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EXHIBIT 99.1
RISK FACTORS RELATING TO THE PENDING MERGER OF ACCORD NETWORKS LTD.
WITH A WHOLLY-OWNED SUBSIDIARY OF POLYCOM, INC.
The risks below relate to the pending merger of Merger Sub Ltd., a
wholly-owned subsidiary of Polycom, Inc., with and into Accord Networks Ltd., an
Israeli corporation, which would survive the merger as a wholly-owned subsidiary
of Polycom. Polycom and Accord expect to complete the merger in the first
quarter of 2001. An investment in Polycom common stock involves a high degree of
risk. The pending merger of Polycom and Accord involves a number of risks which
are specific to the merger and to the combined company that would result if the
merger is completed. In addition to the other information contained or
incorporated by reference in or annexed to Polycom's filings in accordance with
the Securities Exchange Act of 1934 with the Securities and Exchange Commission,
you should carefully consider the following risk factors before making an
investment decision. Additional information concerning the pending merger of
Polycom and Accord is available in the Registration Statement on Form S-4, as
amended (File No. 333-52232), filed by Polycom with the Securities and Exchange
Commission on January 9, 2001.
RISKS RELATED TO THE MERGER
WHILE POLYCOM'S AND ACCORD'S SHARE PRICES HAVE BEEN VOLATILE IN RECENT PERIODS,
THE MERGER EXCHANGE RATIO IS FIXED.
Upon completion of the merger, each ordinary share of Accord will be
exchanged for 0.3065 of a share of Polycom common stock. The exchange ratio will
not change even if the market price of either or both the Accord ordinary shares
and Polycom common stock fluctuates. Accord may not withdraw from the merger or
resolicit the vote of its shareholders solely because of changes in the market
price of Accord ordinary shares or Polycom common stock. The specific dollar
value of Polycom common stock an Accord shareholder will receive upon completion
of the merger will depend on the market value of Polycom common stock at that
time. Polycom's stock price has been volatile and you should expect it to
continue to fluctuate.
POLYCOM AND ACCORD MAY NOT REALIZE THE BENEFITS THEY EXPECT FROM THE MERGER.
Polycom and Accord may not realize the benefits described in "Reasons
for the Merger" below because of the following challenges:
- incorporating Accord's technology and products into Polycom's next
generation of products;
- integrating Accord's relatively small technical team with Polycom's
larger and more widely dispersed engineering organization; and
- integrating Accord's products with Polycom's business, because
Polycom does not have manufacturing, marketing or support
experience for these products, which are sold to customers that
Polycom does not normally service.
THE INTEGRATION PROCESS MAY DISRUPT POLYCOM'S AND ACCORD'S BUSINESSES AND
INTERNAL RESOURCES.
The integration of Polycom and Accord will be complex, time consuming
and expensive and may disrupt Polycom's and Accord's businesses. Some of
Accord's suppliers, distributors, customers and licensors are Polycom's
competitors or work with Polycom's competitors and as a result may terminate
their business relationships with Accord as a result of the merger. In addition,
the integration process may strain the combined company's financial and
managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from the combined company's core
business objectives.
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GENERAL UNCERTAINTY RELATED TO THE MERGER COULD HARM THE COMBINED COMPANY.
Polycom's or Accord's customers may, in response to the announcement of
the proposed merger, delay or defer purchasing decisions. If Polycom's or
Accord's customers delay or defer purchasing decisions, the combined company's
revenue could materially decline or any increases in revenue could be lower than
expected. Similarly, Polycom and Accord employees may experience uncertainty
about their future roles with the combined company. This may harm the combined
company's ability to attract and retain key management, marketing and technical
personnel. Also, speculation regarding the likelihood of the closing of the
merger could increase the volatility of Polycom's and Accord's share prices.
THIRD PARTIES MAY TERMINATE OR ALTER EXISTING CONTRACTS WITH ACCORD.
Accord has contracts with some of its suppliers, distributors,
customers, licensors and other business partners. Certain of these contracts
require Accord to obtain consent from these other parties in connection with the
merger. If their consent cannot be obtained, Accord may suffer a loss of
potential future revenue and may lose rights to facilities or intellectual
property that are material to Accord's business and the business of the combined
company.
FAILURE TO QUALIFY FOR POOLING-OF-INTERESTS ACCOUNTING TREATMENT MAY HARM THE
FUTURE OPERATING RESULTS OF THE COMBINED COMPANY.
If events occur that cause the merger to fail to qualify for
pooling-of-interests accounting treatment, the purchase method of accounting
would apply. Purchase accounting treatment would harm the reported operating
results of the combined company. Under purchase accounting, Polycom would record
the estimated fair value of Polycom common stock issued in the merger in
exchange for ordinary shares and vested options to acquire ordinary shares of
Accord as the cost of acquiring Accord. A portion of the purchase price would be
charged to in process research and development expense. The remainder would be
allocated to the net assets acquired, with the excess of the estimated fair
value of Polycom common stock issued in the merger over the fair value of net
assets acquired recorded as goodwill or other intangible assets. This goodwill
and other intangible assets would be amortized in future periods. The estimated
fair value of Polycom common stock to be issued in the merger is much greater
than the historical net book value at which Accord carries its assets in its
accounts.
FAILURE TO COMPLETE THE MERGER COULD HARM ACCORD'S ORDINARY SHARE PRICE AND
FUTURE BUSINESS AND OPERATIONS.
If the merger is not completed, Accord may be subject to the following
risks:
- if the merger agreement is terminated under certain circumstances,
Accord will be required to pay Polycom a termination fee of
$9,500,000;
- the price of Accord ordinary shares may decline to the extent that
the current market price of Accord ordinary shares reflects a
market assumption that the merger will be completed;
- costs related to the merger, such as legal, accounting and certain
financial advisory fees, must be paid even if the merger is not
completed; and
- if the merger is terminated and Accord's board of directors
determines to seek another merger or business combination, Accord
may not be able to find a partner willing to pay an equivalent or
more attractive price than that which would be paid in the merger.
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RISKS RELATED TO THE COMBINED COMPANY
UNANTICIPATED FLUCTUATIONS IN THE COMBINED COMPANY'S QUARTERLY OPERATING RESULTS
COULD AFFECT THE COMBINED COMPANY'S STOCK PRICE.
Each of Polycom and Accord believes that quarter-to-quarter comparisons
of its financial results are not necessarily meaningful indicators of the future
operating results of the combined company and should not be relied on as an
indication of future performance. If the combined company's quarterly operating
results fail to meet the expectations of analysts, the trading price of Polycom
common stock following the merger could be negatively affected. Each of
Polycom's and Accord's quarterly operating results have varied substantially in
the past and those of the combined company may vary substantially in the future
depending upon a number of factors described in this section of the proxy
statement/prospectus, including many that are beyond the combined company's
control.
Polycom and Accord cannot be certain that the business strategy of the
combined company will be successful or that it will successfully manage these
risks. If the combined company fails to adequately address any of these risks or
difficulties, its business would likely suffer.
EACH OF POLYCOM AND ACCORD HAS EXPERIENCED SIGNIFICANT GROWTH IN ITS RESPECTIVE
BUSINESS IN RECENT PERIODS AND THE COMBINED COMPANY'S ABILITY TO MANAGE THIS
GROWTH AND ANY FUTURE GROWTH WILL AFFECT ITS ABILITY TO BECOME PROFITABLE.
Polycom's and Accord's historical growth has placed, and any further
growth is likely to continue to place, a significant strain on their respective
resources. Polycom has grown from 243 employees at December 31, 1998 to 532
employees at November 30, 2000. At December 31, 1998, Accord had a total of 98
employees, and at November 30, 2000, Accord had a total of 229 employees. The
combined company's productivity and the quality of its products may be adversely
affected if it does not integrate and train its new employees quickly and
effectively. Polycom and Accord also cannot be sure that the combined company's
revenues will grow at a sufficient rate to absorb the costs associated with a
larger overall headcount. Polycom and Accord expect that the combined company
will need to expand its infrastructure, including operating and administrative
systems and controls, train employees and coordinate among its executive,
engineering, finance, marketing, sales, operations and customer support
organizations. In addition, the future growth of the combined company may
require significant resources and management attention. Managing this growth
will require substantial resources that the combined company may not have and,
therefore, impede the combined company's growth.
THE COMBINED COMPANY MAY NOT BE ABLE TO SUSTAIN THE REVENUE GROWTH RATES
PREVIOUSLY EXPERIENCED BY ACCORD OR POLYCOM INDIVIDUALLY.
Although Polycom's and Accord's revenue has grown rapidly in recent
years, Polycom and Accord do not anticipate that the combined company will
sustain this rate of revenue growth because of the difficulty of maintaining
high percentage increases as the base of revenue increases.
THE COMBINED COMPANY WILL NEED TO RETAIN AND RECRUIT EXECUTIVE AND OTHER
PERSONNEL TO SUCCESSFULLY RUN AND EXPAND ITS BUSINESS.
The combined company's success will depend to a significant extent on
the continued service of its executive officers and other key employees,
including key sales, consulting, technical and marketing personnel. If the
combined company loses the services of one or more of its executives or key
employees, this could harm the combined company's business and could affect its
ability to successfully implement its business objectives. The combined
company's future success will also depend in large part on its ability to
attract and retain experienced technical, sales, marketing and management
personnel.
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POLYCOM AND ACCORD HAVE EXPERIENCED LOSSES IN THE PAST, AND THE COMBINED COMPANY
MAY EXPERIENCE LOSSES IN THE FUTURE.
Accord and Polycom have experienced losses in the past. Polycom and
Accord expect that the combined company will continue to incur significant sales
and marketing, product development and administrative expenses. As a result, the
combined company will need to generate significant revenue to maintain
profitability. Neither Polycom nor Accord can be certain that the combined
company will sustain or increase profitability in the future. Any failure to
significantly increase revenue as the combined company implements its product
and distribution strategies would adversely affect its business.
RISKS RELATED TO POLYCOM
In determining whether to approve and adopt the merger agreement,
approve the merger and exchange their investment in Accord for an investment in
Polycom, Accord shareholders should read carefully the section titled "Factors
That May Affect Future Performance" on pages 16 through 24 in Polycom's
quarterly report on Form 10-Q for the periods ended October 1, 2000, which is
incorporated by reference in the proxy statement/prospectus. These risks all
relate to Polycom's current business. In addition, Polycom recommends that you
carefully note that many of the risks outlined below that relate to Accord's
operations in Israel will also apply to the business of the combined company
following the merger.
RISKS RELATED TO ACCORD
In determining whether to approve and adopt the merger agreement and
approve the merger and exchange their investment in Accord for an investment in
Polycom, Accord shareholders should consider the following risks relating to
Accord together with the information about Accord's business, financial
condition and results of operations provided elsewhere in this document. If the
merger is completed, these risks will continue to apply to your investment in
Polycom, although to a lesser degree because Accord's business will, following
the merger, represent only a portion of the combined company's business.
ACCORD IS AN EARLY-STAGE COMPANY AND ACCORD'S LIMITED OPERATING HISTORY MAKES
EVALUATING ACCORD'S BUSINESS AND PREDICTING ACCORD'S FUTURE RESULTS DIFFICULT.
IF ACCORD DOES NOT MEET FINANCIAL EXPECTATIONS, ACCORD'S ORDINARY SHARE PRICE
WOULD LIKELY DECLINE.
Accord has a limited operating history on which to base an evaluation
of its business and prospects. As a result, evaluation of Accord's business and
prospects may prove inaccurate. If Accord's operating results fall below
expectations of securities analysts or investors, the market price of Accord's
ordinary shares will likely decline. Accord began its research and development
activities in 1994 and commercially released the first version of its system in
1997. Because Accord is an early-stage company, Accord has not yet fully
implemented its business model and strategy, and therefore, it is difficult to
evaluate whether Accord will be successful.
ACCORD MAY BE UNABLE TO PROTECT ITS PROPRIETARY TECHNOLOGY OR MAINTAIN ITS
TECHNOLOGICAL ADVANTAGES, WHICH COULD CAUSE ACCORD TO LOSE ITS INTELLECTUAL
PROPERTY RIGHTS OR RESULT IN INCREASED COSTS.
Accord's success and ability to compete depend to a significant degree
on its internally developed proprietary technology. If Accord is unable to
protect its proprietary rights, Accord could lose them or incur increased costs.
Accord attempts to protect its technology through a combination of patent and
trademark applications, copyrights, trade secret and other intellectual property
laws and contractual obligations. Accord does not hold any patents for its
existing system. Accord's intellectual property protection measures may not be
sufficient to prevent misappropriation of its technology and Accord's
competitors may independently develop technologies that are substantially
equivalent or superior to Accord's technology. Accord also has foreign
operations and the laws of many foreign countries may not protect Accord's
intellectual property rights to the same extent as the laws of the U.S.
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IF ACCORD LOSES THE RIGHT TO LICENSE TECHNOLOGY USED IN ITS SYSTEM, ACCORD'S
OPERATIONS MAY BE DISRUPTED, ACCORD'S SALES MAY BE DELAYED AND ACCORD MAY LOSE
BUSINESS.
Accord licenses key technology from third parties that is incorporated
into Accord's system, including operating systems and embedded visual, audio and
data software. Any interruption in the supply or support of any licensed
technology could disrupt Accord's operations, delay its sales and result in the
loss of business. Some of Accord's technology is licensed under agreements that
are not perpetual and that could expire or require the consent of the other
party in the event of a change of control.
THIRD PARTIES MAY CLAIM THAT ACCORD INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD RESULT IN THE LOSS OF ACCORD'S RIGHTS, SUBJECT ACCORD TO
LIABILITY AND DIVERT MANAGEMENT'S ATTENTION.
Accord may be subject to adverse claims or litigation alleging
infringement of the intellectual property rights of others. Any adverse claims
or litigation, regardless of the merits of the claims or their outcome, could be
costly and cause diversion of management's attention. In the past Accord
received a letter, and Accord may receive additional letters, indicating that
the technology used in Accord's system requires a third-party license. An
adverse outcome in any litigation alleging infringement could result in the loss
of proprietary rights, subject Accord to significant liabilities, require Accord
to seek licenses from third parties, which may not be available on commercially
reasonable terms or at all, or prevent Accord from manufacturing or selling
Accord's systems.
ACCORD DEPENDS ON THIRD PARTIES TO UPDATE AND SUPPORT KEY TECHNOLOGY THAT ACCORD
USES IN ITS SYSTEM, AND ANY INTERRUPTION IN THE ENHANCEMENT, SUPPLY OR SUPPORT
OF THIS TECHNOLOGY COULD CAUSE ACCORD TO LOSE CUSTOMERS OR FAIL TO ATTRACT NEW
CUSTOMERS.
Because Accord's system incorporates technology developed and
maintained by third parties, Accord depends on these third parties to deliver
and support reliable products, enhance their current products, develop new
products on a timely and cost-effective basis and respond to emerging industry
standards and other technological changes. If these third parties fail to do so,
it could impede Accord's ability to enhance and update its system, which could
cause Accord to lose customers or fail to attract new customers and Accord's
revenue could decline.
IF REAL-TIME INTERACTIVE VISUAL COMMUNICATIONS APPLICATIONS ARE NOT DEVELOPED
AND ADOPTED FOR BUSINESS AND NON-BUSINESS PURPOSES THEN THE DEMAND FOR ACCORD'S
PRODUCTS WILL SLOW AND ACCORD'S REVENUES WILL DECLINE.
The future growth of Accord's business depends in large part on the
widespread development and adoption of real-time interactive visual
communications applications for business and non-business purposes. If the
development and adoption of real-time interactive visual communications
applications do not occur, or occur more slowly than Accord anticipates, then
the demand for Accord's products will slow and Accord's revenues will decline.
A SIGNIFICANT PART OF ACCORD'S STRATEGY IS TO SELL TO TELECOMMUNICATIONS SERVICE
PROVIDERS, AND IF THAT MARKET FAILS TO DEVELOP AS ACCORD ANTICIPATES, ACCORD MAY
NOT BE ABLE TO INCREASE SALES OF ITS SYSTEM. IF ACCORD FAILS TO GROW AS
EXPECTED, ACCORD'S ORDINARY SHARE PRICE WILL LIKELY DECLINE.
Accord believes its future growth in sales volume will depend, in large
part, on the expansion of visual communications service offerings beyond
videoconferencing by telecommunications service providers. If telecommunications
service providers do not expand their service offerings to include new visual
communications applications, Accord may not increase sales of its system, and
Accord may not grow as expected. If Accord does not meet growth expectations of
securities analysts or investors, its ordinary share price will likely decline.
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ACCORD'S MARKET IS HIGHLY COMPETITIVE AND ITS MAIN COMPETITORS ARE LARGER THAN
ACCORD IS, WHICH MAY MAKE IT MORE DIFFICULT TO ACQUIRE AND RETAIN CUSTOMERS.
Accord competes in a market that is highly competitive, and Accord
expects competition to continue to intensify. Competitive pressure may make it
difficult for Accord to acquire and retain customers and may require Accord to
reduce the price of its system and services. As a result, Accord's revenues
could decline. Accord's principal competitors include Ezenia! Inc., Lucent,
RADVison Ltd. and CUseeMe Networks, Inc. Some of Accord's competitors have
longer operating histories and significantly greater financial, marketing and
other resources than Accord does. These companies may have existing
relationships with some of Accord's current and prospective customers. These
companies also may be able to respond more quickly than Accord can to new or
emerging technologies and changes in customer requirements. Accord may not be
able to compete successfully with existing or new competitors.
BECAUSE ACCORD DEPENDS ON SALES OF ACCORD'S MGC-100 AND MGC-50 SYSTEMS FOR
SUBSTANTIALLY ALL OF ACCORD'S REVENUE, ACCORD IS PARTICULARLY SUSCEPTIBLE TO
SUCCESSFUL COMPETITION, PRODUCT OBSOLESCENCE AND DOWNTURNS IN THE VISUAL
COMMUNICATIONS MARKET, WHICH COULD CAUSE ACCORD'S REVENUES TO DECLINE.
Sales of Accord's MGC-100 and MGC-50 systems and related services have
historically accounted for all of Accord's revenue. If sales of Accord's MGC-100
and MGC-50 systems and related services decline and if Accord does not develop
new systems and services, Accord's revenues may decline, which could cause
Accord's ordinary share price to fall. Dependence on two systems makes Accord
particularly susceptible to successful competition by others in the industry, to
product obsolescence and to downturns in the visual communications market.
TECHNOLOGICAL CHANGES COULD CAUSE ACCORD'S SYSTEM TO BECOME OBSOLETE OR REQUIRE
ACCORD TO REDESIGN ITS SYSTEM, WHICH COULD CAUSE ACCORD TO LOSE CUSTOMERS OR
INCUR SUBSTANTIAL COSTS.
The market in which Accord competes is characterized by:
- technological changes;
- frequent product and feature introductions;
- changes in customer demands;
- evolving industry standards; and
- emerging communications networks.
If Accord is unable to react to these events, Accord may lose customers
or incur substantial costs. Accord expects that the growth of real-time
interactive visual communications, as well as technology trends such as the
adoption of new types of communication networks and transmission protocols, will
require Accord to enhance and adapt its systems and product line to remain
competitive. Enhancements and adaptations to Accord's systems and product line
could be costly and time-consuming, and Accord may not be able to enhance and
adapt its systems and product line quickly or inexpensively enough to compete
successfully.
ACCORD'S QUARTERLY FINANCIAL PERFORMANCE IS LIKELY TO VARY SIGNIFICANTLY IN THE
FUTURE. ACCORD'S REVENUES AND OPERATING RESULTS IN ANY QUARTER MAY NOT BE
INDICATIVE OF ACCORD'S FUTURE PERFORMANCE, AND IT MAY BE DIFFICULT FOR INVESTORS
TO EVALUATE ACCORD'S PROSPECTS. IF ACCORD DOES NOT MEET QUARTERLY EXPECTATIONS,
ACCORD'S ORDINARY SHARE PRICE WOULD LIKELY DECLINE.
Accord's quarterly revenues and operating results are difficult to
predict and Accord expects them to vary significantly in the future. Accord's
operating results in some quarters may fall below the expectations of securities
analysts or investors, which would likely cause the market price of Accord's
ordinary shares to decline. Accord has a lengthy sales cycle for its system, and
it typically takes from one to nine months after Accord first begins discussions
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with a prospective customer before Accord receives an order from that customer.
Accord also has a limited order backlog, which makes revenues in any quarter
substantially dependent upon orders Accord receives and delivers in that
quarter. Because of these factors, Accord's revenues and operating results in
any quarter may not meet market expectations or be indicative of future
performance and it may be difficult for investors to evaluate Accord's
prospects.
ACCORD MAY BE UNABLE TO DELIVER PRODUCTS ON TIME OR TO GROW ITS BUSINESS BECAUSE
OF THE LIMITED SUPPLY OF KEY COMPONENTS IN ITS SYSTEMS.
Several of the key components in Accord's systems are in limited
supply. If Accord is unable to obtain key components, Accord may not be able to
deliver products to customers on time, and customers may seek other sources for
products similar to Accord's. Either of these results could cause Accord to
change its business, cause Accord's revenue to decline or impede its growth. In
the past, Accord has experienced shortages in the supply of flash memory
components and several chips used in its systems. Accord may be unable to obtain
sufficient supplies of its systems' components in the future.
ACCORD ACHIEVED PROFITABILITY FOR THE FIRST TIME IN 1999, AND ACCORD MAY NOT BE
ABLE TO SUSTAIN IT. IF ACCORD IS UNABLE TO SUSTAIN OR INCREASE PROFITABILITY,
ACCORD'S ORDINARY SHARE PRICE WILL LIKELY DECREASE AND ACCORD MAY BE UNABLE TO
GROW ITS BUSINESS.
Accord has a history of losses and in 1999 achieved profitability for
the first time. Accord may not be able to sustain or increase profitability on a
quarterly or annual basis. Accord's inability to maintain profitability or
positive cash flow could result in disappointing financial results, impede
implementation of Accord's growth strategy and cause the market price of its
ordinary shares to decrease. Accord incurred net losses of $3.0 million in 1996,
$5.0 million in 1997, and $980,000 in 1998.
SOME OF THE KEY COMPONENTS IN ACCORD'S SYSTEMS COME FROM SOLE SOURCE SUPPLIERS.
IF THESE SUPPLIERS DELAY OR DISCONTINUE THE MANUFACTURE OF THESE COMPONENTS,
RAISE THEIR PRICES OR PRODUCE POOR QUALITY PRODUCTS, ACCORD MAY LOSE CUSTOMERS
OR EXPERIENCE INCREASED COSTS.
Accord purchases a number of key components, including various chips,
power supply components and chassis components used in Accord's systems, from
sole source suppliers for which alternative sources are not readily available.
If these suppliers delay or discontinue manufacture of these components, raise
their prices or produce poor quality products, Accord may lose customers and
experience increased costs. Accord does not have any agreements that guarantee
Accord a minimum supply of these components from Accord's sole source suppliers.
If Accord is unable to obtain sufficient quantities of these components or to
locate alternative suppliers, Accord may experience delays in shipping its
systems or be required to redesign its systems to use other components that are
more readily available or are higher quality. If Accord does find alternative
suppliers, it may be on unacceptable terms. Any of these results would lead to
lower margins or less competitive pricing.
ACCORD DEPENDS ON THIRD PARTY SUBCONTRACTORS TO PARTIALLY ASSEMBLE ITS SYSTEMS,
WHICH COULD RESULT IN SYSTEM DELIVERY DELAYS, LOSS OF CUSTOMERS AND LOSS OF
REVENUE.
Accord contracts with a limited number of independent subcontractors to
partially assemble the modules and chassis used in Accord's systems. Any
significant delays in the delivery of products to Accord by the independent
subcontractors could cause delivery delays to Accord's customers, which could
result in the loss of both customers and revenue. Accord's subcontractors could
experience financial, operational, production or quality assurance difficulties
or a catastrophic event that reduced or interrupted delivery of supplies to
Accord. Establishing alternative arrangements could take several months. Accord
does not know that alternative subcontracting sources will be able to meet
Accord's future requirements or that existing or alternative sources will be
available to Accord at favorable prices, if at all.
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ACCORD'S SYSTEMS MAY SUFFER FROM DEFECTS AND ERRORS, WHICH COULD DELAY MARKET
ACCEPTANCE, DAMAGE ACCORD'S CUSTOMER RELATIONSHIPS AND REPUTATION, AND INCREASE
SERVICE AND WARRANTY COSTS.
Software and hardware systems as complex as Accord's may contain
undetected errors or defects, especially when first introduced or when new
versions are released. Accord's systems may not be free from errors or defects
after commercial shipments have begun. Any errors or defects that are discovered
after commercial release could result in:
- delay in market acceptance;
- diversion of development resources;
- damage to Accord's customer relationships or reputation; and
- increased service and warranty costs.
IF ACCORD IS UNABLE TO EXPAND ITS INTERNATIONAL SALES AND OPERATIONS, ITS
REVENUES MAY NOT GROW AS EXPECTED WHICH COULD CAUSE THE PRICE OF ITS ORDINARY
SHARES TO DECLINE.
Accord's ability to increase sales of its systems will depend in part
on the expansion of Accord's international sales and operations. If Accord is
unsuccessful in expanding its international sales and operations, Accord's sales
and revenue may not grow as expected. If Accord does not meet the growth
expectations of securities analysts and investors, the market price of Accord's
ordinary shares will likely decline. Approximately 20.0% of Accord's revenues in
1999 and approximately 26.0% of Accord's revenues for the nine months ended
September 30, 2000 were derived from sales to customers outside of North
America, primarily in Europe and Asia. Accord intends to expand its sales
activities in these and other regions. International sales of visual
communications networking equipment are subject to a number of risks that could
prevent Accord from selling its systems in a particular country, including:
- conflicting and changing governmental laws and regulations relating
to imports and the use of communications equipment;
- difficulties in collecting payments from Accord's customers; and
- foreign currency exchange rate fluctuations.
IF ACCORD DOES NOT ATTRACT AND RETAIN A SKILLED WORKFORCE, ACCORD'S CUSTOMER
SUPPORT AND PRODUCT DEVELOPMENT OPERATIONS WILL SUFFER AND ACCORD MAY NOT BE
ABLE TO SUSTAIN OR GROW ITS BUSINESS.
Accord believes that its future success will depend on its ability to
attract and retain skilled engineering and customer support personnel. If Accord
is unable to hire or retain these individuals, Accord's customer support and
product development operations will suffer and Accord may not be able to sustain
or grow its business. The market for qualified personnel in the technology
industry is highly competitive and Accord has experienced difficulty in
recruiting qualified personnel. Recruiting qualified personnel is an expensive,
competitive and time-consuming process.
ACCORD'S GROWTH WILL CONTINUE TO PLACE A SIGNIFICANT STRAIN ON ACCORD'S
RESOURCES. IF ACCORD IS UNABLE TO MANAGE ITS EXPANDING OPERATIONS ACCORD'S
REVENUES MAY NOT INCREASE, ACCORD'S COST OF OPERATIONS MAY RISE AND ACCORD MAY
NOT SUSTAIN PROFITABILITY.
Accord has rapidly expanded its operations both in the U.S. and abroad
and anticipates that further expansion will be required to execute its growth
strategy. If Accord fails to successfully manage the challenges Accord's growth
poses, its revenues may not increase, its cost of operations may rise and Accord
may not remain profitable. Accord's research and development facilities are
located in Israel, and Accord's directors, executive officers and other key
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employees are located in the United States, Israel and the United Kingdom.
Accord also maintains offices in China and Accord plans to open offices in other
countries to market and sell its system in those countries and surrounding
regions. Accord's rapid growth and international expansion has placed
significant demands on its management, financial, technical and other resources.
These demands are likely to continue to increase.
RISKS RELATED TO OPERATIONS IN ISRAEL
POTENTIAL POLITICAL, ECONOMIC AND MILITARY INSTABILITY IN ISRAEL MAY HARM
ACCORD'S ABILITY TO PRODUCE AND SELL ACCORD'S SYSTEMS.
Accord's principal research and development and manufacturing
facilities and many of Accord's suppliers are located in Israel. Any future
armed conflicts or political instability in the region could impair Accord's
ability to produce and sell Accord's systems and could disrupt research or
developmental activities. Political, economic and military conditions in Israel
directly affect Accord's operations. Since the establishment of the State of
Israel in 1948, a number of armed conflicts have taken place between Israel and
its Arab neighbors. A state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. The future of peace efforts
between Israel and its Arab neighbors remains uncertain, and in recent months
there has been a marked increase in civil unrest and hostility between Israelis
and Palestinians. Several countries still restrict business with Israel and
Israeli companies. These restrictive laws and policies may have an adverse
impact on Accord's operating results, financial condition or the expansion of
Accord's business.
IF ACCORD'S KEY PERSONNEL IS REQUIRED TO PERFORM MILITARY SERVICE, ACCORD WILL
BE DEPRIVED OF THEIR SERVICES AND ACCORD'S OPERATIONS MAY BE DISRUPTED.
Many of Accord's executive officers, directors and employees in Israel
are obligated to perform annual military reserve duty and are subject to being
called to active duty at any time under emergency conditions. Accord's
operations could be disrupted by the absence for a significant period of one or
more of our executive officers or key employees due to military service. Any
disruption in Accord's operations could negatively affect Accord's
profitability.
BECAUSE ACCORD'S REVENUES ARE GENERATED IN U.S. DOLLARS AND A SIGNIFICANT
PORTION OF ACCORD'S EXPENSES ARE INCURRED IN NEW ISRAELI SHEKELS, ACCORD'S
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY INFLATION AND CURRENCY
FLUCTUATIONS.
Accord generates its revenues in U.S. dollars but incurs a significant
portion of its expenses, principally salaries and related personnel expenses, in
new Israeli shekels, commonly referred to as NIS. As a result, Accord is exposed
to the risk that the rate of inflation in Israel will exceed the rate of
devaluation of the NIS in relation to the dollar or that the timing of any
devaluation may lag behind inflation in Israel. If the dollar cost of Accord's
operations in Israel increases, Accord's dollar-measured results of operations
will be adversely affected. Accord's operations also could be adversely affected
if Accord is unable to protect itself from currency fluctuations in the future.
THE GOVERNMENT GRANTS WHICH ACCORD RECEIVES AND TAX BENEFITS TO WHICH ACCORD IS
ENTITLED REQUIRE ACCORD TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR
REDUCED IN THE FUTURE, WHICH WOULD INCREASE ACCORD'S COSTS OR TAXES.
Accord receives research and development grants and is entitled to tax
benefits under Israeli government programs, particularly as a result of the
approved enterprise status of Accord's existing facilities in Israel. The
termination or reduction of these programs and the tax benefits could cause
Accord's costs to increase, which could prevent Accord from maintaining
profitability. From 1995 through September 30, 2000, Accord received or accrued
research and development grants from the government of Israel totaling
approximately $8.3 million, and Accord has paid or accrued royalties in an
aggregate amount of $2.5 million. The Israeli government has reduced the
<PAGE>
benefits available under these programs in recent years and has indicated that
it may reduce or eliminate these benefits in the future. Accord has submitted
and may submit in the future requests for expansion of its approved enterprise
programs or for new programs. These requests might not be approved. Some of
these programs restrict Accord's ability to manufacture particular products or
transfer particular technology outside of Israel. Accord may choose in the
future not to request funding from Israeli government programs.
ACCORD MAY BE RESTRICTED FROM TRANSFERRING MANUFACTURING AND CERTAIN TECHNOLOGY
DEVELOPED PURSUANT TO GRANTS PROVIDED BY THE OFFICE OF THE CHIEF SCIENTIST
OUTSIDE ISRAEL. SUCH TRANSFERS, IF ALLOWED, MAY REQUIRE ACCORD TO PAY
SIGNIFICANT INCREASED ROYALTIES THAT WOULD ADVERSELY AFFECT ITS BUSINESS.
Under Israeli law, it is prohibited to transfer technology developed
pursuant to grants from the Office of the Chief Scientist to any person without
the prior written consent of the Office of the Chief Scientist. The grants also
contain restrictions on the ability to manufacture products developed with these
grants outside of Israel. Approval to manufacture such products outside of
Israel, if granted, is generally subject to an increase in the total amount to
be repaid to the Office of the Chief Scientist to between 120% to 300% of the
amount granted, depending on the extent of the manufacturing to be conducted
outside of Israel. These restrictions on the ability to transfer technology to
third parties or manufacture products outside Israel may adversely affect
Accord's operating results and significantly reduce the value of the technology.
PROPOSED TAX REFORM IN ISRAEL MAY REDUCE ACCORD'S TAX BENEFITS WHICH COULD
NEGATIVELY AFFECT ACCORD'S PROFITABILITY.
On May 4, 2000, a committee chaired by the director general of the
Israeli Ministry of Finance issued a report recommending widespread reform in
Israel's tax system. If the reform is adopted as recommended in the report, some
of the tax benefits to approved enterprises such as Accord's may be reduced, and
purchasers of Accord's ordinary shares may have to pay higher taxes in the
future. A reduction in the tax benefits available to Accord could negatively
affect Accord's profitability. The Israeli cabinet has approved the
recommendation in principle, but implementation of the reform requires
legislation by Israel's parliament. Accord cannot be certain whether the
proposed reform will be adopted or when it will be adopted. Accord also does not
know what form any reform will ultimately take or what effect it will have on
Accord or on persons who purchase Accord's ordinary shares.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST ACCORD, ACCORD'S OFFICERS
AND DIRECTORS AND SOME OF THE EXPERTS NAMED IN THE PROXY STATEMENT/PROSPECTUS.
Service of process upon Accord, which is incorporated in Israel, and
upon Accord's directors and officers and Accord's Israeli auditors, some of whom
reside outside the United States, may be difficult to effect within the United
States. Because many of Accord's assets and some of Accord's directors and
officers are located outside the United States, any judgment obtained in the
United States against Accord or any of these directors and officers may not be
collectible within the United States.
