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Filed by Accord Networks Ltd.
pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 of
the Securities Exchange Act of 1934
Subject Company: ACCORD NETWORKS LTD.
Registration No. 000-30887
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BOB
Good morning everyone. Thank you for joining this call to discuss
Polycom's acquisition of Accord Networks. I am Bob Hagerty, president and CEO of
Polycom, and I am joined by Jules DeVigne, Chairman and CEO of Accord Networks,
and Mike Kourey, CFO of Polycom. In addition, we have Phil Keenan, Executive
Vice President at Accord and Craig Malloy, General Manager of Polycom's Video
Communications group on line by phone to answer any questions directed to them
during Q&A at the end of the call.
As with previous analyst calls, we are again augmenting today's voice
conference call with a webcast, using our StreamStation multimedia server. If
you would like to receive the webcast, please open your web browser at this time
and enter Polycom's home page, which is www.polycom.com. Then, select the icon
entitled Accord Acquisition Call. Next, click to join the webcast... then,
select the meeting name... which is also, Accord Acquisition call. Next, simply
enter your name as requested. After you have entered your name, please press
the submit button.
At this time, you should see the stream buffering and then beginning. Due
to the buffering process... there will be an approximate 15 second webcast
delay. For this reason, please turn down the volume on your speakerphone or take
the handset away from your ear once you've successfully logged onto our webcast.
For the analysts participating in the Q&A session, leave your call live so that
you can use your conference call connection for the Q&A session at the end of
our call. Please note that Q&A is enabled for financial and market research
analysts. We welcome all others to listen-in to the Q&A session. Please also
note that this entire webcast... including Q&A...will be maintained on Polycom's
website for 5 business days from today, for your convenience and replay.
Most of you participating in this call are aware of the federal legislation
regarding forward-looking statements. Accordingly, we would like to note that
during the course of this conference call, Jules, Mike, Phil, Craig, and I will
make forward-looking statements regarding future events or the future
performance of the Company. We wish to caution you that such statements are just
predictions that involve risks and uncertainties, and that actual events or
results could differ materially.
We discuss a number of the risks in our business in detail in Polycom's SEC
reports, including the 1999 Form 10-K Report, and Polycom's subsequent Form 10-Q
filings, and in Accord's Form F-1, and Accord's subsequent Form 10-Q filing, and
any forward-looking statements must be considered in the context of such risks
and uncertainties.
As many of you have seen, we are pleased to announce that we have signed an
agreement to acquire Accord Networks, a leading high-end next generation video
and voice network infrastructure provider. During this call, I'd like to provide
you with some insight into the strategic importance of bringing Accord into our
company. Then, I'd like to give Jules an opportunity to provide his perspective
on this merger and how he and his management team came to the conclusion to join
forces with us. After Jules' comments, Mike will cover the mechanics and the
financial parameters of the acquisition.
Let me begin by describing our vision of Polycom to you... as we take this
important transformational step into the core of the converged network
infrastructure. We believe that... through the rapidly-growing availability of
broadband connectivity, enterprises of all sizes are able to benefit from the
use of broadband, real-time video and voice communications over the broadband
network. This is evidenced by our success and the industry's success in the
video endpoint space... both in the meeting room and on the desktop. In
addition... the validation by rapidly increasing voice-over-IP server
deployment... such as Cisco's AVVID call manager... is a testament to the
importance of broadband in enterprise-wide communications.
With this changing landscape as a macro driver, our customers will be able
to add a video component to virtually any communications product or service and
more fully integrate the video network with voice and data through one,
converged network. Polycom, with Accord, will be uniquely positioned to make
this capability a reality.
Strategically... Accord will provide a key component of a complete,
interoperable communications solution. With the rapid adoption of converged
network capabilities... a seamlessly integrated solution comprised of endpoints
and network infrastructure is critical.
Technologically challenging issues such as Gateways between IP and circuit-
switched networks... Quality of Service on intranets and the Internet... voice
and video communication through firewalls... addressing and calling in a DHCP
and NAT environment... and multipoint calls have added a new layer of complexity
to the communications
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environment. From a technology perspective... Accord's expertise in IP
architecture and modular scaleability will complement Polycom's position in
broadband communications. Critical technology in the areas of voice and video
algorithms, communication protocols, and hardware engineering are leverageable
extensively between the various development teams within Polycom. Accord also
brings to Polycom the talent of 87 world-class development engineers.
With the addition of Accord's technology and engineering resources, Polycom
will have assembled a world class end-to-end broadband voice and video
communications development team. This will undoubtedly accelerate our ability to
provide products with the highest level of integration and customer value. I am
sure that many of you have seen the increase in the deployment of broadband
video and voice communications. Over the past three years, we have sold nearly
75,000 ViewStations and have already garnered a leadership position in desktop
video. In addition, we are poised to launch our first voice-over-IP products in
Q1 and have shipped tens of thousands of voice-over DSL integrated access
devices thus far. The key take away here is that with all of this broadband
deployment, we are finding that our customer base is demanding more and more
integration of their communications tools. Accord gives us exactly that
opportunity--which is, for us, a significant, strategic, competitive advantage.
Additionally, as we continue to further penetrate the emerging market
opportunity of small-to-medium enterprises, a tightly integrated solution
becomes even more critical as IT resources become even more scarce.
In addition to these factors, Accord brings to Polycom its first service
provider class product platform, called V2IPERA, which is NEBS compliant,
enabling a whole host of video, voice and data applications. As the last mile
low-cost broadband network becomes increasingly widespread, service providers
will begin to offer enhanced video communication and other multimedia services.
The Accord platform is a unique, differentiated networking product, essential
for offering next generation services. We see the Accord platform as a key
element of our strategy; tying together our voice, video and access products at
the enterprise and service provider level.
The Accord platform is extensible, scalable, and fault-tolerant, providing
video and voice bridging and gateway services, data collaboration, and
eventually, serving as a gateway for wireless video communication services.
Today, Accord is a leader in its category of any-to-any, rich media network
infrastructure. With Accord integrated into Polycom, our company will address
each of the broadband video and voice product categories; and with our voice-
over-IP launch coming in 2001, Polycom will be uniquely positioned as the next
generation network provider for voice, video, and data communications.
With the new Polycom, the integrated product offering will simplify user
operation through seamless integration from end-to-end. This will ensure
quality interoperability with all endpoints through all connections, and from
all suppliers--essentially an "any-to-any" connection. This combination will
also provide a one-stop shop for our end users and will serve to provide our
combined company with additional insight into the latest protocol developments
and, in fact, should speed the advancement of new standards driven through
Polycom's broad offerings. At this point, I'd like to turn the call over to
Jules to provide his perspective on the acquisition.
JULES
Thank you, Bob.
First, let me say that the employees of Accord and I are excited by the
obvious strategic synergies between Accord and Polycom. We are delighted to be
able to leverage the power of Polycom's brand equity, strategic partnerships,
and extensive global distribution network. As one entity, our company will be
uniquely positioned to fulfill the need for seamless broadband voice, video, and
data communications over the converged network.
I am excited about our two companies joining forces and I know that
becoming one company will benefit our employees, customers, and shareholders
around the world. Let me begin by providing some background on Accord and our
products in the core network infrastructure area.
We develop, manufacture and distribute next generation networking systems
that enable real-time interactive video and voice communications. Our systems
connect people at different locations using visually enabled endpoints... such
as ViewStation and ViaVideo, across packet-based, circuit-switched, and other
broadband networks, using the Internet protocol, or IP, integrated services
digital network, or ISDN, and asynchronous transfer mode, or ATM.
Accord's products are architected for the rapidly-growing broadband
environment, and some of its key technology capabilities include advanced video
and voice processing as well as multi-network, or "any-to-any"
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connectivity. Today, these technologies are embedded in a product set that
includes multipoint video communications network systems, such as our MGC 100
and MGC 50 products, gateways such as our VGC 20 Firewall Gateway and GC 20
multiway gateway, and comprehensive network management, scheduling, and
directory systems.
One of the key features within these products is what we call transcoding.
It is an essential component of any video network, whether broadband or narrow-
band, that ensures seamless communication between endpoints with different
video, voice and data parameters as well as differing bandwidth availability--
clearly the environment in the world today. Another key feature enabled by our
video processing expertise is Continuous Presence. As in Polycom's 4-port MP
products, this functionality allows participants to simultaneously view multiple
participants and other visual content on a single screen. With the Accord
network equipment, this extends to sixteen different visual image layouts in a
call and the layouts can be easily changed at any time by the user.
Additionally, ease-of-use has been a major driver in Accord's design
objective. We have a comprehensive suite of management options that enable a
user to control his or her own call and allow service providers to develop,
operate, and bill for an entire range of video services. As I mentioned earlier,
Accord's products have a unique architecture. When our initial product, the MGC
100, was first released, the market demanded reliability and feature richness
predominantly for the circuit-switched environment. The MGC 100 provided this
and propelled us to a leading position in a short period of time. However, when
we developed our architecture, we recognized that the market would change over
time. In fact, it would change to a predominantly broadband packet based, or IP
based, environment that brings a unique set of challenges in building robust
communications solutions.
In this new environment, the demands on the architecture and feature set
change from merely bringing reliability and added features to that of a platform
that supports both voice and video, acts as a protocol gateway, as a network
gateway, addresses security issues, and facilitates QOS--in other words... it is
a key network element in providing real-time solutions. Accord's products are
uniquely positioned in that environment because our capabilities address and
solve these issues today. Accord offers the most comprehensive set of
capabilities and solutions over heterogeneous networks. Further, our products
are architected to add additional features and functionality in the future
through software.
Accord's products are used by enterprises and service providers around the
world. For the service provider market, we sell directly to the major carriers.
For the customer premise market, we reach enterprise users typically through our
channel partners. This list of carriers and channel partners include:
- AT&T,
- Deutsche Telecom,
- Global Crossing,
- Southwestern Bell,
- Nissei Sangyo,
- MCI/Worldcom,
- Nortel,
- British Telecom,
- France Telecom,
- Verizon, and others.
Examples of our enterprise end-user customers today are:
- Aetna,
- Volkswagen,
- Microsoft,
- Extreme Networks,
- the University of California,
- Kaiser Permanente, and several investment banking firms.
Our service provider customers, such as Akamai, offer services based on our
products to users who wish to outsource their real-time video communications
requirements. This is an important market for Accord and we expect this sector
to grow moving forward as service providers look for innovative ways to deploy
broadband applications and develop additional value-added services.
Geographically, Accord's U.S. headquarters is in Atlanta, Georgia. Our research
and development and manufacturing management teams are based in Israel and we
have regional sales offices
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throughout the US, Europe and China. Since shipping our first products in Q3
1997, Accord became profitable in 1999 on revenues of $25 million and has had an
operating profit in each quarter in 2000 with third quarter year-to-date
revenues of approximately $29 million.
We undertook an initial public offering in June of this year and raised $55
million in cash, which is on the balance sheet today.
Next, let's move to the acquisition. The benefits from this transaction are
numerous. As Bob mentioned, this will ransition Polycom from an endpoint and
edge-network focused company to a provider of next-generation network solutions
for voice, video, and data.
This will enable Polycom to participate in the core infrastructure space
for its voice and video products and will leverage the combined company, both in
the customer premise and the service provider market areas.Moving forward, the
combined R&D teams will actively develop new technologies and solutions that
will deliver a seamless communications solution, ensure interoperability, and
drive new standards that can be adopted by the industry as a whole. This
combination will further remove the barriers to mass adoption and further
establish Polycom as the company leading the broadband voice and video
communications market with high quality products from the boardroom to the
desktop to the wiring closet to the central office. Service providers will be
able to develop a whole new range of services to fill their broadband pipes and
enterprises will be able to communicate in a way not possible before and share
knowledge more effectively, attract and retain customers using a whole new set
of tools and expand their market reach on a global scale.
All of these factors should fuel the widespread adoption of broadband video
and voice communications. Polycom will deliver solutions that optimize ease-of-
use, reliable call set-up, and integrated video, voice, and data. In addition,
directory services and network management will be essential new elements
provided by Polycom. By putting Accord and Polycom together... I am confident
that the synergy afforded by the combination of our technologies, products, and
teams can uniquely position the new Polycom to take advantage of the broadband
revolution. At this point, let me turn the call over to Mike who will discuss
the mechanics and financial details of the acquisition.
MIKE
Thank you, Jules.Under the terms of the agreement, 6.26 million shares of
Polycom common stock will be exchanged for all outstanding shares of Accord and
1.51 million shares will be used in exchange for the outstanding options and
warrants for Accord. These shares will be exchanged based on a fixed ratio of
0.3065 shares of Polycom for each share of Accord. The value of the transaction,
based on yesterday's Polycom closing price, is approximately $339 million. This
acquisition is anticipated to be completed by the end of the first quarter of
2001 and is subject regulatory approval and approval by Accord's shareholders.
In addition, this transaction is intended to be accounted for as a pooling of
interests and is intended to qualify as a tax-free reorganization. One-time
acquisition-related expenses and charges of approximately $12 million for the
combined companies will be expensed as incurred.
As we did with each of our prior acquisitions, Accord will remain at its primary
locations. As part of the agreement with Accord... key personnel have signed
three-year employment agreements with Polycom.
Following the completion of the transaction, Jules DeVigne, Chairman and CEO of
Accord, will become General Manager of the Accord Networks product line at
Polycom.Next, I'd like to provide some financial perspective on this
transaction.
Prior to the close of the acquisition, Accord plans to record a one-time charge
of $5.4 million to pay the Israeli Chief Science Office royalty rather than
record the royalties on a percent of revenue basis over the next several years.
This will appear as a separate, one-time line-item on Accord's income statement
this quarter. Moving forward, Accord will not be utilizing the CSO research and
development funding.
Moving to Polycom's operating model, this transaction will not change our base
target model ranges...which are as follows: - gross margin of 50 - 55%, - sales
and marketing expenses of 17 - 19%, - research and development of 9 - 11%,
and - general and administrative expenses of 4 - 5%.
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However, although we are not changing our model, Accord's blended gross margins
of the high-60s percent will, in fact, serve to keep Polycom's gross margins
toward the higher-end of our 50 - 55% blended gross margin... offsetting the 40
- 45% target network access and desktop product gross margins... as they become
a higher percent of consolidated revenues. Research and development and G&A
will, with the addition of Accord, operate just above their ranges for the next
several quarters. Netting out these factors, Polycom continues to target its
operating margin at 20 - 22%.
Moving to income tax... Polycom expects to reduce its effective tax rate from
33% to 31% for 2001 and beyond, based on the tax treatments gained through this
acquisition. To provide DSO guidance, we expect the DSO for the Accord product
group to be in the low 50s to low 60s as they have been in recent quarters. This
is, in fact, a somewhat lower DSO than Polycom and will pull Polycom's DSO to
the lower end of our long standing target range of 63 to 73 days. On other
balance sheet items, it's important to note that Accord does not have any
capitalized software development on its balance sheet.
Regarding inventory turns, Accord exited Q3 with turns of 1.7.Moving forward,
Accord is expecting its inventory turns to move toward Polycom's target range of
5-6 over the next several quarters. Based on a Q1 2001 close, and excluding the
one-time acquisition-related expenses, we expect the acquisition to be break-
even to slightly accretive in each quarter of 2001.
Finally, it's important to note that Polycom is forecasting this accretion with
only minimal operating synergies and no revenue synergies.At this time, let me
turn the call back over to Bob Hagerty for closing comments.
BOB
Thank you, Mike. As you can see, we are all extremely excited with this
acquisition. This represents the next transformational step for Polycom, moving
our company into the core of network infrastructure, extending our reach well
beyond our edge network devices, such as IADs, and our voice and video
communications products that utilize the broadband network.
The acquisition of Accord provides an opportunity not only to leverage our
mutual technologies and development teams across all product lines, but also
provides an optimized level of integration across the converged network and
guarantee seamless product interoperability. This transaction integrates
Accord's high-end next-generation video network infrastructure product with
Polycom's integrated access devices and voice and video endpoints, providing an
end-to-end communications solution that is compelling.
At this point, we would like to open the floor to the financial and market
analysts for any questions that you may have. For all others, we invite to stay
on the call to listen-in. Of course, as we discussed earlier in the call, many
of the statements we've made and will make during the Q&A period are forward-
looking statements, which are subject to many risks and uncertainties.
Is the conference call operator available at this time?
** Question and Answer Period **
Thank you very much for participating in this call today. We appreciate your
interest as we continue to drive Polycom to the next level. We'll see you next
time.
Additional Information: Polycom plans to file a Registration Statement on
SEC Form S-4 in connection with the merger and Accord expects to mail a Proxy
Statement/Prospectus to its security holders containing information about the
merger. Investors and security holders are urged to read the Registration
Statement and the Proxy Statement/Prospectus carefully when they are available.
The Registration Statement and the Proxy Statement/Prospectus will contain
important information about Polycom, Accord, the merger and related matters.
Investors and security holders will be able to obtain free copies of these
documents through the web site maintained by the U.S. Securities and Exchange
Commission at http//www.sec.gov. In addition to the Registration Statement and
the Proxy Statement/Prospectus, Polycom and Accord file annual, quarterly and
special reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, statements and other
information filed by Polycom and Accord at the SEC public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549 or at the Commission's other public
reference rooms in New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on public reference rooms.
Polycom's and Accord's filings with the Commission also are available
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to the public from commercial document-retrieval services and at the web site
maintained by the Commission at http//www.sec.gov.
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