PICTURETEL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page | ||||
Consolidated Balance Sheets as of September 29, 2001 and December 31, 2000 (Unaudited) | 2 | |||
Consolidated Statements of Operations for the Three and Nine Months Ended September 29, 2001 and September 30, 2000 (Unaudited) | 3 | |||
Consolidated Statements of Cash Flows for the Nine Months Ended September 29, 2001 and September 30, 2000 (Unaudited) | 4 | |||
Notes to Consolidated Financial Statements (Unaudited) | 5-10 |
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PICTURETEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
| | September 29, 2001 | December 31, 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (Unaudited) | | ||||||||
| ASSETS | ||||||||||
Current assets: | ||||||||||
| Cash and cash equivalents | $ | 30,105 | $ | 43,441 | ||||||
| Restricted cash | 34,961 | 5,775 | ||||||||
| Accounts receivable, less allowances for doubtful accounts of $2,397 and $4,100 at September 29, 2001 and December 31, 2000, respectively | 32,683 | 39,897 | ||||||||
| Inventories | 24,242 | 27,020 | ||||||||
| Other current assets | 10,871 | 9,716 | ||||||||
| Total current assets | 132,862 | 125,849 | ||||||||
| Property and equipment, net | 13,187 | 18,310 | ||||||||
| Other assets | 1,948 | 2,861 | ||||||||
| Total assets | $ | 147,997 | $ | 147,020 | ||||||
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY | ||||||||||
Current liabilities: | ||||||||||
| Short-term borrowings | $ | 41,500 | $ | 1,487 | ||||||
| Accounts payable | 10,628 | 20,575 | ||||||||
| Accrued compensation and benefits | 5,456 | 7,280 | ||||||||
| Accrued expenses | 44,432 | 32,896 | ||||||||
| Deferred revenue | 14,599 | 18,216 | ||||||||
| Total current liabilities | 116,615 | 80,454 | ||||||||
| Non-current liabilities | 10,590 | 2,101 | ||||||||
| Total liabilities | 127,205 | 82,555 | ||||||||
| Commitments and contingencies: | ||||||||||
| Redeemable convertible preferred stock, $.01 par value; 13,500,000 shares authorized; 1,132,000 and 9,416,708 shares outstanding at September 29, 2001 and December 31, 2000 | 2,830 | 42,845 | ||||||||
| Stockholders' equity: | ||||||||||
| Preferred stock, $.01 par value: | ||||||||||
| 1,500,000 shares authorized; 0 issued and outstanding at September 29, 2001 and December 31, 2000 | ||||||||||
| Common stock, $.01 par value; 80,000,000 shares authorized; 53,703,295 and 45,049,032 shares issued and outstanding at September 29, 2001 and December 31, 2000 | 537 | 450 | ||||||||
| Additional paid-in capital | 286,457 | 245,399 | ||||||||
| Accumulated deficit | (266,390 | ) | (221,751 | ) | ||||||
| Accumulated other comprehensive loss | (2,086 | ) | (1,922 | ) | ||||||
| Treasury stock, 92,065 shares, at cost | (556 | ) | (556 | ) | ||||||
| Total stockholders' equity | 17,962 | 21,620 | ||||||||
| Total liabilities, redeemable convertible preferred stock and stockholders' equity | $ | 147,997 | $ | 147,020 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
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PICTURETEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)
| | Three Months Ended | Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | September 29, 2001 | September 30, 2000 | September 29, 2001 | September 30, 2000 | |||||||||||
| Revenue | $ | 45,501 | $ | 70,029 | $ | 143,971 | $ | 196,797 | |||||||
| Cost of revenue | 39,645 | 49,200 | 104,731 | 151,672 | |||||||||||
| Gross margin | 5,856 | 20,829 | 39,240 | 45,125 | |||||||||||
| Operating expense: | |||||||||||||||
| Selling, general and administrative | 23,724 | 44,985 | 57,632 | 102,371 | |||||||||||
| Research and development | 5,336 | 11,873 | 18,708 | 38,922 | |||||||||||
| Total operating expense | 29,060 | 56,858 | 76,340 | 141,293 | |||||||||||
| Loss from operations | (23,204 | ) | (36,029 | ) | (37,100 | ) | (96,168 | ) | |||||||
| Interest income (expense), net | 163 | (1,272 | ) | 1,120 | (2,148 | ) | |||||||||
| Other income (expense), net | (4,591 | ) | 126 | (7,650 | ) | 955 | |||||||||
| Loss before income tax expense | (27,632 | ) | (37,175 | ) | (43,630 | ) | (97,361 | ) | |||||||
| Income tax expense (benefit) | 328 | (245 | ) | 1,009 | 1,385 | ||||||||||
| Net loss | (27,960 | ) | (36,930 | ) | (44,639 | ) | (98,746 | ) | |||||||
| Preferred stock beneficial conversion feature | — | (6,689 | ) | — | (6,689 | ) | |||||||||
| Net loss applicable to common shareholders | $ | (27,960 | ) | $ | (43,619 | ) | $ | (44,639 | ) | $ | (105,435 | ) | |||
| Net loss per common share—basic and diluted | $ | (0.52 | ) | $ | (1.06 | ) | $ | (0.90 | ) | $ | (2.58 | ) | |||
| Weighted average shares outstanding—basic and diluted | 53,540 | 40,999 | 49,362 | 40,865 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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PICTURETEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| | Nine Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | September 29, 2001 | September 30, 2000 | |||||||
| Cash flows from operating activities: | |||||||||
| Net loss | $ | (44,639 | ) | $ | (98,746 | ) | |||
| Adjustments to reconcile net loss to net cash used in | |||||||||
| Operating activities: | |||||||||
| Depreciation and amortization | 6,047 | 19,262 | |||||||
| Provision for doubtful accounts | 2,397 | 473 | |||||||
| Loss on disposal of fixed assets | 92 | 5,086 | |||||||
| Provision for inventory obsolescence | 4,654 | 10,501 | |||||||
| Provision for inventory purchase commitment | 6,419 | — | |||||||
| Write-down of long-lived assets | — | 11,188 | |||||||
| Operating charge related to preferred stock issuance | — | 6,207 | |||||||
| Reduction in obligation of terminated capital lease | — | (1,806 | ) | ||||||
| Other non-cash items | (238 | ) | — | ||||||
| Changes in operating assets and liabilities: | |||||||||
| Accounts receivable | 4,317 | 10,936 | |||||||
| Inventories | (2,043 | ) | (6,847 | ) | |||||
| Other current assets | (105 | ) | 5,462 | ||||||
| Accounts payable | (9,776 | ) | (2,162 | ) | |||||
| Accrued compensation and benefits and accrued expenses | 11,814 | (1,123 | ) | ||||||
| Deferred revenue | (3,389 | ) | (4,922 | ) | |||||
| Net cash used in operating activities | (24,450 | ) | (46,491 | ) | |||||
| Cash flows from investing activities: | |||||||||
| Purchase of marketable securities | — | (31,262 | ) | ||||||
| Proceeds from sale of marketable securities | — | 69,049 | |||||||
| Purchases of property and equipment | (1,085 | ) | (4,156 | ) | |||||
| Proceeds from sale of fixed assets | 5 | 9 | |||||||
| Net cash provided by (used in) investing activities | (1,080 | ) | 33,640 | ||||||
| Cash flows from financing activities: | |||||||||
| Increase in restricted cash and cash equivalents | (29,186 | ) | (17,800 | ) | |||||
| Net proceeds on short-term/long-term borrowings | 40,086 | 1,217 | |||||||
| Principal payments under capital lease obligations | — | (1,324 | ) | ||||||
| Proceeds from preferred stock issuance | — | 21,845 | |||||||
| Proceeds from employee stock purchase plan and exercise of stock options | 1,176 | 4,164 | |||||||
| Net cash provided by financing activities | 12,076 | 8,102 | |||||||
| Effect of exchange rate changes on cash | 118 | 1,063 | |||||||
| Net decrease in cash and cash equivalents | (13,336 | ) | (3,686 | ) | |||||
| Cash and cash equivalents at beginning of period | 43,441 | 21,915 | |||||||
| Cash and cash equivalents at end of period | $ | 30,105 | $ | 18,229 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
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PICTURETEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
1. Basis of Presentation
As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all the disclosures required by generally accepted accounting principles. Reference should be made to the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on April 17, 2001.
In the opinion of the management of PictureTel Corporation, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company's financial position at September 29, 2001 and December 31, 2000, results of operations for the three and nine months ended September 29, 2001 and September 30, 2000 and changes in cash flows for the nine months ended September 29, 2001 and September 30, 2000.
The results disclosed in the Consolidated Balance Sheet at September 29, 2001, the Consolidated Statement of Operations for the three and nine months ended September 29, 2001 and the Consolidated Statement of Cash Flows for the nine months ended September 29, 2001 are not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The consolidated financial statements include significant estimates of the net realizable value of accounts receivable, inventory and the amount of certain contingent liabilities. Actual results could differ from those estimates.
The presentation of certain prior year information has been reclassified to conform with the current year presentation. These reclassifications had no effect on net income or stockholders equity.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern as an independent company. The Company has incurred recurring losses from operations and requires additional financing for its continued operation. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In February 2001, the Company received a report from its independent accountants containing an explanatory paragraph stating that its recurring losses and requirement for additional financing raise substantial doubt about our ability to continue as a going concern. Management's plans to continue as a going concern rely heavily on forecasted revenue from products that were released in the third quarter of 2000 and in April 2001. Management is also continuing to identify and implement internal actions to improve the Company's liquidity. Most importantly, the Company's management and Board of Directors approved an Agreement and Plan of Merger dated as of May 24, 2001 with Polycom, Inc. (Polycom) and one of its subsidiaries, providing for an acquisition of the Company by Polycom. In connection with the merger agreement, the Company also obtained "interim" senior convertible note financing from Polycom in the amount of $49,900, available for use by the Company subject to specified terms and conditions. (See Notes 2. and 6.)
In October 2001 the acquisition of the Company by Polycom was completed. (See Note 12.)
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2. Restricted Cash
The Company had restricted cash of $34,961 and $5,775 at September 29, 2001 and December 31, 2000, respectively. The restricted amount at September 29, 2001 represents $34,900 in proceeds received during the second quarter of 2001 from the Series B senior convertible note issued to Polycom, as contemplated by the merger agreement and note agreement, dated as of June 15, 2001, entered into in connection with the merger agreement. The restricted amount also includes interest income earned on the proceeds and is net of unrealized gains and losses. The funds are held in an account (the "Account") in which the note purchaser (Polycom) has first priority interest subject to no other liens. The note agreement permits the Company to withdraw funds from the Account upon meeting certain withdrawal criteria. As of September 29, 2001, the Company has not met the withdrawal criteria to draw funds from the Account. The restricted amount at December 31, 2000 represents a cash collateral requirement for standby letters of credit issued under a credit agreement with Congress Financial Corporation (New England). As of September 29, 2001, the Company's funds were no longer collateralizing the letters of credit, as the collateral requirement is being met by a third party, Polycom. (See Note 6.)
3. Inventories
Inventories consist of the following:
| | September 29, 2001 | December 31, 2000 | ||||
|---|---|---|---|---|---|---|
| Purchased Parts | $ | 4,457 | $ | 4,018 | ||
| Work in Process | 149 | 234 | ||||
| Finished Goods | 19,636 | 22,768 | ||||
| $ | 24,242 | $ | 27,020 | |||
4. Loss Per Share
The following table reconciles the numerator and the denominator of the basic and diluted loss per share computations shown on the Consolidated Statements of Operations:
| | Three Months Ended | Nine Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | September 29, 2001 | September 30, 2000 | September 29, 2001 | September 30, 2000 | ||||||||||
| Basic and Diluted Loss Per Share Computation | ||||||||||||||
| Numerator: | ||||||||||||||
| Net loss applicable to common shareholders | $ | (27,800 | ) | $ | (43,619 | ) | $ | (44,479 | ) | $ | (105,435 | ) | ||
| Denominator: | ||||||||||||||
| Weighted average common shares outstanding | 53,540 | 40,999 | 49,362 | 40,865 | ||||||||||
| Basic and diluted loss per share | $ | (0.52 | ) | $ | (1.06 | ) | $ | (0.90 | ) | $ | (2.58 | ) | ||
Options to purchase shares of the Company's common stock of 5,197,863 and 6,521,296 were outstanding at September 29, 2001 and September 30, 2000, respectively, but were not included in the computation of diluted loss per share because they were antidilutive due to the net losses sustained in 2001 and in 2000. Warrants for 2,723 shares of the Company's Common Stock and Redeemable Convertible Preferred Stock of 1,132,000 and 13,216,708 shares were outstanding at September 29, 2001 and September 30, 2000, respectively, but were not included in the computation of diluted loss per share because they were antidilutive due to the loss sustained in 2001 and 2000.
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5. Comprehensive Loss
The calculation of comprehensive income includes the loss as reported in the Consolidated Statements of Operations and the gains and losses on foreign currency translation adjustments.
| | Three Months Ended | Nine Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | September 29, 2001 | September 30, 2000 | September 29, 2001 | September 30, 2000 | |||||||||
| Net loss | $ | (27,960 | ) | $ | (36,930 | ) | $ | (44,639 | ) | $ | (98,746 | ) | |
| Foreign currency translations, net | 25 | (230 | ) | (164 | ) | (520 | ) | ||||||
| Comprehensive loss | $ | (27,985 | ) | $ | (37,160 | ) | $ | (44,803 | ) | $ | (99,266 | ) | |
6. Debt
The Company entered into an asset-based collateralized revolving credit agreement dated August 21, 2000, which will expire on August 21, 2003. This credit facility provides a revolving credit line of up to $35,000 with Congress Financial Corporation (New England). In connection with the merger agreement with Polycom, the Company amended the Loan and Security Agreement on June 15, 2001. The amendment allowed for the issuance of up to $15,000 of senior convertible notes—Series A and $34,900 of senior convertible notes—Series B to Polycom and for the granting of second position security for the senior convertible notes. In addition to the consent to the merger, the amendment suspended any availability for revolving loans that would have been available otherwise under the line. The Company has $8,000 of outstanding standby letters of credit issued under this agreement as of September 29, 2001. Polycom has issued to Congress Financial Corporation an irrevocable standby letter of credit equal to 105%, or $5,775, to collateralize the outstanding letters of credits issued under this agreement. As a result, cash subject to the cash collateral requirement of $5,775 was released and made available to the Company to fund ongoing operations. Fees for letters of credit outstanding against this facility are payable at 225 basis points per annum of the face amount. The collateralized letters of credit expire December 2001 and March 2002. This credit agreement also contains certain financial covenants, including minimum net worth and working capital requirements.
In connection with the merger agreement, the Company has entered into a note agreement with Polycom. The Company issued to Polycom a Series A senior convertible note having an original principal amount of $6,600 and a Series B senior convertible note having an original principal amount of $34,900. The principal amount of the Series A note is subject to increase from time to time to the extent of any draws on the backup letter of credit obtained by Polycom, up to a maximum aggregate principal amount of $15,000. The original face amount of the letter of credit obtained by Polycom was $8,400 and the face amount declines over time as the letters of credit it is backing expire, as referenced in the preceding paragraph. The face amount of the letter of credit as of September 29, 2001 is $5,775. The proceeds of the Series B note, which are classified as restricted on the Company's balance sheet at September 29, 2001, are held in an account (the "Account") in which Polycom has first priority interest, subject to no other liens. (See Note 2.) The note agreement permits the Company to withdraw funds from the Account upon meeting certain withdrawal criteria. As of September 29, 2001, the Company has not met the withdrawal criteria to draw funds from the Account. Interest accrues at a rate of 8% per annum and is payable quarterly under the Series A note. As of September 29, 2001, the balance under the Series A note, including accrued interest, was $6,641. Interest on the Series B note is payable quarterly and accrues at a rate of 8% per annum, except to the extent funds are held in the Account, interest accrues on the funds at a rate equal to the interest payable to the Company on the Account. Accrued interest on the Account amounted to $110 as of September 29, 2001. Interest on both notes may be paid in cash or in kind by issuing a note in substantially the form as the Series A note or the Series B note, as applicable, except that the payment in kind note is not convertible. Interest on any payment in kind note accrues at a rate of 8% per annum and is payable in cash or in kind. The
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Series A note is due on June 15, 2003 and to the extent not automatically converted pursuant to the terms of the note, the principal of the Series B note is payable in four quarterly installments beginning August 31, 2004, with the final installment due on May 31, 2005.
The Series A and Series B notes are convertible by the holder into common stock, at any time after the termination of the merger agreement and prior to the repayment in full of the principal amount of the note. The conversion rate is 222.22 shares of common stock for each $1,000 in principal amount of the note (or $4.50 per share), except that if the transactions contemplated by the merger agreement are not completed for certain reasons, the conversion rate is 164.74 shares of common stock for each $1,000 in principal amount (or $6.07 per share).
Both notes are subject to redemption at the election of the Company, in whole or in part, upon not less than 30 or more than 60 days notice at a redemption price equal to 100% of the principal amount plus accrued interest. In addition, the holder of the notes may require the Company to repurchase them upon a change in control or other repurchase events described in the notes. The repurchase events arise from the termination of the merger agreement under specified circumstances. The notes also contain certain events of default and covenants.
The Company has granted a security interest in favor of Polycom on substantially all of its assets to collateralize its obligations under the notes. The Company's obligations to Polycom under the notes are subordinated to the obligations of the Company to Congress Financial Corporation (New England) under the Loan and Security Agreement dated August 21, 2000.
7. Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, in fiscal year 2002. The Company has not completed its evaluation, but anticipates that the adoption of these pronouncements will not have a material impact on the Company's financial statements.
8. Commitments
In conjunction with a joint development agreement with Sharp Corporation, the Company has outstanding commitments as of September 29, 2001 to purchase approximately $12,000 of PictureTel Series 600 units over the next six months. Based on lower than expected sales of this product, the Company has recorded a $6,419 charge against this purchase commitment during the third quarter of 2001 for unused inventory not to be sold.
9. Segment Information
The Company has determined that its reportable segments are videoconferencing products and videoconferencing services. The videoconferencing products segment develops, manufactures and
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markets visual communications systems and collaboration software. The videoconferencing services segment provides services for the videoconferencing products.
| | Video- conferencing Products | Video- conferencing Services | Other | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three months ended September 29, 2001: | |||||||||||||
| Revenue from external customers | $ | 31,651 | $ | 13,733 | $ | 117 | $ | 45,501 | |||||
| Operating income (loss) | $ | (13,441 | ) | $ | 2,716 | $ | (12,479 | ) | $ | (23,204 | ) | ||
| Three months ended September 30, 2000: | |||||||||||||
| Revenue from external customers | $ | 46,211 | $ | 17,746 | $ | 6,072 | $ | 70,029 | |||||
| Operating income (loss) | $ | (12,842 | ) | $ | 2,849 | $ | (26,036 | ) | $ | (36,029 | ) | ||
| Nine months ended September 29, 2001: | |||||||||||||
| Revenue from external customers | $ | 97,190 | $ | 46,428 | 353 | $ | 143,971 | ||||||
| Operating income (loss) | $ | (28,486 | ) | $ | 12,978 | $ | (21,592 | ) | $ | (37,100 | ) | ||
| Nine months ended September 30, 2000: | |||||||||||||
| Revenue from external customers | $ | 127,250 | $ | 54,152 | $ | 15,395 | $ | 196,797 | |||||
| Operating income (loss) | $ | (62,812 | ) | $ | 7,058 | $ | (40,414 | ) | $ | (96,168 | ) | ||
The classification "Other" consists of non-core business revenue and expense and corporate administrative functions, which are excluded from the videoconferencing products and videoconferencing services segments for management decision making.
The Company evaluates the performance of its segments based upon operating income. There is no material intersegment revenue. Transfers of videoconferencing products to the videoconferencing services segment are recorded at standard cost and are not tracked for management reporting purposes. Asset information by reportable segment has not been disclosed since the Company does not produce such information internally.
Geographic Data
In addition to its direct and indirect sales channels in the United States, the Company has subsidiaries in various foreign countries which, through direct and indirect sales channels, sell and service the Company's products in their respective geographic area. Revenue from external customers represents sales made from those countries. The Company's revenue and long-lived asset financial information is detailed as follows:
| | United States | United Kingdom | Japan | All Other | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from external customers: | |||||||||||||||
| Three months ended September 29, 2001 | $ | 28,728 | $ | 9,461 | $ | 3,362 | $ | 3,950 | $ | 45,501 | |||||
| Three months ended September 30, 2000 | $ | 49,464 | $ | 12,176 | $ | 4,391 | $ | 3,998 | $ | 70,029 | |||||
| Nine months ended September 29, 2001 | $ | 92,211 | $ | 29,767 | $ | 10,214 | $ | 11,779 | $ | 143,971 | |||||
| Nine months ended September 30, 2000 | $ | 127,157 | $ | 40,978 | $ | 16,086 | $ | 12,576 | $ | 196,797 | |||||
| Long-lived assets: | |||||||||||||||
| As of September 29, 2001 | $ | 12,365 | $ | 1,793 | $ | 841 | $ | 136 | $ | 15,135 | |||||
| As of September 30, 2000 | $ | 37,729 | $ | 2,767 | $ | 2,005 | $ | 239 | $ | 42,740 | |||||
10. Other Charges
During the third quarter of 2001, the Company recorded a charge of approximately $8,113 in operating expense associated with management's decision to not fully utilize leased office space at the Company's various facilities throughout the United States of America.
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11. Litigation
SEC Investigation
In May 1999, the Company was informed that the Securities and Exchange Commission (SEC) had initiated a formal investigation of matters related to the Company's 1997 restatement of its earnings. The Company has been cooperating with the SEC and will continue to do so. The Company expresses no opinion as to the likely outcome. While no assurances can be provided, the Company does not believe that the investigation will have a material adverse affect to its business, financial condition, results of operations or cash flows.
In addition to the above, the Company has also been and is from time to time subject to claims, such as potential patent infringements, and suits incidental to the conduct of business. There can be no assurance that the Company's insurance will be adequate to cover all liabilities that may arise out of such claims. Further, although the Company intends to defend itself vigorously against all such claims, the ultimate outcome of the claims cannot be accurately predicted. The Company does not believe that any claim of which it is aware, other than the claims listed above, could result in an outcome that will have a material adverse effect to its business, financial condition, results of operations or cash flows.
12. Subsequent Events
Sale of 1414C Video Conferencing Service Delivery Business
On October 1, 2001, the Company completed the sale of its 1414C video conferencing service delivery business to ACT Teleconferencing, Inc. in an asset transaction for a total consideration of approximately $9,000 comprising 769,731 unregistered ACT common shares, $1,000 in cash and $2,500 in a two-year unsecured note bearing interest at 10% per year. As a result of this sale, the Company will record a gain of $6,520 on the sale in the fourth quarter of 2001, which will be included in other income in the Company's Consolidated Statement of Operations.
Polycom Merger
On October 18, 2001, the Company announced the completion of its acquisition by Polycom Inc. and thereby became a wholly-owned subsidiary of Polycom Inc. Under the terms of the transaction, the Company's shareholders receive a combination of 0.1177 shares of Polycom common stock and $3.11 in cash for each outstanding share of PictureTel common stock.
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