UNAUDITED PRO FORMA CONDENSED
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined consolidated financial statements have been prepared to give effect to the acquisition of PictureTel by Polycom, which was accounted for as a purchase. These pro forma condensed combined consolidated financial statements were prepared as if the acquisition had been completed as of January 1, 2000 for statement of operations purposes and on September 30, 2001 for balance sheet purposes.
The unaudited pro forma condensed combined consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the financial position or results of operations that would have actually been reported had the acquisition occurred on September 30, 2001 for balance sheet purposes and as of January 1, 2000 for statement of operations purposes, nor are they necessarily indicative of the future financial position or results of operations. The unaudited pro forma condensed combined consolidated financial statements include adjustments, which are based upon preliminary estimates, to reflect the allocation of purchase consideration to the acquired assets and liabilities of PictureTel, before any integration or restructuring adjustments. The final allocation of the purchase consideration will be determined using PictureTel's financial statements as of October 18, 2001, the closing date of the acquisition, and will be based on appraisals and a comprehensive final evaluation of the fair value of the tangible assets acquired, liabilities assumed, identifiable intangible assets and goodwill at the time of the acquisition as considered appropriate. The final determination of tangible and intangible assets may result in depreciation and amortization expenses that may be materially different from the preliminary estimates of these amounts. The pro forma adjustments are based upon information and assumptions available at the time of the filing of this report. The unaudited pro forma condensed combined consolidated financial statements do not include the realization of cost savings from operating efficiencies, synergies or restructurings that may result from the acquisition.
These unaudited pro forma condensed combined consolidated financial statements are based upon the respective historical consolidated financial statements of Polycom (as restated to include the accounts and results of operations of Accord Networks, Ltd. acquired by Polycom on February 28, 2001, treated as a pooling of interests, see Form 8-K filed on June 15, 2001) and PictureTel and should be read in conjunction with the historical consolidated financial statements of Polycom (as restated) and related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations of Polycom" (as restated) contained in the reports and other information Polycom has on file with the Securities and Exchange Commission and the historical consolidated financial statements and notes thereto of PictureTel, which are attached thereto as Exhibits 99.2 and 99.3.
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UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001
(in thousands)
| | | | Pro Forma | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Polycom As reported | Picturetel As reported | |||||||||||||
| | Adustments | Combined | |||||||||||||
| Assets | |||||||||||||||
| Current assets: | |||||||||||||||
| Cash and cash equivalents | $ | 174,892 | $ | 30,105 | $ | (183,400 | ) (c) | $ | 30,197 | ||||||
| 8,600 | (d) | ||||||||||||||
| Restricted cash and cash equivalents | — | 34,961 | — | 34,961 | |||||||||||
| Short-term investments | 41,630 | — | (8,600 | ) (d) | 33,030 | ||||||||||
| Trade receivables, net | 63,709 | 32,683 | 5,000 | (b) | 98,192 | ||||||||||
| (3,200 | ) (e) | ||||||||||||||
| Inventories | 41,854 | 24,242 | (3,800 | ) (b) | 62,296 | ||||||||||
| Deferred taxes | 24,864 | — | 34,000 | (g) | 58,864 | ||||||||||
| Prepaid expenses and other current assets | 15,317 | 10,871 | (4,100 | ) (c) | 22,088 | ||||||||||
| Total current assets | 362,266 | 132,862 | (155,500 | ) | 339,628 | ||||||||||
| Fixed assets, net | 22,231 | 13,187 | — | 35,418 | |||||||||||
| Long-term investments | 92,892 | — | — | 92,892 | |||||||||||
| Noncurrent deferred taxes | 2,322 | — | 80,000 | (g) | 82,322 | ||||||||||
| Convertible notes receivable | 41,500 | — | (41,500 | ) (e) | — | ||||||||||
| Goodwill and other intangible assets | 11,052 | — | 213,600 | (f) | 224,652 | ||||||||||
| Deposits and other assets | 14,772 | 1,948 | �� | 16,720 | |||||||||||
| Total assets | $ | 547,035 | $ | 147,997 | $ | 96,600 | $ | 791,632 | |||||||
| Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity | |||||||||||||||
| Current liabilities: | |||||||||||||||
| Accounts payable | $ | 21,592 | $ | 10,628 | $ | (3,200 | ) (e) | $ | 29,020 | ||||||
| Accrued payroll and related benefits | 8,397 | 5,456 | — | 13,853 | |||||||||||
| Accrued expenses | 5,924 | 36,811 | — | 42,735 | |||||||||||
| Deferred revenue | 7,118 | 14,599 | (2,000 | ) (b) | 19,717 | ||||||||||
| Short term borrowings | — | 41,500 | (41,500 | ) (e) | — | ||||||||||
| Taxes payable | 18,259 | 7,621 | — | 25,880 | |||||||||||
| Other current liabilities | 9,401 | — | 5,200 | (a) | 14,601 | ||||||||||
| Total current liabilities | 70,691 | 116,615 | (41,500 | ) | 145,806 | ||||||||||
| Long-term liabilities | 1,902 | 10,590 | — | 12,492 | |||||||||||
| Total liabilities | 72,593 | 127,205 | (41,500 | ) | 158,298 | ||||||||||
| Commitments and contingencies | |||||||||||||||
| Redeemable convertible preferred stock | — | 2,830 | (2,830 | ) (c) | — | ||||||||||
| Stockholders' equity: | |||||||||||||||
| Common stock | 42 | 537 | (534 | ) (c) | 45 | ||||||||||
| Additional paid-in capital | 409,557 | 286,457 | (66,968 | ) (c) | 629,046 | ||||||||||
| Unearned stock-based compensation | (953 | ) | — | — | (953 | ) | |||||||||
| Accumulated earnings (deficit) | 65,095 | (266,390 | ) | 266,390 | (c) | 15,795 | |||||||||
| (49,300 | ) (f) | ||||||||||||||
| Accumulated other comprehensive gain (loss) | 701 | (2,086 | ) | 2,086 | (c) | 701 | |||||||||
| Treasury stock, 363, 557 shares, at cost | — | (556 | ) | 556 | (c) | (11,300 | ) | ||||||||
| (11,300 | ) (c) | ||||||||||||||
| Total stockholders' equity | 474,442 | 17,962 | 140,930 | 633,334 | |||||||||||
| Total liabilities, redeemable convertible preferred stock and stockholders' equity | $ | 547,035 | $ | 147,997 | $ | 96,600 | $ | 791,632 | |||||||
The accompanying notes are an integral part of these unaudited pro forma condensed
combined consolidated financial statements.
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UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(in thousands, except per share data)
| | | | Pro Forma | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Polycom As reported | Picturetel As reported | |||||||||||||
| | Adjustments | Combined | |||||||||||||
| Net revenues | $ | 263,141 | $ | 143,971 | $ | (8,900 | ) (b) | $ | 398,212 | ||||||
| Cost of net revenues | 112,605 | 104,731 | (8,200 | ) (b) | 209,136 | ||||||||||
| Gross profit | 150,536 | 39,240 | (700 | ) | 189,076 | ||||||||||
| Operating expenses: | |||||||||||||||
| Sales and marketing | 52,824 | 57,632 | (26,414 | ) (d) | 84,042 | ||||||||||
| Research and development | 41,618 | 18,708 | — | 60,326 | |||||||||||
| General and administrative | 13,767 | — | 26,414 | (d) | 40,181 | ||||||||||
| Purchased in-process research and development | 2,450 | — | — | 2,450 | |||||||||||
| Acquisition-related costs | 11,530 | — | — | 11,530 | |||||||||||
| Amortization of goodwill and other intangible assets | 2,018 | — | 9,825 | (a) | 11,843 | ||||||||||
| Total operating expenses | 124,207 | 76,340 | 9,825 | 210,372 | |||||||||||
| Operating income (loss) | 26,329 | (37,100 | ) | (10,525 | ) | (21,296 | ) | ||||||||
| Interest income (expense), net | 10,597 | 1,599 | (6,400 | ) (e) | 5,796 | ||||||||||
| Other investment adjustment | (1,523 | ) | (479 | ) | — | (2,002 | ) | ||||||||
| Other income (expense), net | (446 | ) | (7,650 | ) | — | (8,096 | ) | ||||||||
| Income (loss)before provision for income taxes | 34,957 | (43,630 | ) | (16,925 | ) | (25,598 | ) | ||||||||
| Provision for (benefit from) income taxes | 12,302 | 1,009 | (15,127 | ) (c) | (1,816 | ) | |||||||||
| Net income (loss) | $ | 22,655 | $ | (44,639 | ) | $ | (1,798 | ) | $ | (23,782 | ) | ||||
| Basic net income (loss) per share | $ | 0.27 | $ | (0.90 | ) | $ | (0.26 | ) | |||||||
| Diluted net income (loss) per share | $ | 0.26 | $ | (0.90 | ) | $ | (0.26 | ) | |||||||
| Weighted average shares outstanding for basic net income (loss) per share | 83,432 | 49,362 | 90,016 | ||||||||||||
| Weighted average shares outstanding for diluted net income (loss) per share | 86,322 | 49,362 | 90,016 | ||||||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed
combined consolidated financial statements.
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UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(in thousands, except per share data)
| | | | Pro Forma | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Polycom As reported, As restated | Picturetel As reported | |||||||||||||
| | Adjustments | Combined | |||||||||||||
| Net revenues | $ | 373,554 | $ | 245,149 | $ | (5,900 | ) (b) | $ | 612,803 | ||||||
| Cost of net revenues | 164,099 | 188,197 | (5,900 | ) (b) | 346,396 | ||||||||||
| Gross profit | 209,455 | 56,952 | — | 266,407 | |||||||||||
| Operating expenses: | |||||||||||||||
| Sales and marketing | 70,745 | 129,595 | (68,800 | ) (d) | 131,540 | ||||||||||
| Research and development | 43,570 | 46,783 | — | 90,353 | |||||||||||
| General and administrative | 20,702 | — | 68,800 | (d) | 89,502 | ||||||||||
| Acquisition-related costs | 4,768 | — | — | 4,768 | |||||||||||
| Amortization of other intangible assets | — | — | 13,100 | (a) | 13,100 | ||||||||||
| Other non recurring expenses | 10,533 | — | — | 10,533 | |||||||||||
| Total operating expenses | 150,318 | 176,378 | 13,100 | 339,796 | |||||||||||
| Operating income (loss) | 59,137 | (119,426 | ) | (13,100 | ) | (73,389 | ) | ||||||||
| Interest income (expense), net | 8,419 | (2,082 | ) | (5,200 | ) (e) | 1,137 | |||||||||
| Other investments adjustment | (5,854 | ) | — | — | (5,854 | ) | |||||||||
| Other income (expense), net | 8 | 15,707 | — | 15,715 | |||||||||||
| Income (loss)before provision for income taxes | 61,710 | (105,801 | ) | (18,300 | ) | (62,391 | ) | ||||||||
| Provision for (benefit from) income taxes | 24,247 | 1,170 | (36,634 | ) (c) | (11,217 | ) | |||||||||
| Preferred stock beneficial conversion feature | — | 6,900 | — | 6,900 | |||||||||||
| Net income (loss) attributable to holders of common stock(1) | $ | 37,463 | $ | (113,871 | ) | $ | 18,334 | $ | (58,074 | ) | |||||
| Basic net income (loss) per share | $ | 0.50 | $ | (2.73 | ) | $ | (0.71 | ) | |||||||
| Diluted net income (loss) per share | $ | 0.45 | $ | (2.73 | ) | $ | (0.71 | ) | |||||||
| Weighted average shares outstanding for basic net income (loss) per share | 75,264 | 41,739 | 81,848 | ||||||||||||
| Weighted average shares outstanding for diluted net income (loss) per share | 83,828 | 41,739 | 81,848 | ||||||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed
combined consolidated financial statements.
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NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRO FORMA PRESENTATION
On October 18, 2001, Polycom completed the acquisition of PictureTel. Polycom acquired all of the outstanding shares of PictureTel common stock for a combination of 0.1177 shares of Polycom common stock and $3.11 in cash for each outstanding share of PictureTel common stock. Polycom issued approximately 6.9 million shares of its common stock, including treasury stock resulting from the transaction of 364,000 shares, and paid approximately $183 million in cash for all of the outstanding shares of PictureTel common stock and assumed PictureTel options exercisable for approximately 1.2 million shares of Polycom common stock. Polycom has accounted for the transaction as a purchase.
2. PRELIMINARY PURCHASE PRICE
The accompanying unaudited pro forma condensed combined consolidated financial statements reflect a purchase price of approximately $412 million, consisting of cash and Polycom common stock issued valued using the average fair value of Polycom's outstanding common stock from May 22, 2001 to May 29, 2001, five trading days surrounding the date the acquisition agreement was announced, and the fair value of the options and warrant to be assumed by Polycom in the acquisition, and other costs directly related to the acquisition as follows (in thousands):
| Cash | $ | 183,400 | ||
| Fair value of Polycom's common stock | 195,400 | |||
| Fair value of options and warrant assumed | 24,100 | |||
| Estimated acquisition related costs | 9,300 | |||
| Total consideration | $ | 412,200 | ||
For purposes of computing the estimated fair value of the options and warrant assumed, the Black-Scholes pricing model was used with the following assumptions: fair value of Polycom's stock of $27.74, expected life of 5.5 years, risk-free rate of 5.5%, expected dividend yield of 0% and volatility of 90%. The preliminary purchase price allocation, which is subject to change based on Polycom's final analysis, is as follows (in thousands):
| Tangible assets acquired | $ | 274,497 | ||||
| Liabilities assumed | (125,205 | ) | ||||
| In-process research and development | 49,300 | |||||
| Goodwill | 174,307 | |||||
| Other intangible assets consisting of: | ||||||
| Core technology | 11,061 | |||||
| Developed technology | 2,847 | |||||
| Patents | 8,668 | |||||
| Product customer relationships | 3,211 | |||||
| Service customer relationships | 13,514 | |||||
| Total consideration | $ | 412,200 | ||||
The amount allocated to purchased in-process research and development and other intangible assets was determined by an independent appraisal using established valuation techniques in the high-technology communications industry. In-process research and development was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed. It is reasonably possible that the development of this technology could fail because of either
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prohibitive cost, inability to perform the required efforts to complete the technology or other factors outside of the Company's control such as a change in the market for the resulting developed products. In addition, at such time that the projects are completed it is reasonably possible that the completed products do not receive market acceptance or that the Company is unable to produce and market the products effectively.
For purposes of these unaudited pro forma condensed combined consolidated financial statements, goodwill originating from the acquisition of PictureTel and Polycom has not been amortized in accordance with the guidance contained in the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard No. 142 (SFAS 142) "Goodwill and Other Intangible Assets". Other intangible assets are being amotized over their estimated useful lives of three years.
3. PRO FORMA ADJUSTMENTS
Balance Sheet:
The accompanying unaudited pro forma condensed combined consolidated balance sheet has been prepared as if the acquisition was completed on September 30, 2001 and reflects the following pro forma adjustments:
Statement of Operations:
The accompanying unaudited pro forma condensed combined consolidated statement of operations have been prepared as if the acquisition was completed as of January 1, 2000 and reflects the following pro forma adjustments:
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4. UNAUDITED PRO FORMA COMBINED NET INCOME (LOSS) PER SHARE DATA
Shares used to calculate unaudited pro forma combined net loss per share, were computed by adding the 6.6 million shares, net of treasury stock, issued in exchange for the outstanding PictureTel shares to Polycom's basic weighted average shares outstanding. As the unaudited pro forma condensed combined consolidated statements of operations for all periods presented shows a combined net loss, weighted average basic and diluted shares are the same.
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