the meaning of Rule 145 promulgated under the Securities Act and
holders of more than 51% of the sum of (i) all shares of Target Common Stock
issued and outstanding and (ii) all shares of Target Preferred Stock issued and
outstanding, have agreed in writing to vote for approval of the Merger pursuant
to stockholder agreements attached hereto as EXHIBIT B-1 and EXHIBIT F ("Target
Affiliate's Agreement" and "Stockholder's Representation Agreement",
respectively), and pursuant to Irrevocable Proxies attached as EXHIBIT A
("Irrevocable Proxies") to the Voting Agreement attached hereto as EXHIBIT C-1
(the "Target Voting Agreement").
2.26 VOTE REQUIRED. The affirmative vote of (i) the holders of a majority
of the shares of Target's Common Stock and Preferred Stock voting together as a
single class outstanding on the record date set for the Target Stockholders
Meeting and (ii) the holders of a majority of the shares of Target's Preferred
Stock voting together as a single class outstanding on the record date set for
the Target Stockholder Meeting are the only votes of the holders of any of
Target's Capital Stock necessary to approve this Agreement and the transactions
contemplated hereby.
2.27 BOARD APPROVAL. The Board of Directors of Target has unanimously
approved this Agreement and the Merger, (ii) determined that in its opinion the
Merger is in the best interests of the stockholders of Target and is on terms
that are fair to such stockholders and (iii) recommended that the stockholders
of Target approve this Agreement and the Merger.
2.28 INVENTORY. The inventories shown on the Financial Statements or
thereafter acquired by Target, consisted of items of a quantity and quality
usable or salable in the ordinary course of business. Since May 31, Target has,
subject to any reasonable reserves contained in the Financial Statements,
continued to replenish inventories in a normal and customary manner consistent
with past practices. Target has not received notice that it will experience in
the foreseeable future any difficulty in obtaining, in the desired quantity and
quality and at a reasonable price and upon reasonable terms and conditions, the
raw materials, supplies or component products required for the manufacture,
assembly or production of its products. The values at which inventories are
carried reflect the inventory valuation policy of Target, which is consistent
with its past practice and in accordance with generally accepted accounting
principles applied on a consistent basis. Since May 31, 1997, due provision was,
made on the books of Target in the ordinary course of business consistent with
past practices to provide for all slow-moving, obsolete, or unusable inventories
to their estimated useful or scrap values and such inventory reserves are
adequate to provide for such slow-moving, obsolete or unusable inventory and
inventory shrinkage.
2.29 CUSTOMERS AND SUPPLIERS. As of the date hereof, no customer which
individually accounted for more than 10% of Target's gross revenues during the
12 month period preceding the date hereof, and no supplier of Target, has
canceled or otherwise terminated, or made any written threat to Target to cancel
or otherwise terminate its relationship with Target, or has at any time on or
after May 31, 1997 decreased materially its services or supplies to Target in
the case of any such supplier, or its usage of the services or products of
Target in the case of such customer, and to Target's knowledge, no such supplier
or customer has indicated either orally or in writing that it will cancel or
otherwise terminate its relationship with Target or to decrease materially its
services or supplies to Target or its usage of the services or products of
Target, as the case may be. Target has not knowingly breached, so as to provide
a benefit to Target that was not
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intended by the parties, any agreement with, or engaged in any fraudulent
conduct with respect to, any customer or supplier of Target.
2.30 PRELIMINARY POOLING LETTER. Target has caused Coopers & Lybrand
L.L.P., Target's independent auditors, to deliver to Acquiror on or prior to the
date hereof a draft letter setting forth the preliminary conclusion of Coopers &
Lybrand L.L.P. that, assuming Acquiror is a corporation eligible to be a party
to a transaction seeking pooling of interests accounting treatment and that the
participation of Acquiror in the Merger will not, in and of itself, disqualify
the Merger from qualifying for pooling of interests accounting treatment, the
Merger will qualify for pooling of interests accounting treatment if consummated
in accordance with this Agreement.
2.31 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by Target herein or in any Schedule or Exhibit hereto, including the Target
Disclosure Schedule, or certificate furnished by Target pursuant to this
Agreement or any written statement furnished to Acquiror pursuant hereto or in
connection with the transactions contemplated hereby, when all such documents
are read together in their entirety, contains or will contain at the Effective
Time any untrue statement of a material fact, or omits or will omit at the
Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading; provided, however, that (a) for purposes of this
representation, any document attached hereto and any document specifically
referenced in the Target Disclosure Schedule as a "Superseding Document" (even
if not attached hereto) that provides information inconsistent with or in
addition to any other written statement furnished to Acquiror in connection with
the transaction contemplated hereby, shall be deemed to supersede any other
document or written statement furnished to Acquiror with respect to such
inconsistent or additional information, and (b) it is understood that the
financial projections delivered by Target represent only Target's best estimate
under the circumstances of what it reasonably believes (although it is not aware
of any fact or information that would lead it to believe that such projections
are misleading in any material respect) and are based upon assumptions set forth
in such projections that Target believes were reasonable as of the time such
projections were made. Target does not make any other representation or warranty
regarding such projections or Target's possible or anticipated operating
performance other than as set forth in this Section 2.31.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
Except as disclosed in a document of even date herewith and delivered by
Acquiror to Target prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Acquiror
Disclosure Schedule"), Acquiror and Merger Sub represent and warrant to Target
as follows:
3.1 ORGANIZATION, STANDING AND POWER. Each of Acquiror and its
subsidiaries, including Merger Sub, is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of Acquiror and its subsidiaries has the corporate power to
own its properties and to carry on its business as now being conducted and as
proposed to be conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified and in
good standing would have a Material Adverse Effect on Acquiror. Acquiror has
delivered a true and correct copy of the Certificate of Incorporation and Bylaws
or other charter documents, as applicable, of Acquiror and each of its
subsidiaries, each as amended to date, to Target. Neither Acquiror nor any of
its subsidiaries is in violation of any of the provisions of is Certificate of
Incorporation or Bylaws or equivalent organizational documents. Acquiror is the
owner of all outstanding shares of capital stock of each of its subsidiaries and
all such shares are duly authorized, validly issued, fully paid and
nonassessable. All of the outstanding shares of capital stock of each such
subsidiary are owned by Acquiror free and clear of all liens, charges, claims or
encumbrances or rights of others. There are no outstanding subscriptions,
options,
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warrants, puts, calls, rights, exchangeable or convertible securities or other
commitments or agreements of any character relating to the issued or unissued
capital stock or other securities of any such subsidiary, or otherwise
obligating Acquiror or any such subsidiary to issue, transfer, sell, purchase,
redeem or otherwise acquire any such securities. Except as disclosed in the
Acquiror SEC Documents (as defined in Section 3.4), Acquiror does not directly
or indirectly own any equity or similar interest in, or any interest convertible
or exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity.
3.2 CAPITAL STRUCTURE. The authorized capital stock of Acquiror consists
of 50,000,000 shares of Common Stock, $0.0005 par value, and 18,095,690 shares
of Preferred Stock, $0.001 par value, of which there were issued and outstanding
as of the close of business on June 10, 1997, 19,111,647 shares of Common Stock
and no shares of Preferred Stock. There are no other outstanding shares of
capital stock or voting securities of Acquiror other than shares of Acquiror
Common Stock issued after June 10, 1997 upon the exercise of options issued
under the Acquiror 1996 Stock Incentive Plan (the "Acquiror Stock Option Plan").
The authorized capital stock of Merger Sub consists of 1,000 shares of Common
Stock, $.0001 par value, all of which are issued and outstanding and are held by
Acquiror. All outstanding shares of Acquiror and Merger Sub have been duly
authorized, validly issued, fully paid and are nonassessable and free of any
liens or encumbrances other than any liens or encumbrances created by or imposed
upon the holders thereof. As of the close of business on June 10, 1997, Acquiror
has reserved 5,377,393 shares of Common Stock for issuance to employees,
directors and independent contractors pursuant to the Acquiror Stock Option
Plan, of which 2,347,525 shares have been issued pursuant to option exercises,
and 2,352,456 shares are subject to outstanding, unexercised options. In
addition, as of the close of business on June 10, 1997, Acquiror had also issued
a warrant to purchase 2,000,000 shares of Acquiror's Common Stock. Other than
pursuant to this Agreement, the Acquiror Stock Option Plan and the Acquiror
Employee Stock Purchase Plan there are no other options, warrants, calls,
rights, commitments or agreements of any character to which Acquiror or Merger
Sub is a party or by which either of them is bound obligating Acquiror or Merger
Sub to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock of
Acquiror or Merger Sub or obligating Acquiror or Merger Sub to grant, extend or
enter into any such option, warrant, call, right, commitment or agreement. The
shares of Acquiror Common Stock to be issued pursuant to the Merger will be duly
authorized, validly issued, fully paid, and non-assessable.
3.3 AUTHORITY. Acquiror and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Acquiror and Merger Sub,
subject only to the approval of the Merger by the Acquiror stockholders as
contemplated by Section 6.1(a). This Agreement has been duly executed and
delivered by Acquiror and Merger Sub and constitutes the valid and binding
obligations of Acquiror and Merger Sub. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of a benefit
under (i) any provision of the Certificate of Incorporation or Bylaws of
Acquiror or any of its subsidiaries, as amended, or (ii) any material mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Acquiror or any of its subsidiaries or their properties
or assets, except where such conflict, violation, default, termination,
cancellation or acceleration with respect to the foregoing provisions of (ii)
would not have had and would not reasonably be expected to have a Material
Adverse Effect on Acquiror. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, is required
by or, to the knowledge of Acquiror with respect to, Acquiror or any of its
subsidiaries in connection with the execution and delivery of this Agreement by
Acquiror and Merger Sub or the consummation by Acquiror and Merger Sub of the
transactions contemplated hereby, except for (i) the filing of the Certificate
of
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Merger as provided in Section 1.2, (ii) the filing with the SEC and NASD of the
Registration Statement and the Proxy Statement relating to the Acquiror
Stockholders Meeting, (iii) the filing of a Form 8-K with the SEC and NASD
within 15 calendar days after the Closing Date, (iv) any filings as may be
required under applicable state securities laws and the securities laws of any
foreign country, (v) such filings as may be required under HSR, (vi) the filing
with the Nasdaq National Market System of a Notification Form for Listing of
Additional Shares with respect to the shares of Acquiror Common Stock issuable
upon conversion of the Target Common Stock in the Merger and upon exercise of
the options under the Target Stock Option Plans assumed by Acquiror, and (vii)
such other consents, authorizations, filings, approvals and registrations which,
if not obtained or made, would not have a Material Adverse Effect on Acquiror
and would not prevent or materially alter or delay any of the transactions
contemplated by this Agreement.
3.4 SEC DOCUMENTS; FINANCIAL STATEMENTS. Acquiror has made available to
Target a true and complete copy of each statement, report, registration
statement (with the prospectus in the form filed pursuant to Rule 424(b) of the
Securities Act), definitive proxy statement, and other filing filed with the SEC
by Acquiror since April 29, 1996, and, prior to the Effective Time, Acquiror
will have furnished Target with true and complete copies of any additional
documents filed with the SEC by Acquiror prior to the Effective Time
(collectively, the "Acquiror SEC Documents"). In addition, Acquiror has made
available to Target all exhibits to the Acquiror SEC Documents filed prior to
the date hereof, and will promptly make available to Target all exhibits to any
additional Acquiror SEC Documents filed prior to the Effective Time. All
documents required to be filed as exhibits to the Target SEC Documents have been
so filed, and all material contracts so filed as exhibits are in full force and
effect, except those which have expired in accordance with their terms, and
neither Acquiror nor any of its subsidiaries is in default thereunder. As of
their respective filing dates, the Acquiror SEC Documents complied in all
material respects with the requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and the Securities Act, and none of the Acquiror
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a subsequently filed Acquiror
SEC Document prior to the date hereof. The financial statements of Acquiror,
including the notes thereto, included in the Acquiror SEC Documents (the
"Acquiror Financial Statements") were complete and correct in all material
respects as of their respective dates, complied as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto as of their respective dates,
and have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent throughout the periods indicated and
consistent with each other (except as may be indicated in the notes thereto or,
in the case of unaudited statements included in Quarterly Reports on Form 10-Qs,
as permitted by Form 10-Q). The Acquiror Financial Statements fairly present the
consolidated financial condition and operating results of Acquiror and its
subsidiaries at the dates and during the periods indicated therein (subject, in
the case of unaudited statements, to normal, recurring year-end adjustments).
There has been no change in Acquiror accounting policies except as described in
the notes to the Acquiror Financial Statements.
3.5 ABSENCE OF CERTAIN CHANGES. Since March 29, 1997 (the "Acquiror
Balance Sheet Date"), Acquiror has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
might reasonably be expected to result in, a Material Adverse Effect to
Acquiror; (ii) any acquisition, sale or transfer of any material asset of
Acquiror or any of its subsidiaries other than in the ordinary course of
business and consistent with past practice; (iii) any change in accounting
methods or practices (including any change in depreciation or amortization
policies or rates) by Acquiror or any revaluation by Acquiror of any of its
assets; (iv) any declaration, setting aside, or payment of a dividend or other
distribution with respect to the shares of Acquiror, or any direct or indirect
redemption, purchase or other acquisition by Acquiror of any of its shares of
capital stock; (v) any material contract entered into by Acquiror, other than in
the ordinary course of business and as provided to Target, or any material
amendment or termination of,
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or default under, any material contract to which Acquiror is a party or by which
it is bound; (vi) any amendment or change to Acquiror's Certificate of
Incorporation or Bylaws; or (vii) any negotiation or agreement by Acquiror or
any of its subsidiaries to do any of the things described in the preceding
clauses (i) through (vi) (other than negotiations with Target and its
representatives regarding the transactions contemplated by this Agreement).
3.6 ABSENCE OF UNDISCLOSED LIABILITIES. Acquiror has no material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in the
Balance Sheet included in Acquiror's Quarterly Report on Form 10-Q for the
period ended March 29, 1997 (the "Acquiror Balance Sheet"), (ii) those incurred
in the ordinary course of business and not required to be set forth in the
Acquiror Balance Sheet under generally accepted accounting principles, and (iii)
those incurred in the ordinary course of business since the Acquiror Balance
Sheet Date and consistent with past practice.
3.7 LITIGATION. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Acquiror or any of its
subsidiaries, threatened against Acquiror or any of its subsidiaries or any of
their respective properties or any of their respective officers or directors (in
their capacities as such) that, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on Acquiror. There is
no judgment, decree or order against Acquiror or any of its subsidiaries or, to
the knowledge of Acquiror or any of its subsidiaries, any of their respective
directors or officers (in their capacities as such) that could prevent, enjoin,
or materially alter or delay any of the transactions contemplated by this
Agreement, or that could reasonably be expected to have a Material Adverse
Effect on Acquiror.
3.8 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no material agreement,
judgment, injunction, order or decree binding upon Acquiror or any of its
subsidiaries which has the effect of prohibiting or materially impairing any
current or future business practice of Acquiror or any of its subsidiaries, any
acquisition of property by Acquiror or any of its subsidiaries or the conduct of
business by Acquiror or any of its subsidiaries as currently conducted or as
proposed to be conducted by Acquiror or any of its subsidiaries.
3.9 OPINION OF FINANCIAL ADVISOR. Acquiror has been advised in writing by
its financial advisor, Montgomery Securities, that in such advisor's opinion as
of the date hereof, the consideration to be paid by Acquiror pursuant to the
Merger is fair to Acquiror from a financial point of view.
3.10 INTELLECTUAL PROPERTY. Acquiror and its subsidiaries own, or are
licensed or otherwise possess legally enforceable rights to use all patents,
trademarks, trade names, service marks, copyrights, and any applications
therefor, maskworks, net lists, schematics, technology, know-how, trade secrets,
inventory, ideas, algorithms, processes, computer software programs or
applications (in both source code and object code form), and tangible or
intangible proprietary information or material ("Acquiror Intellectual
Property") that are used or proposed to be used in the business of Acquiror and
its subsidiaries as currently conducted or as proposed to be conducted by
Acquiror and its subsidiaries, except to the extent that the failure to have
such rights have not had and would not reasonably be expected to have a Material
Adverse Effect on Acquiror.
3.11 GOVERNMENTAL AUTHORIZATION. Acquiror and each of its subsidiaries
have obtained each federal, state, county, local or foreign governmental
consent, license, permit, grant, or other authorization of a Governmental Entity
(i) pursuant to which Acquiror or any of its subsidiaries currently operates or
holds any interest in any of its properties or (ii) that is required for the
operation of Acquiror's or any of its subsidiaries' business or the holding of
any such interest ((i) and (ii) herein collectively called "Acquiror
Authorizations"), and all of such Acquiror Authorizations are in full force and
effect, except where the failure to obtain or have any of such Acquiror
Authorizations could not reasonably be expected to have a Material Adverse
Effect on Acquiror.
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3.12 COMPLIANCE WITH LAWS. Each of Acquiror and its subsidiaries has
complied with, are not in violation of, and have not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
could not be reasonably expected to have a Material Adverse Effect on Acquiror.
3.13 POOLING OF INTERESTS. Neither Acquiror nor any of its subsidiaries
nor, to the knowledge of Acquiror, any of their respective directors, officers
or stockholders has taken any action which would interfere with Acquiror's
ability to account for the Merger as a pooling of interests.
3.14 BROKER'S AND FINDERS' FEES. Acquiror has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.15 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The information
supplied by Acquiror and Merger Sub for inclusion in the Registration Statement
shall not, at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The information supplied by Acquiror for
inclusion in the Proxy Statement shall not, on the date the Proxy Statement is
first mailed to Target's stockholders and Acquiror's stockholders, at the time
of the Target Stockholders Meeting, at the time of the Acquiror Stockholders
Meeting and at the Effective Time, contain any statement which, at such time, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Target
Stockholders Meeting or the Acquiror Stockholders Meeting which has become false
or misleading. If at any time prior to the Effective Time any event or
information should be discovered by Acquiror or Merger Sub which should be set
forth in an amendment to the Registration Statement or a supplement to the Proxy
Statement, Acquiror or Merger Sub will promptly inform Target. Notwithstanding
the foregoing, Acquiror and Merger Sub make no representation, warranty or
covenant with respect to any information supplied by Target which is contained
in any of the foregoing documents.
3.16 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the shares of Acquiror's Common Stock outstanding on the record date set for the
Target Stockholders Meeting is the only vote of the holders of any of Acquiror's
Common Stock necessary to approve this Agreement and the transactions
contemplated hereby.
3.17 BOARD APPROVAL. The Boards of Directors of Acquiror and Merger Sub
have prior to the date hereof unanimously (i) approved this Agreement and the
Merger, (ii) determined that the Merger is in the best interests of their
respective stockholders and is on terms that are fair to such stockholders and
(iii) determined to recommend that the stockholder of Merger Sub approve this
Agreement and the consummation of the Merger.
3.18 PRELIMINARY POOLING LETTER. Acquiror has on or prior to the date
hereof received a draft letter from Coopers & Lybrand, L.L.P., Acquiror's
independent auditors, setting forth its preliminary conclusion, based in part
upon the conclusions set forth in the letter referred to in Section 2.31, that
the Merger will qualify for pooling of interests accounting treatment if
consummated in accordance with this Agreement.
3.19 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by Acquiror or Merger Sub herein or in any Schedule hereto, including the
Acquiror Disclosure Schedule, or certificate furnished by Acquiror or Merger Sub
pursuant to this Agreement, or the Acquiror SEC Documents, or any written
statement furnished to Target pursuant hereto or in connection with the
transactions contemplated hereby, when all such documents are read together in
their entirety, contains or will contain at the
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Effective Time any untrue statement of a material fact, or omits or will omit at
the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading; provided, however, that for purposes of this
representation, any document attached hereto and any document specifically
referenced in the Acquiror Disclosure Schedule as a "Superseding Document" (even
if not attached hereto) that provides information inconsistent with or in
addition to any other written statement furnished to Target in connection with
the transaction contemplated hereby, shall be deemed to supersede any other
document or written statement furnished to Target with respect to such
inconsistent or additional information.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS OF ACQUIROR. Except as expressly contemplated by
this Agreement, Acquiror shall neither cause, nor permit any of the following,
or allow, cause or permit any of is subsidiaries to do, cause or permit any of
the following, without the prior written consent of Target, which consent shall
not be unreasonably withheld:
(a) DIVIDENDS; CHANGES IN CAPITAL STOCK. Declare or pay any dividends
on or make any other distributions (whether in cash, stock or property) with
respect to any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital
stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service to it or its
subsidiaries;
(b) MATERIAL ACQUISITIONS. Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets of,
or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or
in the aggregate, to its and its subsidiaries' business, taken as a whole,
or acquire or agree to acquire any equity securities of any corporation,
partnership, association or business organization (any of the foregoing
referred to herein as a "Material Acquisition") which Material Acquisition
would require Acquiror to file a Form 8-K pursuant to Item 2 of Form 8-K
under Section 13 or 15(d) of the Securities and Exchange Act of 1934;
(c) STOCK OPTION PLANS, ETC. Grant in excess of 1,300,000 options
under the Acquiror's Stock Option Plan after the date hereof, in the
ordinary course of business.
(d) OTHER. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (c) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.2 CONDUCT OF BUSINESS OF TARGET. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Target agrees (except to the extent expressly
contemplated by this Agreement or as consented to in writing by Acquiror, which
consent shall not be unreasonably withheld), to carry on its and its
subsidiaries' business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to pay debts and Taxes
when due subject (i) to good faith disputes over such debts or Taxes and (ii) to
Acquiror's consent (which will not be unreasonably withheld) to the filing of
material Tax Returns if applicable, to pay or perform other obligations when
due, and to use all reasonable commercial efforts consistent with past practice
and policies to preserve intact its present business organizations, keep
available the services of its and its subsidiaries' present officers and key
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
to the end that its
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goodwill and ongoing businesses shall be materially unimpaired at the Effective
Time. Each of Target and Acquiror agrees to promptly notify the other of (x) any
event or occurrence not in the ordinary course of its or its subsidiaries'
business, and of any event which could have a Material Adverse Effect and (y)
any material change in its capitalization as set forth in Section 2.2 or Section
3.3, as applicable. Without limiting the foregoing, except as expressly
contemplated by this Agreement or the Target Disclosure Schedule, Target, shall
not do, cause or permit any of the following, without the prior written consent
of the Acquiror which consent shall not be unreasonably withheld:
(a) CHARTER DOCUMENTS. Cause or permit any amendments to its
Certificate of Incorporation or Bylaws;
(b) DIVIDENDS; CHANGES IN CAPITAL STOCK. Declare or pay any dividends
on or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital
stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service to it;
(c) STOCK OPTION PLANS, ETC. Accelerate, amend or change the period of
exercisability or vesting of options or other rights granted under its stock
plans or authorize cash payments in exchange for any options or other rights
granted under any of such plans.
(d) POOLING. Take any action, which would interfere with Acquiror's
ability to account for the Merger as a pooling of interests; or
(e) OTHER. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (d) above, or any action which
would cause a material breach of its representations or warranties contained
in this Agreement or prevent it from materially performing or cause it not
to materially perform its covenants hereunder.
4.3 LIMITATIONS ON BUSINESS OF TARGET. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, except as expressly contemplated by this
Agreement or the Target Disclosure Schedule, Target shall not do, cause or
permit any of the following, or allow, cause or permit any of its subsidiaries
to do, cause or permit any of the following, without the prior written consent
of Acquiror which consent shall not be unreasonably withheld:
(a) MATERIAL CONTRACTS. Enter into any material contract or
commitment, or violate, amend or otherwise modify or waive in any material
fashion any of the terms of any of its material contracts, other than in the
ordinary course of business. Among other things, the ordinary course of
business shall include non-exclusive distribution agreements;
(b) ISSUANCE OF SECURITIES. Issue, deliver, sell, authorize or propose
the issuance, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements
or commitments of any character obligating it to issue any such shares or
other convertible securities, other than (i) the issuance of shares of its
Common Stock pursuant to the exercise of stock options, warrants or other
rights therefor outstanding as of the date of this Agreement, (ii) the grant
of stock options to service providers in the ordinary course of business, or
(iii) issuances and option exercises to service providers pursuant to the
grants in (ii) above, in the ordinary course of business, provided that the
aggregate of (ii) and (iii) above shall not exceed 77,667 shares after the
date hereof;
(c) INTELLECTUAL PROPERTY. Transfer to any person or entity any rights
to its Intellectual Property other than in the ordinary course of business
consistent with past practice;
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(d) EXCLUSIVE RIGHTS. Enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing or other exclusive
rights of any type or scope with respect to any of its products or
technology;
(e) DISPOSITIONS. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually or
in the aggregate, to its and its parent's/subsidiaries' business, taken as a
whole, except in the ordinary course of business;
(f) INDEBTEDNESS. Incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others in excess of $1,000,000 at an
interest rate of no greater than prime rate plus 1%;
(g) LEASES. Enter into any operating lease in excess of $50,000;
(h) PAYMENT OF OBLIGATIONS. Pay, discharge or satisfy in an amount in
excess of $10,000 in any one case or $50,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the Target Financial Statements;
(i) CAPITAL EXPENDITURES. Make any capital expenditures, capital
additions or capital improvements except in the ordinary course of business;
(j) INSURANCE. Materially reduce the amount of any material insurance
coverage provided by existing insurance policies;
(k) TERMINATION OR WAIVER. Terminate or waive any right of substantial
value, other than in the ordinary course of business;
(l) EMPLOYEE BENEFIT PLANS; NEW HIRES; PAY INCREASES. Adopt or amend
any employee benefit plan, except if such Plan, as adopted or amended, is
not materially more favorable than Acquiror's benefit plans, or adopt or
amend any stock purchase or option plan, or hire any new officer level
employee (except that it may hire a replacement for any current director
level or officer level employee if it first provides Acquiror advance notice
regarding such hiring decision), pay any special bonus or special
remuneration to any employee or director (except payments made pursuant to
written agreements outstanding on the date hereof), or increase the salaries
or wage rates of its employees except in the ordinary course of business in
accordance with its standard past practice;
(m) SEVERANCE ARRANGEMENTS. Except as set forth on the Target
Disclosure Schedule, grant any severance or termination pay (i) to any
director or officer or (ii) to any other employee except (A) payments made
pursuant to written plans or agreements outstanding on the date hereof or
(B) grants which are made in the ordinary course of business in accordance
with its standard past practice;
(n) LAWSUITS. Commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit would result in the material impairment of a
valuable aspect of in its business, provided that it consults with Acquiror
prior to the filing of such a suit, or (iii) for a breach of this Agreement
or otherwise in connection with interpretation or enforcement of any
provision of this Agreement or any agreement or transaction contemplated
hereby;
(o) ACQUISITIONS. Acquire or agree to acquire by merging or
consolidaing with, or by purchasing a substantial portion of the assets of,
or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or
in the aggregate, to its and its parent's/ subsidiaries' business, taken as
a whole;
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(p) TAXES. Other than in the ordinary course of business, make or
change any material election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, file any material Tax Return or any
amendment to a material Tax Return, enter into any closing agreement, settle
any material claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any material
claim or assessment in respect of Taxes;
(q) REVALUATION. Revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business; or
(r) OTHER. Take or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through (q) above, or any action which
would cause a material breach of its representations or warranties contained
in this Agreement or prevent it from materially performing or cause it not
to materially perform its covenants hereunder.
4.4 NO SOLICITATION. Target and its officers, directors, employees or
other agents will not, directly or indirectly, (i) take any action to solicit,
initiate or encourage any Takeover Proposal (defined below) or (ii) engage in
negotiations with, or disclose any nonpublic information relating to Target to,
or afford access to the properties, books or records of Target to, any person
that has advised Target that it may be considering making, or that has made, a
Takeover Proposal. Target will promptly notify Acquiror after receipt of any
Takeover Proposal or any notice that any person is considering making a Takeover
Proposal or any request for nonpublic information relating to Target for access
to the properties, books or records of Target by any person that has advised
Target that it may be considering making, or that has made, a Takeover Proposal
and will keep Acquiror fully informed of the status and details of any such
Takeover Proposal notice or request. For purposes of this Agreement, "Takeover
Proposal" means any offer or proposal for, or any indication of interest in 15%
or more of the outstanding shares of capital stock of Target, a merger or other
business combination involving Target or the acquisition of any significant
equity interest in, or a significant portion of the assets of, Target other than
the transactions contemplated by this Agreement. Notwithstanding the foregoing,
if on or after December 31, 1997 Target delivers a written notice to Acquiror
(with appropriate backup documentation provided) which states that Target
projects that it will run out of cash and cash equivalents on or before June 1,
1998, Target may initiate discussions with venture funds and other non-corporate
investors for the purpose of raising equity funding for Target's operations.
Target may not close any of such transactions prior to March 31, 1998, and must
keep Acquiror fully informed of the details of such discussions, including,
without limitation, the identities of all parties with whom Target has such
discussions. The foregoing shall in no way limit any of Target's other
obligations and covenants in this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT. As promptly as
practicable after the execution of this Agreement, Target and Acquiror shall
prepare, and Acquiror shall file with the SEC, preliminary proxy materials
relating to the approval of the Merger and the transactions contemplated hereby
by the stockholders of Acquiror and, as promptly as practicable following
receipt of SEC comments thereon, Acquiror shall file with the SEC a Registration
Statement on Form S-4 (or such other or successor form as shall be appropriate)
(the "S-4"), which complies in form with applicable SEC requirements and shall
use all reasonable efforts to cause the Registration Statement to become
effective as soon thereafter as practicable; provided, however, that neither
Acquiror nor Target shall be obligated to agree to account for the Merger as a
"purchase" in order to cause the Registration Statement to become effective.
Subject to the provisions of Section 4.4 hereof, the Proxy Statement shall
include, if requested by Acquiror, the recommendation of the Target's Board of
Directors in favor of the Merger. The Proxy Statement shall include the
recommendation of the Acquiror's Board of Directors in favor of the Merger;
provided that
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such recommendation may not be included, or may be withdrawn if previously
included, if Acquiror's Board of Directors believes in good faith and, upon
written advice of its outside legal counsel, shall determine that to include
such recommendation, or not withdraw such recommendation if previously included,
would constitute a breach of Acquiror's Board of Directors' fiduciary duty under
applicable law. The Acquiror will update and amend the S-4 to the extent
necessary prior to the Closing.
5.2 MEETING OF STOCKHOLDERS.
(a) Target shall promptly after the date hereof take all action necessary in
accordance with Delaware Law and its Certificate of Incorporation and Bylaws to
convene the Target Stockholders Meeting within 45 days of the Registration
Statement being declared effective by the SEC. Target shall consult with
Acquiror and use all reasonable efforts to hold the Target Stockholders Meeting
on the same day as the Acquiror Stockholders Meeting and shall not postpone or
adjourn (other than for the absence of a quorum) the Target Stockholders Meeting
without the consent of Acquiror, which consent shall not be unreasonably
withheld. Subject to Section 5.1, Target shall use its best efforts to solicit
from stockholders of Target proxies in favor of the Merger and shall take all
other action necessary or advisable to secure the vote or consent of
stockholders required to effect the Merger.
(b) Acquiror shall promptly after the date hereof take all action necessary
in accordance with Delaware Law and its Certificate of Incorporation and Bylaws
to convene the Acquiror Stockholders Meeting within 45 days of the Registration
Statement being declared effective by the SEC. Acquiror shall consult with
Target and use all reasonable efforts to hold the Acquiror Stockholders Meeting
on the same day as the Target Stockholders Meeting and shall not postpone or
adjourn (other than for the absence of a quorum) the Acquiror Stockholders
Meeting without the consent of Target, which consent shall not be unreasonably
withheld. Subject to Section 5.1, Acquiror shall use its best efforts to solicit
from stockholders of Acquiror proxies in favor of the Merger and shall take all
other action necessary or advisable to secure the vote or consent of
stockholders required to effect the Merger.
5.3 ACCESS TO INFORMATION.
(a) Target shall afford Acquiror and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all of Target's properties, books,
contracts, commitments and records, and (ii) all other information concerning
the business, properties and personnel of Target as Acquiror may reasonably
request. Target agrees to provide to Acquiror and its accountants, counsel and
other representatives copies of internal financial statements promptly upon
request. Acquiror shall afford Target and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all of Acquiror's and its
subsidiaries' properties, books, contracts, commitments and records, and (ii)
all other information concerning the business, properties and personnel of
Acquiror and its subsidiaries as Target may reasonably request. Acquiror agrees
to provide to Target and its accountants, counsel and other representatives
copies of internal financial statements promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof until
the Effective Time, each of Acquiror and Target shall confer on a regular and
frequent basis with one or more representatives of the other party to report
operational matters of materiality and the general status of ongoing operations.
(c) No information or knowledge obtained in any investigation pursuant to
this Section 5.3 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.4 CONFIDENTIALITY. The parties acknowledge that each of Acquiror and
Target have previously executed a non-disclosure agreement dated March 11, 1997
(the "Confidentiality Agreement"), which Confidentiality Agreement shall
continue in full force and effect in accordance with its terms.
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5.5 PUBLIC DISCLOSURE. Unless otherwise permitted by this Agreement,
Acquiror and Target shall consult with each other before issuing any press
release or otherwise making any public statement or making any other public (or
non-confidential) disclosure (whether or not in response to an inquiry)
regarding the terms of this Agreement and the transactions contemplated hereby,
and neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld), except as may be required by law, or in exercise of the
fiduciary duties of the Board of Directors, or by obligations pursuant to any
listing agreement with any national securities exchange or with the NASD.
Notwithstanding the foregoing, Acquiror and Target intend to issue a mutually
agreeable press release upon execution of this Agreement.
5.6 CONSENTS; COOPERATION.
(a) Each of Acquiror and Target shall promptly apply for or otherwise seek,
and use its reasonable commercial efforts to obtain, all consents and approvals
required to be obtained by it for the consummation of the Merger, including
those required under HSR, and shall use its reasonable commercial efforts to
obtain all necessary consents, waivers and approvals under any of is material
contracts in connection with the Merger for the assignment thereof or otherwise,
except where the failure to obtain such consents under material contracts would
not have a Material Adverse Effect on Target. The parties hereto will consult
and cooperate with one another, and consider in good faith the views of one
another, in connection with any analyses, appearances, presentations, memoranda,
briefs, arguments, opinions and proposals made or submitted by or on behalf of
any party hereto in connection with proceedings under or relating to HSR or any
other federal or state antitrust or fair trade law.
(b) Each of Acquiror and Target shall use all reasonable efforts to resolve
such objections, if any, as may be asserted by any Governmental Entity with
respect to the transactions contemplated by this Agreement under HSR, the
Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade
Commission Act, as amended, and any other Federal, state or foreign statutes,
rules, regulations, orders or decrees that are designed to prohibit, restrict or
regulate actions having the purpose or effect of monopolization or restraint of
trade (collectively, "Antitrust Laws"). In connection therewith, if any
administrative or judicial action or proceeding is instituted (or threatened to
be instituted) challenging any transaction contemplated by this Agreement as
violative of any Antitrust Law, each of Acquiror and Target shall cooperate and
use all reasonable commercial efforts to vigorously contest and resist any such
action or proceeding and to have vacated, lifted, reversed, or overturned any
decree, judgment, injunction or other order, whether temporary, preliminary or
permanent (each an "Order"), that is in effect and that prohibits, prevents, or
restricts consummation of the Merger or any such other transactions, unless by
mutual agreement Acquiror and Target decide that such litigation is not in their
respective best interests. Notwithstanding the provisions of the immediately
preceding sentence, it is expressly understood and agreed that Acquiror shall
have no obligation to litigate or contest any administrative or judicial action
or proceeding or any Order beyond the earlier of (i) March 31, 1998 or (ii) the
date of a ruling preliminary enjoining the Merger issued by a court of competent
jurisdiction (the "Injunction Date"). Each of Acquiror and Target shall use all
reasonable efforts to take such action as may be required to cause the
expiration of the notice periods, under the HSR or other Antitrust Laws with
respect to such transactions, to occur as promptly as possible after the
execution of this Agreement.
(c) Notwithstanding anything to the contrary in Section 5.6(a) or (b), (i)
neither Acquiror nor any of it subsidiaries shall be required to divest any of
their respective businesses, product lines or assets, or to take or agree to
take any other action or agree to any limitation that could reasonably be
expected to have a Material Adverse Effect on Acquiror or on Acquiror combined
with the Surviving Corporation after the Effective Time, and (ii) Target shall
not be required to divest any of its businesses, product lines or assets, or to
take or agree to take any other action or agree to any limitation that could
reasonably be expected to have a Material Adverse Effect on Target.
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5.7 POOLING ACCOUNTING. Acquiror and Target shall each use its reasonable
commercial efforts to cause the business combination to be effected by the
Merger to be accounted for as a pooling of interests. Each of Acquiror and
Target shall use its reasonable commercial efforts to cause its "Affiliates" (as
defined in Section 5.8) not to take any action that would adversely affect the
ability of Acquiror to account for the business combination to be effected by
the Merger as a pooling of interest.
5.8 AFFILIATE AGREEMENTS.
(a) SCHEDULE 5.8(A) sets forth those persons who may be deemed "Affiliates"
of Target within the meaning of Rule 145 promulgated under the Securities Act
("Rule 145"). Target shall provide Acquiror such information and documents as
Acquiror shall reasonably request for purposes of reviewing such list. Target
shall use its reasonable commercial efforts to deliver or cause to be delivered
to Acquiror, concurrently with the execution of this Agreement (and in each case
prior to the Effective Time) from each of the Affiliates of Target, an executed
Affiliate Agreement in the form attached hereto as EXHIBIT B-1. Acquiror and
Merger Sub shall be entitled to place appropriate legends on the certificates
evidencing any Acquiror Common Stock to be received by such Affiliates of Target
pursuant to the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for Acquiror Common Stock, consistent with
the terms of such Affiliate Agreements.
(b) SCHEDULE 5.8(B) sets forth those persons who may be deemed "Affiliates"
of Acquiror within the meaning of Rule 145. Acquiror shall provide Target such
information and documents as Target shall reasonably request for purposes of
reviewing such list. Acquiror shall use its reasonable commercial efforts to
deliver or cause to be delivered to Target, concurrently with the execution of
this Agreement (and in each case prior to the Effective Time) from each of the
Affiliates of Acquiror, an executed Affiliate Agreement in the form attached
hereto as EXHIBIT B-2.
5.9 VOTING AGREEMENT
(a) Target shall use its reasonable commercial efforts, on behalf of
Acquiror and pursuant to the request of Acquiror, to cause each Target
stockholder named in SCHEDULE 5.9(A) to execute and deliver to Acquiror a Voting
Agreement substantially in the form of EXHIBIT C-1 attached hereto concurrent
with the execution of this Agreement.
(b) Acquiror shall use its reasonable commercial efforts, on behalf of
Target and pursuant to the request of Target, to cause each Acquiror stockholder
named in SCHEDULE 5.9(B) to execute and deliver to Target a Voting Agreement
substantially in the form of EXHIBIT C-2 attached hereto concurrent with the
execution of this Agreement.
5.10 LEGAL REQUIREMENTS. Each of Acquiror, Merger Sub and Target will, and
will cause their respective subsidiaries to, take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed on
them with respect to the consummation of the transactions contemplated by this
Agreement and will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such requirements imposed upon such
other party in connection with the consummation of the transactions contemplated
by this Agreement and will take all reasonable actions necessary to obtain (and
will cooperate with the other parties hereto in obtaining) any consent,
approval, order or authorization of, or any registration, declaration or filing
with, any Governmental Entity or other person, required to be obtained or made
in connection with the taking of any action contemplated by this Agreement.
5.11 BLUE SKY LAWS. Acquiror shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Acquiror Common Stock in connection with the
Merger. Target shall use its best efforts to assist Acquiror as may be necessary
to comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of Acquiror Common Stock in
connection with the Merger.
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5.12 EMPLOYEE BENEFIT PLANS
(a) At the Effective Time, the Target Stock Option Plan and each outstanding
option to purchase shares of Target Common Stock under the Target Stock Option
Plan, whether vested or unvested, will be assumed by Acquiror. SCHEDULE 5.13
hereto sets forth a true and complete list as of the date hereof of all holders
of outstanding options under the Target Stock Option Plan, including the number
of shares of Target capital stock subject to each such option, the exercise or
vesting schedule, the exercise price per share and the term of each such option.
On the Closing Date, Target shall deliver to Acquiror an updated SCHEDULE 5.13
hereto current as of such date. Each such option so assumed by Acquiror under
this Agreement shall continue to have, and be subject to, the same terms and
conditions set forth in the Target Stock Option Plan, immediately prior to the
Effective Time, except that (i) such option will be exercisable for that number
of whole shares of Acquiror Common Stock equal to the product of the number of
shares of Target Common Stock that were issuable upon exercise of such option
immediately prior to the Effective Time multiplied by the Exchange Ratio and
rounded down to the nearest whole number of shares of Acquiror Common Stock, and
(ii) the per share exercise price for the shares of Acquiror Common Stock
issuable upon exercise of such assumed option will be equal to the quotient
determined by dividing the exercise price per share of Target Common Stock at
which such option was exercisable immediately prior to the Effective Time by the
Exchange Ratio, rounded up to the nearest whole cent. Consistent with the terms
of the Target Stock Option Plan and the documents governing the outstanding
options under that Plan, the Merger will not terminate any of the outstanding
options under such Plan or accelerate the exercisability or vesting of such
options except as disclosed in the Target Disclosure Schedule or the shares of
Acquiror Common Stock which will be subject to those options upon the Acquiror's
assumption of the options in the Merger. It is the intention of the parties that
the options so assumed by Acquiror qualify following the Effective Time as
incentive stock options as defined in Section 422 of the Code to the extent such
options qualified as incentive stock options prior to the Effective Time. Within
10 business days after the Effective Time, Acquiror will issue to each person
who, immediately prior to the Effective Time was a holder of an outstanding
option under the Target Stock Option Plan a document in form and substance
satisfactory to Target evidencing the foregoing assumption of such option by
Acquiror.
5.13 ESCROW AGREEMENT. On or before the Effective Time, the Escrow Agent
and the Stockholders' Agent (as defined in Article VIII hereto) will execute the
Escrow Agreement contemplated by Article VIII in the form attached hereto as
EXHIBIT E ("Escrow Agreement").
5.14 LETTER OF ACQUIROR'S AND TARGET'S ACCOUNTANTS.
(a) Acquiror shall use all reasonable efforts to cause to be delivered to
Target a Procedures Letter of Acquiror's independent auditors, dated a date
within two business days before the date on which the Registration Statement
shall become effective and addressed to Target, in form reasonably satisfactory
to Target and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement.
(b) Target shall use all reasonable efforts to cause to be delivered to
Acquiror a Procedures Letter of Target's independent auditors, dated a date
within two business days before the date on which the Registration Statement
shall become effective and addressed to Acquiror, in form reasonably
satisfactory to Acquiror and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement.
5.15 FORM S-8. Acquiror agrees to file, as soon as practicable but in no
event later than thirty (30) days after the Closing, a registration statement on
Form S-8 covering the shares of Acquiror Common Stock issuable pursuant to
outstanding options under the Target Stock Option Plan assumed by Acquiror and
use reasonable commercial efforts to cause such registration statement to be
declared effective as soon as practicable thereafter. Target shall cooperate
with and assist Acquiror in the preparation of such registration statement.
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5.16 STOCKHOLDER'S REPRESENTATION AGREEMENTS. Target will use reasonable
commercial efforts to cause all Target stockholders who are not also Affiliates
of Target to execute and deliver to Acquiror a Stockholder's Representation
Agreement substantially in the form attached hereto as EXHIBIT F (the
"Stockholder's Representation Agreement") which imposes certain restrictions
regarding the resale of Acquiror Common Stock received in the Merger.
5.17 LISTING OF ADDITIONAL SHARES. Prior to the Effective Time, Acquiror
shall file with the Nasdaq National Market a Notification Form for Listing of
Additional Shares with respect to the shares referred to in Section 6.1(f) and
use reasonable commercial efforts to ensure that all such shares are listed for
trading thereof.
5.18 EMPLOYEES. Concurrently with the execution of this Agreement, each of
the individuals set forth on SCHEDULE 5.18 shall have delivered to Acquiror an
executed Employment and Non-Competition Agreement in the form of EXHIBIT G-1,
et. seq., as applicable. Target shall cooperate with Acquiror to assist Acquiror
in employing such employees.
5.19 POOLING LETTERS.
(a) Target shall use all reasonable efforts to cause to be delivered to
Acquiror a letter of Coopers & Lybrand L.L.P., Target's independent auditors,
dated on or prior to the date of this Agreement and confirmed in writing two
business days before the date of the Proxy Statement to the effect that the
Merger qualifies for pooling-of-interest accounting treatment if consummated in
accordance with this Agreement. Such letter shall be in a form reasonably
satisfactory to Acquiror and customary in scope and substance for letters
delivered by independent public accountants in connection with transactions of
this type.
(b) Acquiror shall use all reasonable efforts to cause to be delivered to
Target a letter of Coopers & Lybrand L.L.P., Acquiror's independent auditors,
dated on or prior to the date of this Agreement and confirmed in writing two
business days before the date of the Proxy Statement to the effect that the
Merger qualifies for pooling-of-interest accounting treatment if consummated in
accordance with this Agreement. Such letter shall be in a form reasonably
satisfactory to Target and customary in scope and substance for letters
delivered by independent public accountants in connection with transactions of
this type.
5.20 INDEMNIFICATION.
(a) After the Effective Time, Acquiror will cause the Surviving Corporation
to indemnify and hold harmless the present and former officers, directors,
employees and agents of Target (the "Indemnified Parties") in respect of acts or
omissions occurring on or prior to the Effective Time to the extent provided
under Target's then effective Certificate of Incorporation and Bylaws or any
indemnification agreement with Target officers and directors to which Target is
a party, in each case in effect on March 1, 1997; provided that such
indemnification shall be subject to any limitation imposed from time to time
under applicable law.
(b) The provisions of this Section 5.21 are intended to be for the benefit
of and shall be enforceable by, each Indemnified Party, and his or her heirs and
representatives.
5.21 REORGANIZATION. Acquiror and Target shall each use its reasonable
commercial efforts to cause the business combination to be effected by the
Merger to be qualified as a "reorganization" described in Section 368(a) of the
Code.
5.22 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the Certificate of Merger
and the transactions contemplated hereby and thereby shall be paid by the party
incurring such expense; provided, however that any out-of-pocket expenses
incurred by Target (including, without limitation, fees and expenses of one
legal counsel to the Company, financial Advisors and accountants) in excess of
$150,000.00 (which amount shall be subject to
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reasonable increases in the event of unexpected and material changes in the
scope of work required by such counsel, advisors or accounts, approval of which
shall not be unreasonably withheld) in addition to fees and expenses of more
than one legal counsel shall remain an obligation of Target's stockholders.
5.23 TERMINATION OF REGISTRATION RIGHTS. Target shall use commercially
reasonable efforts to terminate any and all rights granted by that certain
Amended and Restated Investors Rights Agreement, dated May 28, 1997, by and
among Target and each of the parties listed on Exhibit A thereto, from all
holders of Registrable Securities thereunder.
5.24 SERVICES AGREEMENT. Acquiror and Target shall have entered into a
Services Agreement in the form attached hereto as EXHIBIT H.
5.25 EMPLOYEE BENEFIT PLANS. As soon as practicable after Effective Time,
Acquiror shall merge Target's 401(k) plan into the 401(k) plan maintained by
Acquiror. Acquiror shall, and shall cause the Surviving Corporation to, permit
the employees of the Surviving Corporation to participate in all employee
benefit plans offered to similarly situated employees of Acquiror. Acquiror
shall cause the employee benefit plans and vacation programs of Acquiror or the
Surviving Corporation that are offered to the employees of the Surviving
Corporation to recognize service with Target to the same extent as service with
Acquiror for purposes of determining eligibility, vesting and seniority, but
service with Target need not be recognized for purposes of benefit accrual under
any defined-benefit pension plan maintained by Acquiror or the Surviving
Corporation. Acquiror shall absorb any deferred sales charges associated with
the termination of Target's 401(k) plan not to exceed $10,000.
5.26 REASONABLE COMMERCIAL EFFORTS AND FURTHER ASSURANCES. Each of the
parties to this Agreement shall use reasonable commercial efforts to effectuate
the transactions contemplated hereby and to fulfill and cause to be fulfilled
the conditions to closing under this Agreement. Each party hereto, at the
reasonable request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) STOCKHOLDER APPROVAL. This Agreement and the Merger shall have
been approved and adopted by (i) the holders of at least ninety-one percent
(91%) of the stockholders of Target (as described in Section 2.26) under
Delaware Law, (ii) the requisite vote of the stockholders of Acquiror (as
described in Section 3.16) and (iii) Acquiror as the sole stockholder of
Merger Sub.
(b) REGISTRATION STATEMENT EFFECTIVE. The SEC shall have declared the
Registration Statement effective. No stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose, and no similar proceeding in respect of the
Proxy Statement, shall have been initiated or threatened by the SEC and all
requests for additional information on the part of the SEC shall have been
complied with to the reasonable satisfaction of the parties thereto.
(c) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be and remain in
effect, nor shall any proceeding brought by an administrative agency or
commission or other
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governmental authority or instrumentality, domestic or foreign, seeking any
of the foregoing be pending, which would have a Material Adverse Effect on
such party. Nor shall there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal. In the event an
injunction or other order shall have been issued, each party agrees to use
its reasonable diligent efforts to have such injunction or other order
terminated or lifted.
(d) GOVERNMENTAL APPROVAL. Acquiror, Target and Merger Sub and their
respective subsidiaries shall have timely obtained from each Governmental
Entity all approvals, waivers and consents, if any, necessary for
consummation of or in connection with the Merger and the several
transactions contemplated hereby, including such approvals, waivers and
consents as may be required under the Securities Act, under state Blue Sky
laws, and under HSR other than filings and approvals relating to the Merger
or affecting Acquiror's ownership of Target or any of its properties if
failure to obtain such approval, waiver or consent would not have a Material
Adverse Effect to either party.
(e) ESCROW AGREEMENT. Acquiror, Target, Escrow Agent and the
Stockholder's Agent (as defined in Article VIII hereto) shall have entered
into an Escrow Agreement substantially in the form attached hereto as
EXHIBIT E.
(f) TAX OPINIONS. Each of Acquiror and Target shall have received
substantially identical written opinions from their respective counsel, in
form and substance reasonably satisfactory to them, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code. In rendering such opinions, counsel shall be entitled to rely
upon representations of Acquiror, Merger Sub and Target and certain
stockholders of Target.
(g) LISTING OF ADDITIONAL SHARES. The filing with the Nasdaq National
Market of a Notification Form for Listing of Additional Shares with respect
to the shares of Acquiror Common Stock issuable upon conversion of the
Target Common Stock in the Merger and upon exercise of the options under the
Target Stock Option Plan assumed by Acquiror shall have been made and shares
so listed.
(h) LETTER FROM ACCOUNTANTS. Each of Acquiror and Target shall have
received a letter from Coopers & Lybrand L.L.P., independent auditors of
both Acquiror and Target, confirming that the Merger qualifies for pooling
of interests accounting treatment if consummated in accordance with this
Agreement.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF TARGET. The obligations of
Target to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, any of which may be waived, in writing, by
Target:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. (i) Except as set forth
on a schedule to be delivered to Target prior to the Effective Time (the
"Acquiror Closing Disclosure Schedule"), the representations and warranties
of Acquiror and Merger Sub in this Agreement shall be true and correct in
all material respects (except for such representations and warranties that
are qualified by their terms by a reference to materiality which
representations and warranties as so qualified shall be true in all
respects) on and as of the Effective Time as though such representations and
warranties were made on and as of such time, except to the extent that the
failure to be so true would not and would not reasonably be expected to have
a Material Adverse Effect on Acquiror and (ii) Acquiror and Merger Sub shall
have performed and complied in all material respects with all covenants,
obligations and conditions of this Agreement required to be performed and
complied with by them as of the Effective Time.
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(b) CERTIFICATE OF ACQUIROR. Target shall have been provided with a
certificate executed on behalf of Acquiror by its President and its Chief
Financial Officer to the effect that, as of the Effective Time:
(i) except as set forth on Acquiror Closing Disclosure Schedule
delivered prior to the Effective Time, all representations and warranties
made by Acquiror and Merger Sub under this Agreement are true and
complete in all material respects; and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Acquiror and Merger Sub on or before such date have been
so performed in all material respects.
(c) NO MATERIAL ADVERSE CHANGES. There shall not have occurred any
material adverse change in the financial condition, properties, assets
(including intangible assets), liabilities, business, operations or results
of operations of Acquiror and its subsidiaries, taken as a whole.
(d) LETTER FROM ACCOUNTANTS. Target shall have received the letters
referred to in Section 5.20 from Coopers & Lybrand L.L.C., Acquiror's
independent auditors.
(e) AFFILIATE AGREEMENTS. Target shall have received from each of the
Affiliates of Acquiror an executed Affiliate Agreement in substantially the
form attached hereto as EXHIBIT B-2.
(f) CLOSING PRICE. The Closing Price (as defined in Section 1.6(a))
shall be at least $3.00 per share, as adjusted for any stock splits, stock
dividends or recapitalizations.
(g) THIRD PARTY CONSENTS. SCHEDULE 6.2(G) hereto sets forth all
consents or approvals required in connection with the Merger under the
contracts of Acquiror. Target shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose consent
or approval shall be required in connection with the Merger under the
contracts of Acquiror set forth on SCHEDULE 6.2(G) hereto, if failure to
obtain such consents or approvals would or would reasonably be expected to
have a Material Adverse Effect on Acquiror.
6.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF ACQUIROR AND MERGER
SUB. The obligations of Acquiror and Merger Sub to consummate and effect this
Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by Acquiror:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. Except as set forth on
a schedule to be delivered to Acquiror prior to the Effective Time (the
"Target Closing Disclosure Schedule"), the representations and warranties of
Target in this Agreement shall be true and correct in all material respects
(except for such representations and warranties that are qualified by their
terms by a reference to materiality which representations and warranties as
so qualified shall be true in all respects) on and as of the Effective Time
as though such representations and warranties were made on and as of such
time except to the extent that the failure to be so true would not and would
not reasonably be expected to have a Material Adverse Effect on Target and
(ii) Target shall have performed and complied in all material respects with
all covenants, obligations and conditions of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) CERTIFICATE OF TARGET. Acquiror shall have been provided with a
certificate executed on behalf of Target by its President and Chief
Financial Officer to the effect that, as of the Effective Time:
(i) except as set forth on the Target Closing Disclosure Schedule
delivered prior to the Effective Time, all representations and warranties
made by Target under this Agreement are true and complete in all material
respects; and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Target on or before such date have been so performed in
all material respects.
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(c) THIRD PARTY CONSENTS. SCHEDULE 6.3(C) hereto sets forth all
consents or approvals required in connection with the Merger under the
contracts of Target. Acquiror shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose consent
or approval shall be required in connection with the Merger under the
contracts of Target set forth on SCHEDULE 6.3(C) hereto, if failure to
obtain such consents or approvals would or would reasonably be expected to
have a Material Adverse Effect on Target.
(d) INJUNCTIONS OR RESTRAINTS ON CONDUCT OF BUSINESS. No temporary
restraining order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Acquiror's conduct or operation
of the business of Target, following the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or
other Governmental Entity, domestic or foreign, seeking the foregoing be
pending.
(e) NO MATERIAL ADVERSE CHANGES. There shall not have occurred any
material adverse change in the financial condition, properties, assets
(including intangible assets), liabilities, business, operations or results
of operations of Target.
(f) LETTER OF ACCOUNTANTS. Acquiror shall have received the letters
referred to in Section 5.19 from Coopers & Lybrand L.L.C., Acquiror's
independent auditors.
(g) AFFILIATE'S AGREEMENTS. Acquiror shall have received from each of
the Affiliates of Target an executed Affiliate's Agreement in substantially
the form attached hereto as EXHIBIT B-1.
(h) FIRPTA CERTIFICATE. Target shall, prior to the Closing Date,
provide Acquiror with a properly executed FIRPTA Notification Letter,
substantially in the form of EXHIBIT D attached hereto, which states that
shares of capital stock of Target do not constitute "United States real
property interests" under Section 897(c) of the Code, for purposes of
satisfying Acquiror's obligations under Treasury Regulation Section
1.1445-2(c)(3). In addition, simultaneously with delivery of such
Notification Letter, Target shall have provided to Acquiror, as agent for
Target, a form of notice to the Internal Revenue Service in accordance with
the requirements of Treasury Regulation Section 1.897-2(h)(2) and
substantially in the form of EXHIBIT D attached hereto along with written
authorization for Acquiror to deliver such notice form to the Internal
Revenue Service on behalf of Target upon the Closing of the Merger.
(i) STOCKHOLDER'S REPRESENTATION AGREEMENTS. Acquiror shall have
received from holders of at least ninety percent (90%) of the Target Capital
Stock, outstanding immediately prior to the Effective Time, a duly executed
and delivered Stockholder's Representation Agreement in substantially the
form attached hereto as EXHIBIT F.
(j) RESIGNATION OF DIRECTORS. The directors of Target in office
immediately prior to the Effective Time shall have resigned as directors of
the Surviving Corporation effective as of the Effective Time.
(k) EMPLOYMENT AND NON-COMPETITION AGREEMENTS. The employees of Target
set forth on Schedule 5.18 shall have accepted employment with Acquiror and
shall have entered into an Employment and Non-Competition Agreement
substantially in the form attached hereto as EXHIBITS G-1, et. seq.
(l) EXPENSE STATEMENT. Acquiror shall have received from Target a
statement of all out-of-pocket expenses incurred by Target which are subject
to the limitation described in Section 5.23 hereto.
(m) TERMINATION OF REGISTRATION RIGHTS. Acquiror shall have received
an agreement of termination of any and all rights granted by that certain
Amended and Restated Investors Rights Agreement, dated May 28, 1997, as
amended, by and among Target and each of the parties listed on EXHIBIT A
thereto.
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(n) CONVERSION OF PREFERRED STOCK. All holders of Target Preferred
Stock shall have converted all such shares of Preferred Stock into Common
Stock of Target prior to the Closing. There shall be no outstanding shares
of Target Preferred Stock immediately prior to the Closing.
(o) PRODUCT DELIVERY. Target shall have made shipments of commercially
available Products, as that term is defined and pursuant to the
specifications detailed in a product acceptance criteria letter provided by
the Target and approved by Acquiror as of the date hereof, to bona fide
customers bookable in accordance with Acquiror's revenue recognition policy
of at least Seventy-Five Thousand dollars ($75,000) by March 31, 1998.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. At any time prior to the Effective Time, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of Target, this Agreement may be terminated:
(a) by mutual consent duly authorized by the Boards of Directors of
Acquiror and Target;
(b) by either Acquiror or Target, if, without fault of the terminating
party, the Closing shall not have occurred on or before March 31, 1998
(provided a later date may be agreed upon in writing by the parties hereto,
and provided further that the right to terminate this Agreement under this
Section 7.1(b) shall not be available to any party whose action or failure
to act has been the cause or resulted in the failure of the Merger to occur
on or before such date and such action or failure to act constitutes a
breach of this Agreement);
(c) by Acquiror, if (i) Target shall breach any representation,
warranty, obligation or agreement hereunder and such breach shall not have
been cured within ten (10) business days of receipt by Target of written
notice of such breach and such breach would have or would reasonably be
expected to have a Material Adverse Effect on Target, or Target or shall
take any action that would preclude the Merger to be accounted for as a
pooling of interests, provided that the right to terminate this Agreement by
Acquiror under this Section 7.1(c)(i) shall not be available to Acquiror
where Acquiror is at that time in willful breach of this Agreement, (ii) the
Board of Directors of Target shall have withdrawn or modified its
recommendation of this Agreement or the Merger in a manner adverse to
Acquiror or shall have resolved to do any of the foregoing, provided that
the right to terminate this Agreement by Acquiror under this Section
7.1(c)(ii) shall not be available to Acquiror where Acquiror is at that time
in willful breach of this Agreement, (iii) for any reason Target fails to
call and hold the Target Stockholders Meeting or obtain appropriate written
consent of Target's stockholders by March 31, 1998 or (iv) holders of more
than nine percent (9%) of Target Capital Stock have not voted in favor of
the Merger by March 31, 1998.
(d) by Target, if (i) Acquiror shall breach any representation,
warranty, obligation or agreement hereunder and such breach shall not have
been cured within ten (10) days following receipt by Acquiror of written
notice of such breach and such breach would have or would reasonably be
expected to have a Material Adverse Effect on Target, provided that the
right to terminate this Agreement by Target under this Section 7.1(d) shall
not be available to Target where Target is at that time in willful breach of
this Agreement, (ii) the Board of Directors of Acquiror shall have withdrawn
or modified its recommendation of this Agreement or the Merger in a manner
adverse to Target or shall have resolved to do any of the foregoing,
provided that the right to terminate this Agreement by Target under this
Section 7.1(d)(ii) shall not be available to Target where Target is at that
time in willful breach of this Agreement, (iii) for any reason Acquiror
fails to call and hold the Acquiror Stockholders Meeting or obtain
appropriate written consent of Acquiror's stockholders by March 31, 1998 or
(iv) Acquiror's stockholders do not approve the Merger and this Agreement by
the requisite vote at the Acquiror Stockholders Meeting;
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(e) by either Acquiror or Target (i) if any permanent injunction or
other order of a court or other competent authority preventing the
consummation of the Merger shall have become final and nonappealable or (ii)
if any required approval of the stockholders of Target shall not have been
obtained by reason of the failure to obtain the required vote upon a vote
held at a duly held meeting of stockholders or at any adjournment thereof or
by written consent;
(f) by Target, in the event (i) of the acquisition, by any person or
group of persons (other than persons or groups of persons who (A) acquired
shares of Acquiror Common Stock pursuant to any merger of Acquiror in which
Acquiror was the surviving corporation or any acquisition by Acquiror of all
or substantially all of the capital stock or assets of another person or (B)
disclose their beneficial ownership of shares of Acquiror Common Stock on
Schedule 13G under the Exchange Act) of beneficial ownership of 30% or more
of the outstanding shares of Acquiror Common Stock (the terms "person,"
"group" and "beneficial ownership" having the meanings ascribed thereto in
Section 13(d) of the Exchange Act and the regulations promulgated
thereunder), or (ii) the Board of Directors of Acquiror accepts or publicly
recommends acceptance of an offer from a third party to acquire 50% or more
of the outstanding shares of Acquiror Common Stock or of Acquiror's
consolidated assets; or
7.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Acquiror, Merger Sub or
Target or their respective officers, directors, stockholders or affiliates,
except to the extent that such termination results from the breach by a party
hereto of any of its representations, warranties or covenants set forth in this
Agreement; provided that, the provisions of Section 5.4 (Confidentiality),
Section 7.3 (Expenses and Termination Fees) and this Section 7.2 shall remain in
full force and effect and survive any termination of this Agreement.
7.3 EXPENSES AND TERMINATION FEES.
(a) Subject to Sections 7.3(b), 7.3(c), 7.3(d) and 7.3(e), whether or not
the Merger is consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby (including, without
limitation, the fees and expenses of its advisers, accountants and legal
counsel) shall be paid by the party incurring such expense.
(b) In the event that (i) either Acquiror or Target shall terminate this
Agreement pursuant to Section 7.1(e)(ii) following a failure of the stockholders
of Target to approve this Agreement and, prior to the time of the Target
Stockholders Meeting, there shall have been (A) a Trigger Event with respect to
Target or (B) a Takeover Proposal which at the time of the meeting of Target's
stockholders shall not have been (x) rejected by Target and (y) withdrawn by the
third party, or (ii) Acquiror shall terminate this Agreement pursuant to Section
7.1(c), due in whole or in part to any failure by Target to use its reasonable
commercial efforts to perform and comply with all agreements and conditions
required by this Agreement to be performed or complied with by Target prior to
or on the Closing Date or any failure by Target's Affiliates to take any actions
required to be taken hereby, and prior thereto there shall have been (A) a
Trigger Event or (B) a Takeover Proposal which shall not have been (x) rejected
by Target and (y) withdrawn by the third party, then Target shall reimburse
Acquiror for all of the reasonable out-of-pocket costs and expenses incurred by
Acquiror in connection with this Agreement and the transactions contemplated
hereby (including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel) and, in addition, Target shall promptly pay to
Acquiror the sum of $4,000,000 (the "Termination Fee").
(c) In the event that Acquiror shall terminate this Agreement pursuant to
Section 7.1(c) or Section 7.1(e)(ii), Target shall promptly reimburse Acquiror
for all of the reasonable out-of-pocket costs and expenses incurred by Acquiror
in connection with this Agreement and the transactions contemplated hereby
(including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel); and, in the event any Takeover Proposal or
Trigger Event is consummated (as defined in Section 7.3(h) within six months of
the later of (x) such termination of this Agreement and (y) the payment of the
above-
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described expenses, Target shall promptly pay to Acquiror the additional sum of
$4,000,000 (provided that no Termination Fee had been previously paid pursuant
to Section 7.3(b)).
(d) In the event that Target shall terminate this Agreement pursuant to
Section 7.1(d) or Section 7.1(f), Acquiror shall promptly reimburse Target for
all of the reasonable out-of-pocket costs and expenses incurred by Target in
connection with this Agreement and the transactions contemplated hereby
(including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel).
(e) The parties hereto agree that the Termination Fees due pursuant to
Section 7.3(b) and Section 7.3(c) shall not be deemed to be liquidated damages
and that Acquiror's right to the payment of such Termination Fees shall be in
addition to any other rights or remedies under contract, at law or in equity to
which Acquiror may be entitled. Nothing in this Article VII shall be interpreted
as limiting Acquiror's rights and remedies under any circumstance in the event
of Target's breach of this Agreement.
(f) As used herein, a "Trigger Event" shall occur if any Person (as that
term is defined in Section 13(d) of the Exchange Act and the regulations
promulgated thereunder) acquires securities representing 15% or more, or
commences a tender or exchange offer following the successful consummation of
which the offeror and its affiliate would beneficially own securities
representing 15% or more, of the voting power of Target; PROVIDED, HOWEVER, a
Trigger Event shall not be deemed to include the acquisition by any Person of
securities representing 15% or more of Target if such Person has acquired such
securities not with the purpose nor with the effect of changing or influencing
the control of Target, nor in connection with or as a participant in any
transaction having such purpose or effect, including without limitation not in
connection with such Person (i) making any public announcement with respect to
the voting of such shares at any meeting to consider any merger, consolidation,
sale of substantial assets or other business combination or extraordinary
transaction involving Target, (ii) making, or in any way participating in, any
"solicitation" of "proxies" (as such terms are defined or used in Regulation 14A
under the Exchange Act) to vote any voting securities of Target (including,
without limitation, any such solicitation subject to Rule 14a-11 under the
Exchange Act) or seeking to advise or influence any Person with respect to the
voting of any voting securities of Target, directly or indirectly, relating to a
merger or other business combination involving Target or the sale or transfer of
a significant portion of assets (excluding the sale or disposition of assets in
the ordinary course of business) of Target, (iii) forming, joining or in any way
participating in any "group" within the meaning of Section 13(d)(3) of the
Exchange Act with respect to any voting securities of Target, directly or
indirectly, relating to a merger or other business combination involving Target
or the sale or transfer of a significant portion of assets (excluding the sale
or disposition of assets in the ordinary course of business) of Target, or (iv)
otherwise acting, alone or in concert with others, to seek control of Target or
to seek to control or influence the management or policies of Target.
(g) For purposes of Section 7.3(c) above, (A) "consummation" of a Takeover
Proposal shall occur on the date a written agreement is entered into with
respect to a merger or other business combination involving Target or the
acquisition of any significant equity interest in 15% or more of the outstanding
shares of capital stock of Target, or sale or transfer of any material assets
(excluding the sale or disposition of assets in the ordinary course of business)
of Target or any of its subsidiaries and (B) "consummation" of a Trigger Event
shall occur on the date any Person or any of its affiliates or associates would
beneficially own securities representing 15% or more of the voting power of
Target following a tender or exchange offer. Additionally, for the purposes of
this Section 7.3(g), a Takeover Proposal shall not include an equity investment
by financial investors, including venture capitalists, which does not result in
a change of control of Target.
7.4 AMENDMENT. The boards of directors of the parties hereto may cause
this Agreement to be amended at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto; provided that an
amendment made subsequent to adoption of the Agreement by the stockholders of
Target or Merger Sub shall not (i) alter or change the amount or kind of
consideration to be received on conversion of the Target Capital Stock, (ii)
alter or change any term of the Certificate of Incorporation of
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the Surviving Corporation to be effected by the Merger, or (iii) alter or change
any of the terms and conditions of the Agreement if such alteration or change
would adversely affect the holders of Target Common Stock or Merger Sub Common
Stock.
7.5 EXTENSION; WAIVER. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE VIII
ESCROW AND INDEMNIFICATION
8.1 ESCROW FUND. As soon as practicable after the Effective Time, 10% of
the shares of Acquiror Common Stock issued at the Closing (the "Escrow Shares")
shall be registered in the name of, and be deposited with, State Street Bank and
Trust Company of California, N.A. (or other institution selected by Acquiror
with the reasonable consent of Target) as escrow agent (the "Escrow Agent"),
such deposit to constitute the Escrow Fund and to be governed by the terms set
forth herein and in the Escrow Agreement attached hereto EXHIBIT E. The Escrow
Fund (but only up to a maximum of ten percent (10%) of the shares of Acquiror
Common Stock issued at the Closing) shall be available to compensate Acquiror
pursuant to the indemnification obligations of the stockholders of Target.
8.2 INDEMNIFICATION.
(a) Subject to the limitations set forth in this Article VIII, the
stockholders of Target will indemnify and hold harmless Acquiror and the
Surviving Corporation and its respective officers, directors, agents and
employees, and each person, if any, who controls or may control Acquiror or the
Surviving Corporation within the meaning of the Securities Act (hereinafter
referred to individually as an "Indemnified Person" and collectively as
"Indemnified Persons") from and against any and all losses, costs, damages,
liabilities and expenses arising from claims, demands, actions, causes of
action, including, without limitation, reasonable legal fees, net of any
recoveries under existing insurance policies, tax benefit received by Acquiror
or its affiliates as a result of such damages, indemnities from third parties or
in the case of third party claims, by any amount actually recovered by Acquiror
or its affiliates pursuant to counterclaims made by any of them directly
relating to the facts giving rise to such third party claims (collectively,
"Damages") arising out of (i) breach by Target of the Confidentiality Agreement
and (ii) any misrepresentation or breach of or default in connection with any of
the representations, warranties, covenants and agreements given or made by
Target in this Agreement, the Target Disclosure Schedules or any exhibit or
schedule to this Agreement. Acquiror and its affiliates shall act in good faith
and in a commercially reasonable manner to mitigate any Damages they may suffer.
The Escrow Fund shall be the sole and exclusive remedy for any claims, demands,
actions or other causes of action brought against Target or its affiliates,
stockholders, officers, directors or agents.
(b) Nothing in this Agreement shall limit the liability (i) of Target for
any breach of any representation, warranty or covenant if the Merger does not
close, or (ii) of any Target stockholder in connection with any breach by such
stockholder of the Affiliate and Stockholder Agreement, Stockholder's
Representation Agreement, Irrevocable Proxy or continuity of interest
certificate(s) delivered in connection with the tax opinions to be rendered
pursuant to Section 6.2(g); provided, however, that resort to the Escrow Fund
shall be the exclusive remedy of Acquiror for any such breaches and
misrepresentations following the Effective Time of the Merger.
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8.3 DAMAGE THRESHOLD.
(a) Notwithstanding Section 8.2, Acquiror may not receive any shares from
the Escrow Fund with respect to the indemnification obligations of the
stockholders of Target set forth in Section 8.2(a)(i) unless and until an
Officer's Certificate or Certificates (as defined in Section 8.5 below)
satisfying the requirements of Section 8.5(a)(ii) and identifying Damages has
been delivered to the Escrow Agent as provided in Section 8.5 below and such
amount is determined pursuant to this Article VIII to be payable, in which case
Acquiror shall receive shares equal in value to the full amount of Damages;
provided, however, that in no event shall Acquiror receive more than the Escrow
Shares.
(b) Notwithstanding Section 8.2, Acquiror may not receive any shares from
the Escrow Fund with respect to the indemnification obligations of the
stockholders of Target set forth in Section 8.2(a)(ii) unless and until an
Officer's Certificate or Certificates (as defined in Section 8.5 below)
satisfying the requirements of Section 8.5(a)(i) and (ii) and identifying
Damages the aggregate amount of which exceeds $100,000 (which aggregate amount
cannot include any individual Damage items of $5,000 or less) has been delivered
to the Escrow Agent as provided in Section 8.5 below and such amount is
determined pursuant to this Article VIII to be payable, in which case Acquiror
shall receive shares equal in value to the full amount of Damages in excess of
$100,000; provided, however, that in no event shall Acquiror receive more than
the Escrow Shares. In determining the amount of any Damage attributable to a
breach, any materiality standard contained in a representation, warranty or
covenant of Acquiror shall be disregarded.
8.4 ESCROW PERIOD. The Escrow Period shall terminate upon the expiration
the earlier to occur of (i) twelve (12) months after the Effective Time or (ii)
the issuance of Acquiror's audited financial statements for the year ending
December 31, 1997 or December 31, 1998, depending on the Closing Date, which
include the results of Target; provided, however, that a portion of the Escrow
Shares, which, in the reasonable judgment of Acquiror, subject to the objection
of the Stockholders' Agent and the subsequent arbitration of the matter in the
manner provided in Section 8.7 hereof, are necessary to satisfy any unsatisfied
claims specified in any Officer's Certificate theretofore delivered to the
Escrow Agent prior to termination of the Escrow Period with respect to facts and
circumstances existing prior to expiration of the Escrow Period, shall remain in
the Escrow Fund until such claims have been resolved.
8.5 CLAIMS UPON ESCROW FUND.
(a) Upon receipt by the Escrow Agent on or before the last day of the Escrow
Period of a certificate signed by any officer of Acquiror (an "Officer's
Certificate"):
(i) stating that, with respect to the indemnification obligations of the
stockholders of Target set forth in Section 8.2(a)(ii), Damages exist in an
aggregate amount greater than $100,000, (which aggregate amount cannot
include any individual Damage items of $5,000 or less), and
(ii) specifying in reasonable detail the individual items of such
Damages included in the amount so stated, the date each such item was paid
or properly accrued or arose, the nature of the misrepresentation, breach of
warranty or claim to which such item is related,
the Escrow Agent shall, subject to the provisions of this Article VIII, deliver
to Acquiror out of the Escrow Fund, as promptly as practicable, Acquiror Common
Stock or other assets held in the Escrow Fund having a value equal to (x) such
Damages with respect to the indemnification obligations of the stockholders of
Target set forth in Section 8.2(a)(i) and (y) such Damages in excess of $100,000
with respect to the indemnification obligations of the stockholders of Target
set forth in Section 8.2(a)(ii).
(b) For the purpose of compensating Acquiror for its Damages pursuant to
this Agreement, the Acquiror Common Stock in the Escrow Fund shall be valued at
the Closing Price.
8.6 OBJECTIONS TO CLAIMS. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate
shall be delivered to the Stockholders' Agent (defined in Section 8.8 below) and
for a period of forty-five (45) days after such delivery, the Escrow Agent shall
make no delivery of Acquiror Common Stock or other property pursuant to Section
8.5 hereof unless the Escrow Agent shall have received written authorization
from the Stockholders' Agent to make such delivery. After
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the expiration of such forty-five (45) day period, the Escrow Agent shall make
delivery of the Acquiror Common Stock or other property in the Escrow Fund in
accordance with Section 8.5 hereof, provided that no such payment or delivery
may be made if the Stockholders' Agent shall object in a written statement to
the claim made in the Officer's Certificate, and such statement shall have been
delivered to the Escrow Agent and to Acquiror prior to the expiration of such
forty-five (45) day period.
8.7 RESOLUTION OF CONFLICTS; ARBITRATION.
(a) In case the Stockholders' Agent shall so object in writing to any claim
or claims by Acquiror made in any Officer's Certificate, Acquiror shall have
forty-five (45) days to respond in a written statement to the objection of the
Stockholders' Agent. If after such forty-five (45) day period there remains a
dispute as to any claims, the Stockholders' Agent and Acquiror shall attempt in
good faith for thirty (30) days to agree upon the rights of the respective
parties with respect to each of such claims. If the Stockholders' Agent and
Acquiror should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties and shall be furnished to the Escrow Agent.
The Escrow Agent shall be entitled to rely on any such memorandum and shall
distribute the Acquiror Common Stock or other property from the Escrow Fund in
accordance with the terms thereof.
(b) If no such agreement can be reached after good faith negotiation, either
Acquiror or the Stockholders' Agent may, by written notice to the other, demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in either such event the matter shall be settled by arbitration conducted by
three arbitrators. Within fifteen (15) days after such written notice is sent,
Acquiror and the Stockholders' Agent shall each select one arbitrator, and the
two arbitrators so selected shall select a third arbitrator. The decision of the
arbitrators as to the validity and amount of any claim in such Officer's
Certificate shall be binding and conclusive upon the parties to this Agreement,
and notwithstanding anything in Section 8.6 hereof, the Escrow Agent shall be
entitled to act in accordance with such decision and make or withhold payments
out of the Escrow Fund in accordance therewith.
(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in Santa Clara
County or San Mateo County, California under the commercial rules then in effect
of the American Arbitration Association. For purposes of this Section 8.7(c), in
any arbitration hereunder in which any claim or the amount thereof stated in the
Officer's Certificate is at issue, Acquiror shall be deemed to be the
Non-Prevailing Party unless the arbitrators award Acquiror more than one-half
( 1/2) of the amount in dispute, plus any amounts not in dispute; otherwise, the
Target stockholders for whom shares of Target Common Stock otherwise issuable to
them have been deposited in the Escrow Fund shall be deemed to be the
Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay its
own expenses, the fees of each arbitrator, the administrative fee of the
American Arbitration Association, and the expenses, including without
limitation, attorneys' fees and costs, reasonably incurred by the other party to
the arbitration.
8.8 STOCKHOLDERS' AGENT.
(a) Craig Malloy shall be constituted and appointed as agent ("Stockholders'
Agent") for and on behalf of the Target stockholders to give and receive notices
and communications, to authorize delivery to Acquiror of the Acquiror Common
Stock or other property from the Escrow Fund in satisfaction of claims by
Acquiror, to object to such deliveries, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to such claims, and to take all
actions necessary or appropriate in the judgment of the Stockholders' Agent for
the accomplishment of the foregoing. Such agency may be changed by the holders
of a majority in interest of the Escrow Fund from time to time upon not less
than 10 days prior written notice to Acquiror. No bond shall be required of the
Stockholders' Agent, and the Stockholders' Agent shall receive no compensation
for his services. Notices or communications to or from the Stockholders' Agent
shall constitute notice to or from each of the Target stockholders.
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(b) The Stockholders' Agent shall not be liable for any act done or omitted
hereunder as Stockholders' Agent while acting in good faith and in the exercise
of reasonable judgment, and any act done or omitted pursuant to the advice of
counsel shall be conclusive evidence of such good faith. The Target stockholders
shall severally indemnify the Stockholders' Agent and hold him harmless against
any loss, liability or expense incurred without gross negligence or bad faith on
the part of the Stockholders' Agent and arising out of or in connection with the
acceptance or administration of his duties hereunder.
(c) The Stockholders' Agent shall have reasonable access to information
about Target and the reasonable assistance of Target's officers and employees
for purposes of performing its duties and exercising its rights hereunder,
provided that the Stockholders' Agent shall treat confidentially and not
disclose any nonpublic information from or about Target to anyone (except on a
need to know basis to individuals who agree to treat such information
confidentially).
8.9 ACTIONS OF THE STOCKHOLDERS' AGENT. A decision, act, consent or
instruction of the Stockholders' Agent shall constitute a decision of all Target
stockholders for whom shares of Acquiror Common Stock otherwise issuable to them
are deposited in the Escrow Fund and shall be final, binding and conclusive upon
each such Target stockholder, and the Escrow Agent and Acquiror may rely upon
any decision, act, consent or instruction of the Stockholders' Agent as being
the decision, act, consent or instruction of each and every such Target
stockholder. The Escrow Agent and Acquiror are hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of the Stockholders' Agent.
8.10 THIRD-PARTY CLAIMS. In the event Acquiror becomes aware of a
third-party claim which Acquiror believes may result in a demand against the
Escrow Fund, Acquiror shall notify the Stockholders' Agent of such claim, and
the Stockholders' Agent and the Target stockholders for whom shares of Acquiror
Common Stock otherwise issuable to them are deposited in the Escrow Fund shall
be entitled, at their expense, to participate in any defense of such claim.
Acquiror shall have the right in its sole discretion to settle any such claim;
provided, however, that Acquiror may not affect the settlement of any such claim
without the consent of the Stockholders' Agent, which consent shall not be
unreasonably withheld. In the event that the Stockholders' Agent has consented
to any such settlement, the Stockholders' Agent shall have no power or authority
to object under Section 8.6 or any other provision of this Article VIII to the
amount of any claim by Acquiror against the Escrow Fund for indemnity with
respect to such settlement.
ARTICLE IX
GENERAL PROVISIONS
9.1 SURVIVAL AT EFFECTIVE TIME. The representations, warranties and
agreements set forth in this Agreement shall survive after the Effective Time
and shall terminate at the earlier of (i) twelve (12) months after the Effective
Time or (ii) the issuance of Acquiror's audited financial statements for the
year ending December 31, 1997 or December 31, 1988, depending on the Closing
Date, which include the results of Target (the "Termination Date"), except that
the agreements set forth in Article I, Section 5.4 (Confidentiality), 5.7
(Pooling Accounting), 5.8 (Affiliate Agreements), 5.13 (Employee Benefit Plans),
5.16 (Form S-8), 5.17 (Stockholder's Representation Agreement), 5.22
(Reorganization), 5.25 (Reasonable Commercial Efforts and Further Assurances),
7.3 (Expenses and Termination Fees), 7.4 (Amendment), Article VIII and this
Article IX shall survive the Termination Date.
9.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified
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mail (return receipt requested) or sent via facsimile (with confirmation of
receipt) to the parties at the following address (or at such other address for a
party as shall be specified by like notice):
(a) if to Acquiror or Merger Sub, to:
Polycom, Inc.
2584 Junction Avenue
San Jose, CA 95134
Attention: President
Fax: (408) 526-9100
Tel: (408) 526-9000
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Attention: Jeffrey P. Higgins, Esq.
Fax: (415) 496-2885
Tel: (415) 424-0160
(b) if to Target, to:
ViaVideo Communications, Inc.
8900 Shoal Creek
Building 300
Austin, TX 78757
Attention: President
Fax: (512) 342-7179
Tel: (512) 923-9633
with a copy to:
Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Attention: Scott Dettmer, Esq.
Fax: (415) 321-2400
Tel: (415) 321-2800
9.3 INTERPRETATION. When a reference is made in this Agreement to
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The phrases "the date of this
Agreement," "the date hereof," and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to June 11, 1997. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
9.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
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9.5 ENTIRE AGREEMENT; NONASSIGNABILITY; PARTIES IN INTEREST. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the Target Disclosure Schedule and the Acquiror Disclosure
Schedule (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, except for the Confidentiality Agreement, which shall continue in full
force and effect, and shall survive any termination of this Agreement or the
Closing, in accordance with its terms; (b) are not intended to confer upon any
other person any rights or remedies hereunder, except as set forth in Sections
1.6(a)-(d) and (h), 1.7-1.9, and 5.13; and (c) shall not be assigned by
operation of law or otherwise except as otherwise specifically provided.
9.6 SEVERABILITY. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.7 REMEDIES CUMULATIVE. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of California that might otherwise govern under
applicable principles of conflicts of law. Each of the parties hereto
irrevocably consents to the exclusive jurisdiction of any court located within
Santa Clara County, State of California, in connection with any matter based
upon or arising out of this Agreement or the matters contemplated herein, agrees
that process may be served upon them in any manner authorized by the laws of the
State of California for such persons and waives and covenants not to assert or
plead any objection which they might otherwise have to such jurisdiction and
such process.
9.9 RULES OF CONSTRUCTION. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
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IN WITNESS WHEREOF, Target, Acquiror and Merger Sub have caused this
Agreement to be executed and delivered by their respective officers thereunto
duly authorized, all as of the date first written above.
<TABLE>
<S> <C>
TARGET
By: /s/ Craig B. Malloy
--------------------------------------------
ACQUIROR
By: /s/ Brian L. Hinman
--------------------------------------------
MERGER SUB
By: /s/ Brian L. Hinman
--------------------------------------------
</TABLE>
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
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AMENDMENT NO. 1 TO THE
AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN OF REORGANIZATION (the
"Amendment") is made and is effective as of September 29, 1997, by and among
Polycom, Inc., a Delaware corporation ("Polycom"), Venice Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of Polycom
("Merger Sub") and ViaVideo Communications, Inc., a Delaware corporation
("ViaVideo").
WHEREAS, Polycom, Merger Sub and ViaVideo are parties to that certain
Agreement and Plan of Reorganization dated as of June 11, 1997 (the
"Reorganization Agreement"), pursuant to which Merger Sub will merge with and
into ViaVideo, with ViaVideo becoming a wholly-owned subsidiary of Polycom.
WHEREAS, the parties desire to enter into this Agreement to provide for the
amendment and addition of various sections of the Reorganization Agreement
pursuant to Section 7.4 of the Reorganization Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties, intending to be legally
bound, hereto hereby agree as follows:
1. AMENDMENT OF SUBSECTION 1.4(A). Subsection 1.4(a) to the Reorganization
Agreement is hereby amended to read in its entirety as follows:
(a) At the Effective Time, the Certificate of Incorporation of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation;
provided, however, that Article I of the Certificate of Incorporation of the
Surviving Corporation shall be amended to read as follows: "The name of the
corporation is ViaVideo, Inc."
2. ADDITION OF SECTION 1.12. Section 1.12 shall be added to the
Reorganization Agreement to read in its entirety as follows:
1.12 EXEMPTION FROM REGISTRATION. The shares of Polycom Common Stock
to be issued in connection with the Merger will be issued in a transaction
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), by reason of Section 4(2) thereof.
3. AMENDMENT OF SECTION 2.24. Section 2.24 of the Reorganization Agreement
is hereby amended to read in its entirety as follows:
2.24 PROXY STATEMENT; INFORMATION STATEMENT. The information supplied
by ViaVideo for inclusion in the proxy statement to be sent to the
stockholders of Polycom (the "Proxy Statement") and for inclusion in the
information statement to be sent to the stockholders of ViaVideo (the
"Information Statement") in connection with the meeting of Polycom's
stockholders to consider the Merger (the "Polycom Stockholders Meeting") and
in connection with the meeting of ViaVideo's stockholders to consider the
Merger (the "ViaVideo Stockholders Meeting"), respectively, shall not, on
the date the Proxy Statement is first mailed to Polycom's stockholders, on
the date the Information Statement is first mailed to ViaVideo's
stockholders, at the time of the Polycom Stockholders Meeting, the time of
the ViaVideo Stockholders Meeting and at the Effective Time, contain any
statement which, at such time, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they
are made, not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect
to the solicitation of proxies for the Polycom Stockholders Meeting or the
ViaVideo Stockholders Meeting which has become false or misleading. If at
any time prior to the Effective Time any event or information should be
discovered by ViaVideo which should be set forth in a supplement to the
Proxy Statement or Information Statement, ViaVideo
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will promptly inform Polycom or Merger Sub. Notwithstanding the foregoing,
ViaVideo makes no representation, warranty or covenant with respect to any
information supplied by Polycom or Merger Sub which is contained in any of
the foregoing documents.
4. AMENDMENT OF SECTION 3.15. Section 3.15 to the Reorganization Agreement
is hereby amended to read in its entirety as follows:
3.15 PROXY STATEMENT; INFORMATION STATEMENT. The information supplied
by Polycom or Merger Sub for inclusion in Proxy Statement and for inclusion
in the Information Statement in connection with the Polycom Stockholders
Meeting and in connection with the ViaVideo Stockholders Meeting, shall not,
on the date the Proxy Statement is first mailed to Polycom's stockholders,
on the date the Information Statement is first mailed to ViaVideo's
stockholders, at the time of the Polycom Stockholders Meeting, the time of
the ViaVideo Stockholders Meeting and at the Effective Time, contain any
statement which, at such time, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they
are made, not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect
to the solicitation of proxies for the Polycom Stockholders Meeting or the
ViaVideo Stockholders Meeting which has become false or misleading. If at
any time prior to the Effective Time any event or information should be
discovered by Polycom or Merger Sub which should be set forth in a
supplement to the Proxy Statement or Information Statement, Polycom or
Merger Sub will promptly inform ViaVideo. Notwithstanding the foregoing,
Polycom and Merger Sub makes no representation, warranty or covenant with
respect to any information supplied by ViaVideo which is contained in any of
the foregoing documents.
5. AMENDMENT OF SUBSECTION 4.3(B). Subsection 4.3(b) to the Reorganization
Agreement is hereby amended to read in its entirety as follows:
(b) ISSUANCE OF SECURITIES. Issue, deliver, sell, authorize or propose
the issuance, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements
or commitments of any character obligating it to issue any such shares or
other convertible securities, other than (i) the issuance of shares of its
Common Stock pursuant to the exercise of stock options, warrants or other
rights therefor outstanding as of the date of this Agreement, or (ii) the
grant of stock options to service providers in the ordinary course of
business, provided that the aggregate of (i) and (ii) above shall not exceed
127,000 shares after the date hereof;
6. AMENDMENT OF SECTION 5.1. Section 5.1 to the Reorganization Agreement
is hereby amended to read in its entirety as follows:
5.1 PROXY STATEMENT; INFORMATION STATEMENT. As promptly as practicable
after the execution of this Agreement, Polycom and ViaVideo shall prepare,
and Polycom shall file with the SEC, preliminary proxy materials relating to
the approval of the Merger and the transactions contemplated hereby by the
stockholders of Polycom and, as promptly as practicable following receipt of
SEC comments thereon, Polycom shall file with the SEC revised proxy
materials which comply in form with applicable SEC requirements and shall
use all reasonable efforts to cause the Proxy Materials to be approved by
the SEC as soon thereafter as practicable; provided, however, that neither
Polycom nor ViaVideo shall be obligated to agree to account for the Merger
as a "purchase" in order to cause the Proxy Materials to be approved by the
SEC. The Proxy Statement shall include the recommendation of the Polycom's
Board of Directors in favor of the Merger; provided that such recommendation
may not be included, or may be withdrawn if previously included, if
Polycom's Board of Directors believes in good faith and, upon written advice
of its outside legal counsel, shall determine that to include such
recommendation, or not withdraw such recommendation if previously included,
would constitute a
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breach of Polycom's Board of Directors' fiduciary duty under applicable law.
Polycom will update and amend the Proxy Materials to the extent necessary
prior to the closing.
7. AMENDMENT OF SECTION 5.2. Section 5.2 to the Reorganization Agreement
is hereby amended to read in its entirety as follows:
5.2. MEETING OF STOCKHOLDERS.
(a) ViaVideo shall promptly after the date hereof take all action
necessary in accordance with Delaware Law and its Certificate of
Incorporation and Bylaws to convene the ViaVideo Stockholders Meeting within
45 days of the Proxy Statement being approved by the SEC. ViaVideo shall
consult with Polycom and use all reasonable efforts to hold the ViaVideo
Stockholders Meeting on the same day as the Polycom Stockholders Meeting and
shall not postpone or adjourn (other than for the absence of a quorum) the
ViaVideo Stockholders Meeting without the consent of Polycom. Subject to
Section 5.1, ViaVideo shall use its best efforts to solicit from
stockholders of ViaVideo proxies in favor of the Merger and shall take all
other action necessary or advisable to secure the vote or consent of
stockholders required to effect the Merger.
(b) Polycom shall promptly after the date hereof take all action
necessary in accordance with Delaware Law and its Certificate of
Incorporation and Bylaws to convene the Polycom Stockholders Meeting within
45 days of the Proxy Statement being approved by the SEC. Polycom shall
consult with ViaVideo and use all reasonable efforts to hold the Polycom
Stockholders Meeting on the same day as the ViaVideo Stockholders Meeting
and shall not postpone or adjourn (other than for the absence of a quorum)
the Polycom Stockholders Meeting without the consent of ViaVideo. Subject to
Section 5.1, Polycom shall use its best efforts to solicit from stockholders
of Polycom proxies in favor of the Merger and shall take all other action
necessary or advisable to secure the vote or consent of stockholders
required to effect the Merger.
8. AMENDMENT OF SECTION 5.22. Section 5.22 to the Reorganization Agreement
is hereby amended to read in its entirety as follows:
5.22 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the certificate of
Merger and the transactions contemplated hereby and thereby shall be paid by
the party incurring such expense; provided, however, that any out-of-pocket
expenses incurred by Target (including, without limitation, fees and
expenses of one legal counsel to the Target, financial advisors and
accountants) in excess of $175,000 (which amount shall be subject to
reasonable increases in the event of unexpected and material changes in the
scope of work required by such counsel, advisors or accountants, approval of
which shall not be unreasonably withheld) in addition to fees and expenses
of more than one legal counsel shall remain an obligation of Target's
stockholders.
9. ADDITION OF SECTION 5.27. Section 5.27 shall be added to the
Reorganization Agreement to read in its entirety as follows:
5.27 REGISTRATION RIGHTS. Polycom hereby agrees to grant to the
holders of Polycom Common Stock issued pursuant to this Agreement,
registration rights as set forth in the Declaration of Registration Rights
in the form attached hereto as Exhibit I.
10. AMENDMENT OF SUBSECTION 6.1(B). Subsection (b) to Section 6.1 to the
Reorganization Agreement is hereby amended to read in its entirety as follows:
(b) PROXY STATEMENT APPROVED. The SEC shall have approved the Proxy
Statement. No stop order suspending the Proxy Statement or any part thereof
shall have been issued and no proceeding for that purpose shall have been
initiated or threatened by the SEC and all request for additional
information on the part of the SEC shall have been complied with to the
reasonable satisfaction of the parties thereto.
A-46
<PAGE>
11. AMENDMENT OF SECTION 9.1. Section 9.1 to the Reorganization Agreement
is hereby amended to read in its entirety as follows:
9.1 SURVIVAL AT EFFECTIVE TIME. The representations, warranties and
agreements set forth in this Agreement shall survive after the Effective
Time and shall terminate at the earlier of (i) twelve (12) months after the
Effective Time or (ii) the issuance of Polycom's audited financial
statements for the year ending December 31, 1997 or December 31, 1998,
depending on the Closing Date, which include the results of ViaVideo (the
"Termination Date"), except that the agreements set forth in Article I,
Section 5.4 (Confidentiality), 5.7 (Pooling Accounting), 5,8 (Affiliate
Agreements), 5.13 (Employee Benefit Plans), 5.16 (Form S-8), 5.17
(Stockholder's Representation Agreement), 5.22 (Reorganization), 5.25
(Reasonable Commercial Efforts and Further Assurances), 7.3 (Expenses and
Termination Fees), 7.4 (Amendment), Article VIII and this Article IX shall
survive the Termination Date.
12. AMENDMENT OF SECTION 9.2. Section 9.2 to the Reorganization Agreement
is hereby amended to read in its entirety as follows:
9.2. NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or by
commercial delivery service, or mailed by registered or certified mail
(return receipt requested) or sent via facsimile (with confirmation of
receipt) to the parties at the following address (or at such other address
for a party as shall be specified by like notice):
(a) if to Polycom or Merger Sub, to:
Polycom, Inc.
2584 Junction Avenue
San Jose, CA 95134
Attention: President
Tel: (408) 526-9000
Fax: (408) 526-9100
with a copy to:
Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Attention: Jeffrey P. Higgins
Tel: (650) 321-2400
Fax: (650) 321-2800
(b) if to ViaVideo, to:
ViaVideo Communications, Inc.
8900 Shoal Creek
Building 300
Austin, TX 78757
Attention: President
Tel: (512) 923-9633
Fax: (512) 342-7179
A-47
<PAGE>
with a copy to:
Brobeck, Phleger & Harrison LLP
301 Congress Avenue
12th Floor
Austin, TX 78701
Attention: Carmelo M. Gordian
Tel: (512) 477-5495
Fax: (512) 477-5813
13. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same
instrument.
14. GOVERNING LAW. This Amendment shall be governed and construed by and
construed in accordance with the laws of the State of California.
15. HEADINGS. Section headings in this Amendment are included herein for
the convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
16. REORGANIZATION AGREEMENT. Except as expressly amended herein, the
Reorganization Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
<TABLE>
<S> <C> <C>
POLYCOM, INC.
By: /s/ BRIAN L. HINMAN
-----------------------------------------
Brian L. Hinman
CHIEF EXECUTIVE OFFICER
VENICE ACQUISITION CORPORATION
By: /s/ BRIAN L. HINMAN
-----------------------------------------
Brian L. Hinman
PRESIDENT
VIAVIDEO COMMUNICATIONS, INC.
By: /s/ CRAIG B. MALLOY
-----------------------------------------
Craig B. Malloy
PRESIDENT
</TABLE>
[SIGNATURE PAGE TO AMENDMENT NO. 1]
A-48
<PAGE>
CERTIFICATE OF MERGER
MERGING
MERGER SUB
WITH AND INTO
TARGET
------------------------
Pursuant to Section 251 of the General Corporation Law of
the State of Delaware
------------------------
Merger Sub, a Delaware corporation ("Merger Sub"), and Target, a Delaware
corporation ("Target"), DO HEREBY CERTIFY AS FOLLOWS:
FIRST: That Merger Sub was incorporated on June , 1997 pursuant to the
Delaware General Corporation Law (the "Delaware Law"), and that Target was
incorporated on , pursuant to the Delaware Law.
SECOND: That an Agreement and Plan of Reorganization (the "Reorganization
Agreement"), dated as of June , 1997, among Acquiror, a Delaware corporation,
Merger Sub and Target, setting forth the terms and conditions of the merger of
Merger Sub with and into Target (the "Merger"), has been approved, adopted,
certified, executed and acknowledged by each of the constituent corporations in
accordance with Section 251 of the Delaware Law.
THIRD: That the name of the surviving corporation (the "Surviving
Corporation") shall be Target.
FOURTH: That pursuant to the Reorganization Agreement, the Restated
Certificate of Incorporation of the Surviving Corporation is amended to read in
its entirety as set forth in EXHIBIT A hereto.
FIFTH: That an executed copy of the Reorganization Agreement is on file at
the principal place of business of the Surviving Corporation at the following
address:
Target
___________________________
___________________________
SIXTH: That a copy of the Reorganization Agreement will be furnished by the
Surviving Corporation, on request and without cost, to any stockholder of any
constituent corporation.
SEVENTH: That the Merger shall become effective upon the filing of this
Certificate of Merger with the Secretary of State of the State of Delaware.
A-49
<PAGE>
IN WITNESS WHEREOF, each of Merger Sub and Target has caused this
Certificate of Merger to be executed in its corporate name this day of
, 1997.
<TABLE>
<S> <C> <C>
MERGER SUB
By:
-----------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ATTEST:
- ------------------------------
SECRETARY
TARGET
By:
-----------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ATTEST:
- ------------------------------
SECRETARY
</TABLE>
[SIGNATURE PAGE TO CERTIFICATE OF MERGER]
A-50
<PAGE>
APPENDIX B
MONTGOMERY
June 11, 1997
Board of Directors
Polycom, Inc.
2548 Junction Avenue
San Jose, California 95134
Gentlemen:
We understand that Polycom, Inc., a Delaware corporation ("Buyer"), a
wholly-owned subsidiary of Buyer ("Merger Sub") and ViaVideo Communications,
Inc., a Delaware corporation ("Seller"), propose to enter into an Agreement and
Plan of Reorganization, to be dated as of June 11, 1997, a draft of which has
been provided to us by management of Buyer (the "Reorganization Agreement"),
pursuant to which Merger Sub will be merged with and into Seller, with Seller as
the surviving entity (the "Merger").
Pursuant to the Merger, as more fully described in the Reorganization
Agreement and as further described to us by management of Buyer, we understand
that all of the outstanding common stock of Seller ("Seller Common Stock")
(assuming conversion of all outstanding preferred stock of Seller into Seller
Common Stock) and all options to purchase shares of Seller Common Stock
(including all outstanding options and all options permitted to be granted
pursuant to the Reorganization Agreement) will be convertible into and
exchangeable for, respectively, the right to receive or an option to purchase,
in the aggregate, up to 9,760,300 shares of the common stock, $0.0005 par value,
of Buyer ("Buyer Common Stock"), subject to certain adjustments (the
"Consideration"), provided, that if the average closing price per share of Buyer
Common Stock as quoted on the Nasdaq National Market System for the ten trading
days immediately preceding (and including) the second day prior to the effective
time of the Merger (the "Closing Price") is greater than $9.00, then the number
of shares of Buyer Common Stock to be issued in connection with the Merger as
described above will be adjusted so that the aggregate Closing Price will be
$87,842,700. The terms and conditions of the Merger are set forth in more detail
in the Reorganization Agreement.
You have asked for our opinion as investment bankers as to whether the
Consideration to be paid by Buyer pursuant to the Merger is fair to Buyer from a
financial point of view, as of the date hereof. As you are aware, we were not
retained to nor did we advise Buyer with respect to alternatives to the Merger
or Buyer's underlying decision to proceed with or effect the Merger.
In connection with our opinion, we have, among other things: (i) reviewed
publicly available financial and other data with respect to Buyer, including the
consolidated financial statements of Buyer for recent years and interim periods
to March 31, 1997, and certain other relevant financial and operating data
relating to Seller and Buyer, including financial statements of Seller for the
period January 1 through March 31, 1997, made available to us from published
sources and from the internal records of Seller and Buyer; (ii) reviewed the
financial terms and conditions of the June 10, 1997 draft of the Reorganization
Agreement, provided to us by management of Buyer; (iii) reviewed certain
publicly available information concerning the trading of, and the trading market
for, Buyer Common Stock; (iv) compared Seller from a financial point of view
with certain other companies in the teleconferencing and related
telecommunications equipment industry which we deemed to be relevant; (v)
considered the financial terms, to the extent
B-1
<PAGE>
Board of Directors
Polycom, Inc.
June 11, 1997
Page 2
publicly available, of selected recent business combinations of companies in the
networking and communications industry which we deemed to be comparable, in
whole or in part, to the Merger; (vi) reviewed and discussed with
representatives of the management of Seller and Buyer certain information of a
business and financial nature regarding Seller, furnished to us by them,
including financial forecasts and related assumptions of Seller furnished to us
by management of Seller (the "Seller Forecasts") and adjustments to such
forecasts furnished to us by management of Buyer (the "Adjusted Seller
Forecasts"); (vii) reviewed and discussed with representatives of the management
of Buyer certain information of a business and financial nature regarding Buyer,
including financial forecasts and related assumptions of Buyer furnished to us
by management of Buyer (the "Buyer Forecasts") or obtained by us from a
Montgomery Securities research report (the forecasts obtained from such research
report, together with the Seller Forecasts, the Adjusted Seller Forecasts and
the Buyer Forecasts, the "Forecasts"); (viii) made inquiries regarding and
discussed the Merger and the Reorganization Agreement and other matters related
thereto with Buyer's counsel; and (ix) performed such other analyses and
examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the Forecasts,
upon the advice of management of Buyer and with your consent we have assumed for
purposes of our opinion that the Forecasts (including assumptions in the Seller
Forecasts and in the Adjusted Seller Forecasts regarding product
commercialization and shipment) have been reasonably prepared and that they
provide a reasonable basis upon which we can form our opinion and that, in the
case of the Seller Forecasts and the Buyer Forecasts, they have been prepared on
bases reflecting the best available estimates and judgments of Seller's and
Buyer's respective managements at the time of preparation as to the future
financial performance of Seller and Buyer, respectively, and in the case of the
Adjusted Seller Forecasts, they have been prepared on bases reflecting the best
available estimates and judgments of Buyer's management at the time of
preparation as to the future financial performance of Seller. We have also
assumed that there have been no material changes in Seller's or Buyer's assets,
financial condition, results of operations, business or prospects since the
respective dates of their last financial statements made available to us. We
have relied on advice of counsel and independent accounts to Buyer as to all
legal and financial reporting matters with respect to Buyer, the Merger and the
Reorganization Agreement. We have assumed that the Merger will be consummated in
a manner that complies in all respects with the applicable provisions of the
Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934 and all other applicable federal and state statutes, rules
and regulations. In addition, we have not assumed responsibility for making an
independent evaluation, appraisal or physical inspection of any of the assets or
liabilities (contingent or otherwise) of Seller or Buyer, nor have we been
furnished with any such appraisals. You have informed us, and we have assumed,
that the Merger will be recorded as a pooling-of-interests under generally
accepted accounting principles. Finally, our opinion is based on economic,
monetary and market and other conditions, including the price per share of Buyer
Common Stock, as in effect on, and the information made available to us as of,
the date hereof. Accordingly, although subsequent developments may affect this
opinion, we have not assumed any obligation to update, revise or reaffirm this
opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Reorganization
Agreement, without any further amendments thereto, and without waiver by Buyer
of any of the conditions to its obligations thereunder.
In the ordinary course of our business, we actively trade the equity
securities of Buyer for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position
B-2
<PAGE>
Board of Directors
Polycom, Inc.
June 11, 1997
Page 3
in such securities. We have also acted as an underwriter in connection with the
initial public offering of Buyer, and have performed various investment banking
services for Buyer.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be paid by Buyer pursuant to the
Merger is fair to Buyer from a financial point of view, as of the date hereof.
This opinion is directed to the Board of Directors of Buyer in its
consideration of the Merger and is not a recommendation to any shareholder as to
how such shareholder should vote with respect to the Merger and is not a
recommendation to any shareholder as to how such shareholder should vote with
respect to the Merger. Further, this opinion addresses only the financial
fairness of the Consideration to be paid by Buyer and does not address the
relative merits of the Merger and any alternatives to the Merger, Buyer's
underlying decision to proceed with or affect the Merger or any other aspect of
the Merger. This opinion may not be used or referred to by Buyer, or quoted or
disclosed to any person in any manner, without our prior written consent, which
consent is hereby given to the inclusion of this opinion in any proxy statement
or prospectus filed with the Securities and Exchange Commission in connection
with the Merger. In furnishing this opinion, we do not admit that we are experts
within the meaning of the term "experts" as used in the Securities Act and the
rules and regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours,
[/S/ MONTGOMERY SECURITIES]
B-3
<PAGE>
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 10, 1997
POLYCOM, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
P
The undersigned, having received the Notice of Special Meeting
of Stockholders and the Proxy Statement, hereby appoint(s) Brian L.
Hinman and Michael R. Kourey, and each of them, Proxies of the undersigned (with
full power of
R
substitution) to attend the Special Meeting of Stockholders of
Polycom, Inc. ("Polycom") to be held on December 10, 1997 at 10:00
a.m., local time, at the offices of Polycom, 2584 Junction Avenue, San Jose,
California 95134, and all postpone ments and adjournments thereof
(the "Meeting"), and there to vote all shares of Common Stock of Polycom that
the undersigned would be entitled to vote, if personally present, in
regard to all matters which may come before the Meeting.
O
The undersigned hereby confer(s) the Proxies, and each of them,
discretionary authority to consider and act upon such business,
matters or proposals other than the business set forth below as may properly
come before the Meeting. The Proxy
X
when properly executed will be voted in the manner specified herein.
If no specification is made, the Proxies intend to vote FOR the
proposal.
Y
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE
SIDE
<PAGE>
/X/ Please mark
votes as in
this example.
The Board of Directors recommends a vote FOR the proposal.
1. Adoption and approval of the Agreement and Plan of Reorganization dated as of
June 11, 1997, as amended, among Polycom, ViaVideo, Inc., and Venice
Acquisition Corporation.
/ / FOR / / AGAINST / / ABSTAIN
2. Approval to adjourn the meeting in the event that the Board of Directors
wishes to continue to solicit votes to approve the transaction. The
subsequent meeting must be held prior to March 31, 1998.
/ / FOR / / AGAINST / / ABSTAIN
MARK HERE IF YOU PLAN TO ATTEND THE
MEETING / /
MARK HERE FOR ADDRESS CHANGE AND NOTE AT
LEFT / /
(This Proxy should be dated, signed by
the stockholder(s) exactly as his or
her name(s) appears hereon, and
returned promptly in the enclosed
envelope. Persons signing in a
fiduciary capacity should so indicate.)
Signature: ______ Date _______________ Signature: _____ Date _______________
