PREM14A 1 dprem14a.htm PRELIMINARY PROXY STATEMENT RELATING TO A MERGER Preliminary Proxy Statement Relating to a Merger
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

x        Preliminary Proxy Statement

 

¨        Definitive Proxy Statement

 

¨        Definitive Additional Materials

 

¨        Soliciting Material Pursuant to §240.14a-12

  

¨        Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Veraz Networks, Inc.

 

(Name of Registrant as Specified In Its Charter)

n/a

 

(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box)

 

¨ No fee required.

 

x Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  1. Title of each class of securities to which transaction applies:

Veraz Networks, Inc., common stock, par value $0.001 per share.

 

 

  2. Aggregate number of securities to which transaction applies:

110,580,900 shares of Veraz Networks, Inc. common stock to be issued in the transaction.

 

 

  3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):

Calculated solely for purposes of determining the filing fee. The maximum aggregate value of the transaction was determined by multiplying 110,580,900 shares of common stock by $0.89 per share (value of one share of common stock, based on the average of high and low prices of Veraz Networks, Inc. common stock as reported on the Nasdaq Global Market on July 9, 2010). In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee has been determined by multiplying 0.00007130 by $98,417,001.00.

 

 

  4. Proposed maximum aggregate value of transaction:

$98,417,001.00

 

 

  5. Total fee paid:

$7,018.00

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

 

  (2) Form, Schedule or Registration Statement No.:

 

 

  (3) Filing Party:

 

 

  (4) Date Filed:

 

 


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Veraz Networks, Inc.

926 Rock Avenue

San Jose, CA 95131

(408) 750-9400

To the Stockholders of Veraz Networks, Inc.:

You are cordially invited to attend a special meeting of the stockholders of Veraz Networks, Inc., a Delaware corporation (“Veraz”), relating to the proposed transaction pursuant to which Veraz will acquire all of the outstanding shares of Dialogic Corporation, a British Columbia corporation (“Dialogic”), and related matters. The meeting will be held at [    ]:00 [a] [p].m., Pacific Daylight Time, on [                    ], 2010, at [            ].

On May 12, 2010, Veraz entered into an Acquisition Agreement (the “Acquisition Agreement”), by and between Veraz and Dialogic, pursuant to which Veraz agreed to acquire all of the outstanding shares of Dialogic in exchange for shares of Veraz common stock (the “Arrangement”). Upon consummation of the Arrangement, Dialogic will become a wholly owned subsidiary of Veraz. Pursuant to the Acquisition Agreement, 110,580,900 shares of Veraz common stock will be issued to the Dialogic shareholders. After taking into account the issuance of stock options to purchase Veraz common stock in exchange for Dialogic stock options, the Dialogic shareholders and optionholders will hold approximately 70%, and existing Veraz stockholders and optionholders will hold approximately 30%, of the outstanding securities of Veraz following the closing.

The business combination will be carried out under a plan of arrangement pursuant to the British Columbia Business Corporations Act (the “BCBCA”) in accordance with the Acquisition Agreement. In addition to voting on the Arrangement Proposal (as described in this proxy statement), the stockholders of Veraz will vote on the proposals to amend Veraz’s certificate of incorporation to change its name to “Dialogic Inc.” and to approve a one for-             reverse split of Veraz common stock to be effective upon consummation of the Arrangement or such other time as determined by Veraz’s board of directors (the “Board”). After careful consideration, the Board has determined that the Arrangement Proposal and the Certificate Amendment Proposals (as described in this proxy statement) are fair to and in the best interests of Veraz and its stockholders. The Board recommends that you vote, or give instruction to vote, “FOR” the adoption of each of the proposals.

Enclosed is a notice of special meeting and proxy statement containing detailed information concerning the Arrangement Proposal and the transactions contemplated by the Acquisition Agreement, as well as detailed information concerning each of the other proposals. You are encouraged to read carefully the accompanying proxy statement in its entirety including the section titled “Risk Factors” beginning on page 22 and all of the Annexes to the proxy statement.

Your vote is very important. Whether or not you plan to attend the special meeting in person, please sign, date and return the enclosed proxy card as soon as possible in the envelope provided.

I look forward to seeing you at the meeting.

Sincerely,

Albert J. Wood,

Secretary

[                    ], 2010


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Veraz Networks, Inc.

926 Rock Avenue

San Jose, CA 95131

(408) 750-9400

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON [                    ], 2010

TO THE STOCKHOLDERS OF VERAZ NETWORKS, INC.:

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Veraz Networks, Inc., a Delaware corporation (“Veraz”), will be held at [    ]:00 [a][p].m. Pacific Daylight Time, on [                    ], 2010, at [            ] for the following purposes:

 

  (1) Proposal No. 1, to consider and vote upon the adoption of the Acquisition Agreement, dated as of May 12, 2010, by and between Veraz and Dialogic Corporation, a British Columbia corporation (“Dialogic”), and to approve the Arrangement contemplated thereby, pursuant to which (i) Veraz will acquire all of the outstanding shares of Dialogic in exchange for shares of Veraz common stock and (ii) all outstanding options to purchase Dialogic common shares will be cancelled in exchange for options to purchase Veraz common stock (the “Arrangement Proposal”). A copy of the Acquisition Agreement is attached as Annex A to the accompanying proxy statement.

 

  (2) Proposal No. 2, to approve an amendment to Veraz’s certificate of incorporation to effect a reverse stock split of the issued and outstanding shares of Veraz’s common stock, to be effective upon the consummation of the Arrangement or such other time as determined by Veraz’s board of directors (the “Board”). A copy of the amendment to Veraz’s certificate of incorporation to effect the reverse stock split is attached as Annex E to the accompanying proxy statement.

 

  (3) Proposal No. 3, to approve an amendment to Veraz’s certificate of incorporation to change the name of Veraz from “Veraz Networks, Inc.” to “Dialogic Inc.,” to be effective upon the consummation of the Arrangement (together with Proposal No. 2, the “Certificate Amendment Proposals”). A copy of the amendment to Veraz’s certificate of incorporation to effect the name change is attached as Annex F to the accompanying proxy statement.

 

  (4) Proposal No. 4, to consider and vote upon the adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the meeting in favor of Proposals No. 1, No. 2 and No. 3 (the “Adjournment Proposal”).

 

  (5) To transact such other business as may properly come before the special meeting.

These items of business are described in the attached proxy statement, which we encourage you to read in its entirety before voting. The Board has fixed [                    ], 2010 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof (the “Record Date”). Only holders of record of Veraz common stock at the close of business on the Record Date are entitled to notice of the special meeting and to have their vote counted at the special meeting and any adjournments or postponements thereof.

At the close of business on the Record Date, Veraz had [            ] shares of common stock outstanding and entitled to vote. A complete list of Veraz stockholders of record entitled to vote at the special meeting will be available for inspection by Veraz stockholders for 10 days prior to the date of the special meeting at the principal executive offices of Veraz during ordinary business hours for any purpose germane to the special meeting.

Your vote is important regardless of the number of shares you own. The affirmative vote of the holders of a majority of the votes cast in person or by proxy at the Veraz special meeting is required for approval of Proposal No. 1 and Proposal No. 4 above. The affirmative vote of at least a majority of Veraz’s issued and outstanding shares of common stock is required for approval of Proposal No. 2 and Proposal No. 3 above.


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All Veraz stockholders are cordially invited to attend the special meeting in person. However, to ensure your representation at the special meeting, you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. If you are a stockholder of record of Veraz common stock, you may also cast your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your shares. If you do not vote or do not instruct your broker or bank how to vote, it will have the same effect as voting “AGAINST” adoption of the Certificate Amendment Proposals, but will have no effect on the vote with respect to the Arrangement Proposal or the Adjournment Proposal. Abstentions will count towards the vote total for the Certificate Amendment Proposals, and will have the same effect as “AGAINST” votes for those Proposals. Abstentions will have no effect for passing of the Arrangement Proposal or Adjournment Proposal.

The Board recommends that you vote “FOR” each of the Proposals, which are described in detail in the accompanying proxy statement.

 

Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of

Stockholders to be Held on [                    ], 2010 at 926 Rock Avenue, San Jose, CA 95131

The proxy statement is available at http://bnymellon.mobular.net/bnymellon/vraz.

By Order of the Board of Directors,

Albert J. Wood,

Secretary

San Jose, California

This proxy statement first being sent to stockholders on or about [                    ], 2010.

 

You are cordially invited to attend the meeting in person. Whether or not you expect to attend the meeting, please complete, date, sign and return the enclosed proxy, or vote over the telephone or the Internet as instructed in these materials, as promptly as possible to ensure your representation at the meeting. A return envelope (which is postage prepaid if mailed in the United States) is enclosed for your convenience. Even if you have voted by proxy, you may still vote in person if you attend the meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain a proxy issued in your name from that record holder.

The accompanying proxy statement provides a detailed description of Proposals 1 to 4 summarized above (the “Proposals”). We urge you to read the accompanying proxy statement, including the documents delivered along with the proxy statement, and its annexes carefully and in their entirety. In particular, the Acquisition Agreement and the plan of arrangement attached as Annexes A and B, respectively, are the legally binding documents governing the terms of the Arrangement and they supersede any contrary information which may be set forth in the descriptions thereof in the proxy statement. If you have any questions concerning the Proposals, or the accompanying proxy statement, would like additional copies of the accompanying proxy statement or need help voting your shares, please contact our corporate secretary:

Veraz Networks, Inc.

926 Rock Avenue

San Jose, CA 95131

Attn: Corporate Secretary

Tel: (408) 750-9400


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TABLE OF CONTENTS

 

     PAGE

SUMMARY OF THE MATERIAL TERMS OF THE ARRANGEMENT

   1

QUESTIONS AND ANSWERS ABOUT THE PROPOSALS AND THE SPECIAL MEETING

   2

SUMMARY OF THE PROXY STATEMENT

   10

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF VERAZ NETWORKS, INC.

   18

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF DIALOGIC CORPORATION AND SUBSIDIARIES

   19

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

   21

RISK FACTORS

   22

FORWARD-LOOKING STATEMENTS

   57

SPECIAL MEETING OF VERAZ STOCKHOLDERS

   58

PROPOSAL NO. 1—THE ARRANGEMENT PROPOSAL

   61

THE ACQUISITION AGREEMENT AND PLAN OF ARRANGEMENT

   83

ACQUISITION AGREEMENT

   85

DIALOGIC SUPPORT AGREEMENT AND VERAZ VOTING AGREEMENT

   104

REGISTRATION RIGHTS AGREEMENT

   105

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS REFLECTING THE ACQUISITION

   106

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

   111

PROPOSAL NO. 2—THE REVERSE STOCK SPLIT PROPOSAL

   118

PROPOSAL NO. 3—THE NAME CHANGE PROPOSAL

   123

PROPOSAL NO. 4—ADJOURNMENT PROPOSAL

   124

OTHER INFORMATION RELATED TO VERAZ

   125

BUSINESS OF DIALOGIC

   143

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR DIALOGIC

   156

DIRECTORS AND EXECUTIVE OFFICERS OF VERAZ FOLLOWING THE ARRANGEMENT

   183

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   186

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

   192

PRICE RANGE OF SECURITIES AND DIVIDENDS

   194

DESCRIPTION OF VERAZ SECURITIES

   195

APPRAISAL RIGHTS

   196

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   196

WHERE YOU CAN FIND ADDITIONAL INFORMATION

   196

INFORMATION INCORPORATED BY REFERENCE

   197

STOCKHOLDER PROPOSALS

   198

 

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Annex A—Acquisition Agreement

Annex B—Plan of Arrangement

Annex C—Form of Veraz Voting Agreement

Annex D—Form of Dialogic Support Agreement

Annex E—Certificate of Amendment to Certificate of Incorporation to Effect a Reverse Stock Split

Annex F—Certificate of Amendment to Certificate of Incorporation to Effect a Name Change

Annex G—Fairness Opinion of Pagemill Partners LLC

Annex H—Consent of Independent Registered Public Accounting Firm

 

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SUMMARY OF THE MATERIAL TERMS OF THE ARRANGEMENT

 

   

Veraz is proposing to engage in a business combination with Dialogic, to be carried out under a plan of arrangement pursuant to the BCBCA as set forth in the Acquisition Agreement, pursuant to which Veraz will acquire all of Dialogic’s outstanding shares and Dialogic will thereby become a wholly owned subsidiary of Veraz. See the section entitled “Proposal No. 1” on page 61. Upon the consummation of the Arrangement, all outstanding Dialogic common shares and preferred shares will be converted into the right to receive an aggregate of 110,580,900 shares of Veraz common stock, which will be allocated to the holders of such Dialogic common shares and preferred shares in accordance with formulas set out in the plan of arrangement. See the section entitled “The Acquisition Agreement and Plan of Arrangement—Arrangement Consideration” on page 83.

 

   

Based on the number of shares of Veraz common stock, options to purchase Veraz common stock, Dialogic common and preferred shares and options to purchase Dialogic common shares outstanding as of the date of this proxy statement, 110,580,900 shares of Veraz common stock will be issued to Dialogic shareholders in connection with the Arrangement. Options to purchase Veraz common stock will also be issued in exchange for the cancellation of options to purchase Dialogic common shares. As a result, Dialogic shareholders and optionholders will hold approximately 70% of the combined company’s voting securities following consummation of the Arrangement. See the section entitled “The Acquisition Agreement and Plan of Arrangement—Arrangement Consideration” on page 83. Based on the closing price of Veraz common stock on May 11, 2010, the date prior to the public announcement of the proposed Arrangement, the 110,580,900 shares of Veraz common stock to be issued pursuant to the Arrangement have an aggregate market value of $110.5 million.

 

   

Dialogic is a privately held British Columbia corporation. It is a leading worldwide provider of technologies that enable its customers and partners to deliver innovative mobile, video, Internet Protocol (“IP”) and Time-Division Multiplexing (“TDM”) solutions for network service providers and enterprise communication networks. Its principal executive offices are located in Montreal, Quebec, Canada. See the section entitled “Business of Dialogic” on page 143.

 

   

The Arrangement will be accounted for under the reverse acquisition method of accounting in accordance with generally accepted accounting principles in the United States (“GAAP”) for accounting and financial reporting purposes. Under this method of accounting, to be effective upon consummation of the Arrangement, Veraz will be treated as the “acquired” company for financial reporting purposes, and the combined entity’s results of operations prior to consummation of the Arrangement will be those of Dialogic. See the section entitled “Proposal No. 1—Anticipated Accounting Treatment” on page 81.

 

   

Veraz engaged Pagemill Partners LLC (“Pagemill”) to provide a fairness opinion and act as a financial advisor to it in connection with the Arrangement. Veraz paid a $150,000 non-refundable fee to Pagemill for rendering the fairness opinion. See the section entitled “Proposal No. 1—Opinion of Pagemill” and “—Background of the Arrangement” on pages 72 and 61 respectively.

 

   

In addition to voting on the Arrangement Proposal, the stockholders of Veraz will vote on a proposal to amend Veraz’s certificate of incorporation to effect a one-for-            reverse stock split to be effective upon consummation of the Arrangement or such other time as determined by the Board. The share numbers presented in this proxy statement do not reflect the reverse stock split except where otherwise indicated. See the section entitled “Proposal No. 2” on page 118.

 

   

The stockholders of Veraz will also vote on a proposal to amend Veraz’s certificate of incorporation to change its name from “Veraz Networks, Inc.” to “Dialogic Inc.” See the section entitled “Proposal No. 3” on page 123.

 

   

The stockholders of Veraz will also vote on a proposal to adjourn the special meeting, if necessary, to solicit additional proxies. See the section entitled “Proposal No. 4” on page 124.

 

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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS AND THE SPECIAL MEETING

The following section provides answers to frequently asked questions about the Arrangement, the effect of the Arrangement on stockholders of Veraz, the Acquisition Agreement, the Proposals, and the Veraz special meeting of stockholders. This section, however, only provides summary information. Veraz urges you to read carefully the remainder of this proxy statement, including the annexes to this proxy statement, because the information in this section does not provide all the information that might be important to you regarding the Arrangement and the other matters being considered at Veraz’s special meeting.

 

Q. What is the Arrangement?

 

A. On May 12, 2010, Veraz and Dialogic entered into the Acquisition Agreement, pursuant to which Veraz will acquire all of Dialogic’s outstanding shares and Dialogic will thereby become a wholly owned subsidiary of Veraz. The combination will be carried out in accordance with a plan of arrangement pursuant to the BCBCA as set forth in the Acquisition Agreement. Copies of the Acquisition Agreement and the plan of arrangement are attached to this proxy statement as Annexes A and B, respectively. We encourage you to review both the Acquisition Agreement and the plan of arrangement carefully.

 

Q. If the Arrangement is consummated, what will Veraz stockholders receive?

 

A. Veraz stockholders will not receive any direct consideration as a result of the Arrangement and will continue to own their shares of Veraz common stock. Following consummation of the Arrangement, such Veraz shares will represent a smaller percentage of equity ownership in the combined company.

 

Q. What will Dialogic shareholders receive in the proposed Arrangement?

 

A. Pursuant to the Acquisition Agreement, Veraz will issue 110,580,900 shares of Veraz common stock to the Dialogic shareholders in exchange for their shares of Dialogic. After taking into account the issuance of stock options to purchase Veraz common stock in exchange for Dialogic stock options, the Dialogic shareholders and optionholders will hold approximately 70% and existing Veraz stockholders and optionholders will hold approximately 30% of the outstanding securities of Veraz following the consummation of the Arrangement.

 

Q. Why is Veraz proposing the Arrangement?

 

A. The Board believes that the Arrangement is in the best interest of Veraz stockholders. Veraz has negotiated the terms of the Arrangement with Dialogic and is now submitting the transaction to its stockholders for their approval. Veraz believes that the combined company will be poised to take advantage of growth opportunities for products and services to be provided to telecommunication service providers and enterprises. Veraz is excited about working with Dialogic and the opportunity to optimize operations and expand its market share.

 

Q. What is the reverse stock split and why is it necessary?

 

A. If Proposal No. 2 is approved, the outstanding shares of Veraz’s common stock will be combined into a lesser number of shares on a one-for-            basis. By potentially increasing our stock price, the reverse stock split would reduce the risk that Veraz’s common stock could be delisted from The Nasdaq Global Market, which requires, among other things, that issuers maintain a closing bid price of at least $1.00 per share. Veraz received a letter, dated July 1, 2010, from the Listing Qualifications Department of The Nasdaq Stock Market notifying it that, for 30 consecutive business days, the bid price for Veraz’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Global Market pursuant to Nasdaq Listing Rules. If Veraz fails to regain compliance in accordance with the Nasdaq Listing Rules, its common stock could be subject to delisting.

 

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In addition, the Arrangement may constitute a “change of control” under applicable marketplace rules established by The Nasdaq Stock Market, and, as a result, the combined company may need to comply with the initial listing standards of the applicable Nasdaq market to continue to be listed on such market following the consummation of the Arrangement. The Nasdaq Global Market’s initial listing standards require a company to have, among other things, a $4.00 per share minimum bid price. Because the current price of Veraz common stock is less than the minimum bid price required by Nasdaq, the reverse stock split may be necessary to comply with the continued and initial listing standards. See the section entitled “Proposal No. 2—Background.”

 

Q. Why am I receiving this proxy statement?

 

A. To complete the Arrangement, a majority of the votes cast at the special meeting by the holders of shares of Veraz’s common stock must vote to adopt the Acquisition Agreement and approve the issuance of shares of Veraz common stock in the Arrangement. Veraz stockholders are also being asked to approve amendments to Veraz’s certificate of incorporation to effect a reverse stock split and to change the name of Veraz. The proposed amendments to Veraz’s certificate of incorporation will be filed with the Secretary of State of the State of Delaware if the Certificate Amendment Proposals are approved. Copies of these proposed amendments are attached hereto as Annexes E and F, respectively.

Veraz will hold a special meeting of its stockholders to consider and vote upon the Proposals. Veraz has sent you this proxy statement and the enclosed proxy card because the Board is soliciting your proxy to vote at the special meeting, including any adjournments or postponements of the meeting. This proxy statement contains important information about the proposed Arrangement, the Certificate Amendment Proposals and the special meeting of Veraz stockholders. You should read this proxy statement together with all of the annexes carefully.

You are invited to attend the special meeting to vote on the Proposals. However, you don’t need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card, or follow the instructions below to submit your proxy over the telephone or Internet. Your vote is important. Veraz encourages you to vote as soon as possible after carefully reviewing this proxy statement.

Veraz intends to mail this proxy statement and accompanying proxy card on or about [                    ], 2010 to all stockholders of record entitled to vote at the special meeting.

 

Q. What is being voted on?

 

A. There are four proposals on which the Veraz stockholders are being asked to vote:

 

   

Proposal No. 1, the adoption of the Acquisition Agreement and approval of the issuance of shares of Veraz common stock in the Arrangement.

 

   

Proposal No. 2, the approval of an amendment of the Veraz certificate of incorporation to effect a one-for-            reverse split of Veraz’s common stock, effective upon the consummation of the Arrangement or such other time as determined by the Board. The share numbers presented in this proxy statement do not reflect the reverse stock split except where otherwise indicated.

 

   

Proposal No. 3, the approval of an amendment of the Veraz certificate of incorporation to change the name of Veraz from “Veraz Networks, Inc.” to “Dialogic Inc.,” effective upon the consummation of the Arrangement.

 

   

Proposal No. 4, the adjournment of the special meeting, if necessary, to solicit additional proxies.

 

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Q. How are votes counted?

 

A. Votes will be counted by the inspector of election appointed for the meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and broker non-votes. Except with respect to Proposal No. 1 and Proposal No. 4, abstentions will be counted towards the vote total for each Proposal and will have the same effect as “AGAINST” votes. Abstentions will not be counted towards the vote totals for Proposal No. 1 and Proposal No. 4. Broker non-votes will have the same effect as “AGAINST” votes with respect to the Certificate Amendment Proposals, but will not be counted towards the vote total for the Arrangement Proposal.

If your shares are held by your broker as your nominee (that is, in “street name”), you will need to obtain a proxy form from your broker or the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker to vote your shares.

 

Q. What are “broker non-votes”?

 

A. Broker non-votes occur when a beneficial owner of shares held in “street name” does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-routine.” Generally, if shares are held in street name, the beneficial owner of the shares is entitled to give voting instructions to the broker or nominee holding the shares. If the beneficial owner does not provide voting instructions, the broker or nominee can still vote the shares with respect to matters that are considered to be “routine,” but not with respect to “non-routine” matters. Under the rules and interpretations of the New York Stock Exchange (“NYSE”), “non-routine” matters are matters that may substantially affect the rights or privileges of stockholders, such as mergers or shareholder proposals and, for the first time, under a new amendment to the NYSE rules, elections of directors, even if not contested.

 

Q. What vote is required to adopt the Arrangement Proposal?

 

A. The adoption of the Acquisition Agreement and the issuance of the Veraz common stock in the Arrangement requires the affirmative vote of a majority of the votes cast at the special meeting by the holders of shares of Veraz common stock outstanding on the Record Date. If you “abstain” from voting on the Arrangement Proposal, it will not be counted towards the vote total. Similarly, if you do not give instructions to your broker on how to vote your shares, the shares will be treated as broker non-votes and will have no effect.

 

Q. What vote is required to adopt the Certificate Amendment Proposals?

 

A. The adoption of the Certificate Amendment Proposals will require the affirmative vote of the holders of a majority of the outstanding shares of Veraz common stock on the Record Date. If you do not vote or “abstain” from voting on these Proposals, it will have the same effect as a vote “AGAINST.” Broker non-votes will have the same effect as votes “AGAINST.”

 

Q. What vote is required to adopt the Adjournment Proposal?

 

A. The adoption of the Adjournment Proposal will require the affirmative vote of the holders of a majority of the votes cast at the special meeting by the holders of shares of Veraz common stock outstanding on the Record Date. If you “abstain” from voting on the Adjournment Proposal, it will not be counted towards the vote total.

 

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Q. What is the quorum requirement?

 

A. A quorum of Veraz stockholders is necessary to hold a valid meeting. A quorum will be present if a majority of the outstanding shares of Veraz common stock are represented by stockholders present at the meeting in person or by proxy. On the Record Date, there were              shares of Veraz common stock outstanding and entitled to vote. Thus, the holders of              shares must be present in person or by proxy at the meeting to have a quorum.

Your shares will be counted towards the quorum only if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote in person at the special meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum, the chairman of the meeting or a majority of the votes present at the meeting in person or by proxy may adjourn the meeting to another date.

 

Q. Who can vote at the special meeting?

 

A. Only Veraz stockholders of record at the close of business on the Record Date will be entitled to vote at the special meeting. On the Record Date, there were              shares of common stock outstanding and entitled to vote.

Stockholder of Record: Shares Registered in Your Name

If on the Record Date your shares were registered directly in your name with Veraz’s transfer agent, BNY Mellon Shareowner Services LLC, then you are a stockholder of record. As a stockholder of record, you may vote in person at the special meeting or vote by proxy. Whether or not you plan to attend the special meeting in person, we urge you to fill out and return the enclosed proxy card or vote by proxy over the telephone or on the Internet as instructed below to ensure your vote is counted.

Beneficial Owner: Shares Registered in the Name of a Broker or Bank

If on the Record Date your shares were not held in your name, but rather in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the special meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the special meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the special meeting unless you request and obtain a valid proxy from your broker or other agent.

 

Q. Does the Board recommend voting for the adoption of each of the Proposals?

 

A. Yes. After careful consideration, the Board has determined that each of the Proposals is fair to and in the best interests of Veraz and its stockholders. The Board recommends that Veraz stockholders vote “FOR” each of the Proposals. The members of the Board may have interests in the Arrangement that are different from, or in addition to, your interests as a stockholder. For a description of such interests, please see the section entitled “Proposal No. 1—Interests of Veraz Directors and Executive Officers in the Arrangement.”

For a description of the factors considered by the Board in making its determination, see the section entitled “Proposal No. 1—the Board of Directors’ Reasons for Approval of the Arrangement.”

 

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Q. Did the Board obtain a fairness opinion in connection with its approval of the Acquisition Agreement?

 

A. Yes. On May 8, 2010, Pagemill delivered to the Board its written opinion that, as of that date and based upon and subject to the assumptions and other matters described in the opinion, the consideration to be paid by Veraz pursuant to the Acquisition Agreement was fair from a financial point of view to Veraz and the holders of Veraz’s common stock. The full text of this opinion is attached to this proxy statement as Annex G. We encourage you to read this opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations included in connection with the review undertaken. Pagemill’s opinion speaks only as of its date and is directed to the Board.

 

Q. How do Veraz’s insiders intend to vote their shares?

 

A. With respect to the Arrangement Proposal, the Certificate Amendment Proposals, and any matter that could reasonably be expected to facilitate the foregoing, some of Veraz’s major stockholders and all of its officers and directors who hold shares of Veraz common stock have each entered into voting agreements with Dialogic (each, a “Veraz Voting Agreement”), pursuant to which they agreed to vote all shares of Veraz common stock held by them, representing approximately 35% of Veraz’s outstanding common stock, “FOR” such Proposals and “AGAINST” any alternative transaction. A copy of the form of Veraz Voting Agreement is attached as Annex C hereto. See the section entitled “Dialogic Support Agreement and Veraz Voting Agreement” beginning on page 104.

 

Q. What risks should I consider in deciding whether to vote in favor of or consent to the Proposals?

 

A. You should carefully review the section of this proxy statement entitled “Risk Factors,” beginning on page 22, which sets forth certain risks and uncertainties related to the Arrangement and the Proposals, and to which Veraz’s and Dialogic’s businesses are now subject and may be subject in the future.

 

Q. What if I object to the proposed Arrangement? Do I have appraisal rights?

 

A. Veraz stockholders do not have appraisal rights in connection with the Arrangement.

 

Q. Who will manage Veraz after the Arrangement?

 

A. Upon consummation of the Arrangement, Veraz expects the Board to consist of nine members: three nominated by Veraz and six nominated by Dialogic. Veraz expects the executive officers of Veraz to include Nick Jensen, the current President, Chairman of the Board of Directors and Chief Executive Officer of Dialogic, as Chairman of the Board and Chief Executive Officer and Doug Sabella, the current President and Chief Executive Officer of Veraz, as President and Chief Operating Officer. Veraz stockholders are not entitled to elect directors in connection with the Arrangement, and are not being asked to vote for the election of any directors in connection with this proxy. For a description of the individuals Veraz expects to serve as Veraz’s directors and executive officers, see the section entitled “Directors and Executive Officers of Veraz Following the Arrangement” beginning on page 183.

 

Q. What will the business strategy of the combined company be after the Arrangement?

 

A. Veraz intends to continue to pursue many of the same strategies that Veraz and Dialogic already have been pursuing, including initiatives to improve profit margins and efficiency, expand their customer base and identify additional growth opportunities. Veraz believes attractive opportunities exist to grow Dialogic’s business. However, Veraz’s and Dialogic’s business strategies may evolve and change over time.

 

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Q. What percentage of the combined company’s voting interests will existing Veraz stockholders own after the consummation of the Arrangement?

 

A. Effective upon consummation of the Arrangement, based on the number of shares of Veraz common stock, options to purchase Veraz common stock, Dialogic common and preferred shares and options to purchase Dialogic shares outstanding as of that date, Veraz’s existing stockholders’ voting interest will be diluted from 100% to approximately 30% of the combined company’s voting interests. The voting interests of Veraz stockholders following the Arrangement may be subject to further dilution from the exercise of outstanding options. See the section entitled “Risk Factors—The ownership percentage of current stockholders of Veraz will be substantially reduced, resulting in a dilution of existing stockholders’ voting power.”

 

Q. What other conditions must be satisfied to consummate the Arrangement?

 

A. In addition to Veraz obtaining stockholder approval of the Arrangement, conditions to the obligations of Dialogic under the Acquisition Agreement include, among others:

 

   

Conditional approval of the Nasdaq listing application and listing of the shares of Veraz common stock to be issued in the Arrangement on the Nasdaq Global Market;

 

   

The absence of a material adverse effect with respect to Veraz;

 

   

The performance of the covenants and obligations of Veraz pursuant to the Acquisition Agreement in all material respects;

 

   

The accuracy of the representations and warranties provided by Veraz pursuant to the Acquisition Agreement, subject to a material adverse effect threshold; and

 

   

The absence of any applicable restraining order, injunction or governmental litigation prohibiting the Arrangement.

In addition to Dialogic obtaining shareholder approval of the Arrangement, conditions to the obligations of Veraz under the Acquisition Agreement include, among others:

 

   

Completion of the restructuring of Dialogic’s indebtedness;

 

   

The approval of the Arrangement by the Supreme Court of British Columbia;

 

   

Conditional approval of the Nasdaq listing application and listing of the shares of Veraz common stock to be issued in the Arrangement on the Nasdaq Global Market;

 

   

The absence of a material adverse effect with respect to Dialogic;

 

   

The performance of the covenants and obligations of Dialogic pursuant to the Acquisition Agreement in all material respects;

 

   

The accuracy of the representations and warranties provided by Dialogic pursuant to the Acquisition Agreement, subject to a material adverse effect threshold; and

 

   

The absence of any applicable restraining order, injunction or governmental litigation prohibiting the Arrangement.

Veraz or Dialogic may waive compliance with any closing condition intended for its benefit.

 

Q. Should Veraz’s stockholders send in their stock certificates now?

 

A. No. Veraz’s stockholders are not required to tender or exchange their stock certificates as part of the Arrangement, but if Proposal No. 2 to effect a reverse stock split is approved and implemented, Veraz’s stockholders will be asked by Veraz’s transfer agent to surrender stock certificates representing pre-reverse stock split shares in exchange for post-reverse stock split stock certificates in accordance with procedures to be set forth in a letter of transmittal.

 

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Q. When do you expect the Arrangement to be consummated?

 

A. It is currently anticipated that the Arrangement will be consummated in the second half of 2010, subject to adoption of the Acquisition Agreement by Veraz’s stockholders and the satisfaction of certain other conditions, as discussed in the section entitled “The Acquisition Agreement and Plan of Arrangement—Conditions to Consummation of the Arrangement.”

 

Q. What do I need to do now?

 

A. Veraz urges you to read carefully and consider the information contained in this proxy statement, including the annexes, and to consider how the Arrangement will affect you as a stockholder of Veraz. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement and on the enclosed proxy card.

 

Q. How do I vote?

 

A. You may vote “For” or “Against” or abstain from voting on the Proposals. The procedures for voting are as follows:

Stockholder of Record: Shares Registered in Your Name

If you are a stockholder of record, you may vote in person at the special meeting or vote by proxy using the enclosed proxy card, vote by proxy over the telephone, or vote by proxy on the Internet. Whether or not you plan to attend the meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the meeting and vote in person even if you have already voted by proxy.

 

   

To vote in person, come to the special meeting and we will give you a ballot when you arrive.

 

   

To vote using the proxy card, simply complete, sign and date the enclosed proxy card and return it promptly in the envelope provided. If you return your signed proxy card to us before the special meeting, we will vote your shares as you direct.

 

   

To vote over the telephone, dial toll-free [1-866-540-5760] using a touch-tone phone and follow the recorded instructions. You will be asked to provide the company number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., Eastern Time on [                    ], 2010 to be counted.

 

   

To vote on the Internet, go to http://www.proxyvoting.com/vraz to complete an electronic proxy card. You will be asked to provide the company number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., Eastern Time on [                    ], 2010 to be counted.

Beneficial Owner: Shares Registered in the Name of Broker or Bank

If you hold your shares in “street name,” which means you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from Veraz. Simply complete and mail the proxy card to ensure that your vote is counted. Alternatively, you may vote by telephone or over the Internet as instructed by your broker, bank or other agent. To vote in person at the special meeting, you must obtain a valid proxy from your broker, bank, or other agent. Follow the instructions from your broker, bank or other agent included with these proxy materials, or contact your broker, bank or other agent to request a proxy form.

 

We provide Internet proxy voting to allow you to vote your shares on-line, with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your Internet access, such as usage charges from Internet access providers and telephone companies.

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Q. How many votes do I have?

 

A. On each matter to be voted upon, you have one vote for each share of common stock you own as of [                    ], 2010.

 

Q. What will happen if I abstain from voting or fail to vote?

 

A. An abstention or failure to vote by a Veraz stockholder will not be counted towards the vote totals for the Arrangement Proposal or the Adjournment Proposal. An abstention or failure to vote will have the effect of voting against the Certificate Amendment Proposals. If your shares are held in “street name” and you don’t give your broker voting instructions, your broker may not vote your shares with respect to the Proposals presented in this proxy statement.

 

Q. Can I change my vote after I have mailed my signed proxy or direction form?

 

A. Yes. You can revoke your proxy at any time prior to the final vote at the special meeting. If you are the record holder of your shares, you may revoke your proxy in any one of three ways:

 

   

you may submit another properly completed proxy card with a later date;

 

   

you may send a written notice that you are revoking your proxy to Veraz’s Secretary at the address listed at the end of this section; or

 

   

you may attend the special meeting and vote in person. Simply attending the special meeting will not, by itself, revoke your proxy.

If your shares are held by your broker or bank as a nominee or agent, you should follow the instructions provided by your broker or bank.

Q. What should I do if I receive more than one set of voting materials?

 

A. You may receive more than one set of voting materials, including multiple copies of this proxy statement and multiple proxy cards or voting instruction cards, if your Veraz shares are registered in more than one name or are registered in different accounts. For example, if you hold your Veraz shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold Veraz shares. Please complete, sign, date and return each proxy card and voting instruction card that you receive to cast a vote with respect to all of your Veraz shares.

 

Q. Who is paying for this proxy solicitation?

 

A. Veraz is soliciting proxies on behalf of the Board. This solicitation is being made by mail but also may be made by telephone or in person. Veraz and its directors, officers and employees may also solicit proxies in person, by telephone or by other electronic means. These parties will not be paid any additional compensation for soliciting proxies. Veraz may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

 

Q. Who can help answer my questions?

 

A. If you have questions about the Arrangement or the other Proposals or if you need additional copies of the proxy statement or the enclosed proxy card you should contact:

Veraz Networks, Inc.

926 Rock Avenue

San Jose, CA 95131

Attn: Corporate Secretary

Tel: (408) 750-9400

You may also obtain additional information about Veraz from documents filed with the Securities and Exchange Commission (“SEC”) by following the instructions in the section entitled “Where You Can Find More Information.”

 

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SUMMARY OF THE PROXY STATEMENT

This summary highlights selected information from this proxy statement and does not contain all of the information that is important to you. To better understand the Arrangement and the Proposals, you should read this entire document carefully, including the Acquisition Agreement and plan of arrangement attached as Annexes A and B, respectively, to this proxy statement. We encourage you to read the Acquisition Agreement and plan of arrangement carefully. They are the legal documents that govern the Arrangement and certain other transactions contemplated by the Acquisition Agreement. They are also described in detail elsewhere in this proxy statement. Unless the context requires otherwise, the terms “Veraz,” “we,” “us” and “our” refer to Veraz Networks, Inc.; “Dialogic” refers to Dialogic Corporation and the “Board” refers to the Veraz board of directors. Where the context so requires, various references to “Veraz,” “we,” “us” and “our” refer to Veraz Networks, Inc. and its subsidiaries collectively, and various references to “Dialogic” refer to Dialogic Corporation and its subsidiaries collectively.

The Parties

Veraz

Veraz was incorporated in Delaware on October 18, 2001, and is a leading global provider of voice infrastructure solutions for established and emerging wireline and wireless service providers. Service providers use our products to transport, convert and manage data and voice traffic over both legacy TDM networks and IP networks, while enabling Voice over IP (“VoIP”) and other multimedia services. Our products consist of our bandwidth optimization products and our Next Generation Network (“NGN”) switching products. Our bandwidth optimization products include our I-Gate 4000 family of stand-alone media gateways and session bandwidth optimizers and our DTX family of digital circuit multiplication equipment (“DCME”) products. Our NGN solution includes our ControlSwitch product family based on the industry-standard IP Multimedia Subsystem (“IMS”) architecture, our Network-adaptive Border Controller product family, which includes our session border controller (“SBC”) solution providing security and session management, and our I-Gate 4000 family of media gateways. We also offer services consisting of hardware and software maintenance and support, installation, training and other professional services.

Our early business was based on the sale of DCME products to service providers for use in their legacy TDM networks. DCME optimizes the transmission of voice across existing transmission links through the use of specific voice compression and voice quality enhancement. We have increasingly focused our efforts on our IP products (bandwidth optimization products and products that comprise our NGN solution).

We outsource the manufacturing of our hardware products. We sell our products through both a direct sales force and also through indirect sales channels.

Our principal executive offices are located at 926 Rock Avenue, San Jose, California, and our telephone number is (408) 750-9400.

Veraz, [            ], [            ] and [            ] are registered trademarks of the Company. All other trademarks, trade names and service marks appearing in this proxy statement are the property of their respective owners.

Dialogic

Dialogic was incorporated in 1984 under the Canada Business Corporations Act and was continued under the BCBCA in 2006. Dialogic is a leading worldwide provider of technologies that enable its customers and partners to deliver innovative mobile, video, IP, and TDM solutions for network service providers and enterprise communication networks. Beginning in 1984, businesses that are now part of Dialogic were at the forefront of the Computer Telephony Integration (“CTI”) revolution, and Dialogic is now developing innovative voice, fax,

 

 

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and video value-added services. Its open-systems-based media and signaling products have allowed Dialogic to become a leader in the convergence of IT and telecommunications, just as the businesses now owned by Dialogic promoted economical and rapid time-to-market CTI solutions in the 1980s and 1990s.

For network service providers, Dialogic markets, sells and supports a suite of open telecommunications hardware and software components (both IP and TDM) that include media and signaling gateways, high-density multimedia processing solutions, IP media servers, and signaling protocol software at multiple levels of integration. These products enable Dialogic’s customers to build their solutions (including voice/video messaging, music/video ring tones, voice/video short message service, and location based services) for deployment in wireless and wireline networks. For enterprise communication networks (or customer premise equipment), Dialogic sells innovative IP, transitional hybrid, and flexible TDM boards, software and gateway products that enable the integration of new IP communications technologies into the Dialogic customer’s existing voice, messaging, fax, interactive voice response (“IVR”), contact center, and/or unified communications solutions.

Dialogic’s principal executive offices are located at 9800 Cavendish Blvd., 5th Floor, Montreal, Quebec, Canada, and its telephone number is (514) 745-5500.

Dialogic, Brooktrout and Diva are registered trademarks of Dialogic.

The Arrangement Proposal

Veraz and Dialogic are proposing to engage in a business combination pursuant to which Veraz will acquire all of the outstanding shares of Dialogic, which will thereby become a wholly owned subsidiary of Veraz. The combination will be carried out under a plan of arrangement pursuant to the BCBCA as set forth in the Acquisition Agreement dated May 12, 2010 between Veraz and Dialogic. Pursuant to such plan of arrangement, Veraz will acquire all the outstanding Dialogic preferred and common shares in consideration of the issuance of newly-issued shares of Veraz common stock. In addition, as part of the Arrangement, all outstanding options to purchase Dialogic common shares will be exchanged for options to purchase Veraz common stock. If the Arrangement is consummated, Veraz will change its name to “Dialogic Inc.”

The Arrangement is expected to be consummated during the second half of 2010. The consummation of the Arrangement is subject to the approval of the Arrangement Proposal by Veraz’s stockholders and Dialogic’s shareholders, compliance with the court ordered approval process pursuant to the BCBCA (the corporate legislation applicable to Dialogic) and the satisfaction of certain other conditions, as discussed in greater detail in the sections entitled “Proposal No. 1—Approvals and Regulatory Matters” and “The Acquisition Agreement—Conditions to Consummation of the Arrangement.”

The Certificate Amendment Proposals

There are two proposals relating to the amendment of Veraz’s certificate of incorporation following consummation of the Arrangement. Proposal No. 2 is to effect a one-for-             reverse stock split of Veraz’s common stock. Proposal No. 3 is to change our name from “Veraz Networks, Inc.” to “Dialogic Inc.”.

The Certificates of Amendment to Veraz’s certificate of incorporation will be filed with the Secretary of State of the State of Delaware if the Certificate Amendment Proposals are approved. Copies of these amendments to Veraz’s certificate of incorporation are attached as Annexes E and F hereto.

 

 

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The Adjournment Proposal

If we fail to receive a sufficient number of votes to approve Proposals No. 1, No. 2 or No. 3, we may propose to adjourn the special meeting for a period of not more than [30] days for the purpose of soliciting additional proxies to approve Proposals No. 1, No. 2 and/or No. 3. We currently do not intend to propose adjournment at the special meeting if there are sufficient votes to approve Proposals No. 1, No. 2 and No. 3.

Veraz’s Recommendations to Stockholders; Reasons for Approval of the Arrangement

After careful consideration of the terms and conditions of the Arrangement and the Certificate Amendment Proposals to be presented at the Veraz special meeting, the Board has determined that the Proposals are fair to and in the best interests of Veraz and its stockholders. In reaching its decision with respect to the Arrangement and the transactions contemplated by the Acquisition Agreement and the plan of arrangement, the Board reviewed various industry and financial data and considered the due diligence and evaluation materials provided by Dialogic to determine that the consideration to be paid in connection with the Arrangement was fair to and in the best interests of Veraz and its stockholders. See “Proposal No. 1—The Board’s Reasons of the Approval of the Arrangement” and “Proposal No. 1—Recommendation of the Veraz Board of Directors.” On May 8, 2010, Pagemill delivered to the Board its written opinion that, as of that date and based upon and subject to the assumptions and other matters described in the opinion, the consideration to be paid by Veraz pursuant to the Acquisition Agreement was fair to Veraz and the holders of Veraz’s common stock from a financial point of view. See the section entitled “Proposal No. 1—Opinion of Pagemill.” Accordingly, the Board recommends that Veraz stockholders vote:

 

   

FOR Proposal No. 1, the Arrangement Proposal;

 

   

FOR Proposal No. 2, the reverse stock split proposal;

 

   

FOR Proposal No. 3, the name change proposal; and

 

   

FOR Proposal No. 4, the Adjournment Proposal.

Opinion of Pagemill

Pagemill was retained to act as exclusive financial advisor to Veraz in connection with the Arrangement and, if requested, to render to the Board an opinion as to the fairness, from a financial point of view, of the consideration to be paid by Veraz under the Arrangement.

At the May 4, 2010 meeting of the Board, Pagemill delivered its oral opinion, subsequently confirmed in writing as of May 8, 2010, to the Board to the effect that, as of the date of such opinion, based upon and subject to the assumptions made, matters considered and limits of the review undertaken by Pagemill, the Arrangement which will result in Veraz’s original stockholders (including holders of derivative securities such as options and restricted stock units) holding approximately 30% of the equity in Veraz following consummation of the Arrangement was fair, from a financial point of view, to Veraz and the holders of Veraz common stock.

Post Closing Veraz Board of Directors and Management

Following the consummation of the Arrangement, the Board will be set at nine members and will include Messrs. Corey, Sabella and West, each of whom is currently a member of the Board, and Messrs. Ben-Gacem, Guira, Jensen, Joannou, Konnerup and Vig, each of whom is currently a member of the Dialogic board of directors. We expect the executive officers of Veraz following the consummation of the Arrangement to be Nick Jensen as Chairman of the Board and Chief Executive Officer (current President, Chairman of the Board and Chief Executive Officer of Dialogic), and Doug Sabella as President and Chief Operating Officer (current Veraz President and Chief Executive Officer). See section entitled “Executive Officers of Veraz Following the Arrangement.”

 

 

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Veraz stockholders are not entitled to elect directors in connection with the Arrangement, and are not being asked to vote for the election of any directors in connection with this proxy.

Acquisition Agreement

Pursuant to the terms of the Acquisition Agreement, Veraz will acquire all of the outstanding common and preferred shares of Dialogic in consideration of the issuance of shares of Veraz common stock. The Arrangement will be carried out pursuant to a plan of arrangement pursuant to the BCBCA as set forth in the Acquisition Agreement. Upon the consummation of the Arrangement, the Dialogic shareholders will receive an aggregate of 110,580,900 shares of Veraz common stock. All outstanding options to purchase Dialogic common shares will be cancelled in exchange for options to purchase Veraz common stock.

Each of Veraz and Dialogic has made customary representations, warranties and covenants in the Acquisition Agreement, including, among others, covenants: (a) to conduct its respective business in the ordinary course during the interim period between the execution of the Acquisition Agreement and the consummation of the Arrangement; (b) not to engage in certain kinds of transactions during such period or solicit or engage in discussions with third parties regarding other proposals to be acquired, in each case subject to specified exceptions; and (c) to seek approval from stockholders of Veraz and shareholders of Dialogic in connection with the Arrangement.

Consummation of the Arrangement is subject to customary conditions, including: (a) the approval of the Arrangement by the shareholders of Dialogic and the approval by the stockholders of Veraz of the issuance of shares of Veraz common stock; (b) absence of any applicable restraining order, injunction or governmental litigation prohibiting the Arrangement; (c) the absence of any material adverse effect with respect to each of Veraz and Dialogic; (d) the accuracy of the representations and warranties of each party, subject to specified materiality thresholds; (e) performance in all material respects by each party of its obligations under the Acquisition Agreement; (f) completion of the restructuring of Dialogic’s indebtedness; (g) the approval of the Arrangement by the Supreme Court of British Columbia; and (h) antitrust approvals, including expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (the “HSR Act”). Veraz and Dialogic have received notification of the early termination of the waiting period under the HSR Act. The Acquisition Agreement contains certain termination rights for both Veraz and Dialogic in certain circumstances, some of which may require Veraz to pay Dialogic a termination fee of $1,500,000 and an expense reimbursement of up to $1,000,000 or Dialogic to pay Veraz a termination fee of $3,000,000 and an expense reimbursement of up to $1,000,000.

Approvals and Regulatory Matters

In addition to the approval of Veraz’s stockholders, the consummation of the Arrangement and the other transactions contemplated by the Acquisition Agreement are subject to various regulatory requirements and approvals, the approval of the plan of arrangement by the Supreme Court of British Columbia, and the approval by shareholders of Dialogic by way of unanimous written consent or by 66 2/3% of the votes cast on the Arrangement resolutions by (i) all of the Dialogic shareholders, (ii) the holders of Dialogic common shares and (iii) the holders of each class of Dialogic preferred shares. Votes, in each case, must be cast by holders present in person or by proxy at the Dialogic special meeting, voting as a single class. Veraz and Dialogic have received notification of the early termination of the waiting period under the HSR Act. Dialogic is in the process of seeking an order of the Supreme Court of British Columbia in respect of the calling and conduct of a meeting of the shareholders of Dialogic. Following the approval of the shareholders of Dialogic of the Arrangement, Dialogic will seek an order of the Supreme Court of British Columbia approving the Arrangement. See “Proposal No. 1—Approvals and Regulatory Matters.”

 

 

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Conditions to Consummation of the Arrangement

In addition to the approvals and regulatory matters discussed above, the Acquisition Agreement sets forth a number of other conditions to the obligations of each party to complete the Arrangement, including the accuracy of the other party’s representations and warranties in the Acquisition Agreement, subject to specified materiality thresholds, the compliance by the other party with its covenants and obligations under the Acquisition Agreement, the absence of a Parent Material Adverse Effect or a Company Material Adverse Effect (each as defined in the Acquisition Agreement). See “The Acquisition Agreement—Conditions to Consummation of the Arrangement.”

Support and Voting Agreements

At the same time that the Acquisition Agreement was entered into, all of the shareholders of Dialogic entered into a Support Agreement (the “Dialogic Support Agreement”) with Veraz and certain stockholders of Veraz each entered into a Veraz Voting Agreement with Dialogic. Copies of the forms of Veraz Voting Agreement and Dialogic Support Agreement are attached as Annexes C and D hereto.

The Dialogic Support Agreement provides that each of the Specified Dialogic Shareholders will, among other things, vote its Dialogic common and preferred shares in favor of the Arrangement and against an alternative transaction. The Dialogic Support Agreement will terminate upon the earliest of: (a) the consummation of the Arrangement; (b) mutual agreement among Veraz and the Specified Dialogic Shareholders; or (c) the termination of the Acquisition Agreement in accordance with its terms.

The Veraz Voting Agreements provide that each of the Specified Veraz Stockholders will, among other things, vote its shares of Veraz common stock for (a) the Arrangement, (b) the issuance of shares of Veraz common stock to the Dialogic shareholders pursuant to the terms of the Acquisition Agreement, (c) the amendment of one or more of the Veraz stock plans for the purpose of increasing the number of shares of Veraz common stock available for issuance thereunder to consummate the Arrangement in accordance with the terms of the Acquisition Agreement, and (d) any matter that could reasonably be expected to facilitate any of the foregoing; and against any acquisition proposal or any action that could reasonably be expected to delay, prevent or frustrate the Arrangement. Each Veraz Voting Agreement will terminate upon the earlier of: (a) consummation of the Arrangement; (b) mutual agreement by Dialogic and the Specified Veraz Stockholder, or (c) the termination of the Acquisition Agreement in accordance with its terms.

Date, Time and Place of Special Meeting of Veraz Stockholders

The special meeting of the stockholders of Veraz will be held at [    ]:00 [a].[m]., Pacific Daylight Time, on [                    ], 2010, at [            ] to consider and vote upon the Arrangement Proposal and the Certificate Amendment Proposals.

Voting Power; Record Date

You will be entitled to vote or direct votes to be cast at the Veraz special meeting if you owned shares of Veraz common stock at the close of business on the Record Date for the special meeting. You will have one vote for each share of Veraz common stock you owned at the close of business on the Record Date. On the Record Date, there were              shares of Veraz common stock outstanding.

 

 

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Quorum and Vote of Veraz Stockholders

A quorum of Veraz stockholders is necessary to hold a valid meeting. A quorum will be present at the Veraz special meeting if a majority of the outstanding Veraz shares entitled to vote at the special meeting are represented in person or by proxy. Abstentions and broker non-votes will count as present for the purposes of establishing a quorum. The approval requirements for each of the matters to be dealt with at the special meeting are as follows:

 

   

The adoption of the Arrangement Proposal will require the affirmative vote of a majority of the votes cast at the special meeting by the holders of shares of Veraz common stock outstanding on the Record Date.

 

   

The adoption of the Certificate Amendment Proposals will require the affirmative vote of the holders of a majority of the outstanding shares of Veraz common stock on the Record Date.

 

   

The adoption of the Adjournment Proposal will require the affirmative vote of a majority of the votes cast at the special meeting by the holders of shares of Veraz common stock outstanding on the record date.

An abstention or failure to vote by a Veraz stockholder will not be counted towards the vote total with respect to the Arrangement Proposal. An abstention or failure to vote will have the effect of voting against the Certificate Amendment Proposals. If your shares are held in “street name” and you don’t give your broker voting instructions, your broker may not vote your shares with respect to the Proposals presented in this proxy statement.

Appraisal Rights

Veraz stockholders do not have appraisal rights in connection with the Arrangement under the Delaware General Corporation Law (“DGCL”).

Proxies and Proxy Solicitation Costs

We are soliciting proxies on behalf of the Board. This solicitation is being made by mail but also may be made by telephone, on the Internet or in person. We and our directors, officers and employees may also solicit proxies in person, by telephone or by other electronic means. Any information provided by electronic means will be consistent with the written proxy statement and proxy card.

We will ask banks, brokers and other institutions, nominees and fiduciaries to forward proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. We will reimburse them for their reasonable expenses.

If you grant a proxy, you may still vote your shares in person if you revoke your proxy before the special meeting.

Interests of Veraz Directors and Executive Officers in the Arrangement

When you consider the recommendation of the Board in favor of adoption of the Arrangement Proposal, you should keep in mind that Veraz’s directors and executive officers may have interests in the Arrangement that are different from, or in addition to, your interests as a stockholder. In general, these interests could reasonably be expected to give Veraz’s directors and executive officers a greater incentive to support consummation of the Arrangement than Veraz’s other stockholders. See “Proposal No. 1—Interests of Veraz Directors and Executive Officers in the Arrangement.”

 

 

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Certain Other Interests in the Arrangement

In addition to the interests of our directors and executive officers in the Arrangement, you should keep in mind that certain individuals promoting the Arrangement and/or soliciting proxies on behalf of Veraz have interests in the Arrangement that are different from, or in addition to, your interests as a stockholder.

 

   

Under the terms of our engagement letter with Pagemill, we paid a $150,000 non-refundable fee to Pagemill for rendering the initial fairness opinion. In addition, we agreed to pay an additional $875,000 fee upon consummation of the Arrangement to Pagemill in exchange for certain advisory services Pagemill is providing to us in connection with the Arrangement. We also agreed to indemnify Pagemill against certain liabilities relating to or arising out of services performed by Pagemill in rendering its opinion.

Risk Factors

In evaluating the Proposals, and the Arrangement, you should carefully read this proxy statement and especially consider the factors discussed in the section entitled “Risk Factors.”

Nasdaq Listing

Veraz’s outstanding common stock is currently listed on The Nasdaq Global Market, which requires, among other things, that issuers maintain a closing bid price of at least $1.00 per share. We received a letter, dated July 1, 2010, from the Listing Qualifications Department of The Nasdaq Stock Market notifying us that, for 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Global Market pursuant to Nasdaq Listing Rules. If we fail to regain compliance in accordance with the Nasdaq Listing Rules, our common stock could be subject to delisting.

In addition, the Arrangement may constitute a “change of control” under applicable marketplace rules established by The Nasdaq Stock Market, and, as a result, the combined company may need to comply with the initial listing standards of the applicable Nasdaq market to continue to be listed on such market following the consummation of the Arrangement. The Nasdaq Global Market’s initial listing standards require a company to have, among other things, a $4.00 per share minimum bid price. Because the current price of Veraz common stock is less than the minimum bid price required by Nasdaq, the reverse stock split may be necessary to comply with the continued and initial listing standards.

Anticipated Accounting Treatment

The Arrangement will be accounted as a reverse acquisition, pursuant to the acquisition method of accounting, in accordance with GAAP.

The determination of Dialogic as the accounting acquirer was made based on consideration of all quantitative and qualitative factors of the Arrangement, including significant consideration given to the following upon consummation of the transaction that (i), based on the number of Dialogic shares currently outstanding, former Dialogic shareholders will control approximately 70% of the voting interests in Veraz, (ii) pursuant to the Acquisition Agreement, the initial directors on the combined company’s nine member board of directors will consist of three nominated by Veraz and six nominated by Dialogic, (iii) certain of Dialogic’s management will continue in some of the officer and senior management positions of the combined company and, accordingly, will have day-to-day authority to carry out the business plan after the transaction and (iv) Dialogic’s employees will continue on with no expected disruption as employees of the combined company.

 

 

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In a reverse acquisition, for legal purposes, Dialogic is the acquiree, but for accounting purposes, Dialogic is the acquirer of Veraz. Consolidated financial statements prepared following the closing of the reverse acquisition will be issued in the name of Dialogic, the proposed combined company name, but will be described in the notes as a continuation of the financial statements of Dialogic, with one adjustment: the legal capital will be retroactively adjusted to reflect the legal capital of Veraz. As the consolidated financial statements represent the continuation of the financial statements of Dialogic, except for the capital structure, consolidated financial statements after the closing of the reverse acquisition will reflect:

 

   

The assets and liabilities of Dialogic recognized and measured at their pre-combination carrying amounts;

 

   

The assets and liabilities of Veraz recognized and measured at fair value at the closing date in accordance with ASC 805;

 

   

The retained earnings and other equity balances of Dialogic before the business combination and;

 

   

Reported results of operations after completion of the transaction will reflect those of Dialogic, to which the operations of Veraz will be added from the date of the completion of the transaction. The operating results will reflect purchase accounting adjustments.

Additionally, historical financial condition and results of operations shown for comparative purposes in periodic filings subsequent to the completion of the transaction will reflect those of Dialogic. See the section entitled “Proposal No. 1—Anticipated Accounting Treatment” beginning on page 81 for additional information.

Market Price for Veraz Securities

Veraz common stock is trading on the Nasdaq Global Market under the symbol “VRAZ.” The last reported sale price for the common stock of Veraz on May 11, 2010, the last trading day before announcement of the execution of the Acquisition Agreement, was $1.00 per share.

Holders

As of the Record Date for the special meeting of stockholders of Veraz, there were              holders of record of the common stock.

Dividends

Veraz has not paid any cash dividends on its common stock to date and does not intend to pay dividends prior to the consummation of the Arrangement. It is the current intention of the Board to retain all earnings, if any, for use in the business operations, and accordingly, the Board does not anticipate declaring any dividends in the foreseeable future. The payment of any dividends subsequent to the Arrangement will be within the discretion of the then board of directors and will be contingent upon revenues and earnings, if any, capital requirements and general financial condition of Veraz.

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF VERAZ NETWORKS, INC

The following tables set forth Veraz’s selected historical consolidated financial data as of the dates and for each of the periods indicated. The tables below present selected consolidated financial data of Veraz prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The data below are only a summary and should be read in conjunction with Veraz’s consolidated financial statements and accompanying notes, as well as Veraz’s management’s discussion and analysis of financial condition and results of operations, all of which can be found in publicly available documents, including those incorporated by reference in this proxy statement. For a complete list of documents incorporated by reference in this proxy statement, see “Where You Can Find Additional Information” beginning on page 196.

The historical consolidated financial data for each of the two years ended December 31, 2009 and 2008 and as of December 31, 2009 and 2008 is derived from Veraz’s audited consolidated financial statements. The consolidated financial data for each of the three months ended March 31, 2010 and 2009 and as of March 31, 2010 is derived from Veraz’s unaudited condensed consolidated financial statements. Veraz has prepared the unaudited information on the same basis as the audited consolidated financial statements and has included, in its opinion, all adjustments, consisting only of normal recurring adjustments that it considers necessary for a fair presentation of the financial information set forth in those statements. Veraz’s historical results are not necessarily indicative of the results to be expected in the future.

 

      March  31,
2010
   December 31,
      2009    2008

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 27,258    $ 25,095    $ 35,388

Working capital(1)

   $ 38,910    $ 43,172    $ 47,144

Total assets

   $ 74,417    $ 80,711    $ 95,200

Total stockholders’ equity

   $ 41,780    $ 46,441    $ 52,124

 

      Three Months Ended
March 31,
    Twelve Months Ended
December 31,
 
     2010     2009     2009     2008  

Consolidated Statements of Operations Data:

        

Total revenues

   $ 16,070      $ 20,951      $ 75,091      $ 93,435   

Total cost of revenues

     7,147        8,809        31,223        41,973   
                                

Gross profit

     8,923        12,142        43,868        51,462   

Total operating expenses

     13,993        14,546        53,482        72,736   
                                

Loss from operations

     (5,070     (2,404     (9,614     (21,274

Other income (expenses), net

     48        (534     163        (98
                                

Loss before income taxes

     (5,022     (2,938     (9,451     (21,372

Income taxes provision (benefit)

     223        70        2,170        (412
                                

Net loss

   $ (5,245   $ (3,008   $ (11,621   $ (20,960
                                

Net loss allocable to common stockholders per share—basic and diluted

   $ (0.12   $ (0.07   $ (0.27   $ (0.50
                                

Weighted-average shares outstanding used in computing net loss allocable to common stockholders per share—basic and diluted:

     44,042        43,165        43,424        42,034   
                                

 

(1) Working capital is defined as current assets minus current liabilities.

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF

DIALOGIC CORPORATION AND SUBSIDIARIES

The following tables sets forth Dialogic’s selected historical consolidated financial data as of the dates and for each of the periods indicated, prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The data below are only a summary and should be read in conjunction with Dialogic’s financial statements and accompanying notes, as well as the management’s discussion and analysis of financial condition and results of operations of Dialogic’s, all of which can be found in this proxy statement.

The historical consolidated financial data for each of the two years ended December 31, 2009 and 2008 and as of December 31, 2009 and 2008 is derived from Dialogic’s audited consolidated financial statements, which are included in this proxy statement. The consolidated financial data for each of the three months ended March 31, 2010 and 2009 and as of March 31, 2010 is derived from Dialogic’s unaudited condensed consolidated financial statements which are included in this proxy statement. In Dialogic’s opinion, such unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of its financial position and results of operations for such periods. Dialogic’s historical results are not necessarily indicative of the results to be expected in the future.

 

      March  31,
2010
    December 31,  
     2009     2008  

Consolidated Balance Sheet Data:

      

Cash

   $ 2,661      $ 3,973      $ 3,931   

Working capital(1)

   $ (66,901   $ 19,816      $ 22,900   

Total assets

   $ 147,537      $ 154,024      $ 190,195   

Other long-term obligations

   $ 3,378      $ 3,323      $ 2,862   

Long-term debt, including current portion

   $ 90,530      $ 89,921      $ 85,000   

Redeemable equity

   $ 93,138      $ 93,138      $ 86,785   

Total stockholders’ deficiency

   $ (84,990   $ (80,077   $ (35,879

 

      Three Months  Ended
March 31,
    Twelve Months Ended
December 31,
 
    
     2010     2009     2009     2008(2)  

Consolidated Statements of Operations and Comprehensive Loss Data:

        

Total revenues

   $ 41,456      $ 42,941      $ 176,272      $ 205,444   

Total cost of revenues

     15,186        18,754        71,633        80,858   
                                

Gross profit

     26,270        24,187        104,639        124,586   

Total operating expenses

     27,398        33,855        118,816        137,672   
                                

Loss from operations

     (1,128     (9,668     (14,177     (13,086

Other expenses, net

     (3,656     (2,690     (13,492     (13,613
                                

Loss before income taxes

     (4,784     (12,358     (27,669     (26,699

Income taxes provision

     129        130        9,974        3,136   
                                

Net loss and comprehensive loss

     (4,913     (12,488     (37,643     (29,835

Change in redemption value of preferred shares

     —          —          (6,555     29,672   
                                

Net loss attributable to common shareholders

   $ (4,913   $ (12,488   $ (44,198   $ (163
                                

Net loss allocable to common stockholders per share

        

—basic

   $ (0.09   $ (0.23   $ (0.81   $ (0.00
                                

—diluted

   $ (0.09   $ (0.23   $ (0.81   $ (0.25
                                

Weighted-average shares outstanding used in computing net loss allocable to common stockholders per share

        

—basic:

     54,665        54,665        54,665        54,665   
                                

—diluted:

     54,665        54,665        54,665        119,937   
                                

 

 

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(1) Working capital is defined as current assets minus current liabilities. Includes $87,176 of long-term debt reclassified to current liabilities at March 31, 2010. See “Business of Dialogic—Debt Refinancing—Restructuring Commitment Letter.” Excluding this reclassification, adjusted working capital at March 31, 2010 was $20,275.
(2) Reflects acquisition of the assets of the Communications Platform business of NMS Communications Corporation on December 5, 2008.

Dialogic is providing the following historical consolidated financial data as of the dates and for each of the periods indicated to assist you in your analysis of the financial aspects of the acquisition. Below is separate historical information of Dialogic.

 

   

Separate unaudited historical financial statements of Dialogic as of March 31, 2010 and for the three month periods ended March 31, 2010 and March 31, 2009, included in this proxy statement beginning on page F-B-1; and

 

   

Audited historical financial statements of Dialogic as of and for the years ended December 31, 2009 and 2008, included in this proxy statement beginning on page F-A-1.

 

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The following tables sets forth selected unaudited pro forma condensed combined financial data as of the dates and for each of the periods indicated. The data below are only a summary and should be read in conjunction with Dialogic’s and Veraz’s historical financial statements and accompanying notes, as well as management’s discussion and analysis of financial condition and results of operations.

The selected unaudited pro forma condensed combined financial data for the three months ended March 31, 2010 and the year ended December 31, 2009 and as of March 31, 2010 is derived from the unaudited pro forma condensed combined financial statements and notes, which are included in this proxy statement. The pro forma results are not necessarily indicative of the results to be expected in the future.

 

     March 31,
2010

Unaudited Pro Forma Condensed Combined Balance Sheet Data:

  

Cash and cash equivalents

   $ 27,199

Working capital(1)

   $ 59,738

Total assets

   $ 223,691

Other long-term liabilities

   $ 3,378

Long-term debt, including current portion

   $ 90,530

Total stockholders’ equity

   $ 55,668

 

     Three Months
Ended
March 31,
2010
    Twelve Months
Ended
December 31,
2009
 

Unaudited Pro Forma Condensed Combined Statements of Operations Data:

    

Total revenues

   $ 57,526      $ 251,363   

Total cost of revenues

     22,237        102,397   
                

Gross profit

     35,289        148,966   

Total operating expenses

     40,527        171,127   
                

Loss from operations

     (5,238     (22,161

Other expenses, net

     (3,454     (13,911
                

Loss before income taxes

     (8,692     (36,072

Income taxes provision

     352        12,144   
                

Net loss attributable to common shareholders

   $ (9,044   $ (48,216
                

Net loss allocable to common stockholders per share—basic and diluted

   $ (0.06   $ (0.31
                

Weighted-average shares outstanding used in computing net loss allocable to common stockholders per share—basic and diluted:

     154,623        154,005   
                

 

(1) Working capital is defined as current assets minus current liabilities.

 

 

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RISK FACTORS

You should carefully consider the following risk factors, together with all of the other information included in this proxy statement, before you decide whether to vote or instruct your vote to be cast to adopt the Proposals.

Risks Related to the Arrangement

Failure to consummate the Arrangement, or any delay in consummating the Arrangement, with Dialogic could negatively impact Veraz’s stock price and Veraz’s and Dialogic’s future business and financial results; and whether or not the Arrangement is consummated, the pending Arrangement could adversely affect Veraz’s and Dialogic’s operations.

The Acquisition Agreement contains a number of important conditions that must be satisfied before Veraz and Dialogic can complete the Arrangement, including, among other things, conditions relating to (i) obtaining the interim and final orders from the Supreme Court of British Columbia, (ii) approval of the Arrangement by the Dialogic shareholders and the Veraz stockholders, (iii) approval by the Nasdaq of the listing of the Veraz shares of common stock to be issued in the Arrangement, (iv) absence of certain actions, suits, proceedings before, or objection or opposition by, any governmental or regulatory authority, (v) receipt of required regulatory approvals, and (vi) the Veraz shares of common stock issued in the Arrangement being exempt from the registration requirements of the U.S. Securities Act.

If the Arrangement is not consummated for any reason, Veraz’s ongoing business and financial results may be adversely affected, and Veraz will be subject to a number of risks, including the following:

 

   

under the terms of the Acquisition Agreement, in certain circumstances, if the Arrangement is not consummated, Veraz will be required to pay a $1,500,000 termination fee to Dialogic and reimburse Dialogic for up to $1,000,000 of Dialogic’s transaction expenses; and

 

   

the price of Veraz shares may decline to the extent that the current market price of Veraz shares reflect a market assumption that the Arrangement will be consummated and that the related benefits and synergies will be realized, or as a result of the market’s perceptions that the Arrangement was not consummated due to an adverse change in Veraz’s business or financial condition.

If the Arrangement is not consummated for any reason, Dialogic’s ongoing business and financial results may be adversely affected, and Dialogic will be subject to a number of risks, including the following:

 

   

under the terms of the Acquisition Agreement, in certain circumstances, if the Arrangement is not consummated, Dialogic will be required to pay a $3,000,000 termination fee to Veraz and reimburse Veraz for up to $1,000,000 of Veraz’s transaction expenses.

In addition, whether or not the Arrangement is consummated, the pending transaction could adversely affect Veraz’s and Dialogic’s operations because:

 

   

matters relating to the Arrangement (including integration planning) require substantial commitments of time and resources by Veraz’s and Dialogic’s management and employees, whether or not the Arrangement is consummated, which could otherwise have been devoted to other opportunities that may have been beneficial to Veraz and/or Dialogic;

 

   

Veraz’s and Dialogic’s ability to attract new employees and consultants and retain their existing employees and consultants may be harmed by uncertainties associated with the Arrangement, and Veraz and/or Dialogic may be required to incur substantial costs to recruit replacements for lost personnel or consultants; and

 

   

shareholder lawsuits could be filed against Veraz and/or Dialogic challenging the Arrangement. If this occurs, even if the lawsuits are groundless and Veraz or Dialogic, as applicable, ultimately prevails, it may incur substantial legal fees and expenses defending these lawsuits, and the Arrangement may be prevented or delayed.

 

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Veraz and Dialogic cannot guarantee when, or whether, the Arrangement will be consummated, that there will not be a delay in the consummation of the Arrangement or that all or any of the anticipated benefits of the Arrangement will be obtained. If the Arrangement is not consummated or is delayed, Veraz and Dialogic may experience the risks discussed above which may adversely affect Veraz’s and Dialogic’s business, financial results and share price.

Veraz and Dialogic may be unable to successfully integrate their operations.

Achieving the anticipated benefits of the Arrangement will depend in part upon the ability of Veraz and Dialogic to integrate their businesses in an efficient and effective manner. Attempts to integrate two companies that have previously operated independently may result in significant challenges, and Veraz and Dialogic may be unable to accomplish the integration smoothly or successfully. In particular, the necessity of coordinating geographically dispersed organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration will require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the businesses of the combined company. The process of integrating operations after the consummation of the Arrangement could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company’s businesses and the loss of key personnel. Employee uncertainty, lack of focus or turnover during the integration process may also disrupt the businesses of the combined company. Any inability of management to integrate the operations of Veraz and Dialogic successfully could have a material adverse effect on the business and financial condition of the combined company.

The issuance of Veraz common stock pursuant to the Arrangement may cause the market price of Veraz common stock to decline.

As of June 30, 2010, 44,281,191 shares of Veraz common stock were outstanding and an additional 7,849,967 shares of common stock of Veraz were subject to outstanding options and restricted stock units. Veraz currently expects that in connection with the Arrangement, it will issue 110,580,900 additional shares of common stock to the former Dialogic shareholders. The issuance of these Veraz shares of common stock and the sale of shares of Veraz common stock in the public market from time to time could depress the market price for Veraz common stock.

In addition, Dialogic shareholders have rights with respect to registration of the Veraz common stock issued in connection with the Arrangement under the Securities Act. If such holders exercise their registration rights, the Veraz common stock issued in the Arrangement will be registered under the Securities Act and will be freely transferable, subject to the limitations imposed on affiliates of Veraz by Rule 145 and to the provisions of lock-up agreements certain of the Dialogic shareholders have granted in favor of Veraz. Upon the expiration of the lock-up agreements, 180 days following the effectiveness of the Arrangement, a significant number of shares of Veraz common stock issued in the Arrangement will become eligible for resale. Any substantial sale of shares of our common stock issued in the Arrangement could have a material adverse effect on the price of our securities. In addition, Veraz intends to file a registration statement on Form S-8 to register Dialogic replacement options which will be issued by Veraz pursuant to the Acquisition Agreement.

Directors and executive officers of Veraz may have interests in the Arrangement that are different from those of Veraz stockholders generally.

Certain executive officers and directors of Veraz may have interests in the Arrangement that may be different from, or in addition to, the interests of Veraz stockholders generally. In the event of the termination of their employment following the consummation of the Arrangement, certain Veraz officers might be entitled to receive payments or other benefits, including acceleration of vesting of their equity awards. Furthermore, immediately following the effective time of the transaction, three directors who currently serve on the Board, currently expected to be Messrs. Corey, Sabella and West, will continue to serve as directors of the combined company.

 

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Veraz and Dialogic expect to incur significant costs associated with the Arrangement, whether or not the Arrangement is consummated, which are difficult to estimate and will reduce the amount of cash otherwise available for other corporate purposes.

Both Veraz and Dialogic expect to incur significant costs associated with the Arrangement, whether or not the Arrangement is consummated. These costs will reduce the amount of cash otherwise available for other corporate purposes. Veraz has already incurred and expensed $0.6 million, and estimates that it will incur further direct transaction costs of approximately $1.1 million associated with the Arrangement, which will expensed as incurred for accounting purposes if the Arrangement is consummated. Dialogic has already incurred and expensed $0.6 million, and estimates that it will incur further direct transaction costs of approximately $3.0 million, which will also be expensed as incurred for accounting purposes if the Arrangement is consummated. There is no assurance that the actual costs may not exceed these estimates, or that the estimates are accurate. In addition, the combined company may incur additional material charges reflecting additional costs associated with the Arrangement in fiscal quarters subsequent to the quarter in which the Arrangement is consummated. There is no assurance that the significant costs associated with the Arrangement will prove to be justified in light of the benefits ultimately realized.

Nasdaq may consider the anticipated Arrangement a “change of control” and therefore may require that the combined company submit a new listing application, which requires certain actions on the combined company’s part which may not be successful and, if unsuccessful, could make it more difficult for stockholders of the combined company to sell their shares.

Nasdaq may consider the Arrangement proposed in this proxy statement a change of control and may require that the combined company submit a new listing application. Nasdaq may not approve the combined company’s new listing application. If this occurs and the Arrangement is still consummated, you may have difficulty converting your investments in the combined company into cash effectively.

As part of the new listing application, the combined company will be required to submit, among other things, a plan for the combined company to conduct a reverse stock split. A reverse stock split would increase the per share trading price by a yet undetermined multiple. The change in share price may affect the volatility and liquidity of the combined company’s stock, as well as the marketplace’s perception of the stock. As a result, the relative price of the combined company’s stock may decline and/or fluctuate more than in the past, and you may have trouble converting your investments in the combined company into cash effectively.

The proposed reverse stock split may not increase our stock price as much as anticipated, which would prevent us from realizing some of the anticipated benefits of the reverse stock split.

The Board expects that a reverse stock split of Veraz common stock will increase the market price of Veraz common stock so that Veraz complies with the Nasdaq continued and, as necessary, initial listing standards, including the minimum bid price requirement. However, the effect of a reverse stock split upon the market price of Veraz common stock cannot be predicted with any certainty, and the history of similar stock splits for companies in like circumstances is varied. It is possible that the per share price of Veraz common stock after the reverse stock split will not rise in proportion to the reduction in the number of shares of Veraz common stock outstanding following the reverse stock split, and there can be no assurance that the market price per post-reverse split share will either exceed or remain in excess of the $4.00 minimum bid price for a sustained period of time. The market price of Veraz common stock may also be based on other factors which may be unrelated to the number of shares outstanding, including the future performance of the combined company. In addition, there can be no assurance that we meet other initial listing requirements, including the minimum stockholders’ equity requirement, even if the market price per post-reverse stock split share of Veraz common stock remains in excess of $4.00 per share. Notwithstanding the foregoing, the Board would only implement the proposed reverse stock split if it believed it would result in the market price of our common stock rising to the level necessary to satisfy the $4.00 minimum bid price requirement for the foreseeable future.

 

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The proposed reverse stock split may decrease the liquidity of our stock.

The liquidity of our capital stock may be harmed by the proposed reverse split given the reduced number of shares that would be outstanding after the reverse stock split, particularly if the stock price does not increase as much as anticipated as a result of the reverse stock split.

Dialogic has never operated as a U.S. public company. Fulfilling Dialogic’s obligations as a U.S. public company after the Arrangement will be expensive and time consuming for the combined company’s management.

As a public company, the combined company will incur significant legal, accounting and other expenses that Dialogic did not incur as a private company. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) as well as rules implemented by the SEC and the Nasdaq Global Market, impose various requirements on public companies, including those related to corporate governance practices. Dialogic is a Canadian private company and has not been required to comply with such rules and obligations, including the requirement of Section 404 of the Sarbanes-Oxley Act to document and assess the effectiveness of its internal control procedures. The combined company’s management and other personnel will need to devote a substantial amount of time to these requirements. Members of Dialogic’s management, who will continue as the management of the combined company, do not have recent experience in addressing these requirements. Moreover, these rules and regulations will increase the combined company’s legal and financial compliance costs relative to those of Dialogic and will make some activities more time-consuming and costly.

Although Veraz has maintained disclosure controls and procedures and internal control over financial reporting as required under the federal securities laws with respect to its activities, establishing and maintaining such disclosure controls and procedures and internal controls over financial reporting as will be required with respect to the combined company, which will have significant operations in different geographic regions will be substantially more difficult. Compliance with these obligations will require significant time and resources from management, including finance and accounting staff and legal staff and will significantly increase Dialogic’s legal, insurance and financial compliance costs. As a result of the increased costs associated with being a U.S. public company after the Arrangement, Dialogic’s operating income, as measured in absolute terms or as a percentage of revenue, may be lower.

In addition, if we are unable to complete the required modifications to our internal control over financial reporting to maintain compliance with Section 404 of the Sarbanes-Oxley Act, or if the combined company or its independent registered public accounting firm identifies deficiencies in its internal controls over financial reporting that are deemed to be material weaknesses, investors could lose confidence in the reliability of our internal control over financial reporting, which could have a material adverse effect on our stock price. The combined company could also be subject to sanctions or investigations by the Nasdaq Global Market, the SEC or other regulatory authorities.

Material weaknesses may exist when the combined company reports on the effectiveness of its internal control over financial reporting for purposes of its reporting requirements.

Because Dialogic has not been subject to the Sarbanes-Oxley Act, Dialogic’s management and independent registered public accounting firm have not performed an evaluation of Dialogic’s internal control over financial reporting as of December 31, 2009 in accordance with the provisions of the Sarbanes-Oxley Act. Material weaknesses may exist when the combined company reports on the effectiveness of its internal control over financial reporting for purposes of its reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or Section 404 of the Sarbanes-Oxley Act after consummation of the Arrangement. The existence of one or more material weaknesses would preclude a conclusion that the combined company maintains effective internal control over financial reporting. Such a conclusion would be required to be disclosed in the combined company’s future Annual Reports on Form 10-K and could impact the accuracy and

 

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timing of its financial reporting and the reliability of its internal control over financial reporting, which could harm the combined company’s reputation and cause the market price of its common stock to drop.

The combined company will be managed by a management team consisting of current Veraz and Dialogic executives, and this management team may undertake a strategy and business direction which is different from that which would be undertaken by Veraz’s current management team.

Following the consummation of the Arrangement, the new management team of the combined company will consist of certain current Veraz and certain current Dialogic executives. The manner in which the new management team conducts the business of the combined company, and the direction in which the new management team moves the business, may differ from the manner and direction in which the current management of either Veraz or Dialogic would direct the combined or separate companies on a stand-alone basis. Such control by the new management team, together with the effects of future market factors and conditions, could ultimately evolve into an integration and business strategy that, when implemented, differs from the strategy and business direction currently recommended by Veraz’s or Dialogic’s current management and boards of directors. The new management team, and any change in business or direction, may not improve, and could adversely impact, the combined company’s financial condition and results of operations.

The consummation of the Arrangement could result in disruptions in business, loss of customers or contracts or other adverse effects.

The consummation of the Arrangement may cause disruptions, including potential loss of customers and other business partners, in our business and the business of Dialogic, which could have material adverse effects on the combined company’s business and operations. Although we believe that the business relationships of Veraz and Dialogic are and will remain stable following the Arrangement, Veraz’s and Dialogic’s customers, and other business partners, in response to the completion of the Arrangement, may adversely change or terminate their relationships with the combined company, which could have a material adverse effect on the combined company following the Arrangement.

The pro forma condensed combined financial statements are not an indication of the combined company’s financial condition or results of operations following the Arrangement.

The pro forma condensed combined financial statements contained in this proxy statement are not an indication of the combined company’s financial condition or results of operations following the Arrangement. The pro forma condensed combined financial statements have been derived from the historical financial statements of Veraz and Dialogic and many adjustments and assumptions have been made regarding the combined company after giving effect to the Arrangement. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with complete accuracy. As a result, the actual financial condition and results of operations of the combined company following the Arrangement may not be consistent with, or evident from, these pro forma financial statements. In addition, the actual earnings or (loss) per share, which is referred to as EPS, of the combined company following the Arrangement may decrease below that reflected in the pro forma condensed combined financial information for several reasons. The assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect the combined company’s actual EPS following the Arrangement. See the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.”

Consummation of the Arrangement may result in dilution of future earnings per share to the stockholders of Veraz.

The consummation of the Arrangement may result in greater net losses or a weaker financial condition compared to that which would have been achieved by either Veraz or Dialogic on a stand-alone basis. The

 

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Arrangement could fail to produce the benefits that the companies anticipate, or could have other adverse effects that the companies currently do not foresee. In addition, some of the assumptions that either company has made, such as the achievement of operating synergies, may not be realized. In this event, the Arrangement could result in greater losses as compared to the losses that would have been incurred by Veraz if the Arrangement had not occurred.

The ownership percentage of current stockholders of Veraz will be substantially reduced, resulting in a dilution of existing stockholders’ voting power.

Upon consummation of the Arrangement, 110,580,900 shares of Veraz common stock will be issued by Veraz. The issuance of 110,580,900 shares of Veraz common stock, based on the number of Veraz common stock outstanding as of the date of this proxy statement, will dilute Veraz’s existing stockholders’ voting percentage from 100% to approximately 30% of the combined company’s voting securities. In addition, following the Arrangement, Veraz’s outstanding stock will be subject to substantial potential dilution by outstanding options. Current Veraz stockholders will lose the ability to control the outcome of stockholder votes and certain current directors of Veraz will be replaced.

Ownership of the combined company’s common stock may be highly concentrated, and it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the combined company’s stock price to decline.

The combined company’s executive officers, directors and their affiliates will beneficially own or control approximately 48.5% of the outstanding common stock of the combined company (see “Security Ownership of Certain Beneficial Owners and Management Following the Merger” beginning on page 186 for more information on the estimated ownership of the combined company following the merger). Accordingly, these executive officers, directors and their affiliates, acting individually or as a group, will have substantial influence over the outcome of any corporate action of the combined company requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. These stockholders may also delay or prevent a change in control of the combined company, even if such change in control would benefit the other stockholders of the combined company. The significant concentration of stock ownership may adversely affect the value of the combined company’s common stock due to investors’ perception that conflicts of interest may exist or arise.

Risks Relating to Dialogic’s Business

Dialogic has no internal hardware manufacturing capabilities and depends exclusively upon contract manufacturers to manufacture its hardware products. Dialogic’s failure to successfully manage its relationships with its contract manufacturers would impair its ability to deliver its products in a manner consistent with required volumes or delivery schedules, which would likely cause Dialogic to fail to meet the demands of its customers and damage its customer relationships.

Dialogic outsources the manufacturing of all of our hardware products to a number of subcontractors including Jabil Circuit, Inc., SigmaPoint Technologies, Inc., Plexus Corp. and SMTC Manufacturing Corp. These contract manufacturers provide comprehensive manufacturing services, including the assembly of Dialogic’s products and the procurement of its materials and components. Each of Dialogic’s contract manufacturers also builds products for other companies and may not always have sufficient quantities of inventory available or may not allocate their internal resources to fill Dialogic’s orders on a timely basis.

Dialogic has supply contracts in place with each of these subcontractors and has done its best to negotiate terms which protect the Dialogic business. However, all of these contracts can be terminated by subcontractors following a reasonable notice period pursuant to the terms of each individual contract.

 

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Dialogic does not have internal manufacturing capabilities to meet its customers’ demands and cannot assure you that it will be able to develop or contract for additional manufacturing capacity on acceptable terms on a timely basis if it is needed. An inability to manufacture Dialogic products at a cost comparable to Dialogic historical costs could impact Dialogic’s gross margins or force it to raise prices, affecting customer relationships and its competitive position.

Qualifying a new contract manufacturer and commencing commercial scale production is expensive and time consuming and could result in a significant interruption in the supply of Dialogic products. If Dialogic’s contract manufacturers are not able to maintain Dialogic’s high standards of quality, increase capacity as needed, or are forced to shut down a factory, Dialogic’s ability to deliver quality products to its customers on a timely basis may decline, which would damage its relationships with customers, decrease its revenues and negatively impact its growth.

Dialogic’s ability, as well as its contract manufacturers’ ability, to meet customer demand depends largely on Dialogic’s ability to obtain raw materials and a reduction or disruption in the availability of raw materials could negatively impact Dialogic’s business.

The continued global economic contraction has caused many of Dialogic’s component suppliers to reduce their manufacturing capacity. As the global economy improves, Dialogic’s component suppliers are experiencing and will continue to experience supply constraints until they expand capacity to meet increased levels of demand. These supply constraints may adversely affect the availability and lead times of components for Dialogic’s products. Increased lead times mean Dialogic may have to forsake flexibility in aligning its supply to customer demand changes and increase its exposure to excess inventory since Dialogic may have to order material earlier and in larger quantities. Further, supply constraints will likely result in increased overall procurement costs as Dialogic attempts to meet customer demand requirements. In addition, these supply constraints may affect Dialogic’s ability, as well as its contract manufacturers’ ability, to meet customer demand and thus result in missed sales opportunities and a loss of market share, negatively impacting revenues and Dialogic’s overall operating results.

Dialogic’s failure to develop and introduce new products on a timely basis could harm its ability to attract and retain customers.

Dialogic’s industry is characterized by rapidly changing technology, frequent product introductions and ongoing demands for greater speed and functionality. Therefore, Dialogic must continually design, develop and introduce new products with improved features to be competitive. To introduce these products on a timely basis Dialogic must:

 

   

design innovative and performance-improving features that differentiate Dialogic’s products from those of its competitors;

 

   

identify emerging technological trends in Dialogic’s target markets, including new standards for its products;

 

   

accurately define and design new products to meet market needs;

 

   

anticipate changes in end-user preferences with respect to its customers’ products;

 

   

rapidly develop and produce these products at competitive prices;

 

   

respond effectively to technological changes or product announcements by others; and

 

   

provide effective technical and post-sales support for these new products as they are deployed.

If Dialogic is not able to introduce such products on a timely basis, it may not be able to attract and retain customers, which could decrease its revenues and negatively impact its growth.

 

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Not all new product designs ramp into production, and even if ramped into production, the timing of such production may not occur as Dialogic or its customers had estimated, or the volumes derived from such projects may not be as significant as Dialogic had estimated, each of which could have a substantial negative impact on Dialogic’s anticipated revenues and profitability.

Dialogic’s revenue growth expectations for its next-generation products are highly dependent upon successful ramping of its design wins. In some cases there is little time between when a design win is achieved and when production level shipments begin. With many new design wins, customers may require Dialogic to provide enhanced features not on its immediate roadmap. In addition, customers may require significant time to port their own applications to Dialogic’s products. Adding features to Dialogic’s products to meet customer requests as well as porting of customer specific applications can take six to 12 months. After that, there is an additional time lag from the start of production ramp to peak revenue. Not all product designs ramp into production and, even if a product ramps into production, the volumes derived from such products and associated projects may be less than Dialogic had originally estimated. Customer projects related to design wins are sometimes canceled or delayed, or can perform below original expectations, which can adversely impact anticipated revenues and profitability. In particular, the volumes and time to production ramp associated with new design wins depend on the adoption rate of new technologies in its customers’ end markets, especially in the communications networking sector. Program delays or cancellations could be more frequent during times of meaningful economic downturn.

Dialogic’s business depends on conditions in the communications networks and commercial systems markets. Demand in these markets can be cyclical and volatile, and any inability to sell products to these markets or forecast customer demand due to unfavorable or volatile market conditions could have a material adverse effect on Dialogic’s revenues and gross margin.

Dialogic derives its revenues from a number of diverse end markets, some of which are subject to significant cyclical changes in demand. In 2009, Dialogic derived 57% and 43% of its revenues from the enterprise and service provider markets, respectively. Dialogic believes that its revenues will continue to be derived primarily from these two markets. In many instances, Dialogic’s products are building blocks for its customers’ products and as such, Dialogic’s customers are not the end-users of Dialogic’s products. If Dialogic’s customers experience adverse economic conditions in the end markets into which they sell Dialogic’s products, Dialogic would expect a significant reduction in spending by Dialogic’s customers. Some of these end markets are characterized by intense competition, rapid technological change and economic uncertainty. Dialogic’s exposure to economic cyclicality and any related fluctuation in customer demand in these end markets could have a material adverse effect on its revenues and financial condition.

Dialogic has a material amount of intangible assets which, if they become impaired, would result in a reduction in Dialogic’s net income.

Current accounting standards require that intangible assets be periodically evaluated for impairment. Dialogic has a material amount of intangible assets that have originated from its acquisitions of Intel’s media and signaling business in 2006, EAS in 2007, and the NMS CP business in 2008. Any future impairment of Dialogic’s intangible assets would have a negative impact on Dialogic’s net income.

Dialogic operates in intensely competitive industries, and its failure to respond quickly to technological developments and incorporate new features into its products could have an adverse effect on its ability to compete.

Dialogic operates in intensely competitive industries that experience rapid technological developments, changes in industry standards, changes in customer requirements, and frequent new product introductions and improvements. If Dialogic is unable to respond quickly and successfully to these developments, Dialogic may lose its competitive position, and its products or technologies may become uncompetitive or obsolete. Similarly, if there are changes to technology requirements, it can render Dialogic’s products and technologies

 

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uncompetitive. To compete successfully, Dialogic must maintain a successful research and development effort, develop new products and production processes, and improve its existing products and processes at the same pace or ahead of its competitors. Dialogic may not be able to successfully develop and market these new products; the products Dialogic invests in and develops may not be well received by customers; and products developed and new technologies offered by others may affect the demand for Dialogic’s products. These types of events could have a variety of negative effects on Dialogic’s competitive position and its profitability and financial condition, such as reducing Dialogic’s revenue, increasing its costs, lowering its gross margin, and requiring Dialogic to recognize and record impairments of its assets.

Acquisitions and partnerships may be more costly or less profitable than anticipated and may adversely affect the growth of Dialogic’s business.

Dialogic’s growth is dependent upon market growth and its ability to enhance its existing products and introduce new products on a timely basis. Dialogic has addressed and is likely to continue to address the need to introduce new products through both internal development and through acquisitions of other companies and technologies that would complement Dialogic’s business or enhance its technological capability. Future acquisitions and partnerships may involve the use of significant amounts of cash, issuances of debt and amortization of intangible assets with determinable lives, each of which could negatively impact the growth of Dialogic’s business. In addition, acquisitions or strategic investments involve numerous risks, including:

 

   

adverse effects on existing customer relationships, such as cancellation of orders or the loss of key customers;

 

   

potential incompatibility of business cultures;

 

   

difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company;

 

   

the diversion of management’s attention from other business concerns;

 

   

the risks of entering markets in which Dialogic has no or limited prior experience;

 

   

the potential loss of key employees of the acquired business;

 

   

unanticipated liabilities;

 

   

performance by the acquired business below Dialogic’s expectations;

 

   

issues with meeting the needs of acquired customers;

 

   

potential difficulty in successfully implementing, upgrading and deploying in a timely and effective manner new operational information systems and upgrades of Dialogic’s finance, accounting and product distribution systems;

 

   

difficulty in incorporating acquired technology and rights into Dialogic’s products and technology; and

 

   

management of geographically remote business units both in the United States and internationally.

If Dialogic makes an acquisition or enters into a partnership and Dialogic is unable to successfully integrate operations, technologies, products or personnel that Dialogic acquires, its business, results of operations and financial condition could be materially adversely affected. Dialogic may expend additional resources without receiving a related benefit from strategic alliances with third parties.

Dialogic has incurred, and may in the future incur, restructuring and other charges, the amounts of which are difficult to predict accurately.

From time to time, Dialogic has sought to optimize its operational capabilities and efficiencies and focus its efforts and expertise through business restructurings. The last restructuring occurred in early 2009, following the completion of the acquisition of the NMS CP business. In the future Dialogic may decide to engage in discrete

 

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restructurings of its operations if business or economic conditions warrant. Possible adverse consequences related to such actions may include various charges for such items as idle capacity, disposition costs, severance costs, loss of propriety information and in-house knowledge. Dialogic may be unsuccessful in any of its current or future efforts to restructure its business, which may have a material adverse effect upon Dialogic’s business, financial condition or results of operations.

Dialogic’s international operations expose it to additional political, economic and regulatory risks not faced by businesses that operate only in the United States.

Dialogic is a multinational company with a Canadian parent company and subsidiaries, branch offices and representative offices located in many countries around the world. Dialogic’s manufacturing operations are located in Canada, the United States and Ireland and Dialogic utilizes various subcontractors in Canada, the United States and Malaysia. Dialogic has development locations in Canada, the United States, Ireland and Germany and it has sales offices in many other countries, including China, India, Singapore, Malaysia, Australia, Hong Kong, Japan, the United Kingdom, France, Spain, the Netherlands, Belgium, Slovenia and Sweden. More than half of Dialogic’s sales are generated in markets outside of the United States and Dialogic sees its largest market growth occurring in foreign countries such as India, Brazil and China. As a result of all these international activities Dialogic is subject to worldwide economic and market condition risks generally associated with global trade, such as fluctuating exchange rates, tariff and trade policies, domestic and foreign tax policies, foreign governmental regulations, political unrest, wars and other acts of terrorism and changes in other economic conditions. Additionally, some of Dialogic’s sales to overseas customers are made under export licenses that must be obtained from the U.S. Department of Commerce. Protectionist trade legislation in either the United States or other countries, such as a change in the current tariff structures, export compliance laws, trade restrictions resulting from war or terrorism, or other trade policies could adversely affect Dialogic’s ability to sell or to manufacture in international markets. Additionally, U.S. federal and state agency restrictions imposed by the Buy American Act or the Trade Agreement Act may apply to Dialogic’s products manufactured outside the United States. These risks, among others, could adversely affect Dialogic’s results of operations or financial position.

Dialogic’s operations are subject to inherent risks, including the ability of its customers to access sufficient credit.

As a result of the recent financial crisis and tightening of the credit markets, Dialogic’s customers and suppliers may face issues gaining timely access to sufficient credit, which could impair Dialogic’s customers’ ability to make timely payments to Dialogic and could cause key suppliers to delay shipments and face serious risks of insolvency. These risks, among others, could adversely affect Dialogic’s results of operations or financial position.

If Dialogic is unable to protect its intellectual property, Dialogic may lose a valuable competitive advantage or be forced to endure costly litigation.

Dialogic is a technology dependent company, and its success depends on developing and protecting its intellectual property. Dialogic relies on patents, copyrights, trademarks and trade secret laws to protect its intellectual property. At the same time, Dialogic’s products are complex and are often not patentable in their entirety. Dialogic also licenses intellectual property from third parties and relies on those parties to maintain and protect their technology. Dialogic cannot be certain that its actions will protect its proprietary rights. Any patents owned by Dialogic may be invalidated, circumvented or challenged. Any of Dialogic’s patent applications, whether or not being currently challenged, may not be issued with the scope of the claims Dialogic seeks, if at all. If Dialogic is unable to adequately protect its technology, or if Dialogic is unable to continue to obtain or maintain licenses for protected technology from third parties, it could have a material adverse effect on its results of operations and significant impairment of intangible assets. In addition, some of Dialogic’s products are now designed, manufactured and sold outside of the United States and Canada. Despite the precautions Dialogic takes

 

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to protect its intellectual property, this international exposure may reduce or limit protection of its intellectual property, which is more prone to design piracy outside of the United States and Canada.

Third parties may also assert infringement claims against Dialogic in the future. Assertions by third parties may result in costly litigation and Dialogic may not prevail in such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Litigation, regardless of its outcome, could result in substantial costs and diversion of Dialogic’s resources. Any infringement claim or other litigation against Dialogic or by Dialogic could materially adversely affect its financial condition and results of operations.

If Dialogic is not able to obtain necessary licenses of third-party technology at acceptable prices, or at all, Dialogic products could become obsolete.

Dialogic has incorporated third-party licensed technology into its current products. From time to time, Dialogic may be required to license additional technology from third parties to develop new products or product enhancements. Third party licenses may not be available or not be available to Dialogic on commercially reasonable terms. The inability to maintain or re-license any third party licenses required in Dialogic’s current products, or to obtain any new third-party licenses to develop new products and product enhancements, could require Dialogic to obtain substitute technology of lower quality or performance standards or at greater cost, and delay or prevent Dialogic from making these products or enhancements, any of which could seriously harm the competitiveness of its products.

Decreased effectiveness of share-based payment awards could adversely affect Dialogic’s ability to attract and retain employees.

Dialogic has historically used stock options and other forms of share-based payment awards as key components of its employee compensation program to retain employees and provide competitive compensation and benefit packages. As a result, Dialogic has and may continue to incur increased compensation costs associated with its stock-based compensation programs making it more expensive for Dialogic to incentivize employees with grants of share-based payment awards in the future.

Additional expenses following the consummation of the Arrangement from Dialogic’s stock-based compensation plans will adversely affect its profitability.

Following the consummation of the Arrangement, Dialogic will recognize additional annual employee compensation expenses stemming from options and shares granted to employees, directors and executives under its stock-based compensation plans. These additional expenses will adversely affect Dialogic’s profitability. In the two years ended December 31, 2009 and 2008, Dialogic recognized no stock compensation expense due to a requirement that all options granted after September 28, 2006 become exercisable only upon a liquidity event, which for accounting purposes is not recorded until the liquidity event occurs or shortly before. Dialogic cannot determine the actual amount of these new stock-related compensation expenses at this time because applicable accounting practices generally require that they be based on the fair value of the options at the date of the grant; however, Dialogic expects them to be material.

Dialogic relies on its key management and depends on the recruitment and retention of qualified personnel, and Dialogic’s failure to attract and retain such personnel could seriously harm its business.

A small number of key executives manage Dialogic’s business, the departure of any one of which could have a material adverse effect on Dialogic’s operations. In addition, due to the specialized nature of Dialogic’s business, its future performance is highly dependent upon its ability to attract and retain qualified personnel for its operations. Competition for personnel is intense, and Dialogic may not be successful in attracting and retaining qualified personnel. Dialogic’s failure to compete for these personnel could seriously harm its business, results of operations and financial condition. In addition, if incentive programs Dialogic offers are not considered

 

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desirable by current and prospective employees, Dialogic could have difficulty retaining and recruiting qualified personnel. If Dialogic is unable to recruit and retain key employees, certain aspects of its operations could be harmed, including but not limited to, those related to product development, marketing and sales.

Dialogic’s disclosure controls and internal control over financial reporting do not guarantee the absence of error or fraud.

Disclosure controls are procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that the information is accumulated and communicated to Dialogic’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Internal controls over financial reporting (“internal controls”) are procedures which are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of Dialogic’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of Dialogic’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Dialogic’s assets that could have a material effect on its financial statements.

Dialogic’s management, including its CEO and CFO, do not expect that Dialogic’s disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and Dialogic cannot assure that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

There are a number of trends and factors affecting Dialogic’s markets, including economic conditions in specific countries, regions and globally, which are beyond its control. These trends and factors may result in increasing upward pressure on the costs of products and an overall reduction in demand.

There are trends and factors affecting Dialogic’s markets and its sources of supply that are beyond its control and may negatively affect its cost of sales. Such trends and factors include: adverse changes in the cost of raw commodities and increasing freight, energy, and labor costs in developing regions. Dialogic’s business strategy has been to provide customers with faster time-to-market and greater value solutions to help them compete in an industry that generally faces downward pricing pressure. In addition, Dialogic’s competitors have in the past lowered, and may again in the future lower, prices to increase their market share, which would ultimately reduce the price Dialogic may realize from its customers. If Dialogic is unable to realize prices that allow Dialogic to continue to compete on this basis of performance, its profit margin, market share, and overall financial condition and operating results may be materially and adversely affected.

 

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Dialogic is dependent on revenue from the Time Division Multiplexing (“TDM”) products.

Currently, Dialogic derives a significant portion of its product revenue from TDM media processing boards. These products connect to and interact with an enterprise or service provider based circuit switched network and support some or all of a suite of media processing features, including echo cancellation, dual tone multi frequency detection, voice play and record, conferencing, fax, modem, speech integration, and monitoring. This business has been declining as networks increasingly deploy packet-based technology. This technology migration resulted in a decrease in sales of Dialogic’s TDM products over the last several years. If Dialogic is unable to develop substantial revenue from its newer packet-based product lines, its business and results of operations will suffer. Although Dialogic has developed a migration path to broadband based IP products, the TDM products remain a sizable portion of its revenue. If Dialogic’s migration path to broadband based IP products is unsuccessful, Dialogic may not be able to mitigate the revenue loss due to the decease in sales of its TDM products.

The deployment of advanced wireless networks may not proceed according to analyst projections and even if it does, the adoption of mobile video added services may not occur.

The successful deployment of advanced third generation (“3G”) and fourth generation (“4G”) wireless networks would significantly impact the deployment of video gateway infrastructure. Since Dialogic’s ability to increase revenue is partially dependent on video gateways and video media servers that attach to the advanced 3G and 4G wireless networks, delay in the deployment of 3G and 4G wireless networks would impact Dialogic’s ability to increase revenue. Additionally, even if the advanced wireless networks are deployed successfully, the use of mobile video value added services (including video ring tones, video with interactive voice response, video location based services and video chat) may not be widely adopted. If the deployment of advanced wireless networks does not proceed according to analyst projections or if mobile video added services are not widely adopted, the growth of Dialogic’s business could be negatively effected.

The success of Dialogic’s Voice over Internet Protocol (“VoIP”) gateways is dependent upon the successful deployment of technology by other companies and any delay in the deployment of such technology would negatively impact the growth of Dialogic’s enterprise gateway business.

Dialogic’s VoIP gateways are used to connect software-based internet protocol private branch exchanges such as Microsoft Office Communications Server and IBM Sametime, which are currently in the process of being deployed, to existing legacy systems. Any delay in the deployment of the IP PBXs would impact the sales of Dialogic’s VoIP gateways which would negatively impact its revenue.

The conversion to certain new technology may result in some customers utilizing other products or developing their own technology.

Dialogic is in the process of converting certain of its media enabling components from a board based product to its Dialogic® Host Media Processing (“HMP”) software product that can be deployed on the host central processing unit of the server. The cost of entry for an HMP based software product is significantly lower than that of a board based product. As a result, there is a risk that Dialogic’s board based customers may utilize alternative producers of media enabling components or develop their own software product. The loss of customers during this conversion would negatively impact Dialogic’s revenue.

As Dialogic’s product lines age, Dialogic may be required to redesign its products or make substantial purchases of end of life components.

Dialogic sells multiple product lines that have been in production for several years. In some instances the production of components that are used in the manufacturing of Dialogic’s products has been terminated or will be terminated. Such termination of production requires that Dialogic must either incur the additional costs of purchasing a significant amount of such components prior to their termination or Dialogic must invest in significant engineering efforts to redesign the product, either of which would adversely affect its operating results.

 

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Dialogic’s leverage limits its flexibility and increases its risk of default.

As of December 31, 2009, Dialogic had $89.9 million in total long-term debt outstanding. Dialogic’s degree of leverage could have important consequences to its investors, such as:

 

   

limiting Dialogic’s ability to obtain additional financing Dialogic may need to fund future working capital, capital expenditures, product development, acquisitions or other corporate requirements; and

 

   

requiring the dedication of a substantial portion of Dialogic’s cash flow from operations to the payment of principal and interest on Dialogic’s debt, which would reduce the availability of cash flow to fund working capital, capital expenditures, product development, acquisitions and other corporate requirements.

In addition, the instruments governing Dialogic’s debt contain financial and other restrictive covenants, which limit its operating flexibility and could prevent Dialogic from taking advantage of business opportunities. Dialogic’s failure to comply with these covenants may result in an event of default. If such event of default is not cured or waived, Dialogic may suffer adverse effects on its operations, business or financial condition, including acceleration of its debt.

Dialogic anticipates that average selling prices for many of its products will decline in the future, which could adversely affect its ability to be profitable.

Dialogic expects that the price it can charge its customers for many of its products will decline as new technologies become available, as Dialogic transitions to software based IP and as low cost regional providers take measures to achieve or maintain market share. If this occurs, Dialogic’s operating results will be adversely affected.

To respond to increasing competition and Dialogic’s anticipation that average-selling prices will decrease, Dialogic are attempting to reduce manufacturing costs of its new and existing products. If Dialogic does not reduce manufacturing costs and average selling prices decrease, its operating results will be adversely affected.

Two of Dialogic’s key US patents expire in March, 2011, which could lead to competitors entering the market.

The Dialogic® Brooktrout® TDM boards, the Dialogic® Diva® TDM boards and the Dialogic® Brooktrout® SR140 software products make use of Dialogic patented technology to route a fax to a local area network using a direct inward dial number. The two patents covering this technology are scheduled to expire in March, 2011. The expiration of a patent typically results in increased competition and a decline in revenue. If other companies start to manufacture and sell a similar product based on this technology in the United States it could adversely impact Dialogic’s revenues.

Competition in the market for communication enabling technology is intense, and if Dialogic loses its market share, its revenues and profitability could decline.

Dialogic competes with a number of companies and divisions of companies that focus on providing one or more aspects of communication enabling technology, including, but not limited to, AudioCodes Limited, Radisys Corporation, Movius Interactive Corporation, Cisco Systems, Inc., Network Equipment Technologies, Inc., Genband Inc., Dilithium Networks, RipCode, Inc., Radvision Ltd. and Huawei Technologies Co., Ltd. Some of Dialogic’s competitors and potential competitors may have a number of significant advantages over us, including:

 

   

a longer operating history;

 

   

greater name recognition and marketing power;

 

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preferred vendor status with Dialogic’s existing and potential customers;

 

   

significantly greater financial, technical, marketing and other resources, which allow them to respond more quickly to new or changing opportunities, technologies and customer requirements; and

 

   

lower cost structures.

Furthermore, existing or potential competitors may establish cooperative relationships with each other or with third parties or adopt aggressive pricing policies to gain market share.

As a result of increased competition, Dialogic could encounter significant pricing pressures and/or suffer losses in market share. These pricing pressures could result in significantly lower average selling prices for its products. Dialogic may not be able to offset the effects of any price reductions with an increase in the number of customers, cost reductions or otherwise.

If Dialogic loses the services of one or more members of its current executive management team or other key employees, or if it is unable to attract additional executives or key employees, it may not be able to execute on its business strategy.

Dialogic’s future success depends in large part upon the continued service of its executive management team and other key employees. In particular, Nick Jensen, its chairman of the board of directors, president and chief executive officer, is critical to the overall management of Dialogic as well as to the development of its culture and our strategic direction. To be successful, Dialogic must also hire, retain and motivate key employees, including those in managerial, technical, marketing, and sales positions. In particular, its product generation efforts depend on hiring and retaining qualified engineers. Experienced management and technical, sales, marketing and support personnel in the telecommunications and networking industries are in high demand and competition for their talents is intense.

The loss of services of any of Dialogic’s executives, one or more other members of its executive management or sales team or other key employees, could seriously harm its business.

Dialogic relies on channel partners for a significant portion of our revenue. Its failure to effectively develop and manage these third-party distributors, systems integrators, and resellers specifically and its indirect sales channel generally, or disruptions to the processes and procedures that support its indirect sales channel could adversely affect our ability to generate revenues from the sale of Dialogic products.

Dialogic relies on third-party distributors, systems integrators, and resellers for a significant portion of its revenue. Dialogic revenues depend in large part on the performance of these indirect channel partners. Although many aspects of its partner relationships are contractual in nature, its Arrangements with indirect channel partners are not exclusive. Accordingly, important aspects of these relationships depend on the continued cooperation between the parties.

Many factors out of Dialogic’s control could interfere with its ability to market, license, implement or support our products with any of its partners, which in turn could harm its business. These factors include, but are not limited to, a change in the business strategy of one of its partners, the introduction of competitive product offerings by other companies that are sold through one of its partners, potential contract defaults by one of its partners, or changes in ownership or management of one of its distribution partners. Some of Dialogic’s competitors may have stronger relationships with its distribution partners than Dialogic does, and Dialogic has limited control, if any, as to whether those partners implement Dialogic products rather than its competitors’ products or whether they devote resources to market and support competitors’ products rather than Dialogic offerings.

Moreover, if Dialogic is unable to leverage its sales and support resources through its distribution partner relationships, it may need to hire and train additional qualified sales and engineering personnel. Dialogic cannot

 

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assure you, however, that it will be able to hire additional qualified sales and engineering personnel in these circumstances, and its failure to do so may restrict its ability to generate revenue or implement its products on a timely basis. Even if Dialogic is successful in hiring additional qualified sales and engineering personnel, it will incur additional costs and its operating results, including its gross margin, may be adversely affected. The loss of or reduction in sales by these resellers could reduce its revenues. If Dialogic fails to maintain relationships with these third-party distributors and resellers, fails to develop new relationships with third-party distributors and resellers in new markets, fails to manage, train, or provide incentives to existing third-party resellers effectively or if these third party resellers are not successful in their sales efforts, sales of Dialogic products may decrease and our operating results would suffer.

Dialogic has a history of losses, and Dialogic may be unable to achieve or sustain profitability.

Dialogic has experienced net losses in each of the last three years, and it expects to incur net losses in 2010. Dialogic’s business operations may not become profitable or Dialogic may continue to incur net losses in 2011 and beyond. Dialogic expects to incur significant future expenses as it develops and expands its business, which will make it harder for Dialogic to achieve and maintain future profitability. Dialogic may incur significant losses in the future for a number of reasons, including the other risks described in this proxy statement, and Dialogic may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, Dialogic may not be able to achieve or maintain profitability.

The largest customers in the telecommunications industry have substantial negotiating leverage, which may require that Dialogic agrees to terms and conditions that are less advantageous to Dialogic than the terms and conditions of Dialogic’s existing customer relationships, or risk limiting Dialogic’s ability to sell its products to these large service providers, thereby harming Dialogic’s operating results.

Large telecommunications service providers have substantial purchasing power and leverage negotiating contractual terms and conditions relating to their purchase of Dialogic’s products from them. As Dialogic seeks to sell more products to these large telecommunications providers, it may be required to agree to less favorable terms and conditions to complete such sales, which may result in lower margins, affect the timing of the recognition of the revenue derived from these sales, and the amount of deferred revenues, each of which may have an adverse effect on Dialogic’s business and financial condition.

In addition, Dialogic’s future success depends in part on its ability to sell its products to large service providers operating complex networks that serve large numbers of subscribers and transport high volumes of traffic. The communications industry historically has been dominated by a relatively small number of service providers. While deregulation and other market forces have led to an increasing number of service providers in recent years, large service providers continue to constitute a significant portion of the market for communications equipment. If Dialogic fails to sell additional IP products to its large customers or to expand its customer base to include additional customers that deploy its products in large-scale networks serving significant numbers of subscribers, Dialogic’s revenue growth will be limited.

Consolidation or downturns in the telecommunications industry may affect demand for Dialogic’s products and the pricing of its products, which could limit Dialogic’s growth and may harm its business.

The telecommunications industry, which includes all of Dialogic’s customers, has experienced increased consolidation in recent years, and Dialogic expect this trend to continue. Consolidation among Dialogic’s customers and prospective customers may cause delays or reductions in capital expenditure plans and/or increased competitive pricing pressures as the number of available customers declines and their relative purchasing power increases in relation to suppliers. The occurrence of any of these factors, separately or in combination, may lead to decreased sales or slower than expected growth in revenues and could harm Dialogic’s business and operations.

 

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The communications industry is cyclical and reactive to general economic conditions. In the recent past, worldwide economic downturns, pricing pressures, and deregulation have led to consolidations and reorganizations. These downturns, pricing pressures and restructurings have been causing delays and reductions in capital and operating expenditures by many service providers. These delays and reductions, in turn, have been reducing demand for communications products like Dialogic’s. A continuation or subsequent recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in the communications industry, could harm Dialogic’s operating results in the future.

Difficult conditions in the domestic and international economies generally may materially adversely affect Dialogic’s business and results of operations and Dialogic does not expect these conditions to improve in the near future.

Declining business and consumer confidence and increased unemployment have resulted in an economic slowdown and a global recession. Continuing market upheavals, including specifically the lack of credit currently available in the market, may have an adverse affect on Dialogic because it is dependent on capital budgets and confidence of Dialogic’s customers, and some of Dialogic’s customers are dependant on obtaining credit to finance purchases of Dialogic’s products. Dialogic’s revenues have declined and are likely to continue to decline in such circumstances. Factors such as business investment, and the volatility and strength of the capital markets affect the business and economic environment and, ultimately, the amount and profitability of Dialogic’s business. In an economic slowdown characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment, more volatile capital markets, fewer options to obtain credit and lower consumer spending, the demand for Dialogic’s products could be adversely affected. Adverse changes in the economy and continuing recession could affect earnings negatively and could have a material adverse effect on Dialogic’s business, results of operations, and financial condition.

Risks Relating to Veraz’s Business

Difficult conditions in the domestic and international economies generally may materially adversely affect our business and results of operations and we do not expect these conditions to improve in the near future.

Declining business and consumer confidence and increased unemployment have resulted in an economic slowdown and a global recession. Continuing market upheavals, including specifically the lack of credit currently available in the market, may have an adverse affect on us because we are dependent on capital budgets and confidence of our customers, and some of our customers are dependant on obtaining credit to finance purchases of our products. Our revenues have declined and are likely to continue to decline in such circumstances. Factors such as business investment, and the volatility and strength of the capital markets affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic slowdown characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment, more volatile capital markets, fewer options to obtain credit and lower consumer spending, the demand for our products could be adversely affected. Adverse changes in the economy and continuing recession, particularly domestically and in Russia, could affect earnings negatively and could have a material adverse effect on our business, results of operations, and financial condition.

If we fail to regain compliance with the continued listing requirements of The Nasdaq Global Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

Our common stock is currently listed on The Nasdaq Global Market. On July 1, 2010, we received a letter from the Listing Qualifications Department of The Nasdaq Stock Market notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Global Market. In accordance with Nasdaq Listing Rules, we will be afforded 180 calendar days, or until December 28, 2010, to regain compliance. To regain compliance, the bid price for our common stock must close at or above $1.00 for at least 10 consecutive business days at any time

 

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prior to December 28, 2010. If we do not regain compliance by December 28, 2010, but meet The Nasdaq Capital Market initial inclusion criteria, except for the $1.00 per share bid price requirement, we will be granted an additional 180 calendar day compliance period.

If we do not regain compliance by December 28, 2010, and are not eligible for an additional compliance period at that time, the Nasdaq Listing Qualifications Department will provide written notification to us that our common stock may be delisted. At that time, we may either apply for listing on The Nasdaq Capital Market, provided we meet the continued listing requirements of that market in accordance with Nasdaq Listing Rules, or appeal the decision to a Nasdaq Listing Qualifications Panel, or Panel. In the event of an appeal, our securities would remain listed on The Nasdaq Global market pending a decision by the Panel following a hearing. There can be no assurance that, if we do appeal a delisting determination to the Panel, that such appeal would be successful.

If we fail to regain compliance with the listing standards of The Nasdaq Global Market, we may consider transferring to The Nasdaq Capital Market, provided we meet the transfer criteria, which is a lower tier market, or our common stock may be delisted and traded on the over-the-counter bulletin board network. Moving our listing to The Nasdaq Capital Market could adversely affect the liquidity of our common stock. If our common stock were to be delisted by Nasdaq, we could face significant material adverse consequences, including:

 

   

a limited availability of market quotations for our common stock;

 

   

a reduced amount of news and analyst coverage for us;

 

   

a decreased ability to issue additional securities or obtain additional financing in the future;

 

   

reduced liquidity for our stockholders;

 

   

potential loss of confidence by collaboration partners and employees; and

 

   

loss of institutional investor interest and fewer business development opportunities.

The demand for our solutions depends in large part on continued capital spending in the telecommunications equipment industry. A decline in demand, or a decrease or delay in capital spending by service providers, could have a material adverse effect on our results of operations.

We are exposed to the risks associated with the volatility of the U.S. and global economies, including specifically the continued volatility in certain global markets, such as Portugal, Italy, Greece, Russia and Spain where we have historically successfully sold our products. The difficulty in obtaining credit in these markets and decreased visibility regarding whether or when there will be sustained growth periods for sales of our products in these and other markets and uncertainty regarding the amount of sales, since our customers may rely on lending Arrangements and/or have limited resources to finance capital technology expenditures, may have an adverse effect on our business and operations. In addition, it is expected that this recent economic turmoil and the resulting economic uncertainty will result in decreased consumer spending, which will likely reduce the need for our products from customers. Slow or negative growth in the global economy may continue to materially and adversely affect our business, financial condition, and results of operations for the foreseeable future. Our results of operations would be further adversely affected if we were to experience lower-than-anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements, or pricing pressure as a result of the slowdown.

In addition to the potential decline in capital spending resulting from the volatility markets, capital spending in the telecommunications equipment industry has in the past, and may in the future, fluctuate significantly based on numerous factors, including:

 

   

capital spending levels of service providers;

 

   

competition among service providers;

 

   

pricing pressures in the telecommunications equipment market;

 

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end user demand for new services;

 

   

service providers’ emphasis on generating revenues from traditional infrastructure instead of migrating to emerging networks and technologies;

 

   

lack of or evolving industry standards;

 

   

consolidation in the telecommunications industry; and

 

   

changes in the regulation of communications services.

We cannot make assurances of the rate or extent to which the telecommunications equipment industry will grow, if at all. Demand for our solutions and our IP products in particular will depend on the magnitude and timing of capital spending by service providers as they extend and migrate their networks. Furthermore, industry growth rates may not be as forecast, resulting in spending on product development well ahead of market requirements. The telecommunications equipment industry from time to time has experienced, and appears to be currently experiencing, a downturn. In response to the current downturn, service providers have slowed their capital expenditures, and may also cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies, which could have a negative impact on our business. A continued downturn in the telecommunications industry may cause our operating results to fluctuate from period to period, which also may increase the volatility of the price of our common stock and harm our business.

Our success depends in large part on continued migration to an IP network architecture for communications. If the migration to IP networks does not occur or if it occurs more slowly than we expect, our operating results would be harmed.

Our IP products are used by service providers to deliver communications over IP networks. Our success depends on the continued migration of service providers’ networks to a single IP network architecture, which depends on a number of factors outside of our control. For example, existing networks include switches and other equipment that may have remaining useful lives of 20 or more years, and therefore may continue to operate reliably for a lengthy period of time. Other factors that may delay or speed the migration to IP networks include service providers’ concerns regarding initial capital outlay requirements, available capacity on legacy networks, competitive and regulatory issues, and the implementation of an enhanced services business model. As a result, service providers may defer investing in products such as ours that are designed to migrate communications to IP networks. If the migration to IP networks does not occur for these or other reasons, or if it occurs more slowly than we expect, our operating results will be harmed.

Although we have undertaken a concerted effort to reduce costs, including restructuring efforts, to streamline our operations and to reduce our overall cash burn rate, we have not had sustained profits and our losses could continue.

In the three months ended March 31, 2010 and for the year ended December 31, 2009, 2008, and 2007, we used $2.2 million, $4.5 million, $15.8 million, and $12.7 million, respectively to fund our operating activities and we have never generated sufficient cash to fund our operations. During the third quarter of 2008, we undertook a significant restructuring initiative involving the elimination of approximately 160 positions through reduction in force affecting all departments throughout our organization, but primarily in the research and development and services organizations, and in our India operations. The objective of the restructuring was to reduce our overall cash burn rate and streamline our operations while maintaining core research and development capability. We have continued to focus significant efforts on reducing costs during 2009. There can be no assurance that we will be able to reduce spending as planned or that unanticipated costs will not occur. Any restructuring efforts to focus on key products may not prove successful due to a variety of factors, including risks that a smaller workforce may have difficulty successfully completing research and development efforts and adequately monitoring our development and commercialization efforts. In addition, we may, in the future, decide to

 

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restructure operations and further reduce expenses by taking such measures as additional reductions in our workforce and reductions in other spending. Any restructuring places a substantial strain on remaining management and employees and on operational resources, and there is a risk that our business will be adversely affected by the diversion of management time to the restructuring efforts. There can be no assurance that following this restructuring we will have sufficient cash resources to allow us to fund our operations as planned.

We have not had sustained profits and our losses could continue.

We have experienced significant losses in the past and never sustained profits. For the fiscal years ended December 31, 2005 and 2006, we recorded net losses of approximately $14.3 million and $13.7 million, respectively. For the year ended December 31, 2007, we achieved net income of approximately $3.4 million and for the years ended December 31, 2008 and December 31, 2009, we recorded net losses of approximately $21.0 million and $11.6 million, respectively. For the three months ended March 31, 2010, we recorded a loss of $5.2 million. As of December 31, 2008 and 2009, our accumulated deficit was $77.2 and $88.8 million, respectively. We have never generated sufficient cash to fund our operations and can give no assurance that we will generate net income.

Cooperation with the informal inquiry we received from the SEC in 2008, the subpoena we received in January 2009 and other governmental actions has and will continue to cost significant amounts of money and management resources and has resulted in penalties.

On April 3, 2008, we received a letter from the SEC informing us that the SEC is conducting a confidential informal inquiry of Veraz. In response to the inquiry, the Board appointed a special investigation committee composed of independent directors to cooperate with the SEC in connection with such inquiry and to perform our own investigation of the matters surrounding the inquiry. The special investigation committee, in turn, retained independent legal counsel to perform an internal investigation. Further, on January 27, 2009, we received a subpoena from the SEC requesting the production of certain documents relating to our business practices in Vietnam. In November 2009, the Staff of the SEC contacted us concerning some of the business practices described above. In January 2010, we reached a tentative resolution with the staff of the SEC on the matters described above. On June 29, 2010, in accordance with the tentative resolution reached with the SEC, the SEC filed a federal court action in the U.S. District Court for the Northern District of California, alleging that we violated the books and records and internal control provisions of the Foreign Corrupt Practices Act. Without admitting or denying the allegations in the SEC’s complaint, we consented to the entry of a final judgment permanently enjoining us from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and ordering us to pay a penalty of $0.3 million. Our failure to comply with the injunction may result in additional SEC or other governmental actions against us, potentially resulting in substantial additional expenditures of time and money.

We have incurred, and continue to incur, significant costs related to the SEC Inquiry, which had a material adverse effect on our financial condition and results of operations in 2008 and to a lesser degree in 2009 and will, in future quarters, including at least the first quarter of 2010, also have a material adverse effect on our financial condition and results of operations. Further, the SEC Inquiry has caused and may continue to cause, a diversion of our management’s time and attention which could also have a material adverse effect on our financial condition and results of operations.

We may face risks associated with our international sales that could impair our ability to grow our revenues.

For the three months ended March 31, 2010 and for the fiscal years ended December 31, 2009, 2008, and 2007 revenues from outside North America were approximately $12.0 million, $63.4 million, $77.6 million, and $93.1 million, respectively. We intend to continue selling into our existing international markets and expand into additional international markets where we currently do not do business. If we are unable to continue to sell products effectively in these existing international markets and expand into additional new international markets,

 

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our ability to grow our business will be adversely affected. Some factors that may impact our ability to maintain our international operations and sales and/or cause our results from operations in these international markets to differ from expectations include:

 

   

difficulty enforcing contracts and collecting accounts receivable in foreign jurisdictions, leading to longer collection periods;

 

   

certification and qualification requirements relating to our products;

 

   

the impact of recessions in economies outside the United States;

 

   

unexpected changes in foreign regulatory requirements, including import and export regulations, and currency exchange rates;

 

   

certification and qualification requirements for doing business in foreign jurisdictions;

 

   

inadequate protection for intellectual property rights in certain countries;

 

   

less stringent adherence to ethical and legal standards by prospective customers in certain foreign countries, including compliance with the Foreign Corrupt Practices Act;

 

   

potentially adverse tax or duty consequences;

 

   

unfavorable foreign exchange movements, particularly the continued devaluation of the U.S. dollar, which could result in decreased revenues and/or increased expenses; and

 

   

political and economic instability.

Additionally, as many of our customers are conducting business in emerging markets that can be unpredictable at times due to rapidly changing political and economic conditions, the judgment of management is a significant factor in determining whether an increase in the allowance for uncollectible accounts is warranted. Management considers various factors in making such judgments, including the customer-specific circumstances as well as the general political environment, economic conditions and other relevant matters in determining the collectability of the receivables. We will record a reversal of the allowance if there is significant improvement in collection rates. Historically, the allowance has been adequate to cover the actual losses from uncollectible accounts. Such reversals may negatively impact our results of operations.

We face intense competition from the leading telecommunications networking companies in the world as well as from emerging companies. If we are unable to compete effectively, we might not be able to achieve sufficient market penetration, revenue growth, or profitability.

Competition in the market for our products, and especially our IP products is intense. This market has historically been dominated by established telephony equipment providers such as Alcatel-Lucent, Ericsson LM Telephone Co., and Nokia-Siemens Networks, all of which are our direct competitors. We also face competition from other telecommunications and networking companies, including Cisco Systems, Inc., and Sonus Networks, Inc. While some of the established competitors are exiting the market, we are seeing increasingly intense competition from Huawei, which leverages its broad product portfolio and significant financial resources to compete with us for our switching business.

Many of our current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial, governmental, and other resources available to them, allowing them to offer a more diversified bundle of products and services. In some cases, our competitors have undercut the pricing of our products or provided more favorable financing terms, which has made us uncompetitive or forced us to reduce our average selling prices, negatively impacting our margins. Further, some of our competitors sell significant amounts of other products to our current and prospective customers. In addition, some potential customers when selecting equipment vendors to provide fundamental infrastructure products prefer to purchase from larger, established vendors. Our competitors’ broad product portfolios, coupled with already existing relationships, may cause our customers or potential customers to buy our competitors’ products or harm our ability to attract new customers.

 

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To compete effectively, we must deliver innovative products that:

 

   

provide extremely high reliability, compression rates, and voice quality;

 

   

scale and deploy easily and efficiently;

 

   

interoperate with existing network designs and other vendors’ equipment;

 

   

support existing and emerging industry, national, and international standards;

 

   

provide effective network management;

 

   

are accompanied by comprehensive customer support and professional services;

 

   

provide a cost-effective and space efficient solution for service providers; and

 

   

offer a broad array of services.

If we are unable to compete successfully against our current and future competitors, we could experience reduced gross profit margins, price reductions, order cancellations, and loss of customers and revenues, each of which would adversely impact our business.

Our quarterly operating results have fluctuated significantly in the past and may continue to fluctuate in the future, which could lead to volatility in the price of our common stock.

Our quarterly revenues and operating results have fluctuated significantly in the past and they may continue to fluctuate in the future due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. From our experience, customer purchases of telecommunications equipment have been unpredictable and these purchases are made as customers build out their networks, rather than regular, recurring purchases. The primary factors that may affect our quarterly revenues and results include the following:

 

   

fluctuation in demand for our products and the timing and size of customer orders;

 

   

the length and variability of the sales cycle for our products;

 

   

new product introductions and enhancements by our competitors and us;

 

   

our ability to develop, introduce, and ship new products and product enhancements that meet customer requirements in a timely manner;

 

   

the mix of products sold such as between Next Generation Network sales and sales of bandwidth optimization products;

 

   

our ability to obtain sufficient supplies of sole or limited source components;

 

   

our ability to attain and maintain production volumes and quality levels for our products;

 

   

costs related to acquisitions of complementary products, technologies, or businesses;

 

   

changes in our pricing policies, the pricing policies of our competitors, and the prices of the components of our products;

 

   

the timing of revenue recognition, amount of deferred revenues, and receivables collections;

 

   

difficulties or delays in deployment of customer IP networks that would delay anticipated customer purchases of additional products and services;

 

   

general economic conditions, as well as those specific to the telecommunications, networking, and related industries;

 

   

consolidation within the telecommunications industry, including acquisitions of or by our customers; and

 

   

the failure of certain of our customers to successfully and timely reorganize their operations, including emerging from bankruptcy.

 

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In addition, as a result of our accounting policies, we may be unable to recognize all of the revenue associated with certain customer contracts in the same period as the costs associated with those contracts are expensed, which could cause our quarterly gross margins, particularly of IP gross margins, to fluctuate significantly. Further, our accounting policies may require that revenue related to certain customer contracts be delayed for periods of a year or more. This delay may cause spikes in our revenue in quarters when it is recognized and may result in deferred revenue to revenue conversion taking longer than anticipated.

A significant portion of our operating expenses are fixed in the short term. If revenues for a particular quarter are below expectations, we may not be able to reduce operating expenses proportionally for that quarter. Therefore, any such revenue shortfall would likely have a direct negative effect on our operating results for that quarter. For these and other reasons, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance.

We believe it likely that in some future quarters, our operating results may be below the expectations of public market analysts and investors, which may adversely affect our stock price. A decline in the market price of our common stock could cause our stockholders to lose some or all of their investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, such a decline in our stock price may cause stockholders to initiate securities class action lawsuits. Whether or not meritorious, litigation brought against us could result in substantial costs and diversion of time and attention of our management. Our insurance to cover claims of this sort, if brought, may not be adequate.

We have historically conducted a significant amount of business with ECI Telecom Ltd. (“ECI”). If our relationship with ECI is adversely affected, our business could be harmed and our results of operations could be negatively affected.

ECI may make strategic choices that are not in the best interests of Veraz or its stockholders. For example, other than restrictions with respect to ECI’s exploitation of DCME products, nothing prohibits ECI from competing with us in other matters or offering VoIP products which compete with ours. We may not be able to resolve any potential conflicts that may arise between ECI and us, and even if we are able to do so, the resolution may be less favorable than if we were dealing with an unaffiliated third party. ECI also owns the technology underlying our DCME product lines. Pursuant to the DCME Master Manufacturing and Distribution Agreement, or the DCME Agreement, we have secured the right to act as exclusive worldwide distributor of ECI’s DCME line of products. Under the DCME Agreement, ECI provides certain supply, service, and warranty obligations, and manufactures or subcontracts the manufacture of all DCME equipment sold by us. The DCME Agreement may only be terminated by ECI if we project DCME revenues of less than $1 million in a calendar year, we breach a material provision of the DCME Agreement and fail to cure such breach within 30 days, or we become insolvent. Upon the occurrence of one of these events and the election by ECI to terminate the DCME Agreement, ECI would be under no obligation to continue to contract with us. In addition, ECI beneficially owns a significant percentage of our common stock. If the value of the shares of our common stock held by ECI declines, either by disposition of the shares or a decline in our stock price, ECI may be less likely to enter into agreements with us on reasonable terms or at all. Accordingly, in light of the potential volatility in our stock price as previously noted, we cannot assure you that the DCME Agreement will be extended or renewed at all or on reasonable commercial terms. In addition, our relationship with ECI could be adversely affected by a divestment of our common stock or by declining in our stock price. We do not currently have an independent ability to produce DCME products and have not entered into Arrangements with any third party that would enable us to obtain DCME or similar products if ECI ceases to provide us with DCME products. Should ECI become unable or unwilling to fulfill its obligations under the DCME Agreement for any reason or if the DCME Agreement is terminated, we will need to take remedial measures to manufacture DCME or similar products, which could be expensive. If such efforts fail, our business may be materially harmed. In the event of the occurrence of one of these termination events, we cannot assure you that the DCME Agreement will be extended or renewed at all or on reasonable commercial terms.

 

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ECI beneficially owns a significant percentage of our common stock, which will allow ECI to significantly influence us and matters requiring stockholder approval and could discourage potential acquisitions of our company.

ECI owns approximately 25% of our outstanding common stock. As a result of its ownership in us, ECI is able to exert significant influence over actions requiring the approval of our stockholders, including change of control transactions and any amendments to our certificate of incorporation. Because of the nature of our business relationship with ECI and the size and nature of ECI’s ownership position in us, the interests of ECI may be different than those of our other stockholders. In addition, the significant ownership interest of ECI could have the effect of delaying or preventing a change in control of our company or otherwise discouraging a potential acquirer from obtaining control of our company. In 2007, ECI was acquired by affiliates of the Swarth Group and certain other funds that have appointed Ashmore Investment Management Limited as their investment manager which maintains dispositive and/or voting power over the shares of our common stock held by ECI. In addition, ECI is no longer traded on NASDAQ and has requested that we register their shares of Veraz common stock under a S-3 registration statement. As a result of the change in ownership and the request for registration, the investment objectives of ECI may have changed as compared to the investment objectives when ECI was a publicly-traded company. The possible change in investment objectives may affect whether, or for how long, ECI will continue to hold our shares and any sales may be difficult and may depress the price of our stock.

Our revenue and operating results may be adversely impacted if sales of our IP products and other products are unstable, if revenue from our bandwidth optimization products continues to fluctuate and if the mix between new sales and expansion sales changes substantially.

Our DCME products incorporate mature technologies that we expect to be in lower demand by our customers in the future. While we are actively pursuing new customers for our DCME products and seeking to increase sales of our additional product offerings to these customers, including our IP products, we believe that there are fewer opportunities for new DCME sales, and we expect DCME sales to continue to decrease over the foreseeable future. Further, we have seen increasing fluctuation on an annual basis for our bandwidth optimization products. If the decrease in DCME revenues occurs more rapidly than we anticipate and/or the sales of our other products, including our IP products, do not make up for the decline in revenues, our business and results of operations will be harmed. Additionally, we believe that the mix between new IP product sales and expansion sales in any given quarter may fluctuate and our gross margins could be adversely impacted. Further, if our expected DCME sales decrease below $1 million in a calendar year, ECI may terminate the DCME Agreement.

The largest customers in the telecommunications industry have substantial negotiating leverage, which may require that we agree to terms and conditions that are less advantageous to us than the terms and conditions of our existing customer relationships, or risk limiting our ability to sell our products to these large service providers, thereby harming our operating results.

Large telecommunications service providers have substantial purchasing power and leverage negotiating contractual terms and conditions relating to their purchase of our products from them. As we seek to sell more products to these large telecommunications providers, we may be required to agree to less favorable terms and conditions to complete such sales, which may result in lower margins, affect the timing of the recognition of the revenue derived from these sales, and the amount of deferred revenues, each of which may have an adverse effect on our business and financial condition.

In addition, our future success depends in part on our ability to sell our products to large service providers operating complex networks that serve large numbers of subscribers and transport high volumes of traffic. The communications industry historically has been dominated by a relatively small number of service providers. While deregulation and other market forces have led to an increasing number of service providers in recent years, large service providers continue to constitute a significant portion of the market for communications equipment.

 

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If we fail to sell additional IP products to our large customers or to expand our customer base to include additional customers that deploy our products in large-scale networks serving significant numbers of subscribers, our revenue growth will be limited.

Consolidation or downturns in the telecommunications industry may affect demand for our products and the pricing of our products, which could limit our growth and may harm our business.

The telecommunications industry, which includes all of our customers, has experienced increased consolidation in recent years, and we expect this trend to continue. Consolidation among our customers and prospective customers may cause delays or reductions in capital expenditure plans and/or increased competitive pricing pressures as the number of available customers declines and their relative purchasing power increases in relation to suppliers. The occurrence of any of these factors, separately or in combination, may lead to decreased sales or slower than expected growth in revenues and could harm our business and operations.

The communications industry is cyclical and reactive to general economic conditions. In the recent past, worldwide economic downturns, pricing pressures, and deregulation have led to consolidations and reorganizations. These downturns, pricing pressures and restructurings have been causing delays and reductions in capital and operating expenditures by many service providers. These delays and reductions, in turn, have been reducing demand for communications products like ours. A continuation or subsequent recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in the communications industry, could harm our operating results in the future.

If we fail to anticipate and meet specific customer requirements, or if our products fail to interoperate with our customers’ existing networks or with existing and emerging industry, national, and international standards, we may not be able to retain our current customers or attract new customers.

We must effectively anticipate and adapt our business, products and services in a timely manner to meet customer requirements. We must also meet existing and emerging industry, national and international standards to meet changing customer demands. Prospective customers may require product features and capabilities that are not included in our current product offerings. The introduction of new or enhanced products also requires that we carefully manage the transition from our older products to minimize disruption in customer ordering patterns and ensure that adequate supplies of our new products can be delivered to meet anticipated customer demand. If we fail to develop products and offer services that satisfy customer requirements, or if we fail to effectively manage the transition from our older products to our new or enhanced products, our ability to create or increase demand for our products would be seriously harmed and we may lose current and prospective customers, thereby harming our business.

Many of our customers will require that our products be designed to interface with their existing networks or with existing or emerging industry, national, and international standards, each of which may have different and unique specifications. Issues caused by a failure to achieve homologation to certain standards or an unanticipated lack of interoperability between our products and these existing networks may result in significant warranty, support, and repair costs, divert the attention of our engineering personnel from our hardware and software development efforts, and cause significant customer relations problems. If our products do not interoperate with our customers’ respective networks or applicable standards, installations could be delayed or orders for our products could be cancelled, which would seriously harm our gross margins and result in the loss of revenues and/or customers.

We expect that a majority of the revenues generated from our products, especially our IP products will be generated from a limited number of customers. If we lose customers or are unable to grow and diversify our customer base, our revenues may fluctuate and our growth likely would be limited.

To date, we have sold our IP products to approximately 133 customers. We expect that for the foreseeable future, the majority of the revenues from our IP products will be generated from a limited number of customers in sales transactions that are unpredictable in many key respects, including, but not limited to, the timing of when

 

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these transactions close relative to when the related revenue will be recognized, when cash will be received, the mix of hardware and software, the gross margins related to these transactions, and the total amount of payments to be received. We do not expect to have regular, recurring sales to a limited number of customers. Due to the limited number of our customers and the irregular sales cycle in the industry, if we lose customers and/or fail to grow and diversify our customer base, or if they do not purchase our IP products at levels or at the times we anticipate, our ability to maintain and grow our revenues will be adversely affected. The growth of our customer base could also be adversely affected by:

 

   

consolidation in the telecommunications industry affecting our customers;

 

   

unwillingness of customers to implement our new products or renew contracts as they expire;

 

   

potential customer concerns about our status as an emerging telecommunications equipment vendor;

 

   

delays or difficulties that we may experience in the development, introduction, and/or delivery of products or product enhancements;

 

   

deterioration in the general financial condition (including bankruptcy filings) of our customers and the potential unavailability to our customers of credit or financing for additional purchases;

 

   

new product introductions by our competitors;

 

   

geopolitical risks and uncertainties in countries where our customers or our own facilities are located; or

 

   

failure of our products to perform as expected.

If we do not respond rapidly to technological changes or to changes in industry standards, our products could become obsolete.

The market for IP infrastructure products and services is characterized by rapid technological change, frequent new product introductions and evolving standards. We may be unable to respond quickly or effectively to these developments. We may experience difficulties with software development, hardware design, manufacturing, marketing, or certification that could delay or prevent our development, introduction, or marketing of new products and enhancements. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future products obsolete. If the standards adopted are different from those that we have chosen to support, market acceptance of our products may be significantly reduced or delayed. If our products become technologically obsolete, we may be unable to sell our products in the marketplace and generate revenues, and our business could be adversely affected. Because our products are sophisticated and designed to be deployed in complex environments and in multiple locations, they may have errors or defects that we find only after full deployment. If these errors lead to customer dissatisfaction or we are unable to establish and maintain a support infrastructure and required support levels to service these complex environments, our business may be seriously harmed.

Our products are sophisticated and are designed to be deployed in large and complex networks. Because of the nature of our products, they can only be fully tested when substantially deployed in very large networks with high volumes of traffic. Some of our customers have only recently begun to commercially deploy our products or deploy our products in larger configurations and they may discover errors or defects in the software or hardware, the products may not operate as expected, or our products may not be able to function in the larger configurations required by certain customers. If we are unable to correct errors or other performance problems that may be identified after full deployment of our products, we could experience:

 

   

cancellation of orders or other losses of or delays in revenues;

 

   

loss of customers and market share;

 

   

harm to our reputation;

 

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a failure to attract new customers or achieve market acceptance for our products;

 

   

increased service, support, and warranty costs and a diversion of development resources;

 

   

increased insurance costs and losses to our business and service provider customers; and

 

   

costly and time-consuming legal actions by our customers.

If we experience warranty failure that indicates either manufacturing or design deficiencies, we may be required to recall units in the field and/or stop producing and shipping such products until the deficiency is identified and corrected. In the event of such warranty failures, our business could be adversely affected resulting in reduced revenue, increased costs and decreased customer satisfaction. Because customers often delay deployment of a full system until they have tested the products and any defects have been corrected, we expect these revisions may cause delays in orders by our customers for our systems. Because our strategy is to introduce more complex products in the future, this risk will intensify over time. Service provider customers have discovered errors in our products. If the costs of remediating problems experienced by our customers exceed our expected expenses, which historically have not been significant, these costs may adversely affect our operating results.

In addition, because our products are deployed in large and complex networks around the world, our customers expect us to establish a support infrastructure and maintain demanding support standards to ensure that their networks maintain high levels of availability and performance. To support the continued growth of our business, our support organization will need to provide service and support at a high level throughout the world. This will include hiring and training customer support engineers both at our primary corporate locations as well as our smaller offices in new geographies, such as Central and South America and Russia. If we are unable to provide the expected level of support and service to our customers, we could experience:

 

   

loss of customers and market share;

 

   

a failure to attract new customers in new geographies;

 

   

increased service, support, and warranty costs and a diversion of development resources; and

 

   

network performance penalties.

The long and variable sales and deployment cycles for our products may cause our operating results to vary materially, which could result in a significant unexpected revenue shortfall in any given quarter.

Our products, particularly IP switching products, have lengthy sales cycles, which typically extend from three to 12 months and may take up to two years. A customer’s decision to purchase our products often involves a significant commitment of the customer’s resources and a product evaluation and qualification process that can vary significantly in length. The length of our sales cycles also varies depending on the type of customer to which we are selling, the product being sold and the type of network in which our product will be utilized. We may incur substantial sales and marketing expenses and expend significant management effort during this time, regardless of whether we make a sale.

Even after making the decision to purchase our products, our customers may deploy our products slowly. Timing of deployment can vary widely among customers and among product types. The length of a customer’s deployment period will impact our ability to recognize revenue related to such customer’s purchase and may also directly affect the timing of any subsequent purchase of additional products by that customer. As a result of these lengthy and uncertain sales and deployment cycles for our products, it is difficult for us to predict the quarter in which our customers may purchase additional products or features from us, and our operating results may vary significantly from quarter to quarter, which may negatively affect our operating results for any given quarter.

 

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We rely on channel partners for a significant portion of our revenue. Our failure to effectively develop and manage these third-party distributors, systems integrators, and resellers specifically and our indirect sales channel generally, or disruptions to the processes and procedures that support, our indirect sales channels, could adversely affect our ability to generate revenues from the sale of our products.

We rely on third-party distributors, systems integrators, and resellers for a significant portion of our revenue. Our revenues depend in large part on the performance of these indirect channel partners. Although many aspects of our partner relationships are contractual in nature, our Arrangements with our indirect channel partners are not exclusive. Accordingly, important aspects of these relationships depend on the continued cooperation between the parties.

Many factors out of our control could interfere with our ability to market, license, implement or support our products with any of our partners, which in turn could harm our business. These factors include, but are not limited to, a change in the business strategy of one of our partners, the introduction of competitive product offerings by other companies that are sold through one of our partners, potential contract defaults by one of our partners, or changes in ownership or management of one of our distribution partners. Some of our competitors may have stronger relationships with our distribution partners than we do, and we have limited control, if any, as to whether those partners implement our products rather than our competitors’ products or whether they devote resources to market and support our competitors’ products rather than our offerings. In addition, we recognize a portion of our revenue based on a sell-through model using information provided by our partners. If those partners provide us with inaccurate or untimely information, the amount or timing of our revenues could be adversely impacted and our operating results may be harmed.

Moreover, if we are unable to leverage our sales and support resources through our distribution partner relationships, we may need to hire and train additional qualified sales and engineering personnel. We cannot assure you, however, that we will be able to hire additional qualified sales and engineering personnel in these circumstances, and our failure to do so may restrict our ability to generate revenue or implement our products on a timely basis. Even if we are successful in hiring additional qualified sales and engineering personnel, we will incur additional costs and our operating results, including our gross margin, may be adversely affected. The loss of or reduction in sales by these resellers could reduce our revenues. If we fail to maintain relationships with these third-party resellers, fail to develop new relationships with third-party resellers in new markets, fail to manage, train, or provide incentives to existing third-party resellers effectively or if these third party resellers are not successful in their sales efforts, sales of our products may decrease and our operating results would suffer.

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the Nasdaq Stock Market Rules (the “Nasdaq Rules”). The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. The Exchange Act will require, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act will require, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. As a public company, our systems of internal controls over financial reporting will be required to be periodically assessed and reported on by management and will be subject to annual audits by our independent auditors. We are presently evaluating our internal controls for compliance and will be required to comply with the Sarbanes-Oxley guidelines beginning with our Annual Report on Form 10-K for the year ending December 31, 2010, to be filed in early 2011. During the course of our evaluation, we may identify areas requiring improvement, and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities. We have commenced a review of our existing internal control structure. Although our review is not

 

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complete, we have taken steps to improve our internal control structure by hiring or transferring dedicated, internal Sarbanes-Oxley Act compliance personnel to analyze and improve our internal controls, to be supplemented periodically with outside consultants as needed. However, we cannot be certain regarding when we will be able to successfully complete the procedures, certification, and attestation requirements of Section 404 of the Sarbanes-Oxley Act. If we fail to maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm the market value of our common stock. Any failure to maintain effective internal controls also could impair our ability to manage our business and harm our financial results.

Under the Sarbanes-Oxley Act and Nasdaq Rules, we are required to maintain an independent board. We also expect these rules and regulations will make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be deemed independent for purposes of Nasdaq Rules, and officers will be significantly curtailed.

If we lose the services of one or more members of our current executive management team or other key employees, or if we are unable to attract additional executives or key employees, we may not be able to execute on our business strategy.

Our future success depends in large part upon the continued service of our executive management team and other key employees. In particular, Douglas Sabella, our president and chief executive officer, is critical to the overall management of our company as well as to the development of our culture and our strategic direction. To be successful, we must also hire, retain and motivate key employees, including those in managerial, technical, marketing, and sales positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Experienced management and technical, sales, marketing and support personnel in the telecommunications and networking industries are in high demand and competition for their talents is intense. This is particularly the case in Silicon Valley, where our headquarters and significant operations are located.

The loss of services of any of our executives, one or more other members of our executive management or sales team or other key employees, none of whom are bound by employment agreements for any specific term, could seriously harm our business.

We have no internal hardware manufacturing capabilities and we depend exclusively upon contract manufacturers to manufacture our hardware products. Our failure to successfully manage our relationships with Flextronics, ECI or other replacement contract manufacturers would impair our ability to deliver our products in a manner consistent with required volumes or delivery schedules, which would likely cause us to fail to meet the demands of our customers and damage our customer relationships.

We outsource the manufacturing of all of our hardware products. Our I-Gate 4000 media gateways are exclusively manufactured for us by Flextronics. We buy our DCME products from ECI, which subcontracts the manufacturing to Flextronics. These contract manufacturers provide comprehensive manufacturing services, including assembly of our products and procurement of materials and components. Each of our contract manufacturers also builds products for other companies and may not always have sufficient quantities of inventory available or may not allocate their internal resources to fill these orders on a timely basis. Further, our contract manufacturers may choose to limit the amount of credit available to us which will impact our ability to timely order and procure products.

We do not have long-term supply contracts with these contract manufacturers and they are not required to manufacture products for any specified period at any specified price. We do not have internal manufacturing

 

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capabilities to meet our customers’ demands and cannot assure you that we will be able to develop or contract for additional manufacturing capacity on acceptable terms on a timely basis if it is needed. An inability to manufacture our products at a cost comparable to our historical costs could impact our gross margins or force us to raise prices, affecting customer relationships and our competitive position.

Qualifying a new contract manufacturer and commencing commercial scale production is expensive and time consuming and could result in a significant interruption in the supply of our products. We are in the process of qualifying a second manufacturing facility for Flextronics and there will be additional costs and complexity associated with manufacturing at multiple sites. If our contract manufacturers are not able to maintain our high standards of quality, increase capacity as needed, or are forced to shut down a factory, our ability to deliver quality products to our customers on a timely basis may decline, which would damage our relationships with customers, decrease our revenues and negatively impact our growth.

We and our contract manufacturers rely on single or limited sources for the supply of some components of our products and if we fail to adequately predict our manufacturing requirements or if our supply of any of these components is disrupted, we will be unable to ship our products on a timely basis, which would likely cause us to fail to meet the demands of our customers and damage our customer relationships.

We and our contract manufacturers currently purchase several key components of our products, including commercial digital signal processors, from single or limited sources. We purchase these components on a purchase order basis. If we overestimate our component requirements, we could have excess inventory, which would increase our costs and result in write-downs harming our operating results. If we underestimate our requirements, we may not have an adequate supply, which could interrupt manufacturing of our products and result in delays in shipments and revenues.

We currently do not have long-term supply contracts with our component suppliers and they are not required to supply us with products for any specified periods, in any specified quantities, or at any set price, except as may be specified in a particular purchase order. Because the key components and assemblies of our products are complex, difficult to manufacture and require long lead times, in the event of a disruption or delay in supply, or inability to obtain products, we may not be able to develop an alternate source in a timely manner, at favorable prices, or at all. In addition, during periods of capacity constraint, we are disadvantaged compared to better capitalized companies, as suppliers may in the future choose not to do business with us or may require higher prices or less advantageous terms. A failure to find acceptable alternative sources could hurt our ability to deliver high-quality products to our customers and negatively affect our operating margins. In addition, reliance on our suppliers exposes us to potential supplier production difficulties or quality variations. Our customers rely upon our ability to meet committed delivery dates, and any disruption in the supply of key components would seriously adversely affect our ability to meet these dates and could result in legal action by our customers, loss of customers, or harm our ability to attract new customers, any of which could decrease our revenues and negatively impact our growth.

Failure to manage expenses and inventory risks associated with meeting the demands of our customers may adversely affect our business or results of operations.

To ensure that we are able to meet customer demand for our products, we place orders with our contract manufacturers and suppliers based on our estimates of future sales. If actual sales differ materially from these estimates because of inaccurate forecasting or as a result of unforeseen events or otherwise, our inventory levels and expenses may be adversely affected and our business and results of operations could suffer. In addition, to remain competitive, we must continue to introduce new products and processes into our manufacturing environment. There cannot be any assurance, however, that the introduction of new products will not create obsolete inventories related to older products.

 

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If we are not able to obtain necessary licenses of third-party technology at acceptable prices, or at all, our products could become obsolete.

We have incorporated third-party licensed technology into our current products. From time to time, we may be required to license additional technology from third parties to develop new products or product enhancements. Third party licenses may not be available or continue to be available to us on commercially reasonable terms or at all. The inability to maintain or re-license any third party licenses required in our current products, or to obtain any new third-party licenses to develop new products and product enhancements, could require us to obtain substitute technology of lower quality or performance standards or at greater cost, and delay or prevent us from making these products or enhancements, any of which could seriously harm the competitiveness of our products.

Failures by our strategic partners or by us in integrating our products with those provided by our strategic partners could seriously harm our business.

Our solutions include the integration of products supplied by strategic partners, who offer complementary products and services. We expect to further integrate our IP Products with such partner products and services in the future. We rely on these strategic partners in the timely and successful deployment of our solutions to our customers. If the products provided by these partners have defects or do not operate as expected, if we do not effectively integrate and support products supplied by these strategic partners, or if these strategic partners fail to be able to support products, we may have difficulty with the deployment of our solutions, which may result in:

 

   

a loss of or delay in recognizing revenues;

 

   

increased service, support, and warranty costs and a diversion of development resources; and

 

   

network performance penalties.

In addition to cooperating with our strategic partners on specific customer projects, we also may compete in some areas with these same partners. If these strategic partners fail to perform or choose not to cooperate with us on certain projects, in addition to the effects described above, we could experience:

 

   

a loss of customers and market share; and

 

   

a failure to attract new customers or achieve market acceptance for our products.

Our ability to compete and our business could be jeopardized if we are unable to protect our intellectual property.

We rely on a combination of patent, copyright, trademark, and trade secret laws and restrictions on disclosure to protect our intellectual property rights. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our patent applications may not issue as patents at all or they may not issue as patents in a form that will be advantageous to us. Our issued patents and those that may issue in the future may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing related products. Although we have taken steps to protect our intellectual property and proprietary technology, there is no assurance that third parties will not be able to invalidate or design around our patents. Furthermore, although we have entered into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements.

Additionally, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken to do so will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as comprehensively as in the United States. If competitors are able to use our technology or develop unpatented proprietary technology similar to ours or competing technologies, our ability to compete effectively could be harmed.

 

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Possible third-party claims of infringement of proprietary rights against us could have a material adverse effect on our business, results of operation or financial condition.

The telecommunications industry generally and the market for IP telephony products in particular are characterized by a relatively high level of litigation based on allegations of infringement of proprietary rights. We have received in the past and may receive in the future receive inquiries from other patent holders and may become subject to claims that we infringe their intellectual property rights. We cannot assure you that we are not in infringement of third party patents. Any parties claiming that our products infringe upon their proprietary rights, regardless of its merits, could force us to license their patents for substantial royalty payments or to defend ourselves, and possibly our customers or contract manufacturers, in litigation. We may also be required to indemnify our customers and contract manufacturers for damages they suffer as a result of such infringement. These claims and any resulting licensing Arrangement or lawsuit, if successful, could subject us to significant royalty payments or liability for damages and invalidation of our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

 

   

stop selling, incorporating, or using our products that use the challenged intellectual property;

 

   

obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or

 

   

redesign those products that use any allegedly infringing technology.

Any lawsuits regarding intellectual property rights, regardless of their success, would be time consuming, expensive to resolve and would divert our management’s time and attention.

Regulation of the telecommunications industry could harm our operating results and future prospects.

The telecommunications industry is highly regulated and our business and financial condition could be adversely affected by the changes in the regulations relating to the telecommunications industry. Currently, there are few laws or regulations that apply directly to access to, or delivery of, voice services on IP networks. We could be adversely affected by regulation of IP networks and commerce in any country, including the

United States, where we operate. Such regulations could include matters such as voice over the Internet or using Internet protocol, encryption technology, and access charges for service providers. The adoption of such regulations could decrease demand for our products, and at the same time increase the cost of selling our products, which could have a material adverse effect on our business, operating result, and financial condition.

Compliance with regulations and standards applicable to our products may be time consuming, difficult and costly, and if we fail to comply, our product sales will decrease.

To achieve and maintain market acceptance, our products must continue to meet a significant number of regulations and standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission and Underwriters Laboratories, including particular standards relating to our DCME products.

As these regulations and standards evolve, and if new regulations or standards are implemented, we will be required to modify our products or develop and support new versions of our products, and this will increase our costs. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay introduction of our products, which could harm our business. User uncertainty regarding future policies may also affect demand for communications products, including our products. Moreover, distribution partners or customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products to address these requirements and any regulatory changes could have a material adverse effect on our business, financial condition, and operating results.

 

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Failure of our hardware products to comply with evolving industry standards and complex government regulations may prevent our hardware products from gaining wide acceptance, which may prevent us from growing our sales.

The market for network equipment products is characterized by the need to support industry standards as different standards emerge, evolve, and achieve acceptance. We will not be competitive unless we continually introduce new products and product enhancements that meet these emerging standards. Our products must comply with various domestic regulations and standards defined by agencies such as the Federal Communications Commission, in addition to standards established by governmental authorities in various foreign countries and the recommendations of the International Telecommunication Union. If we do not comply with existing or evolving industry standards or if we fail to obtain timely domestic or foreign regulatory approvals or certificates, we will not be able to sell our products where these standards or regulations apply, which may harm our business.

Production and marketing of products in certain states and countries may subject us to environmental and other regulations including, in some instances, the requirement to provide customers the ability to return product at the end of its useful life and make us responsible for disposing or recycling products in an environmentally safe manner. Additionally, certain states and countries may pass regulations requiring our products to meet certain requirements to use environmentally friendly components, such as the European Union Directive 2002/96/EC Waste Electrical and Electronic Equipment, or WEEE, to mandate funding, collection, treatment, recycling, and recovery of WEEE by producers of electrical or electronic equipment into Europe and similar rules and regulations in other countries. China is in the final approval stage of compliance programs which will harmonize with the European Union WEEE and Recycling of Hazardous Substances directives. In the future, Japan and other countries are expected to adopt environmental compliance programs. If we fail to comply with these regulations, we may not be able to sell our products in jurisdictions where these regulations apply, which would have a material adverse affect on our results of operations.

We have invested substantially in our enhanced access switching solution and we may be unable to achieve and maintain substantial sales.

We have spent considerable effort and time developing our Class 5 solution, and have had limited sales of this product line to date. Although we have scaled back our development efforts with respect to new features and functionalities for our Class 5 solution, we continue to spend effort and time on our solution. We anticipate sales of our access solution as part of our operational plan, but we may not achieve the success rate we currently anticipate or we may not achieve any success at all. The market for our access solution is new and it is unclear whether there will be broad adoption of this solution by our existing and future potential customers. If the market for our Class 5 products does not develop or if we are unable to further develop the required features, we may need to reduce or cancel our development efforts or conclude an agreement with a third party to license the Class 5 solution.

Future interpretations of existing accounting standards could adversely affect our operating results.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC, and various other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions consummated before the announcement of a change.

For example, we recognize our product software license revenue in accordance with Software Revenue Recognition literature. The American Institute of Certified Public Accountants or other accounting standards setters may continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business Arrangements that are prevalent in software licensing Arrangements. Future interpretations of existing accounting standards or changes in our business practices could

 

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result in future changes in our revenue recognition accounting policies that have a material adverse effect on our results of operations. We may be required to delay revenue recognition into future periods, which could adversely affect our operating results. In the past we have had to defer recognition for license fees, and may have to do so again in the future. Such deferral may be as a result of several factors, including whether a transaction involves:

 

   

software Arrangements that include undelivered elements for which we do not have vendor specific objective evidence, or VSOE, of fair value;

 

   

requirements that we deliver services for significant enhancements and modifications to customize our software for a particular customer;

 

   

material acceptance criteria or other identified product-related issues; or

 

   

payment terms extending beyond our customary terms.

Because of these factors and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise terms in our software Arrangements to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend our sales cycle, and we sometimes accept terms and conditions that do not permit revenue recognition at the time of delivery.

Increased political, economic and social instability in the Middle East may adversely affect our business and operating results.

The continued threat of terrorist activity and other acts of war or hostility, including the war in Iraq, threats against Israel and the recent Israeli conflict in Gaza, have created uncertainty throughout the Middle East and have significantly increased the political, economic, and social instability in Israel, where substantially all of our products are manufactured. Acts of terrorism, either domestically or abroad and particularly in Israel, or a resumption of the confrontation along the northern border of Israel, would likely create further uncertainties and instability. To the extent terrorism, or the political, economic or social instability results in a disruption of our operations or delays in our manufacturing or shipment of our products, then our business, operating results and financial condition could be adversely affected.

Our I-Gate 4000 media gateways and our DCME products are exclusively manufactured for us by Flextronics, with the DCME products being manufactured by Flextronics through our relationship with ECI. The Flextronics manufacturing facility is located in Migdal-Haemek, Israel, which is located in northern Israel. While Flextronics has other locations across the world at which our manufacturing requirements may be fulfilled and we are in the process of diversifying our manufacturing capabilities to locations outside of the Middle East, any disruption to its Israeli manufacturing capabilities in Migdal-Haemek would likely cause a material delay in our manufacturing process. If we are forced or if we decide to switch the manufacture of our products to a different Flextronics facility, the time and expense of such switch along with the increased costs, if any, of operating in another location, would adversely affect our operations. In addition, while we expect that Flextronics will have the capacity to manufacture our products at facilities outside of Israel, there can be no assurance that such capacity will be available when we require it or upon terms favorable or acceptable to us. To the extent terrorism or political, economic or social instability results in a disruption of Flextronics’ manufacturing facilities in Israel or ECI operations in Israel as they relate to our business, then our business, operating results and financial condition could be adversely affected.

In addition, any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease, and adversely affect the price of our shares. Furthermore, several countries, principally in the Middle East, still restrict doing business with Israel, Israeli companies or companies with operations in Israel. Should additional countries impose restrictions on doing business with Israel, our business, operating results and financial condition could be adversely affected.

 

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Our operations may be disrupted by the obligations of our personnel to perform military service.

Many of our 155 employees in Israel, including certain key employees, are obligated to perform up to one month (in some cases more) of annual military reserve duty until they reach age 45 and, in emergency circumstances, could be called to active duty. Recently, there have been call-ups of military reservists, including several of our employees, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our employees due to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could adversely affect our business and results of operations.

The grants we have received from the Israeli government for certain research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel, and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously received together with interest and penalties.

Our research and development efforts have been financed, in part, through grants that we have received from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade, and Labor, or the OCS. Therefore, we must comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, 1984 and related regulations, or the Research Law. Under the Research Law, the discretionary approval of an OCS committee is required for any transfer of technology or manufacturing of products developed with OCS funding. OCS approval is not required for the export of any products resulting from the research or development. There is no assurance that we would receive the required approvals for any proposed transfer. Such approvals, if granted, may be subject to the following additional restrictions:

 

   

we could be required to pay the OCS a portion of the consideration we receive upon any transfer of such technology or upon an acquisition of our Israeli subsidiary by an entity that is not Israeli. Among the factors that may be taken into account by the OCS in calculating the payment amount are the scope of the support received, the royalties that were paid by us, the amount of time that elapsed between the date on which the know-how was transferred and the date on which the grants were received, as well as the sale price; and

 

   

the transfer of manufacturing rights could be conditioned upon an increase in the royalty rate and payment of increased aggregate royalties and payment of interest on the grant amount.

These restrictions may impair our ability to sell our company or technology assets or to outsource manufacturing outside of Israel. The restrictions will continue to apply even after we have repaid the full amount of royalties payable for the grants.

 

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FORWARD-LOOKING STATEMENTS

This proxy statement contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us, Dialogic and the industry in which Veraz and Dialogic operate. You can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because they:

 

   

discuss future expectations;

 

   

contain projections of future results of operations or financial condition; or

 

   

state other “forward-looking” information.

We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors and cautionary language discussed in this proxy statement provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us or Dialogic in such forward-looking statements, including among other things:

 

   

uncertainties as to the timing of the closing of the Arrangement, approval of the Arrangement by the stockholders of Dialogic and Veraz and the satisfaction of closing conditions to the transaction, including regulatory approvals;

 

   

future expectations concerning cash and cash equivalents available to the surviving company after the Arrangement;

 

   

Dialogic’s and Veraz’s business strategy, including whether the combined company can successfully develop new products and the degree to which these gain market acceptance;

 

   

outcomes of government reviews, inquiries, investigations and related litigation;

 

   

continued compliance with government regulations;

 

   

difficulties encountered in integrating the businesses of Dialogic and Veraz;

 

   

legislation or regulatory environments, requirements or changes adversely affecting the business in which Dialogic and/or Veraz is engaged;

 

   

the combined company’s ability to obtain and maintain intellectual property protection for their products;

 

   

the timing of the initiation, progress or cancellation of significant contracts or arrangements;

 

   

the mix and timing of products and services sold in a particular period;

 

   

the impact of revenue recognition policies on the timing of both revenues and the related expenses;

 

   

our inability to maintain relationships with indirect channel partners;

 

   

the reluctance of customers to migrate to an IP network architecture;

 

   

fluctuations in customer demand;

 

   

management of rapid growth; and

 

   

general economic conditions.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement.

All forward-looking statements included herein attributable to any of Veraz, Dialogic or any person acting on either party’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, Veraz and Dialogic undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement or to reflect the occurrence of unanticipated events.

 

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SPECIAL MEETING OF VERAZ STOCKHOLDERS

General

We are furnishing this proxy statement to the Veraz stockholders as part of the solicitation of proxies by the Board for use at the special meeting of Veraz stockholders to be held on [                    ], 2010 and at any adjournment or postponement thereof. This proxy statement is first being furnished to our stockholders on or about [                    ], 2010 in connection with the vote on the Arrangement Proposal and the Certificate Amendment Proposals. This document provides you with the information you need to know to be able to vote or instruct your vote to be cast at the special meeting.

Date, Time and Place

The special meeting of stockholders will be held on [    ], 2010, at [    ]:00 [a] [p].m., Pacific Daylight Time, at [    ].

Purpose of the Veraz Special Meeting

At the special meeting, we are asking holders of Veraz common stock to approve the following proposals:

 

   

Proposal No. 1, the Arrangement Proposal—the Acquisition Agreement, dated as of May 12, 2010, between Veraz, and Dialogic, and to approve the Arrangement contemplated thereby, pursuant to which (i) Veraz will acquire all of the outstanding preferred and common shares of Dialogic in exchange for shares of Veraz common stock, and (ii) outstanding options to purchase Dialogic common shares will be exchanged for options to purchase Veraz common stock;

 

   

The Certificate Amendment Proposals

 

   

Proposal No. 2, to approve a certificate of amendment of the certificate of incorporation of Veraz to effect a one-for-         reverse stock split of Veraz’s common stock;

 

   

Proposal No. 3, to change the name of Veraz from “Veraz Networks, Inc.” to “Dialogic Inc.”; and

 

   

Proposal No. 4, to adjourn the special meeting, if necessary, to solicit additional proxies.

Recommendation of the Veraz Board of Directors

After careful consideration of the terms and conditions of the Arrangement and the other Proposals presented at the Veraz special meeting, the Board:

 

   

has determined that each of the Proposals is fair to and in the best interests of us and our stockholders;

 

   

has approved each of the Proposals; and

 

   

recommends that our common stockholders vote “FOR” each of the Proposals.

Record Date; Who is Entitled to Vote

We have fixed the close of business on                     , 2010, as the “Record Date” for determining Veraz stockholders entitled to notice of and to attend and vote at the special meeting. As of the close of business on             , there were              shares of our common stock outstanding and entitled to vote. Each share of our common stock is entitled to one vote per share at the special meeting.

Voting Agreements

Veraz’s major stockholders, in addition to our officers and directors who hold shares of Veraz common stock, have each entered into voting agreements with Dialogic pursuant to which they agreed to vote any shares of common stock held by them “FOR” the adoption of the Arrangement Proposal, the Certificate Amendment Proposals, and any matter that could reasonably be expected to facilitate any of the foregoing, and against alternative transactions.

 

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Quorum

The presence, in person or by proxy, of a majority of all the outstanding shares of common stock will constitute a quorum at the special meeting.

Abstentions and Broker Non-Votes

Proxies that are marked “abstain” and proxies relating to “street name” shares that are returned to us but marked by brokers as “not voted” will be treated as shares present for purposes of determining the presence of a quorum on all matters. The latter will not be treated as shares entitled to vote on the matter as to which authority to vote is withheld by the broker. If you do not give your broker voting instructions, under the rules of the National Association of Securities Dealers, your broker may not vote your shares with respect to the remaining Proposals presented in this proxy statement.

Vote of Our Stockholders Required

The adoption of the Arrangement Proposal will require the affirmative vote of the holders of a majority of the shares of our common stock voting at the special meeting. Because abstentions are not votes, they will have no effect on the approval of the Acquisition Agreement.

The adoption of the Certificate Amendment Proposals will require the affirmative vote of holders of a majority of Veraz common stock outstanding on the Record Date. Abstentions and shares not entitled to vote because of a broker non-vote will have the same effect as a vote “AGAINST” with respect to the Certificate Amendment Proposals.

Voting Your Shares

Each share of Veraz common stock that you own in your name entitles you to one vote. Your proxy card shows the number of shares of our common stock that you own.

There are four ways to vote your shares of Veraz common stock at the special meeting:

 

   

You can vote by signing and returning the enclosed proxy card. If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted, as recommended by our Board, “FOR” the adoption of each of the Proposals. Votes received after a matter has been voted upon at the special meeting will not be counted.

 

   

You can vote over the telephone by dialing toll-free [1-866-540-5760] using a touch-tone phone and follow the recorded instructions. You will be asked to provide the company number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., Eastern Time on [            ], 2010 to be counted.

 

   

You can vote on the Internet by going to http://www.proxyvoting.com/vraz to complete an electronic proxy card. You will be asked to provide the company number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., Eastern Time on [            ], 2010 to be counted.

 

   

You can attend the special meeting and vote in person. We will give you a ballot when you arrive. However, if your shares are held in the name of your broker, bank or another nominee, you must get a proxy from the broker, bank or other nominee. That is the only way we can be sure that the broker, bank or nominee has not already voted your shares.

Revoking Your Proxy

If you give a proxy, you may revoke it at any time before it is exercised by doing any one of the following:

 

   

you may send another proxy card with a later date;

 

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you may notify our corporate secretary in writing before the special meeting that you have revoked your proxy; or

 

   

you may attend the special meeting, revoke your proxy, and vote in person, as indicated above.

Who Can Answer Your Questions About Voting Your Shares

If you have any questions about how to vote or direct a vote in respect of your shares of our common stock, you may call our corporate secretary at (408) 750-9400.

No Additional Matters May Be Presented at the Special Meeting

This special meeting has been called only to consider the adoption of the Arrangement Proposal and the Certificate Amendment Proposals. Under our bylaws, other than procedural matters incident to the conduct of the special meeting, no other matters may be considered at the special meeting if they are not included in the notice of the special meeting.

Appraisal Rights

Stockholders of Veraz do not have appraisal rights under the DGCL in connection with the Arrangement.

Proxies and Proxy Solicitation Costs

We are soliciting proxies on behalf of the Board. This solicitation is being made by mail but also may be made by telephone or in person. We and our directors, officers and special advisors may also solicit proxies in person, by telephone or by other electronic means. Any information provided by electronic means will be consistent with the written proxy statement and proxy card.

We will ask banks, brokers and other institutions, nominees and fiduciaries to forward its proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. We will reimburse them for their reasonable expenses.

If you grant a proxy, you may still vote your shares in person if you revoke your proxy before the special meeting.

 

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PROPOSAL NO. 1

THE ARRANGEMENT PROPOSAL

General Description of the Arrangement

Veraz and Dialogic are proposing to engage in a business combination pursuant to which Veraz will acquire all of the outstanding shares of Dialogic and Dialogic will thereby become a wholly-owned subsidiary of Veraz. The business combination will be carried out pursuant to an Arrangement under a plan of arrangement pursuant to the BCBCA as set forth in the Acquisition Agreement dated May 12, 2010 between Veraz and Dialogic. Pursuant to such plan of arrangement, Veraz will acquire all the outstanding Dialogic shares in consideration of the issuance by it of shares of Veraz common stock.

In addition, as part of the Arrangement, all outstanding options to purchase Dialogic common shares will be exchanged for options to purchase Veraz common stock. The Arrangement will be accounted for under the reverse acquisition method of accounting in accordance with GAAP for accounting and financial reporting purposes.

Upon the consummation of the Arrangement, all outstanding Dialogic common shares and preferred shares will be transferred to Veraz and the former shareholders of Dialogic will thereupon have the right to receive an aggregate of 110,580,900 shares of Veraz common stock, which will be allocated to the holders of such shares in accordance with formulas set out in the Plan of Arrangement. See Annex B to this proxy statement.

Based on the number of shares of Veraz common stock and Dialogic preferred and common shares outstanding as of the date of this proxy statement, 110,580,900 shares of Veraz common stock, representing approximately 70% of the combined company’s voting interests, will be issued to Dialogic shareholders in connection with the Arrangement. Those 110,580,900 shares have an aggregate market value of $110.5 million, calculated based on the closing price of Veraz’s common stock on May 11, 2010, the date prior to the public announcement of the proposed Arrangement. The aggregate market value of the consideration to be received by the Dialogic shareholders upon consummation of the Arrangement is subject to fluctuation based on the trading price of Veraz’s common stock.

The Arrangement is expected to be consummated during the second half of 2010. The consummation of the Arrangement is subject to the approval of the Arrangement Proposal by Veraz’s stockholders and Dialogic’s shareholders, compliance with the approval process ordered by the Supreme Court of British Columbia pursuant to the BCBCA and the satisfaction of certain other conditions, as discussed in greater detail in the section “The Acquisition Agreement—Conditions to Consummation of the Arrangement.”

Background of the Arrangement

The terms of the Acquisition Agreement and the Arrangement are the result of arm’s-length negotiations between representatives of the management teams of Veraz and Dialogic, among members of the boards of directors of both companies and the large shareholders of both companies as well as outside advisors retained by both companies. The following is a brief discussion of the background of these negotiations, the Arrangement and the related transactions.

During the period from early 2008 through November 3, 2009 and again during the period from February 18, 2010 through April 7, 2010, Veraz was involved both in soliciting and evaluating businesses regarding potential combinations and in reviewing and evaluating potential investments in Veraz from third parties. In May 2008, Veraz first created a list of potential targets for a business combination, consisting initially of companies that Veraz believed would either add complementary product lines to Veraz’s existing product mix or allow Veraz access to markets (geographic or otherwise) into which Veraz was not currently selling or was selling at a lower-than-desirable level. Over the course of the following few months, Veraz management was primarily engaged in finding a strategic business partner (reseller or distributor partner) rather than a merger or combination candidate. In December 2008, Veraz management, together with the Board met to review a revised preliminary list of potential

 

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merger candidates and established criteria for identifying companies of particular interest. During that meeting, members of Veraz management and the Board created a short list of five companies that were considered to be the most interesting prospects and assigned responsibilities for specific members of the management team or specific members of the Board to contact or engage with these potential partners.

Using the December 2008 list as a guide (together with the May 2008 list), Veraz management initiated or attempted to initiate conversations (i) directly with third-party companies they believed could make attractive combination partners, (ii) with professional service providers (lawyers, accountants, consultants and bankers), (iii) with their own network of business associates and friends, and (iv) with third-party intermediaries, including, on an informal bases, the investment bankers who had underwritten Veraz’s initial public offering. Veraz also responded to inquiries or solicitations from (i) companies looking for capital or investment alternatives, and (ii) investment bankers or other similar professionals who represented companies engaged in sale or fund-raising processes. From time to time the list of potential candidates was updated and supplemented based on additional information derived from these discussions with third parties.

As a result of these efforts, Veraz directly contacted approximately seventeen potential targets and held detailed discussions with three potential target companies, not including Dialogic which had not yet been identified as a potential target. Veraz signed non-disclosure agreements relating to thirteen of these potential target companies in connection with the discussion of potential business combination opportunities. Veraz was still in discussions with a potential target company other than Dialogic as late as October 2009. With respect to these business combination opportunities, discussions included financial disclosures, reviews of potential transaction structures, reviews of preliminary estimates of transaction values and discussions of management objectives, business plans and projections. Each of the three potential target companies with which Veraz engaged in detailed discussions was either in the initial list created by Veraz or in a subsequent version of that list. None of the discussions with the potential target companies, other than Dialogic, resulted in a definitive agreement or letter of intent regarding a potential business combination.

During the course of the discussions regarding potential business combinations the possibility of a conflict of interest arose among Board members. In particular, Board members associated with venture capital firms often had investments in a broad array of companies, including companies with which Veraz was potentially interested in pursuing a business combination. Therefore, on February 13, 2009 the Board established the Special Transaction Committee, consisting of Mr. Bob Corey and Mr. Mike West, both independent directors. The Special Transaction Committee was constituted for the purpose of discussing merger and acquisition opportunities and/or other corporate restructurings. Veraz did not have detailed discussions with any company with which members of the Board held an interest.

Based on their experience in assessing mergers and combinations, Veraz’s management assessed the business alternatives for the companies that could be a potential target for a business combination. Veraz’s management determined that any of these companies identified as a suitable potential business combination partner would typically have several alternatives to any potential business combination with Veraz, including remaining independent or selling itself to another third party, as well as obtaining funding either privately or publicly. The reasons for which Veraz did not reach agreement with potential business combination partners other than Dialogic varied. For example, after preliminary discussions with one potential target, the target made it clear that the valuation expectations from such target were substantially different from what Veraz was willing to accept. In another case, the target determined that it was in the best interest of the target to consolidate its own business rather than pursue merger discussions with Veraz. For another company, the company’s own business operations changed and management of the target decided to remain a stand-alone entity rather than pursue further discussions with Veraz.

On or about April 14, 2009, a representative of Jefferies & Company, Inc. (“Jefferies”), Dialogic’s financial advisor, introduced Doug Sabella, Veraz’s President and CEO to Nick Jensen, Chairman of Dialogic’s board of directors and its President and CEO. On May 13, 2009, Mr. Sabella met with Mr. Jensen in Veraz’s offices in San Jose, California. At that meeting, Mr. Jensen inquired whether Veraz would consider discussing a possible

 

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business combination with Dialogic. Although Veraz was generally familiar with Dialogic and had entered into discussions with Dialogic in April 2008 regarding a potential business partnership, Dialogic was not on Veraz’s initial list (or any revised list) of potential business combination partners.

Following the May 13, 2009 meeting, Eric Schlezinger, Veraz’s General Counsel, and Anthony Housefather, Dialogic’s General Counsel, confirmed that the mutual non-disclosure agreement entered into between the parties in April 2008 was sufficient to cover additional discussions among the parties regarding a potential merger. On May 27, 2009, members of the Veraz management team, including Mr. Sabella and Dawn Hogh, Veraz’s Vice President of Marketing, and members of the Dialogic management, including Mr. Jensen, Tim Murray, Dialogic’s then Chief Operating Officer, and Jim Machi, Dialogic’s Senior Vice President of Marketing, participated in a lengthy conference call during which both parties provided presentations regarding each respective company, its product portfolio, as well as customers, markets and channels. On May 29, 2009, the following members of the Veraz management team, Mr. Sabella, Al Wood, Veraz’s Chief Financial Officer and the following members of the Dialogic management team, Mr. Jensen and Jean Gagnon, Dialogic’s Chief Financial Officer participated in a lengthy conference call during which both companies provided presentations regarding each respective company and its financial results and possible financial results as a combined company.

On June 9-10, 2009, Veraz management, Messrs. Wood, Sabella and Ms. Hogh and Dialogic management, Messrs. Jensen, Gagnon, Mele and Machi, met to further discuss a potential transaction and to begin to develop possible synergy models regarding the combined companies. During the period between the June 9-10 meeting and June 19, 2009, Dialogic and Veraz representatives had several follow up conference calls including: (1) several conference calls between Mr. Wood and Mr. Gagnon for the purpose of developing a combined company business model; and (2) several conference calls between Ms. Hogh and Mr. Machi regarding combining the companies’ product portfolios. During the course of these conference calls, the participants shared presentations regarding how the business of a combined company could be operated with a particular emphasis on identifying and quantifying potential operational synergies as well as sales and growth opportunities that could be obtained by combining the two companies.

Additionally, during June 2009, Veraz interviewed and considered several possible investment bankers to assist Veraz in a transaction with Dialogic, as well as other potential strategic transactions. After reviewing proposals from some of those investment bankers, Veraz entered into an engagement letter with Pagemill on July 13, 2009. Pursuant to the engagement letter, Pagemill was to assist Veraz in evaluating a potential business combination with Dialogic (as well as other third parties) and, if requested by Veraz, provide a fairness opinion regarding a potential transaction with Dialogic. Representatives of Pagemill were immediately put in contact with representatives from Jefferies to initiate discussions about a potential business combination between Dialogic and Veraz.

On July 13, 2009, the Board, together with representatives of Pagemill and Veraz management met to discuss a potential business combination between Veraz and Dialogic. Following that meeting, Veraz invited representatives of Dialogic to participate in a Board meeting to be held on August 3, 2009. At the August 3, 2009 Board meeting, representatives of Dialogic management, including Messrs. Jensen, Machi and Mele presented information regarding Dialogic as well as a preliminary analysis of the potential benefits of a merger.

Following the August 3, 2009 Board meeting, members of the Veraz management, including Messrs. Sabella, Wood, and Schlezinger and Dialogic management, including Messrs. Jensen, Gagnon and Housefather, together with certain representatives of Jefferies, Milledge Hart, Managing Director of Pagemill and Christian Bennett, Principal at Pagemill, and each party’s outside counsel, began discussing preliminary terms for a transaction between the parties. The Board met again on August 4, 2009, August 5, 2009, August 26, 2009 and September 14, 2009 to discuss the terms of a potential transaction between Veraz and Dialogic including discussing the economic terms of the transaction, the potential deal structure, avenues to restructuring Dialogic’s existing debt and the Board’s fiduciary duties. During the course of these discussions multiple draft term sheets

 

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were proposed among the parties, and Tenennbaum Capital Partners, LLC (“TCP”), the holder of Dialogic’s existing long-term debt, made an oral proposal to Dialogic regarding certain parameters within which they believed the debt could be restructured if a combination with Veraz were to occur.

On September 25, 2009, Veraz received an inquiry from one of the potential merger candidates originally on the Veraz list of potential partners. On September 28, 2009, Mr. Sabella informed Mr. Jensen that it had received an inquiry and that, although it was interested in continuing discussions with Dialogic, the Board felt it was necessary to enter into discussions with such third party. Mr. Jensen immediately informed Mr. Sabella that Dialogic was not interested in further discussions with Veraz at that time, but left open the possibility that if Veraz wished to continue discussions on an exclusive basis it would be willing to open discussions again.

On September 25, 2009, Veraz and the potential third-party merger candidate entered into a non-disclosure agreement. Between September 25, 2009 and October 25, 2009, Veraz management, including Messrs. Sabella, Schlezinger and Ben Ishisaki, Veraz’s Controller, together with Messrs. Hart and Bennett of Pagemill and members of the Board held multiple discussions with the potential third-party merger candidate, including discussions regarding potential terms for a transaction and potential product and operational synergies. On October 25, 2009, the potential third-party merger candidate informed Veraz that its board of directors had decided to focus on new product sets rather than a potential merger and therefore all discussions regarding a potential merger with this third-party were terminated.

On October 27, 2009, Mr. Sabella contacted Mr. Jensen to inform him that Veraz’s discussions with the third party had terminated and to determine whether Dialogic was still interested in discussing a potential merger. Mr. Jensen informed Mr. Sabella that Dialogic would be interested in having additional discussions but would only do so under the provisions of an exclusivity agreement that would prevent either party from entering into negotiations with a third party for a limited period of time. On November 3, 2009, the Board met, discussed and approved entering into an addendum to the non-disclosure agreement with Dialogic that would require each party to negotiate exclusively with the other regarding a potential merger for a period of 60 days. On November 3, 2009, Veraz and Dialogic signed an exclusivity addendum to the existing non-disclosure agreement.

Commencing shortly after signing the exclusivity addendum to the non-disclosure agreement, the parties commenced an extensive due diligence process. On December 1, 2009, Veraz retained a due diligence consultant (the “Due Diligence Consultant”) to assist Veraz in its financial due diligence regarding Dialogic. On December 5, 2009, Cooley LLP, outside legal counsel to Veraz, distributed to Dialogic and Dialogic’s counsel the first draft of the Acquisition Agreement. Thereafter, the parties engaged in extensive negotiations and exchanged multiple drafts of the Acquisition Agreement and related agreements. In addition, during this period, there were frequent communications between Veraz and Dialogic and their respective counsel, including emails regarding the negotiation of transaction terms, due diligence materials and supplemental due diligence requests, drafts of various transaction documents, and updates on the financial performance of Dialogic and Veraz. During this period, representatives of Pagemill and Jefferies along with members of the Veraz and Dialogic management teams also had extensive and frequent discussions regarding the potential exchange ratio for any transaction between Veraz and Dialogic and exchanged emails, presentations and spreadsheets calculating the potential exchange ratios.

Starting in late November 2009 and continuing through April 2010, members of the management teams of Dialogic and Veraz, and in some cases members of the Board, met in person, or had telephone conversations, with several different lending/banking institutions regarding possible ways in which Dialogic’s existing debt could be refinanced or restructured. These discussions additionally involved representatives of outside legal counsel as well as representatives of Jefferies and Pagemill to assist in reviewing the terms of debt proposals made by such banks or lending institutions. On or about February 12, 2010, TCP provided Dialogic with a preliminary term sheet regarding the restructuring of the existing Dialogic debt. This preliminary term sheet was a revision of the terms verbally proposed by TCP on or about September 25, 2009. Following receipt of this preliminary term sheet, representatives of Veraz and Dialogic continued discussions with four other banks/lending institutions regarding the restructuring or refinancing of Dialogic’s existing debt. Veraz and Dialogic were not able to finalize terms with any banking institution that were superior to the existing proposals from TCP.

 

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On December 3, 2009, Veraz, Dialogic and ECI executed an addendum to the existing nondisclosure agreement between Veraz and ECI. Pursuant to the terms of that addendum, Mr. Jensen and Mr. Sabella met with representatives of ECI (as a large business partner of Veraz) to update them regarding the potential merger discussions between Veraz and Dialogic and to answer any questions ECI may have. Additionally, in late January 2010, Veraz and Argonaut Private Equity, a large holder of Veraz common stock, entered into a nondisclosure agreement. Under the terms of the non-disclosure agreement Mr. Sabella provided information regarding the proposed merger of Dialogic and Veraz.

On December 4-5, 2009, members of the Veraz management team, including Mr. Sabella and Ms. Hogh, Eyal Hilzenrat, Vice President Bandwidth Optimization, Yair Hevdeli, Vice President Engineering and members of the Dialogic management team, including Messrs. Jensen, Gagnon, Housefather, Machi, Mele, George Kontopidis, Senior Vice President Engineering and two members of the Dialogic board of directors, Dion Joannou and Rajneesh Vig, and two then-current observers on the Dialogic board of directors, Glenn Luk and Timothy Gravely, met in Parsippany, New Jersey at Dialogic’s offices to discuss, in depth, technical and product due diligence.

On January 1, 2010, Veraz and Dialogic agreed to extend the exclusivity period of the addendum to the non-disclosure agreement so that such period would now terminate on January 31, 2010. On January 8, 2010 the Board, along with the representatives of the Due Diligence Consultant due diligence team, members of the Veraz management team, Veraz outside counsel and representatives of Pagemill met. At this meeting the Due Diligence Consultant presented preliminary financial due diligence findings; Pagemill presented a draft preliminary fairness opinion and members of Veraz management presented the status of the negotiations regarding the definitive agreements, as well as management’s review of due diligence materials. On January 21, 2010, Veraz and Dialogic again amended the exclusivity period to provide that such exclusivity period would now expire on February 18, 2010. The Board met again on February 15, 2010 to discuss the terms of the proposed transaction and requested management provide extensive details regarding the proposed transaction at the February 17, 2010 Board meeting.

At the February 17, 2010 Board meeting, representatives of the Due Diligence Consultant presented the Board with its final financial due diligence report, representatives of Pagemill provided a revised and updated preliminary fairness opinion, and Veraz management provided the Board with its due diligence report as well as significant additional information regarding the terms of the Acquisition Agreement, potential synergies from the Arrangement, debt structure and proposed board and management structure.

Following the February 17, 2010 Board meeting, Pascal Levensohn and Promod Haque, representing themselves or their firms as stockholders, entered into a series of lengthy discussions with Nick Jensen and other large Dialogic shareholders regarding the exchange ratios and the debt restructuring. Messrs. Haque and Levensohn also discussed the potential transaction, under the existing non-disclosure agreement in place, with both representatives of ECI and ECI’s financial advisors. During the course of these discussions, Veraz stockholders and Dialogic shareholders discussed in detail revisions to the economic terms under which these particular Veraz stockholders would accept a transaction with Dialogic.

In late February and early March 2010, Veraz management, together with Pagemill, initially identified approximately 36 different companies and financial institutions (some of which were companies previously identified by Veraz as potential partners) that Veraz and Pagemill believed would be possible merger candidates or investment opportunities should Veraz be unable, for whatever reason, to conclude a transaction with Dialogic. Additionally, Veraz, together with Pagemill, prepared a public information book including a summary of information regarding Veraz that had previously been made public. On March 11, 2010, Veraz issued a press release announcing its fourth quarter 2009 financial results and also announced that Veraz had retained Pagemill to examine Veraz’s strategic alliance, divestiture, and acquisition opportunities. Further, Veraz announced that the Board had determined that it was in the best interests of the shareholders, customers and employees to explore all strategic options with the objective of maximizing shareholder value. In response to this press release, Veraz received inbound inquiries from nine different companies or financial institutions regarding a potential

 

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transaction. After reviewing the interest from the various parties, Veraz concluded that the transaction proposed by Dialogic continued to represent the best opportunity for Veraz and signed another exclusivity addendum with Dialogic to commence the exclusivity period again as of April 7, 2010 with the exclusivity period to expire on April 30, 2010. On April 14, 2010, Veraz and Dialogic signed another exclusivity addendum extending the exclusivity period until May 7, 2010.

On April 30, 2010, the Special Transaction Committee of the Board met to discuss the Arrangement. Veraz counsel reviewed the terms of the Acquisition Agreement and related agreements including a discussion of the role and responsibilities of members of the Special Transaction Committee and the Board generally in exercising its fiduciary obligations to all stockholders, and answered questions directed by members of the committee. The Special Transaction Committee then unanimously agreed to recommend the Arrangement to the Board at the meeting to be held on May 4, 2010.

On May 4, 2010, the Board met again to authorize the Arrangement. Veraz counsel reviewed the terms of the Acquisition Agreement and related agreements and answered questions directed by members of the Board. Pagemill rendered to the Board an opinion as to the fairness, from a financial point of view, to Veraz and the holders of Veraz’s common stock of the consideration to be paid in the Arrangement. The Board then unanimously approved the Arrangement (and all associated documents, including the Acquisition Agreement) subject to receipt of the final written fairness opinion from Pagemill. Pagemill delivered the final fairness opinion to the Board on May 8, 2010.

Between the date of delivery of the Pagemill fairness opinion on May 8, 2010 and May 12, 2010, the Dialogic and Veraz management teams arranged for the collection of all required signatures on the Acquisition Agreement and other related agreements.

On May 12, 2010 Veraz and Dialogic entered into the Acquisition Agreement and related agreements and publicly announced their agreement through press releases issued by both parties. Also, on May 12, 2010, Dialogic received the Veraz Voting Agreements from several major stockholders who together own approximately 35% of the outstanding stock common stock of Veraz and Veraz received the Dialogic Support Agreements from all Dialogic shareholders.

The Veraz Board of Directors’ Reasons for the Approval of the Arrangement

In considering the terms of the Arrangement, the Board considered several factors, including various industry and financial data. The Board also reviewed and considered certain valuation analyses and metrics compiled by Veraz’s management and Pagemill, to determine that the Arrangement was fair, from a financial perspective, and in the best interests of Veraz and its stockholders.

Veraz performed a due diligence review of Dialogic that included an industry analysis, a description of Dialogic’s existing business model, a valuation analysis and financial projections of both Dialogic and the combined company to enable the Board to ascertain the reasonableness of the consideration to be paid by Veraz. During its negotiations with Dialogic, Veraz did not receive services from any financial advisor other than Pagemill. Prior to approving the Acquisition Agreement, the Board obtained an opinion from Pagemill as to the fairness, from a financial point of view, to Veraz and the holders of Veraz’s common stock of the consideration to be paid by Veraz in the Arrangement.

The Board considered a wide variety of factors in connection with its evaluation of the Arrangement. In light of the complexity of those factors, the Board did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. In addition, individual members of the Board may have given different weight to different factors. The Board determined that the Arrangement, the Acquisition Agreement and the transactions contemplated thereby are fair to Veraz’s stockholders, from a financial perspective, and in the best interests of Veraz and its stockholders.

 

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In considering the Arrangement, the Board gave considerable weight to the following factors:

 

   

The potential growth opportunities for the combined company that are provided by Dialogic’s video gateway products and services;

 

   

Veraz management’s belief that it is size-constrained in its ability to sell its products and services into the largest telecommunications service providers and the addition of Dialogic will allow it to compete in accounts where it had previously been excluded;

 

   

Veraz management’s belief that within Dialogic’s market segment, Dialogic is well known, has a strong brand and is perceived as a leader in various market segments;

 

   

Dialogic’s sizeable patent and intellectual property portfolio, offering potential differentiation from competitors;

 

   

Veraz management’s belief that there are opportunities to grow Dialogic’s business in the service provider market where Veraz has historically sold its products and similarly believes that there are opportunities to grow Veraz’s business in the enterprise market where Dialogic has historically sold its products and services;

 

   

Veraz management’s belief that there are significant opportunities to improve efficiencies, cut costs and extend the business into product segments with potentially higher revenue growth and gross margins;

 

   

Veraz management’s belief that it will also be able to grow revenue by selling Dialogic products into the emerging markets, such as Brazil, Russia and India where Veraz has historically successfully sold its products;

 

   

Veraz management’s belief that it will also be able to grow revenue by selling Veraz products through Dialogic’s existing sales channels, which includes the ability for Veraz to sell into geographic markets where Dialogic has historically successfully sold its products such as China, continental Europe and North America;

 

   

historical and current information concerning Veraz’s business, including negative trends in its financial condition, operations and competitive position;

 

   

current financial market conditions, and historical market prices, volatility and trading information with respect to Veraz’s common stock;

 

   

Veraz’s limited prospects if it were to remain an independent, standalone company as a result of factors such as its declining cash balance, the expenses and fixed costs associated with its operations and its prospects for development and commercialization of additional products and services;

 

   

Veraz management’s belief that the combination with Dialogic would result in a combined company with the potential for enhanced future growth and value as compared to Veraz as an independent, standalone company;

 

   

the opportunity for Veraz’s stockholders to participate in the potential future value of the combined company;

 

   

the Board’s view as to the potential for other third parties to enter into strategic relationships with Veraz on favorable terms, if at all, based on the interest expressed by other third parties during the strategic alternatives review process undertaken by Veraz;

 

   

historical and current information concerning Dialogic’s business, financial performance, financial condition, operations and management, including the results of a due diligence investigation of Dialogic conducted by Veraz’s management and advisors;

 

   

Veraz management’s belief that the Arrangement was more favorable to Veraz’s stockholders than any other alternative reasonably available to Veraz and its stockholders, including the alternative of remaining an independent, standalone company;

 

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the opinion of Pagemill to the Board that, as of May 8, 2010 and subject to the various assumptions made, procedures followed, matters considered and limitations described in the opinion, the exchange ratio, representing the number of shares of Veraz common stock to be issued in the Arrangement pursuant to the terms of the Acquisition Agreement, was fair, from a financial point of view, to Veraz and the holders of Veraz’s common stock, as more fully described below under the caption “Opinion of Pagemill Partners”; and

 

   

the terms and conditions of the Acquisition Agreement, including:

 

   

the determination that the relative percentage ownership of the combined company by Veraz’s stockholders and Dialogic’s stockholders is consistent with Veraz’s perceived valuations of each company at the time the Board approved the Acquisition Agreement;

 

   

the non-solicitation provisions limiting Dialogic’s ability to engage in discussions or negotiations regarding, or furnish to any person any information with respect to, assist or participate in any effort or attempt by any person with respect to, or otherwise cooperate in any way with, an alternative acquisition proposal;

 

   

Veraz’s rights under the Acquisition Agreement to pursue alternative acquisition proposals received independently under specified circumstances;

 

   

the absence of any terms providing for an adjustment to the exchange ratio based on the amount of cash or working capital at closing for Veraz;

 

   

the requirement that all holders of Dialogic’s capital stock enter into the Dialogic Support Agreements providing that such shareholders vote in favor of adoption of the Acquisition Agreement and against any proposal made in opposition to, or in competition with, the Arrangement;

 

   

the Board’s belief that the termination fee and obligation to reimburse expenses in the circumstances set forth in the Acquisition Agreement was reasonable in the context of termination fees that were payable in other comparable transactions and would not be likely to preclude another party from making a superior acquisition proposal.

Other Factors

The Board also considered potentially negative factors. Among the potentially negative factors considered by the Board, which are more fully described in the “Risk Factors” section of this proxy statement, are the following:

 

   

Dialogic’s current and anticipated debt structure;

 

   

Dialogic’s dependence on TDM products for the majority of its revenues;

 

   

potential risks and uncertainties if the combined company is unable to achieve anticipated synergies;

 

   

the risk that the Arrangement might not be completed in a timely manner or at all due to failure to satisfy the closing conditions, some of which are outside of Veraz’s control;

 

   

if the Arrangement is not completed, the potential adverse effect of the public announcement of the Arrangement on Veraz’s business, including its ability to attract and retain key personnel and its overall competitive position;

 

   

the immediate and substantial dilution of the equity interests and voting power of Veraz’s stockholders upon completion of the Arrangement;

 

   

the ability of Dialogic’s current shareholders to significantly influence the combined company’s business after the completion of the Arrangement;

 

   

the restrictions that the Acquisition Agreement imposes on soliciting competing acquisition proposals;

 

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the fact that Veraz would be obligated to pay a termination fee to Dialogic and reimburse Dialogic’s expenses, subject to certain limitations, if the Acquisition Agreement is terminated under certain circumstances;

 

   

the restrictions on the conduct of Veraz’s business prior to the completion of the Arrangement, which require Veraz to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, which restrictions may delay or prevent Veraz from pursuing business opportunities that would otherwise be in its best interests as a standalone company;

 

   

the condition that Veraz receive approval from Nasdaq for the re-listing of Veraz’s common stock in connection with the Arrangement based on the initial listing requirements of the Nasdaq Global Market;

 

   

the challenges and costs of combining administrative operations and the substantial expenses to be incurred in connection with the Arrangement, including the risks that delays or difficulties in completing the integration of the two businesses and such other expenses, as well as the additional public company expenses and obligations that Dialogic will be subject to in connection with the Arrangement that it has not previously been subject to, could adversely affect the combined company’s operating results and preclude the achievement of some benefits anticipated from the Arrangement;

 

   

Compliance with SEC filing requirements including 404 and regulatory compliance costs;

 

   

the possible volatility, at least in the short term, of the trading price of Veraz’s common stock resulting from the announcement and pendency of the Arrangement;

 

   

the interests of Veraz’s executive officers and directors in the Arrangement, as described in the section of this proxy statement entitled “Interests of Veraz’s Directors and Executive Officers in the Arrangement”; and

 

   

various other applicable risks associated with the business of Veraz and the combined company and the Arrangement, including those described in the section of this proxy statement entitled “Risk Factors.”

The foregoing discussion of the Board’s considerations concerning the Arrangement is forward looking in nature. This information should be read in light of the discussions under the heading “Forward-Looking Information.”

The foregoing discussion of the information and factors considered by the Board is not meant to be exhaustive, but includes all of the material information and factors considered by the Board.

Recommendation of the Veraz Board of Directors

After careful consideration, the Board voted unanimously in favor of approval of the Arrangement and the determination that the Arrangement is fair to and in the best interests of Veraz and its stockholders. On the basis of the foregoing, the Board has approved and declared advisable the Arrangement and recommends that you vote or give instructions to vote “FOR” the adoption of the Arrangement Proposal.

Interests of Veraz Directors and Executive Officers in the Arrangement

When you consider the recommendation of the Board in favor of adoption of the Arrangement Proposal, you should keep in mind that Veraz’s directors and executive officers may have interests in the Arrangement that are different from, or in addition to, your interests as a stockholder. In general, these interests could reasonably be expected to give Veraz’s directors and executive officers a greater incentive to support consummation of the Arrangement than Veraz’s other stockholders, and present a conflict of interest. The Board was aware of these conflicts of interest during its deliberations on the merits of the Arrangement and in making its decision approving the Arrangement, Acquisition Agreement and the related transactions.

 

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Ownership Interest

As of June 30, 2010, all directors and executive officers of Veraz, together with their affiliates, beneficially owned 23.9% of the outstanding shares of Veraz common stock. Approval of the Arrangement requires the affirmative vote of the holders of a majority of the votes cast, in person or by proxy, at the Veraz special meeting. Certain Veraz officers and directors, and their affiliates, have also entered into Veraz Voting Agreements in connection with the Arrangement. The Veraz Voting Agreements are discussed in greater detail under the caption “Dialogic Support Agreement and Veraz Voting Agreement” beginning on page 104.

For a more complete description of the interests of the Veraz directors and executive officers, please see the section entitled “Security Ownership of Certain Beneficial Owners and Management” beginning on page 186.

Executive Officers—Employment and Change in Control Agreements

We have entered into employment agreements with certain of our executive officers that require us to make payments upon termination or constructive termination if our executives are terminated within 12 months following a change in control of Veraz, including upon the consummation of the Arrangement, which would constitute a change of control. Certain of these Arrangements with our executive officers are discussed below. To be eligible for any benefits, the applicable executive must be terminated without “cause” or voluntarily terminate his or her employment for “good reason” and will be required to sign a standard release agreement releasing claims against us and agreeing to the continued applicability of confidentiality and intellectual property agreements.

Unless otherwise indicated below, in each of the employment agreements described below, (1) “cause” is defined as one or more of the following events: (i) executive’s conviction of a felony, (ii) executive’s commission of any act of fraud with respect to Veraz, (iii) any intentional misconduct by executive that has a materially adverse effect upon our business that is not cured by executive within 30 days of a written notice, (iv) a breach by executive of any of executive’s fiduciary obligations as an officer that has a materially adverse effect upon our business that is not cured by executive within 30 days of a written notice, or (v) executive’s willful misconduct or gross negligence in performance of his duties, including executive’s refusal to comply in any material respect with the legal directives of such executive’s superior so long as such directives are not inconsistent with executive’s position or duties, that are not cured by executive within 30 days of a written notice; (2) “good reason” is defined as any one of the following events, which occurs without the executive’s consent: (i) reduction of the executive’s then current base salary, (ii) any material diminution of the executive’s duties, responsibilities or authority (excluding certain specific situations), or (iii) any requirement that the executive relocate to a work site more than 25 miles from our current location; and (3) “change in control” is defined as any of the following: (i) a sale or other disposition of all or substantially all the assets of Veraz, (ii) a merger or other reorganization, in which our shareholders immediately prior to such transaction own less than 50% of the voting power of the surviving corporation, or (iii) any transaction or series of transactions, in which in excess of 50% of Veraz’s voting power is transferred. Consummation of the Arrangement will constitute a change of control.

Douglas A. Sabella

If Mr. Sabella resigns for good reason or is terminated without cause within 12 months following a change in control, Mr. Sabella will be entitled to receive severance payments equal to 12 months of his then-current base salary payable in a lump sum payment and the payment of any and all bonuses that are due or payable at the time of such termination, and the vesting of Mr. Sabella’s stock options, granted pursuant to his employment agreement, shall be accelerated in full.

Pursuant to his agreement, Mr. Sabella is subject to customary nondisclosure, confidentiality, non-competition covenants and a non-solicitation covenant that remains in effect during the term of employment and for one year following termination of employment.

 

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Albert J. Wood

If Mr. Wood resigns for good reason or is terminated without cause within 12 months following a change in control, Mr. Wood will be entitled to receive severance payments equal to 12 months of his then-current base salary payable in a lump sum payment, and the vesting of Mr. Wood’s stock options, granted pursuant to his employment agreement, shall be accelerated in full.

Pursuant to his agreement, Mr. Wood is subject to customary nondisclosure, confidentiality, non-competition covenants and a non-solicitation covenant that remains in effect during the term of employment and for one year following termination of employment.

William R. Rohrbach

If Mr. Rohrbach resigns for good reason or is terminated without cause within 12 months following a change in control, Mr. Rohrbach will be entitled to receive severance payments equal to six months of his then-current base salary payable in a lump sum payment, plus reimbursement for continuing coverage for Mr. Rohrbach and his dependants under the Veraz plans pursuant to Mr. Rohrbach’s COBRA election, and the vesting of Mr. Rohrbach’s stock options, granted pursuant to his employment agreement, shall be accelerated in full.

Pursuant to his agreement, Mr. Rohrbach is subject to customary nondisclosure, confidentiality, non-competition covenants and a non-solicitation covenant that remains in effect during the term of employment and for one year following termination of employment.

Israel Zohar

If Mr. Zohar resigns for good reason or is terminated without cause within eighteen months of a change in control, Mr. Zohar is entitled to receive severance payments equal to six months of his then-current base salary payable monthly, continuation of medical benefits for a period of six months and full acceleration of the vesting on his then-outstanding options and other stock awards, provided that such acceleration shall not result in Mr. Zohar having unvested shares in an amount less than the amount that would vest over the 12 month period following such termination.

Pursuant to Mr. Zohar’s agreement, termination by either party requires prior written notice of 90 days, unless such termination is conducted in circumstances that do not require prior notice under Israeli law. Pursuant to his agreement, Mr. Zohar is also subject to customary nondisclosure, confidentiality and non-competition covenant and a non-solicitation covenant that remains in effect during the term of employment.

Mr. Zohar’s agreement defines “change in control” to mean any one of the following: (i) sale or other disposition of all or substantially all of the assets of Veraz, (ii) a merger in which Veraz is not the surviving corporation, (iii) a reverse merger involving Veraz, in which Veraz is the surviving corporation, but the shares of common stock of Veraz are converted into other form of property, (iv) an acquisition by a person or group of people of more than 50% of securities of Veraz representing at least 50% of the voting power, entitled to vote on election of directors, or (v) if the individuals who are, as of the effective date of such transaction, members of the Board cease to constitute at least 50% of the Board, provided, however, that new members that were elected by the vote of at least 50% of the original Board shall be deemed to be part of the original Board. Mr. Zohar’s agreement defines “cause” as circumstances in which Veraz is not required under the law to provide prior notice before terminating his employment, including each one of the following cases: (i) Veraz has reasonable suspicion of a criminal offense having being committed in connection with Mr. Zohar’s employment or the commission of an offense which contains an element of infamy, (ii) Mr. Zohar’s breach of his duty of trust towards Veraz or taking an action in conflict of interests, (iii) Mr. Zohar’s breach of his covenants of confidentiality, non-competition, and protection of intellectual property, which has not been amended within ten days after a written notice, or (iv) causing damage maliciously or negligently to Veraz’s property.

 

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Members of the Board of Directors

After the consummation of the Arrangement, Messrs. Corey, Sabella and West will continue to serve as members of the Board. As such, in the future Messrs. Corey and West, as non-employee directors, may receive cash compensation, board fees, stock options or stock awards if the Board so determines. Veraz currently has made no determinations regarding the compensation it will pay its directors after consummation of the Arrangement.

Certain Other Interests in the Arrangement

In addition to the interests of our directors and executive officers in the Arrangement, you should keep in mind that certain individuals promoting the Arrangement and/or soliciting proxies on behalf of Veraz may have interests in the Arrangement that are different from, or in addition to, your interests as a stockholder.

 

   

Under the terms of our engagement letters with Pagemill, we paid a $150,000 non-refundable fee to Pagemill for rendering the fairness opinion. In addition, we agreed to pay an additional $875,000 fee upon consummation of the Arrangement to Pagemill in exchange for certain advisory services Pagemill is providing to us in connection with the Arrangement. We also agreed to reimburse Pagemill for its reasonable out-of-pocket expenses and to indemnify Pagemill against certain liabilities relating to or arising out of services performed by Pagemill in rendering its opinion. The contingent nature of this compensation may be seen to create a conflict of interest with respect to the provision by Pagemill of its fairness opinion, although Pagemill does not believe that the potential payment of this fee altered its analysis or issuance of the fairness opinion.

Opinion of Pagemill

In preparation for the May 4, 2010 Board meeting, Pagemill provided to the Board a draft opinion, subsequently confirmed in writing on May 8, 2010, that, as of each date and based upon and subject to the assumptions, factors and limitations set forth in the written opinion and described below, the consideration to be paid in the Arrangement was fair, from a financial point of view, to Veraz and holders of Veraz’s common stock. The full text of Pagemill’s opinion dated May 8, 2010, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Pagemill in rendering its opinion, is attached to this Proxy Statement as Annex G and is incorporated in its entirety herein by reference. You are urged to carefully read the opinion in its entirety. Pagemill rendered its opinion to the Board for the information of its members in connection with their consideration of the proposed Arrangement. Pagemill’s written opinion was directed to the Board and does not constitute a recommendation to any Veraz stockholder as to how to vote or act on any matter relating to the Arrangement.

In arriving at its opinion, Pagemill made such reviews, analyses and inquiries as it deemed necessary and appropriate. Among other things, Pagemill has:

 

   

Reviewed Veraz’s audited financial statements for the fiscal years ended December 31, 2004 through 2008, Veraz-prepared interim financial statements for 2009 and management prepared forecasts for the reporting periods through December 31, 2012 and Dialogic’s audited financial statements for the fiscal years ended December 31, 2005 through 2008, Dialogic-prepared interim financial statements for 2009 and management prepared forecasts for the reporting periods through December 31, 2011;

 

   

Reviewed a draft of the Acquisition Agreement dated May 7, 2010;

 

   

Held discussions with certain members of the senior management of both companies to discuss the operations, financial condition, future prospects and projected operations and performance of each company;

 

   

Evaluated the financial performance of both Veraz and Dialogic;

 

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Considered the implied valuation of both Veraz and Dialogic based on: the observed values of comparable publicly-traded companies; a survey of prices paid in similar transactions; and a model of each of Veraz’s and Dialogic’s future value based on each company’s current forecasts;

 

   

Examined Veraz’s stock performance and trading activity in recent years; and

 

   

Conducted such other studies, analyses and inquiries as Pagemill deemed appropriate.

Pagemill viewed several trends and factors with respect to each of Veraz and Dialogic as particularly relevant for purposes of rendering its opinion. In particular:

Factors with respect to Veraz:

 

   

Veraz is one of the smaller publicly-traded providers of telecom network equipment. Based on 2009 revenues, Veraz is the smallest of all companies analyzed by Pagemill when they applied the market approach using publicly available company comparables as more fully described below. Veraz’s status as a public company mandates regulatory compliance costs, including management time and expense. Veraz management estimated for Pagemill that the annual direct and indirect costs of being a public company were approximately $2 million.

 

   

Since inception, Veraz has faced challenges in becoming a supplier to large telecommunications service providers due to its small size. Much of Veraz’s success has come from selling into developing countries where Veraz has faced and continues to face rising regulatory and overhead costs; legal exposure particularly exposure to liability under the U.S. Foreign Corrupt Practices Act; and increasing competition from offshore suppliers who offer lower cost, government-subsidized products.

 

   

Although Veraz’s annual revenue grew steadily from $69 million in 2004 to $126 million in 2007, since the start of 2008, revenues for both of Veraz’s product lines has decreased and total revenues declined 26% in 2008 and a further 20% in 2009. Only services revenue has increased. Although gross margins are steady and operating expenses were trimmed in 2008 and 2009, losses persist. Veraz has sufficient cash to maintain operations at current levels, but the cash burn rate cannot continue indefinitely.

 

   

Veraz has explored potential cash distribution options and strategic partnerships since 2008 and has held substantive discussions with several potential partners. Of these, only discussions with Dialogic led to an agreement on terms.

 

   

The Veraz ControlSwitch product is technically advanced and has its strongest distribution in high-growth emerging markets.

 

   

With respect to Veraz’s trading history, after Veraz common stock suffered a 34% one-day drop in February 2008, Veraz’s stock price has continued to be volatile and has underperformed the Standard&Poor’s 500 as well as an index of its peers. Despite a recovery since December of 2008, Veraz common stock is still down 61% in the past two years. Further, Veraz common stock is thinly traded as shown by its low trading volume as a percentage of outstanding shares. It would be difficult to liquidate a large block of shares without negatively impacting the share price.

Factors with respect to Dialogic:

 

   

Dialogic has made three significant acquisitions which have improved its access to large customers and given it a critical mass (revenue run rate over $200 million for 2008) necessary to maintain supplier status to these large customers.

 

   

Dialogic’s annual revenue increased from $79 million in 2005 to $205 million in 2008. Dialogic revenues decreased 14% in 2009, but this decrease was due primarily to a general decline in the economy. Despite the revenue decrease in 2009, Dialogic has maintained its EBITDA margins which have helped enable debt funding to fuel its acquisitions. These high debt-levels (and interest expenses) as well amortization expenses have resulted in negative net income margins and net losses.

 

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Dialogic has a strong history of continued high-margin revenues from the sale of TDM products.

 

   

Dialogic views public listing as important to expanding future merger and acquisition opportunities to include stock purchases. In particular, the Arrangement will remedy Dialogic’s lack of access to additional debt and equity financing.

The following is a summary of the material analyses that Pagemill prepared in connection with its opinion. This summary includes information presented in tabular format. To understand fully the financial analyses used by Pagemill, these tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses.

Pagemill considered three generally accepted approaches for the valuation—a market approach, an income approach and an asset approach. Within the market approach and the income approach, Pagemill employed a variety of techniques to estimate value. After consideration, Pagemill determined that the asset approach was not relevant for valuing Dialogic and Veraz as more fully described below.

Market Approach

The market approach is based on the premise that a business can be valued by comparing it to other companies which are publicly-traded or which are being acquired. It involves estimating the value of a business by looking at actual transactions in the equity of similar companies, whether the transactions are trading in the shares of such companies or the acquisition of such companies.

Guideline Public Companies

The market approach using publicly traded companies as a guideline involves searching for publicly traded companies similar to the business being valued. Multiples of revenue and EBITDA are calculated for these companies and then applied to the business being valued using a regression analysis to determine the specific revenue multiples. There are some limitations to this approach, including the difficulty associated with identifying publicly-traded companies which are truly comparable to the business being valued and limitations surrounding the absence of a meaningful amount of revenue or EBITDA in businesses to be valued.

Using publicly available financial data, Pagemill analyzed the financial information and valuation ratios of Veraz and Dialogic compared to corresponding information and ratios from 14 comparable publicly-traded companies in the telecom equipment provider sector (the “Peer Group”). The Peer Group was comprised of:

 

   

Acme Packet, Inc.;

 

   

Akamai Technologies Inc.;

 

   

AudioCodes Ltd.;

 

   

Blue Coat Systems Inc.;

 

   

CIENA Corp.;

 

   

Extreme Networks Inc.;

 

   

F5 Networks, Inc.;

 

   

Kontron AG;

 

   

Mercury Computer Systems, Inc.;

 

   

Occam Networks Inc.;

 

   

RadiSys Corporation;

 

   

Sonus Networks, Inc.;

 

   

Tekelec; and

 

   

Tellabs Inc.

 

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In determining the relative contribution of Veraz utilizing the comparable public company guideline of the market approach, Pagemill concluded that, based in part on the past stock performance for Veraz, Veraz’s valuation would be expected to be near the bottom of the Peer Group. Pagemill noted that Veraz’s enterprise value to revenue multiple, based on the last 12 months revenue and estimated next 12 months revenue, was 0.11 and 0.12 respectively—well below the multiples for the bottom quartile of the Peer Group. In addition, Veraz’s last 12 months and estimated next 12 months EBITDA were negative, such that positive multiples did not result. The multiples are set forth below:

 

     TEV/Revenue    TEV/EBITDA
     Last 12 Months    Next 12 Months    Last 12 Months    Next 12 Months

High

   7.84    5.79    39.41    17.7

Top Quartile

   2.08    1.75    22.41    12.4

Mean

   2.21    1.83    17.43    9.7

Median

   1.08    0.91    13.17    7.0

Bottom Quartile

   0.69    0.64    9.51    6.2

Low

   0.11    0.12    5.8    6.1

Veraz

   0.11    0.12    N/A    N/A

After completing the above analysis, using both revenue growth and EBITDA margins as predictors in a regression analysis (with a 0.71 r-squared), Pagemill concluded that Veraz would have a predicted an enterprise value to revenue multiple, based on the last 12 months of revenue, of 0.46. Pagemill estimated, applying a premium/discount of 15% to the regression multiple of 0.46, that the indicated enterprise value would be between $30.82 million and $41.69 million and after adding the $32.99 million in cash at Veraz as of December 31, 2009, the indicated equity value range was determined to be between $63.81 million and $74.60 million, with a resulting value indication based on the midpoints of Pagemill’s estimate of the relevant ranges of inputs to the valuations (the “Point Estimate”) of $69.25 million. Pagemill performed a similar analysis based on the next the 12 months estimated revenue, last 12 months EBITDA and next 12 months estimated EBITDA, but assumed a 15% premium/discount to the bottom quartile multiple for the Peer Group. In performing this analysis, Pagemill determined that, using the next 12 months estimated revenue would result in an indicated enterprise value of between $46.38 million and $62.75 million and after adding the $32.99 million in cash at Veraz as of December 31, 2009, the indicated equity value range would be between $79.38 million and $95.75 million with a Point Estimate of $87.25 million. Given the negative EBITDA for Veraz for the last 12 months and the expected negative EBITDA for the next 12 months, the results of the Pagemill analysis produced an indicated equity value and a Point Estimate value of $32.99 million (Veraz’s cash balance on December 31, 2009).

In reviewing the revenue growth for 2009 and the EBITDA margin for 2009 for Dialogic, Pagemill considered that the performance for Dialogic indicated that Dialogic’s valuation would be expected to be in the range of the average of the Peer Group. Using both revenue growth and EBITDA margins as predictors in a regression analysis (with a 0.71 r-squared), yielded a predicted revenue multiple for Dialogic of 2.85. Pagemill estimated, applying a premium/discount of 15% to the regression multiple of 2.85, that the indicated enterprise value would be between $331.75 million and $448.83 million and after subtracting the net debt of $86 million as of December 31, 2009, the indicated equity value range was determined to be between $245.75 million and $362.83 million with a Point Estimate of $304.29 million. Pagemill performed a similar analysis for both next 12 months estimated revenue and for last 12 months EBITDA and next 12 months estimated EBITDA again assuming a 15% premium/discount to the average multiple of the Peer Group. In performing this analysis, Pagemill determined that, using the next 12 months estimated revenue would result in an indicated enterprise value of between $295.12 million and $399.28 million and after subtracting the $86 million in debt at Dialogic as of December 31, 2009, the indicated equity value range was determined to be between $209.12 million and $313.28 million with a Point Estimate of $261.20 million. Using last 12 months EBITDA multiples, Pagemill determined that Dialogic would have an indicated enterprise value of between $199.10 million and $269.37 million and after subtracting the $86 million in Dialogic debt as of December 31, 2009, the indicated equity value range was determined to be between $113.10 million and $183.37 million with a Point Estimate of $148.24 million. Finally, using next 12 months estimated EBITDA multiples, Pagemill determined that Dialogic would

 

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have an indicated enterprise value of between $151.35 million and $204.76 million and after subtracting the $86 million in Dialogic debt as of December 31, 2009, the indicated equity value range was determined to be between $65.35 million and $118.76 million with a Point Estimate of $92.05 million. The results of these analyses for both Veraz and Dialogic are set forth in the table below:

 

    Veraz   Dialogic
    Indicated
Enterprise
Value
  Indicated
Equity Value
Range
  Point
Estimate
  Indicated
Enterprise

Value
  Indicated
Equity Value
Range
  Point
Estimate

Last 12 months revenue

  $ 30.82-$41.69   $ 63.81-$74.69   $ 69.25   $ 331.75-$448.83   $ 245.75-$362.83   $ 304.29

Next 12 months estimated revenue

  $ 46.38-$62.75   $ 79.38-$95.75   $ 87.56   $ 295.12-$399.28   $ 209.12-$313.28   $ 261.20

Last 12 months EBITDA

    NM     $32.99   $ 32.99   $ 199.10-$269.37   $ 113.10-$183.37   $ 148.24

Next 12 months estimated EBITDA

    NM     $32.99   $ 32.99   $ 151.35-$204.76   $ 65.35-$118.76   $ 92.05

Based on the preceding analysis, Pagemill determined that the relative contributions of each company would be as follows:

 

     Veraz
Contribution
    Dialogic
Contribution
 

Last 12 months revenue

   19   81

Next 12 months estimated revenue

   25   75

Last 12 months EBITDA

   19   81

Next 12 months estimated EBITDA

   27   73

Guideline M&A Transactions

This approach involves reviewing recent merger and acquisition transactions involving companies similar to the businesses being valued. Multiples of revenue and/or EBITDA are calculated for these transactions and then applied to the businesses being valued. As with the public company guideline, there are difficulties with the guideline merger and acquisition transaction approach, including that it can be difficult to find merger and acquisition transactions involving companies which are truly comparable to the businesses being valued and the business being valued may not have a meaningful amount of revenue or EBITDA. Pagemill reviewed seven acquisition transactions announced during 2007—2009 involving companies selling telecom equipment or similar hardware and/or software (the “M&A Peers”). These transactions were:

 

   

Acquisition of Red Swoosh, Inc. by Akamai Technologies Inc., announced on April 12, 2007;

 

   

Acquisition of Packeteer, Inc. by Blue Coat Systems, Inc., announced on November 14, 2007;

 

   

Acquisition of Airwave Wireless, Inc. by Aruba Networks, Inc., announced on January 4, 2008;

 

   

Acquisition of Trapeze Networks, Inc. by Belden, Inc., announced on June 6, 2008;

 

   

Acquisition of Foundry Networks, Inc. by Brocade Communications Systems, Inc., announced on July 21, 2008;

 

   

Acquisition of Optical Networking and Carrier Ethernet Business by CIENA Corp., announced on October 7, 2008;

 

   

Acquisition of Mazu Networks, Inc. by Riverbed Technology, Inc., announced on January 20, 2009; and

 

   

Acquisition of Convergence, Inc. by Acme Packet, Inc., announced on April 29, 2009.

Pagemill analyzed selected financial information of the targets in these transactions, which is summarized below:

 

     High    Top
Quartile
   Mean    Median    Bottom
Quartile
   Low

Implied Enterprise Value to last 12 months revenue

   6.43    2.84    2.59    2.28    1.58    0.57

 

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Veraz has yet to produce sustained EBITDA and the data from only one of the transactions listed above produced any meaningful EBITDA multiple data. Therefore, Pagemill did not perform any EBITDA analysis on Veraz.

Pagemill performed an analysis identical to that performed with respect to the market approach using the comparable public company guideline to determine the revenue and EBITDA multiples for both Dialogic and Veraz, except that the Peer Group was replaced by the M&A Peers. The results of these analyses are summarized below using the same assumptions described above with respect to the market approach using the comparable public company guidelines. It is important to note, however, that none of the M&A Peers had revenue declines in the year leading up to the acquisition.

 

    Veraz   Dialogic
    Indicated
Enterprise
Value
  Indicated
Equity Value
Range
  Point
Estimate
  Indicated
Enterprise

Value
  Indicated
Equity Value
Range
  Point
Estimate

Last 12 months revenue

  $ 36.28-$49.08   $ 69.27-$82.08   $ 75.67   $ 342.32-$463.14   $ 256.32-$377.14   $ 316.73

Last 12 months EBITDA

    NM     32.99     32.99   $ 219.28-$296.67   $ 133.28-$210.67   $ 171.98

Income Approach

The income approach is based on the premise that the value of a business is the present value of the future earning capacity that is available for distribution to investors. The income approach involves estimating the discounted cash flow (DCF) for a business by projecting the free cash flows each year, calculating a terminal value, and then discounting these back to a present value at an appropriate rate (taking into account the time value of money and the risk inherent in a business). There are naturally limitations to this approach. It can be difficult to forecast more than a few years into the future with any accuracy, especially for an early stage business without meaningful revenue. It also is difficult to establish a terminal value. Pagemill analyzed terminal value using four different approaches: the standard Gordon Growth approach; a value based on a hypothetical terminal market value using revenue for calculating the terminal value; a value based on a hypothetical terminal market value using EBITDA for calculating the terminal value; and the H Model, which is a modified Gordon Growth approach. Pagemill made certain assumptions in conducting its discounted cash flow analysis, including a 5% discount/premium to the weighted average cost of capital and, with respect to the discounted cash flow analysis using a hypothetical market-based terminal value (either revenue or EBITDA), Pagemill employed similar assumptions to those it employed in the market approach described above, including assuming for the purposes of Veraz a 15% premium/discount to the bottom quartile Peer Group (in the case of revenue as a terminal multiple) and a 15% discount/premium to the bottom quartile in the M&A Peers (in the case of EBITDA as a terminal multiple. Similarly, with respect to Dialogic, Pagemill employed a 15% premium/discount to the mean Peer Group (in the case of revenue as a terminal multiple) and a 15% discount/premium to the median M&A Peer multiple (in the case of EBITDA as a terminal multiple). A summary of all these results is set forth below:

 

    Veraz   Dialogic
    Indicated
Enterprise
Value
  Indicated
Equity Value
Range
  Point
Estimate
  Indicated
Enterprise

Value
  Indicated
Equity Value
Range
  Point
Estimate

DCF and Gordon Growth

  7.04-17.86   40.03-50.85   43.64   $ 145.39-$278.80   $ 56.39-$192.80   $ 103.80

DCF and H Model

  8.13-19.95   41.13-52.95   45.10   $ 170.31-$320.01   $ 84.31-$234.01   $ 134.81

DCF with Revenue terminal value

  33.25-42.05   66.25-75.04   70.31   $ 330.83-$369.39   $ 244.83-$283.39   $ 263.25

DCF with EBITDA terminal value

  36.25-62.16   69.24-95.15   80.95   $ 276.80-$404.87   $ 190.80-$318.87   $ 251.36

 

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Asset Approach

The asset approach is based on the premise that the value of a business is the cost of replacing all of the assets of that business, both tangible and intangible. It involves estimating the cost of reproducing or replacing all property in the business, less depreciation for physical deterioration and functional obsolescence. It is difficult to measure the value of unique technology assets, especially intangible assets such as software code and patents. One technique used under the asset approach, a liquidation valuation, may not be used unless the shareholder interest being valued has the legal power to force liquidation. Pagemill did not consider the asset approach relevant for valuing Veraz or Dialogic because it is generally inappropriate for application to a going concern.

Summary of Valuation Analysis

Using these various approaches yielded implied Veraz contributions of between 21% and 30% of the combined company Taken together, the market approach including both the analysis of comparable public companies and the analysis of selected M&A transactions and income approach utilizing discounted cash flow analysis, yield the following contribution percentages for each of Veraz and Dialogic:

 

    Indicated Veraz
Contribution
    Indicated
Dialogic
Contribution
 

Market Approach: Comparable public company analysis last 12 months revenues

  19   81

Market Approach: Comparable public company analysis next 12 months revenues

  25   75

Market Approach: Comparable public company analysis last 12 months EBITDA

  19   81

Market Approach: Comparable public company analysis next 12 months EBITDA

  27   73

Market Approach: M&A Transaction last 12 months revenues

  19   81

Market Approach: M&A Transaction last 12 months EBITDA

  17   83

Income Approach: Discounted cash flow with Gordon Growth

  30   70

Income Approach: Discounted cash flow with H Model

  25   75

Income Approach: Discounted cash flow with revenue terminal multiple

  21   79

Income Approach: Discounted cash flow with EBITDA terminal multiple

  25   75

Mean

  22   78

Median

  22   78

Conclusion

On May 8, 2010, Pagemill rendered to the Board its opinion that based on the foregoing analysis, as of that date and based upon and subject to the assumptions, factors and limitations set forth in the written opinion and described above, the purchase consideration to be received in the Arrangement was fair, from a financial point of view, to Veraz and holders of Veraz’s common stock. In reaching this conclusion, Pagemill did not rely on any single analysis or factor described above, assign relative weights to the analyses or factors considered by it, nor make any conclusion as to how the results of any given analysis, taken alone, supported its opinion. Instead, Pagemill made its determination as to fairness on the basis of its experience and financial judgment after considering the results of all the analyses. Pagemill believes that its analyses must be considered as a whole and that selection of portions of its analyses and of the factors considered by it, without considering all of the factors and analyses, would create a misleading view of the processes underlying the opinion. The order in which these analyses are presented above and the results of those analyses should not be taken as any indication of the relative importance or weight given to these analyses by Pagemill.

As described above, Pagemill’s opinion was one of many factors taken into consideration by the Board in making its determination to approve the Acquisition Agreement. The above summary does not purport to be a complete description of the analyses performed by Pagemill in connection with its opinion and is qualified by reference to the written opinion of Pagemill attached to this Proxy Statement as Annex G.

 

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The analyses of Pagemill are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by the analyses. Analyses relating to the value of companies do not purport to be appraisals or valuations, nor necessarily reflect the price at which companies or securities may actually be sold. No company or transaction used in any analysis for purposes of comparison is directly comparable to either Veraz or Dialogic or the proposed transaction. Accordingly, an analysis of the results of the comparisons is not mathematical; rather, it involves complex considerations and judgments about differences in the companies to which Veraz or Dialogic was compared and other factors that could affect the public trading value of the companies.

Pagemill relied upon and assumed the accuracy, completeness and fair presentation of the financial, accounting and other information provided to or reviewed by it, and did not assume responsibility to verify such information independently. Pagemill relied upon the assurances of Veraz’s management, and assumed, with Veraz’s consent, that the information provided to Pagemill was prepared on a reasonable basis in accordance with industry practice, that Veraz’s management is not aware of any information or facts that would make the information provided to it incomplete or misleading and that, with respect to financial forecasts and other forward-looking financial information relating to Veraz reviewed by Pagemill, such information reflects the best currently available estimates and judgments of Veraz’s management and is based on reasonable assumptions. In rendering its opinion, Pagemill assumed that Veraz is not party to any material pending transaction, including any external financing, recapitalization, acquisition or merger, other than the proposed transaction. Pagemill expressed no opinion as to any financial forecasts or other forward-looking financial information of Veraz or the assumptions on which they were based. Pagemill expressed no opinion on any accounting, legal, tax, or financial reporting matters in any jurisdiction and relied, with Veraz’s consent, on the advice of the outside counsel and the independent accountants to Veraz and on the assumptions of Veraz’s management as to all accounting, legal, tax and financial reporting matters with respect to Veraz and the Acquisition Agreement.

In rendering its opinion, Pagemill assumed that the final Acquisition Agreement was, in all material respects, identical to the draft of the Acquisition Agreement reviewed by it, and that the proposed transaction will be consummated pursuant to the terms of the Acquisition Agreement without amendments thereto, without adjustments to the purchase consideration and without waiver by any party of any material conditions or obligations thereunder. Pagemill also assumed that any necessary regulatory approvals and consents required for the Arrangement will be obtained in a manner that will not adversely affect Veraz or materially alter the terms of the Arrangement.

Pagemill did not perform any appraisals or valuations of any specific assets or liabilities (fixed, contingent or other) of Veraz and was not furnished with any such appraisals or valuations. The analyses performed by Pagemill in connection with its opinion were going concern analyses. Pagemill did not express any opinion regarding the solvency or liquidation value of any entity.

The opinion was based on information available to Pagemill and the facts and circumstances as they existed and were subject to evaluation on the date of the opinion. Events occurring after that date could materially affect the assumptions used in preparing the opinion. Pagemill did not express any opinion as to the price at which shares of common stock of Veraz have traded or may trade following announcement of the proposed transaction. Pagemill did not undertake to reaffirm or revise its opinion or otherwise comment upon any events occurring after the date of its opinion and does not have any obligation to update, revise or reaffirm its opinion.

Pagemill’s opinion addresses solely the fairness, from a financial point of view, to Veraz and the holders of Veraz’s common stock of the purchase consideration as of the date thereof and does not address any other terms or agreements relating to the Arrangement. Pagemill was not requested to opine as to, and its opinion does not, address the basic business decision to proceed with or effect the proposed transaction, or the merits of the Arrangement relative to any alternative transaction or business strategy that may be available to Veraz. Pagemill’s opinion is not intended to confer rights and remedies upon Dialogic, any stockholders of Veraz or any shareholders of Dialogic, or any other person.

 

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Pagemill is a nationally-recognized investment banking firm and is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, private placements and valuations for audit, tax, corporate and other purposes. Pagemill may seek to be engaged by Veraz, Dialogic or Dialogic’s or Veraz’ affiliates in the future.

The Board retained Pagemill because it is a nationally recognized investment banking firm that has substantial experience in transactions similar to the proposed transaction. Pagemill was retained by means of an engagement letter dated July 13, 2009 to provide a fairness opinion in connection with the Arrangement and received an opinion fee of $150,000, none of which is contingent upon consummation of the Arrangement. Veraz also agreed to reimburse Pagemill for its reasonable out-of-pocket expenses and to indemnify Pagemill against certain liabilities relating to or arising out of services performed by Pagemill in rendering its opinion to the Board.

Consequences under Securities Laws; Replacement Options and Veraz Common Stock

United States

The issuance of Veraz common stock to Dialogic shareholders will not be registered under the Securities Act. Such shares will instead be issued in reliance upon the exemption provided by Section 3(a)(10) of the Securities Act. Section 3(a)(10) exempts securities issued in exchange for one or more outstanding securities from the registration requirement under the Securities Act where the terms and conditions of the issuance and exchange of such securities have been approved by a court, after a hearing upon the fairness of the terms and conditions of the issuance and exchange at which all persons to whom such securities will be issued have the right to appear. The Supreme Court of British Columbia is authorized to conduct a hearing to determine the fairness of the terms and conditions of the Arrangement, including the proposed issuance of Veraz common stock in exchange for Dialogic’s other outstanding securities.

Dialogic will have to obtain an interim order from the Supreme Court of British Columbia providing for the calling and holding of a special meeting of shareholders of Dialogic and other procedural matters. Subject to the approval of the plan of arrangement by the shareholders of Dialogic, the Supreme Court of British Columbia will conduct a hearing to determine the fairness of the Arrangement including the proposed issuance of Veraz common stock in exchange for Dialogic’s outstanding securities. For more details, see the section entitled “The Arrangement Proposal—Approvals and Regulatory Matters.”

The Veraz common stock received in exchange for Dialogic preferred and common shares pursuant to the Arrangement will be “restricted stock” transferable under United States federal securities laws in accordance with Rule 144, except for Veraz common stock or replacement options held by persons who are deemed to be “affiliates” (as such term is defined under the Securities Act) of Dialogic or Veraz at the time of the transaction or by persons who become affiliates of Veraz after the transaction which may be resold by them only in transactions permitted by the resale provisions of Rule 145(d)(1), (2), or (3) promulgated under the Securities Act or as otherwise permitted under the Securities Act; provided, however, that the resale provisions of Rule 145(d)(2) or (3) would not be available to persons who are affiliates of Veraz after the transaction. Rule 145(d) provides a safe harbor for resales of securities received by certain persons in transactions such as the Arrangement. Rule 145(d)(1) generally provides that such “affiliates” of Dialogic or Veraz may sell securities of Veraz received in the Arrangement if such sale is effected pursuant to the volume, current public information and manner of sale limitations of Rule 144 promulgated under the Securities Act. These limitations generally require that there be available adequate current public information with respect to Veraz, that any sales made by such an affiliate in any three month period shall not exceed the greater of 1% of the outstanding shares of the securities being sold or the average weekly trading volume over the four calendar weeks preceding the placement of the sell order and that such sales be made in unsolicited “brokers transactions,” or in transactions directly with a “market maker” (as such term is defined under the Exchange Act). Rule 145(d)(2) generally provides that non-affiliates of Veraz may sell securities of Veraz received in the Arrangement after a period of six months has elapsed since the transaction, provided that certain public information continues to be available with respect to Veraz. Rule 145(d)(3) generally provides that non-affiliates of Veraz may sell securities of Veraz received in the

 

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Arrangement after a period of one year has elapsed since the transaction, provided that such persons have not been affiliates of Veraz during the three months preceding the resale. Persons who may be deemed to be affiliates of an issuer generally include individuals or entities that control, are controlled by, or are under common control with, such issuer and may include certain officers and directors of such issuer as well as principal shareholders of such issuer.

Veraz has granted certain registration rights to shareholders of Dialogic in connection with the Arrangement pursuant to a registration rights agreement between Veraz and Dialogic shareholders. Veraz might be required to file a registration statement on Form S-1 or Form S-3 to register the Veraz stock issued in the Arrangement on the exchange of Dialogic preferred and common stock. In addition, Veraz intends to file a registration statement on Form S-8 to register Dialogic replacement options which will be issued by Veraz pursuant to the Acquisition Agreement.

Canada

Pursuant to applicable Canadian securities legislation, the issuance of Veraz common stock pursuant to the plan of arrangement is exempt from prospectus registration requirements.

Anticipated Accounting Treatment

The Arrangement will be accounted as a reverse acquisition, pursuant to the acquisition method of accounting, in accordance with GAAP.

The determination of Dialogic as the accounting acquirer was made based on consideration of all quantitative and qualitative factors of the Arrangement, including significant consideration given to the following upon consummation of the transaction that (i), based on the number of Dialogic shares currently outstanding, former Dialogic shareholders will control approximately 70% of the voting interests in Veraz, (ii) pursuant to the Acquisition Agreement, the initial directors on the combined company’s nine member board of directors will consist of three nominated by Veraz and six nominated by Dialogic, (iii) certain of Dialogic’s management will continue in some of the officer and senior management positions of the combined company and, accordingly, will have day-to-day authority to carry out the business plan after the transaction and (iv) Dialogic’s employees will continue on with no expected disruption as employees of the combined company.

In a reverse acquisition, for legal purposes, Dialogic is the acquiree, but for accounting purposes, Dialogic is the acquirer of Veraz. Consolidated financial statements prepared following the closing of the reverse acquisition will be issued in the name of Dialogic, the proposed combined company name, but will be described in the notes as a continuation of the financial statements of Dialogic, with one adjustment: the legal capital will be retroactively adjusted to reflect the legal capital of Veraz. As the consolidated financial statements represent the continuation of the financial statements of Dialogic, except for the capital structure, consolidated financial statements after the closing of the reverse acquisition will reflect:

 

   

The assets and liabilities of Dialogic recognized and measured at their pre-combination carrying amounts;

 

   

The assets and liabilities of Veraz recognized and measured at fair value at the closing date in accordance with ASC 805;

 

   

The retained earnings and other equity balances of Dialogic before the business combination; and

 

   

Reported results of operations after completion of the transaction will reflect those of Dialogic, to which the operations of Veraz will be added from the date of the completion of the transaction. The operating results will reflect purchase accounting adjustments.

Additionally, historical financial condition and results of operations shown for comparative purposes in periodic filings subsequent to the completion of the transaction will reflect those of Dialogic.

 

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Approvals and Regulatory Matters

In addition to the approval of Veraz’s stockholders, the consummation of the Arrangement and the other transactions contemplated by the Acquisition Agreement are subject to various regulatory requirements and approvals, including the expiration of the waiting period under the HSR Act, the approval of the plan of arrangement by the Supreme Court of British Columbia, and the approval by the shareholders of Dialogic by way of unanimous written consent or by 66 2/3% of the votes cast on the Arrangement resolutions by (i) all of the Dialogic shareholders, (ii) the holders of Dialogic common shares and (iii) the holders of each class of Dialogic preferred shares. Votes, in each case, must be cast by holders present in person or by proxy at the Dialogic special meeting, voting as a single class. Veraz and Dialogic have received notification of the early termination of the waiting period under the HSR Act. Dialogic is in the process of seeking an order of the Supreme Court of British Columbia in respect of the calling and conduct of a meeting of the shareholders of Dialogic. Following the approval of the shareholders of Dialogic of the Arrangement, Dialogic will seek an order of the Supreme Court of British Columbia approving the Arrangement.

Dialogic Shareholder Approval

The plan of arrangement will require the approval of the shareholders of Dialogic by way of unanimous written consent or by 66 2/3% of the votes cast on the Arrangement resolutions in favor of the plan of arrangement by (i) all of the Dialogic shareholders, (ii) the holders of Dialogic common shares and (iii) the holders of each class of Dialogic preferred shares, in each case present in person or by proxy at the Dialogic special meeting.

Approval by Supreme Court of British Columbia

The plan of arrangement requires the approval of the Supreme Court of British Columbia. Dialogic will obtain an interim order of the Supreme Court of British Columbia providing for the calling and holding of a special meeting of its shareholders and other procedural matters. The interim order will provide that the requisite approval for the special resolution approving the Arrangement by way of unanimous written consent or by 66 2/3% of the votes cast on the Arrangement resolutions in favor of the plan of arrangement by (i) all of the Dialogic shareholders, (ii) the holders of Dialogic common shares and (iii) the holders of each class of Dialogic preferred shares, in each case present in person or by proxy at the Dialogic special meeting. If the plan of arrangement is approved by Dialogic’s shareholders, Dialogic will seek a final order of the Supreme Court of British Columbia approving the plan of arrangement. Any Dialogic shareholder who wishes to present evidence or arguments at the hearing will be able to file and deliver an appearance and any affidavits on which it relies, in accordance with the rules of the Supreme Court of British Columbia and the provisions of the interim order to be issued by the Supreme Court of British Columbia. The Supreme Court of British Columbia will consider, among other things, the fairness and reasonableness of the Arrangement. The Supreme Court of British Columbia may approve the Arrangement unconditionally or subject to compliance with any conditions the Supreme Court of British Columbia deems appropriate.

The Supreme Court of British Columbia has broad discretion under the BCBCA when issuing orders relating to the Arrangement. The Supreme Court of British Columbia may approve the Arrangement as proposed unconditionally or as amended in any manner the Supreme Court of British Columbia directs or subject to compliance with any conditions the Supreme Court of British Columbia deems appropriate. Under British Columbia law, for the Supreme Court of British Columbia to grant the final order, the Supreme Court of British Columbia must consider and conclude, among other things, that the Arrangement is fair and reasonable to all affected persons. Pursuant to the plan of arrangement, no material amendment to the Arrangement will be made without obtaining further Dialogic shareholder approval.

 

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THE ACQUISITION AGREEMENT AND PLAN OF ARRANGEMENT

The discussion in this proxy statement of the Arrangement and the principal terms of the Acquisition Agreement, dated as of May 12, 2010 between Veraz and Dialogic is qualified in its entirety by reference to the full text of the Acquisition Agreement attached hereto as Annex A which is incorporated by reference herein. The Acquisition Agreement contains representations and warranties of Dialogic and Veraz made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between Dialogic and Veraz and are subject to qualifications and limitations agreed to by Dialogic and Veraz in connection with negotiating its terms and pursuant to confidential schedules delivered by the parties. While we do not believe that such confidential schedules contain information securities laws require us to publicly disclose other than information that has already been so disclosed, such confidential schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached Acquisition Agreement. Moreover, some of those representations and warranties may be subject to a contractual standard of materiality different from those generally applicable pursuant to securities laws or may have been used for the purpose of allocating risk among Dialogic and Veraz rather than establishing matters as facts.

General; Structure of Arrangement

On May 12, 2010, Veraz and Dialogic entered into the Acquisition Agreement, whereby Veraz has agreed to acquire all the outstanding Dialogic shares in exchange for shares of Veraz common stock. In addition, as part of the Arrangement, which is discussed in greater detail below, all outstanding options to purchase Dialogic common shares will be exchanged for options to purchase Veraz common stock. If the Arrangement is consummated, Dialogic will become a wholly-owned subsidiary of Veraz and Veraz will change its name to “Dialogic Inc.”

The Arrangement is expected to be consummated during the second half of 2010. The consummation of the Arrangement is subject to the approval of the Arrangement Proposal by Veraz’s stockholders and Dialogic’s shareholders, approval of, and compliance with, orders of the British Columbia Supreme Court pursuant to the BCBCA and the satisfaction of certain other conditions, as discussed in greater detail in the section entitled “The Acquisition Agreement—Conditions to Consummation of the Arrangement.”

Plan of Arrangement

The Arrangement will be consummated pursuant to a plan of arrangement, which is attached to this proxy statement as Annex B. The plan of arrangement will govern the transfer of Dialogic shares to Veraz for and in consideration of the issuance to the shareholders of Dialogic of shares of Veraz common stock. It also governs the exchange of Dialogic options for options of Veraz.

Arrangement Consideration

Upon the consummation of the Arrangement, all outstanding Dialogic common shares and preferred shares will be transferred to Veraz and the former shareholders of Dialogic will thereupon have the right to receive an aggregate of 110,580,900 shares of Veraz common stock, which will be allocated to the holders of such shares in accordance with formulas set out in the plan of arrangement.

Based on the number of shares of Veraz common stock and Dialogic common shares and preferred shares outstanding as of the date of this proxy statement, 110,580,900 shares of Veraz common stock, representing approximately 70% of the combined company’s voting interests, will be issued to Dialogic shareholders in connection with the Arrangement. Those 110,580,900 shares have an aggregate market value, calculated based on the closing price of Veraz’s common stock on May 11, 2010, the date prior to the public announcement of the proposed Arrangement, of $110.5 million. The aggregate market value of the consideration to be received by the Dialogic shareholders upon consummation of the Arrangement is subject to fluctuation based on the trading price of Veraz’s common stock.

 

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Consummation of the Arrangement

Unless otherwise agreed to by Veraz and Dialogic, the Arrangement will be consummated on the fifth business day after the satisfaction or waiver of the conditions described below under “The Acquisition Agreement and Plan of Arrangement—Conditions to Closing the Arrangement.”

Headquarters

Effective upon consummation of the Arrangement, the corporate headquarters and principal executive offices of Veraz will be at 926 Rock Avenue, San Jose, CA 95131.

Directors and Executive Officers Following the Arrangement

The Board is required to take all action necessary such that upon the effective time of the Arrangement, the Board will be comprised of Messrs. Corey, Sabella and West, current members of the Board, and Messrs. Ben-Gacem, Guira, Jensen, Joannou, Konnerup, and Vig, current members of the Dialogic board of directors.

Audit, compensation and nominating committees will also be established upon the consummation of the Arrangement, each of which will be composed of independent directors. Mr. Corey shall initially chair the audit committee. Mr. Joannou shall initially chair the compensation committee. Mr. Guira shall initially chair the nominating and corporate governance committee. See the section entitled “Directors and Executive Officers of Veraz following the Arrangement” for a discussion of the directors and the committees of the Board.

 

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ACQUISITION AGREEMENT

The following section describes the material terms of the Acquisition Agreement. This description of the Acquisition Agreement is qualified in its entirety by reference to the full text of the Acquisition Agreement which is attached as Annex A to this proxy statement and is incorporated herein by reference. The Acquisition Agreement has been included to provide you with information regarding its terms. We encourage you to read the entire Acquisition Agreement. The Acquisition Agreement is not intended to provide any other factual information about Veraz or Dialogic. Such information can be found elsewhere in this proxy statement and in the other public filings Veraz makes with the Securities and Exchange Commission, which are available without charge at www.sec.gov.

The Arrangement

The plan of arrangement contemplated by the Acquisition Agreement provides that Veraz and Dialogic will effect a statutory Arrangement under the provisions of section 288 of the British Columbia Business Corporations Act to effect the acquisition by Veraz of all of the outstanding common shares and preferred shares of Dialogic. In exchange for such shares, Veraz will issue to the Dialogic shareholders 110,580,900 shares of Veraz common stock. Upon the consummation of the Arrangement, Dialogic will become a wholly-owned subsidiary of Veraz.

Consummation of the Arrangement

The Acquisition Agreement requires the parties to complete the Arrangement after all of the conditions to the consummation of the Arrangement contained in the Acquisition Agreement are satisfied or waived, including the adoption of the Acquisition Agreement and approval of the Arrangement by the shareholders of Dialogic, and the approval of the issuance of shares of Veraz common stock in the Arrangement by the stockholders of Veraz. The Arrangement must be approved by way of unanimous written consent or by 66 2/3% of the votes cast on the Arrangement resolutions by (i) all of the Dialogic shareholders, (ii) the holders of Dialogic common shares and (iii) the holders of each class of Dialogic preferred shares, in each case present in person or by proxy at the Dialogic special meeting. Because the consummation of the Arrangement is subject to the receipt of governmental and regulatory approvals and the satisfaction of other conditions, the exact timing of the consummation of the Arrangement cannot be predicted.

Manner and Basis of Transferring Shares

Upon the consummation of the Arrangement, all outstanding common shares and preferred shares of Dialogic will be converted into the right to receive an aggregate of 110,580,900 shares of Veraz common stock, which will be allocated to the holders of such shares in accordance with formulas set out in the plan of arrangement.

No fractional shares of Veraz common stock will be issued in the Arrangement, and no certificates or scrip for any such fractional shares shall be issued. Instead, any Dialogic shareholder who would otherwise be entitled to receive a fraction of a share of Veraz common stock (after aggregating all fractional shares of Veraz common stock issuable to such shareholder) will, in lieu of such fraction of a share, be paid in cash the dollar amount (rounded to the nearest whole cent), without interest, determined by multiplying such fraction by the closing price of a share of Veraz common stock on the Nasdaq Global Market on the last trading day prior to the closing date.

The Acquisition Agreement provides that at or as soon as practicable following the closing, Veraz will deliver to each Dialogic shareholder a certificate representing the number of shares of Veraz common stock issuable to such shareholder. No later than two business days prior to the closing date, each Dialogic shareholder will deliver to Veraz written instructions regarding (i) the person in whose name the shares of Veraz common

 

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stock issuable to such shareholder will be registered and (ii) the person to whom the certificate(s) representing such shares of Veraz common stock shall be delivered at the closing, and Veraz will issue and deliver the certificates representing the shares of Veraz common stock in accordance with those instructions.

Upon the transfer of all Dialogic shares to Veraz, each Dialogic shareholder will cease to be the holder of such shares and such holder’s name will be removed from the applicable Dialogic securities register. Legal and beneficial title to such shares will vest in Veraz and Veraz will be and be deemed to be the transferee and legal and beneficial owner of such shares and will be entered in the applicable Dialogic securities register as the sole shareholder.

In the event of a transfer of ownership of Dialogic shares that was not registered in the Dialogic securities register, a certificate representing the proper number of shares of Veraz common stock may be issued to the transferee if the certificate representing such Dialogic shares is presented to Dialogic, accompanied by all documents required to evidence and effect such transfer. Until surrendered, each certificate which immediately prior to or upon the closing represented one or more Dialogic shares that, under the Arrangement, were transferred or were deemed to be transferred for shares of Veraz common stock, will be deemed at all times at and after such closing represent only the right to receive upon such surrender a certificate representing that number of shares of Veraz common stock which such holder has the right to receive as contemplated by the Acquisition Agreement.

Representations and Warranties

The Acquisition Agreement contains customary representations and warranties that Veraz and Dialogic made to, and solely for the benefit of, each other. None of the representations and warranties in the Acquisition Agreement will survive the consummation of the Arrangement. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that Veraz and Dialogic have exchanged in connection with signing the Acquisition Agreement. While Veraz and Dialogic do not believe that these disclosure schedules contain information securities laws require the parties to publicly disclose other than information that has already been so disclosed, they do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Acquisition Agreement. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts, since they were only made as of the date of the Acquisition Agreement and are modified in important part by the underlying disclosure schedules. These disclosure schedules contain information that has been included in the companies’ general prior public disclosures, as well as additional non-public information. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the Acquisition Agreement, which subsequent information may or may not be fully reflected in the companies’ public disclosures.

Covenants; Conduct of Business Prior to the Arrangement

Affirmative Covenants. Each of Veraz and Dialogic has agreed that, before the closing, it will, and in certain cases, it will cause its representatives or subsidiaries to, take the following actions, among others:

 

   

provide the other party and its representatives with (a) reasonable access during normal business hours to the representatives, offices, personnel, properties and assets of such party and its subsidiaries and to all existing books, records, tax returns, work papers and other documents and information relating to such party and its subsidiaries and (b) such copies of the existing books, records, tax returns, work papers and other documents and information relating to such party and its subsidiaries as the other party may reasonably request;

 

   

carry on its respective business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and in compliance with all applicable legal requirements, pay its debts and taxes when due and pay or perform all material obligations when due;

 

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use reasonable best efforts, consistent with past practices and policies, to preserve intact its present business organization, keep available the services of its present officers and employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees and other parties with which it has significant business dealings;

 

   

use commercially reasonable efforts to provide as promptly as practicable any information that is required to effectuate any antitrust or regulatory filings or applications, and except where prohibited by applicable legal requirements, use commercially reasonable efforts to: (i) consult with and consider the views of the other party regarding material positions being taken in material filings to be made under antitrust laws in connection with the Arrangement; (ii) provide the other (and its counsel) as promptly as practicable with copies of all material filings and material written submissions made by such party with any governmental body under any antitrust law in connection with the Arrangement;

 

   

use commercially reasonable efforts to file, as soon as practicable after the date of the Acquisition Agreement, all notices, reports and other documents required to be filed by such party with any governmental body with respect to the Arrangement and the other transactions contemplated by the Acquisition Agreement, including preparing and filing the notifications required under the HSR Act and under any other applicable antitrust laws, and use commercially reasonable efforts to respond as promptly as practicable to: (i) any inquiries or requests (including any “second request”) received from the Federal Trade Commission or the U.S. Department of Justice for additional information or documentation; and (ii) any inquiries or requests received from any state attorney general, foreign antitrust authority or other governmental body in connection with antitrust or related matters;

 

   

co-operate with each other, and permit each other to provide comments to the extent reasonably practicable, in the preparation of any application for the governmental authorizations and any other orders, registrations, consents, filings, rulings, exemptions, no-action letters and approvals and the preparation of any documents reasonably deemed by either of the parties to be necessary to discharge its respective obligations or otherwise advisable under applicable legal requirements in connection with the Arrangement and the Acquisition Agreement as promptly as practicable; and

 

   

use commercially reasonable efforts to take, or cause to be taken, all actions necessary to consummate the Arrangement and make effective the other transactions contemplated by the Acquisition Agreement.

However, Veraz will have no obligation: (i) to sell, divest, or dispose of or agree to sell, divest, or dispose of (or cause any of its subsidiaries or Dialogic or any of its subsidiaries to sell, divest, or dispose of or agree to sell, divest, or dispose of) any of its respective material businesses, product lines, properties or assets, or to take or agree to take any other action or agree to any material limitation or restriction on any of its respective businesses, product lines, properties or assets and (ii) to license or otherwise make available to any person, any material intellectual property, or to commit to cause Dialogic or any of its subsidiaries to license or otherwise make available to any person any material intellectual property.

Additional Affirmative Covenants of Veraz. In addition, Veraz has agreed to cooperate with Dialogic in taking any actions necessary to restructure Dialogic’s indebtedness substantially as set forth in a commitment letter delivered by Special Value Opportunities Fund, LLC, Special Value Expansion Fund, LLC and Tennenbaum Opportunities Partners V, LP to Veraz and Dialogic (the “Commitment Letter”). Veraz is also obligated to use its commercially reasonable efforts to contest any legal proceeding relating to the Arrangement or any of the other transactions contemplated by the Acquisition Agreement. In addition, Veraz is obligated to prepare and submit to Nasdaq a notification form for the listing of the shares of Veraz common stock to be issued in the Arrangement and use its reasonable best efforts to cause such shares to be approved for listing (subject to notice of issuance), and use its reasonable best efforts to cause such listing application to be approved promptly following the closing.

 

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Negative Covenants. Each of Veraz and Dialogic have agreed that, except with the prior written consent of the other party, which consent may not be unreasonably withheld, delayed or conditioned, and except in connection with the restructuring of Dialogic’s debt, at all times before the closing, it will not, and will permit any of its subsidiaries to:

 

   

propose to adopt any amendments to or amend its certificate of incorporation or bylaws or comparable organizational documents;

 

   

authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, other equity based (whether payable in cash, securities or other property or any combination of the foregoing) commitments, subscriptions, rights to purchase or otherwise) any of its securities or any securities of any of its subsidiaries, except for (A) the issuance and sale of shares of common stock pursuant to stock options or restricted stock units outstanding prior to the date of the Acquisition Agreement, (B) grants of purchase rights under an employee stock purchase or other similar plan, and (C) grants to newly hired employees or refresh grants to current employees of restricted stock units covering or stock options to purchase common stock granted in the ordinary course of business consistent with past practice, in the case of stock options, with a per share exercise price that is no less than the then-current market price of a share of common stock;

 

   

amend the terms of any of its securities or any securities (including options, warrants and similar rights) of any of its subsidiaries; provided, however, that Veraz and Dialogic may dissolve and/or merge into any of its respective subsidiaries certain other subsidiaries that are not material to it and its subsidiaries, taken as a whole;

 

   

incur or guarantee any indebtedness for borrowed money or issue or sell any debt securities or guarantee any debt securities or other obligations of other parties, other than contractual obligations of subsidiaries in the ordinary course of business, or create an encumbrance over any of its assets, other than the issuance of performance bonds in the ordinary course of business consistent with past practice;

 

   

declare, set aside or pay any dividend or other distribution of property in respect of any shares of capital stock, or make any other actual, constructive or deemed distribution of property in respect of the shares of capital stock or effect or commit to any stock repurchase of its capital stock;

 

   

propose or adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of it or any of its subsidiaries (other than the transactions contemplated by the Acquisition Agreement); provided, however, that Veraz and Dialogic may dissolve and/or merge into any of its respective subsidiaries certain other subsidiaries that are not material to it and its subsidiaries, taken as a whole;

 

   

forgive any loans of any party, including its employees, officers or directors or any employees, officers or directors of any of its subsidiaries, or any of its affiliates;

 

   

(A) increase the compensation payable or to become payable to its officers, employees (other than in the ordinary course of business) or consultants (other than in the ordinary course of business), or (B) grant any severance or termination pay to, or enter into any severance agreement with any director, officer, consultant or other employee, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any such director, officer, consultant or employee, other than with respect to the hiring and termination of employees in the ordinary course of business consistent with past practice, except the parties may make any amendments to existing employee benefit plans to the extent necessary to maintain their compliance with applicable legal requirements (including any amendments necessary or desirable to comply with Section 409A of the Internal Revenue Code of 1986 so as to avoid the imposition of additional tax with respect thereto) and the parties may make grants of equity awards as provided above;

 

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acquire, sell, lease, license or dispose of any property or assets in any single transaction or series of related transactions, except for (i) transactions pursuant to existing contracts, or (ii) transactions in the ordinary course of business consistent with past practice;

 

   

except as may be required by applicable legal requirements or GAAP, make any change in any of the accounting principles or practices used by it or its subsidiaries;

 

   

make or change any material tax election, adopt or change any tax accounting method, settle or compromise any material tax liability, or consent to the extension or waiver of the limitations period applicable to a material tax claim or assessment;

 

   

enter into or amend any material contract, except in the ordinary course of business consistent with past practice;

 

   

sell, assign, transfer, license or sublicense, pledge or otherwise encumber any intellectual property (other than non-exclusive licenses or other similar contracts in the ordinary course of business consistent with past practice);

 

   

acquire (by merger, consolidation or acquisition of stock or assets) any other person, any equity interest of any person or substantially all of the assets of any person;

 

   

mortgage, pledge or subject to encumbrance, any of its assets or properties;

 

   

authorize, incur or commit to incur any new capital expenditure(s) which in the aggregate exceed $300,000 per quarter; provided, however, that the foregoing shall not limit any maintenance capital expenditures or capital expenditures required pursuant to existing contracts;

 

   

settle or compromise any pending or threatened legal proceeding in a manner which would require either Dialogic or Veraz and its respective subsidiaries, as applicable, to make an adverse admission, or pay, discharge or satisfy or agree to pay, discharge or satisfy any amount greater than $250,000 in damages;

 

   

initiate any material legal proceeding;

 

   

except as required by applicable legal requirements or GAAP, revalue in any material respect any of its properties or assets, including writing off notes or accounts receivable other than in the ordinary course of business consistent with past practice; or

 

   

enter into a contract to do any of the foregoing or knowingly take any action which is reasonably expected to result in any of the conditions to the consummation of the transactions contemplated by the Acquisition Agreement not being satisfied, or knowingly take any action which would make any of its representations or warranties set forth in the Acquisition Agreement untrue or incorrect in any material respect, or that would materially impair its ability to consummate the transactions contemplated by the Acquisition Agreement in accordance with the terms thereof or materially delay such consummation.

Arrangement Resolutions. Under the Acquisition Agreement, Dialogic is obligated to effect the Arrangement by, among other things, taking the following actions:

 

   

as soon as reasonably practicable after the date of execution of the Acquisition Agreement and in any event not later than 60 days thereafter apply, in a manner reasonably acceptable to Veraz, to the Supreme Court of British Columbia pursuant to Section 291 of the British Columbia Business Corporations Act for an interim order of the Supreme Court of British Columbia, providing for, among other things, the calling and holding of a special meeting of Dialogic shareholders for the purpose of considering and, if deemed advisable, approving the resolutions of the holders of Dialogic’s common shares, each class of preferred shares, and common and preferred shares (voting together) to approve the Arrangement;

 

   

in accordance with the interim order, as soon as reasonably practicable, convene and hold the special meeting or, alternatively, obtain a special resolution consented to in writing by all of the Dialogic shareholders, for the purposes of approving such Arrangement resolutions;

 

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if the Arrangement resolutions are to be approved at the Dialogic special meeting, use commercially reasonable efforts to solicit from Dialogic’s shareholders proxies in favor of the approval of the Arrangement resolutions, in a manner consistent with past practice;

 

   

in addition to the approval of the Arrangement resolutions, use all reasonable commercial efforts to obtain such other approvals, if any, as are required by the interim order and proceed with and diligently pursue the application to the Supreme Court of British Columbia for a final order of the Supreme Court of British Columbia approving the Arrangement; and

 

   

subject to obtaining such final order, and only if required pursuant to the BCBCA, file a certified copy of the final order, articles of arrangement and such other documentation as may be required for acceptance and endorsement by the Registrar of Companies appointed under Section 400 of the British Columbia Business Corporations Act to give effect to the Arrangement pursuant to Section 292 of the BCBCA.

Further, the application referred to above will:

 

   

provide that the Arrangement resolutions may be approved by way of unanimous written consent or, if the Arrangement resolutions cannot be, or are not to be, approved by way of written consent, provide for the class of persons to whom notice is to be provided in respect of the Arrangement and for the Dialogic special meeting and for the manner in which such notice is to be provided;

 

   

provide that the only requisite approval for the Arrangement resolutions shall be either approval by way of unanimous written consent or by 66 2/3% of the votes cast on the Arrangement resolutions by (i) all of the Dialogic shareholders, (ii) the holders of Dialogic common shares and (iii) the holders of each class of Dialogic preferred shares, in each case present in person or by proxy at the Dialogic special meeting, each common and preferred share entitling the holder thereof to one vote on the Arrangement resolutions;

 

   

provide that the terms, restrictions and conditions of Dialogic’s constating documents, including quorum requirements and all other matters, shall apply in respect of the Dialogic special meeting;

 

   

provide for the notice requirements with respect to the presentation of the application to the Supreme Court of British Columbia for a final order;

 

   

provide that the Dialogic special meeting may be adjourned or postponed from time to time by Dialogic without the need for additional approval of the Supreme Court of British Columbia; and

 

   

provide that the record date for Dialogic shareholders, including the holders of preferred shares, entitled to notice of, and to vote at, the Dialogic special meeting will not change in respect of any adjournment of the Dialogic special meeting.

The Acquisition Agreement provides that if Dialogic proposes to call a special meeting, Dialogic will prepare a statement (the “Arrangement Meeting Statement”) explaining the proposed Arrangement in accordance with the requirements of the BCBCA. Veraz will cooperate with Dialogic in the preparation of the Arrangement Meeting Statement and each of Veraz and Dialogic acknowledge that they will mutually agree on any comments or any revisions made to such Arrangement Meeting Statement prior to its mailing to Dialogic shareholders in accordance with the interim order and applicable legal requirements. Dialogic will ensure that the Arrangement Meeting Statement complies, and Veraz will ensure that information supplied by it for inclusion in the Arrangement Meeting Statement will comply, with the interim order and all applicable legal requirements.

Proxy Statement and Special Meeting. Under the Acquisition Agreement, Veraz is required to seek approval of the issuance of shares of Veraz common stock in the Arrangement by the stockholders of Veraz.

The Acquisition Agreement provides that Veraz will prepare the proxy statement and cause it to be filed with the SEC. Veraz will use commercially reasonable efforts: (i) to cause the proxy statement to comply with the applicable rules and regulations promulgated by the SEC; and (ii) to promptly notify Dialogic of, cooperate

 

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with Dialogic with respect to, and respond promptly to any comments of the SEC or its staff. Veraz will notify Dialogic promptly upon the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff or any other governmental officers for amendments or supplements to the proxy statement or for additional information and will supply Dialogic with copies of all correspondence between Veraz or any of its representatives, on the one hand, and the SEC, or its staff or other governmental officials, on the other hand, with respect to the proxy statement. Veraz will permit Dialogic to participate in the preparation of the proxy statement and any exhibits, amendment or supplement thereto and will consult with Dialogic and its advisors concerning any comments from the SEC with respect thereto and will not file the proxy statement or any exhibits, amendments or supplements thereto or any response letters to any comments from the SEC without the prior consent of Dialogic, such consent not to be unreasonably withheld, conditioned or delayed. Veraz will cause the proxy statement to be mailed to Veraz’s stockholders promptly following the earliest of (A) notification from the SEC that the SEC will not review the proxy statement, (B) expiration of the ten calendar day period provided by Rule 14a-6 under the Exchange Act if on or prior to such expiration the SEC has not provided comments with respect to the proxy statement or indicated that it intends to provide such comments and (C) resolution of any SEC comments with respect to the proxy statement. Each of Veraz and Dialogic will promptly furnish to the other all information concerning such party and its subsidiaries and stockholders that may be required or reasonably requested in connection with any action contemplated by this paragraph. If either Veraz or Dialogic becomes aware of any information that should be disclosed in the proxy statement, then such party: (1) will promptly inform the other party thereof; and (2) will provide the other party (and its counsel) with a reasonable opportunity to review and comment on the proxy statement prior to it being filed with the SEC.

The Acquisition Agreement also provides that Veraz will comply with, and Dialogic will promptly provide Veraz with such information concerning Dialogic in the form and as required or reasonably requested by Veraz concerning Dialogic in the proxy statement to comply with, all applicable provisions of and rules under the Exchange Act and other applicable federal securities laws and all applicable provisions of the DGCL in the preparation, filing and distribution of the proxy statement, the solicitation of proxies thereunder, and the calling and holding of the special meeting. Veraz will ensure that the proxy statement does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, provided that Veraz will not be responsible for the accuracy or completeness of any information furnished by Dialogic to Veraz for inclusion in the proxy statement. Dialogic will review the proxy statement and will ensure that the information relating to Dialogic contained in the proxy statement does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading.

The Acquisition Agreement further provides that Veraz will take all action necessary to duly call, give notice of, convene and hold the special meeting as soon as practicable following the filing of the proxy statement with the SEC and the completion of the SEC’s review of the proxy statement, and Veraz is obligated not to adjourn or postpone the special meeting if there are sufficient shares of Veraz common stock represented (in person or by proxy) to constitute a quorum necessary to conduct the business of the special meeting. Veraz’s obligation to call, give notice of, convene and hold the special meeting is not limited or otherwise affected by the commencement, disclosure, announcement or submission of any superior proposal or other acquisition proposal, or by any adverse recommendation change unless the Acquisition Agreement has been terminated (as described below). Veraz will ensure that all proxies solicited in connection with the special meeting are solicited in compliance with all applicable legal requirements.

Dialogic Stock Options and Warrant

Stock Options. The Acquisition Agreement provides that upon the transfer of all Dialogic shares to Veraz, each Dialogic stock option that is then outstanding and unexercised will be cancelled in accordance with the terms of the applicable Dialogic stock option plan and, in exchange for such cancellation, the holder of such stock option will receive an option to purchase shares of Veraz common stock with substantially the same terms

 

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and conditions as were in effect immediately prior to the closing (including any repurchase rights or vesting provisions, if applicable). Each such option to purchase shares of Veraz common stock will be exercisable (or will become exercisable in accordance with its terms) solely for a number of whole shares of Veraz common stock equal to the product of (1) the number of Dialogic common shares that would be issuable upon exercise of the Dialogic stock option immediately prior to the closing multiplied by (2) 0.9 (the “Option Exchange Ratio”), rounded down to the nearest whole number of shares of Veraz common stock, and the per share exercise price for the shares of Veraz common stock issuable upon exercise of such Dialogic stock option will be equal to the quotient equal to (1) the per share exercise price for such Dialogic stock option immediately prior to the closing divided by (2) 0.9, rounded up to the nearest whole cent. Each Dialogic stock option will be vested immediately following the closing as to the same percentage of the total number of shares subject thereto as it was vested immediately prior to the closing, except to the extent such Dialogic stock option (either by its terms or by the terms of another contract) provides for acceleration of vesting. Also, each Dialogic stock option will, in accordance with its terms, be subject to further adjustment to reflect any stock split, division or subdivision of shares, stock dividend, reverse stock split, consolidation of shares, reclassification, recapitalization or other similar transaction subsequent to the closing.

Prior to the closing, Dialogic will provide notice to each holder of outstanding Dialogic stock options describing the treatment of such Dialogic stock options. As soon as reasonably practicable (and in no event later than five business days) following the closing, Veraz will issue to each holder of a Dialogic stock option a document evidencing the issuance to such holder, in exchange for the cancelled Dialogic stock option, of a Veraz stock option.

Veraz has agreed to file with the SEC no later than 10 business days after the closing a registration statement on Form S-8 relating to shares of Veraz common stock issuable pursuant to the Veraz stock options and will use all reasonable efforts to maintain the effectiveness of such registration statement (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such Veraz stock options remain outstanding. Veraz will also use reasonable best efforts to cause shares of Veraz common stock, when issued upon exercise of Veraz stock options, to be approved for quotation on the Nasdaq Global Market.

Warrant. The Acquisition Agreement provides that upon the transfer of all Dialogic shares to Veraz, that certain warrant to purchase Dialogic common shares dated as of October 5, 2007 issued by Dialogic will be terminated.

Composition of the Veraz Board of Directors

Prior to the special meeting, Veraz is obligated to take all necessary corporate action such that immediately after the closing the Board and the composition of the committees of the Board will be composed of the persons agreed upon by Dialogic and Veraz prior to the closing date. Veraz and Dialogic have agreed that promptly after the closing the senior officers of Veraz and each of its subsidiaries, including Dialogic, will be those persons agreed upon by Dialogic and Veraz prior to the closing date. If Dialogic and Veraz fail to agree upon the composition of the Board before the closing date, Dialogic will have the right to nominate six (6) directors for election and Veraz will have the right to nominate three (3) directors and those nine (9) directors will determine the senior officers of Veraz and its subsidiaries and will establish the composition of Veraz’s Board committees.

Veraz stockholders are not entitled to elect directors in connection with the Arrangement, and are not being asked to vote for the election of any directors in connection with this proxy.

Indemnification and Insurance

The Acquisition Agreement provides that for a period of six years following the closing date, Veraz will maintain in effect directors’ and officers’ liability insurance (or, at Veraz’s option, a “tail” insurance policy) covering those persons covered by the directors’ and officers’ liability insurance maintained by Dialogic and

 

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Veraz as of the date of the Acquisition Agreement for any actions taken by them or omissions by them on or before the closing date with the same directors’ and officers’ liability insurance coverage as may be provided from time to time by Veraz to its then existing directors and officers.

Obligation of the Veraz Board of Directors with Respect to Its Recommendation; Receipt of Superior Proposal by Veraz or Dialogic

Recommendation of Veraz Board of Directors. As described above, Veraz is obligated to take all action necessary to duly call, give notice of, convene and hold the special meeting as soon as practicable following the filing of the proxy statement with the SEC and the completion of the SEC’s review of the proxy statement. Veraz has agreed to include a statement in the proxy statement to the effect that Board recommends that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement. The Acquisition Agreement provides that this recommendation may not be withdrawn or modified in a manner adverse to Dialogic, and no resolution by the Board or any committee thereof to withdraw or modify the recommendation in a manner adverse to Dialogic may be adopted.

However, at any time prior to obtaining the affirmative vote of Veraz’s stockholders in favor of the Arrangement Proposal, if Veraz receives an acquisition proposal which the Board concludes in good faith constitutes a superior proposal (as described below) after giving effect to all of the adjustments which may be offered by Dialogic pursuant to clause (C) below, the Board may (i) effect an adverse recommendation change and/or (ii) terminate the Acquisition Agreement to enter into a definitive agreement with respect to such superior proposal if the Board determines in good faith, after consultation with its outside legal counsel, that failure to take such action would be inconsistent with its fiduciary duties under applicable legal requirements; provided that Veraz may not terminate the Acquisition Agreement pursuant to the foregoing clause (ii), and any purported termination pursuant to the foregoing clause (ii) shall be void and of no force or effect, unless concurrently with such termination Veraz pays the required termination fee (as described below); and provided further, that the Board may not effect an adverse recommendation change pursuant to the foregoing clause (i) or terminate the Acquisition Agreement pursuant to the foregoing clause (ii) unless: (A) Veraz shall have provided prior written notice to Dialogic, at least five business days in advance, of its intention to effect an adverse recommendation change or terminate the Acquisition Agreement to enter into a definitive agreement with respect to such superior proposal, as the case may be, which notice shall specify the material terms and conditions of any such superior proposal (including the identity of the party making such superior proposal), if applicable, and shall have contemporaneously provided a copy of the most current form or draft of any written agreement providing for the acquisition transaction contemplated by such superior proposal and other material documents; (B) Dialogic does not make, during such five business day period, a binding, unconditional written offer (including the complete form of definitive Acquisition Agreement executed on behalf of Dialogic and all exhibits and other attachments thereto, subject to acceptance by Veraz by countersignature on behalf of Veraz, and subject to no other conditions whatsoever) that the Board determines in good faith, after consultation with a financial advisor (who shall be a nationally recognized investment banking firm) is at least as favorable from a financial point of view to the stockholders of Veraz as such superior proposal; and (c) prior to effecting such an adverse recommendation change or terminating the Acquisition Agreement to enter into a definitive agreement with respect to such superior proposal, Veraz shall, and shall cause its financial and legal advisors to, during such five business day period, negotiate with Dialogic in good faith (to the extent Dialogic desires to negotiate) to make such adjustments in the terms and conditions of the Acquisition Agreement as would permit the Board not to effect an adverse recommendation change or to conclude that such acquisition proposal has ceased to constitute a superior proposal, as the case may be. In the event of a change to (i) the aggregate consideration to be provided as part of the superior proposal or (ii) other material financial terms of the superior proposal, Veraz would be required to deliver a new written notice to Dialogic and to comply with these requirements with respect to such new written notice, except that the applicable notice period would be reduced to two business days.

In addition, notwithstanding the obligation of the Board to make the recommendation as described above, at any time prior to obtaining the affirmative vote of Veraz’s stockholders in favor of the Arrangement Proposal, the Board may effect an adverse recommendation change based on a material change in circumstances, provided,

 

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however, that Veraz shall not make an adverse recommendation change based on a material change of circumstances unless (i) Veraz shall have provided prior written notice to Dialogic, at least three business days in advance, of its intention to effect an adverse recommendation change based on a material change of circumstances, which notice shall specify all relevant facts and circumstances of any such material change of circumstances, and (ii) Veraz shall have provided Dialogic and its representatives an opportunity to discuss the material change of circumstances.

Under the Acquisition Agreement, an “adverse recommendation change” means any of: (a) the failure of the Board to make (and include in this proxy statement) the recommendation that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement; (b) the withdrawal or modification by the Board in a manner adverse to Dialogic of the recommendation that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement; or (c) if the Board recommends an acquisition proposal or takes any action or makes any statement inconsistent with the recommendation that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement. A “material change of circumstances” means a change of circumstances that is material to Veraz and its subsidiaries taken as a whole occurring, or of which Veraz became aware, after the date of the Acquisition Agreement as a result of which the Board determines in good faith, after consultation with its outside legal counsel, that the failure to make an adverse recommendation change would be inconsistent with its fiduciary duties under the DGCL.

Receipt of Superior Proposal by Dialogic. At any time prior to Veraz obtaining the affirmative vote of its stockholders in favor of the Arrangement Proposal, if Dialogic receives an acquisition proposal which the board of directors of Dialogic concludes in good faith constitutes a superior proposal after giving effect to all of the adjustments which may be offered by the Veraz pursuant to clause (C) below, the board of directors of Dialogic may terminate the Acquisition Agreement to enter into a definitive agreement with respect to such superior proposal if the board of directors of Dialogic determines in good faith, after consultation with outside legal counsel, that failure to take such action would be inconsistent with its fiduciary duties under applicable legal requirements (assuming for these purposes that the DGCL and relevant case law are also applicable legal requirements with respect to determining a board of directors’ duties to its stockholders); provided that Dialogic may not terminate the Acquisition Agreement pursuant to the foregoing clause, and any purported termination pursuant to the foregoing clause shall be void and of no force or effect, unless concurrently with such termination Dialogic pays the required termination fee (as described below); and provided further, that the board of directors of Dialogic may not terminate the Acquisition Agreement pursuant to the foregoing clause unless: (A) Dialogic shall have provided prior written notice to Veraz, at least five business days in advance, of its intention to terminate the Acquisition Agreement to enter into a definitive agreement with respect to such superior proposal, which notice shall specify the material terms and conditions of any such superior proposal (including the identity of the party making such superior proposal), if applicable, and shall have contemporaneously provided a copy of the most current form or draft of any written agreement providing for the acquisition transaction contemplated by such superior proposal and other material documents; (B) Veraz does not make, during such five business day period, a binding, unconditional written offer (including the complete form of definitive Acquisition Agreement executed on behalf of Veraz and all exhibits and other attachments thereto, subject to acceptance by Dialogic by countersignature on behalf of Dialogic, and subject to no other conditions whatsoever) that the board of directors of Dialogic determines in good faith, after consultation with a financial advisor (who shall be a nationally recognized investment banking firm) is at least as favorable from a financial point of view to the shareholders of Dialogic as such superior proposal; and (C) prior to terminating the Acquisition Agreement to enter into a definitive agreement with respect to such superior proposal, Dialogic shall, and shall cause its financial and legal advisors to, during such five business day period, negotiate with Veraz in good faith (to the extent Veraz desires to negotiate) to make such adjustments in the terms and conditions of the Acquisition Agreement as would permit the board of directors of Dialogic to conclude that such acquisition proposal has ceased to constitute a superior proposal. In the event of a change to (i) the aggregate consideration to be provided as part of the superior proposal or (ii) other material financial terms of the superior proposal, Dialogic would be required to deliver a new written notice to Veraz and to comply with these requirements with respect to such new written notice, except that the applicable notice period would be reduced to two business days.

 

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Limitation on the Solicitation, Negotiation and Discussion of Other Acquisition Proposals

The Acquisition Agreement contains detailed provisions prohibiting each of Veraz and Dialogic from seeking or entering into an alternative transaction to the Arrangement. Under these “no solicitation” and related provisions, subject to specific exceptions described below, each of Veraz and Dialogic has agreed that, prior to the earlier to occur of the closing and the termination of the Acquisition Agreement, it will not, directly or indirectly (and it will ensure that its respective representatives and subsidiaries and the respective representatives of their respective subsidiaries do not, directly or indirectly):

 

   

solicit, initiate, knowingly encourage, induce or facilitate the making, submission or announcement of any acquisition proposal or acquisition inquiry or take any action that would reasonably be expected to lead to the making, submission or announcement of an acquisition proposal or acquisition inquiry;

 

   

furnish any information regarding Dialogic or Veraz, as the case may be, or any of its subsidiaries or afford access to the business, properties, assets, books or records of Dialogic or Veraz, as the case may be, or any of its subsidiaries, to any person in connection with or in response to an acquisition proposal or acquisition inquiry;

 

   

enter into or engage in discussions or negotiations, otherwise cooperate in any way with, or knowingly assist, participate in, or facilitate any effort by, any person with respect to any acquisition proposal or acquisition inquiry;

 

   

approve, endorse or recommend any acquisition proposal or acquisition inquiry; or

 

   

enter into any written agreement in principle, letter of intent, term sheet or similar document or any contract contemplating or otherwise relating to any acquisition transaction.

Under the Acquisition Agreement, an “acquisition inquiry” is an inquiry, indication of interest or request for nonpublic information (other than an inquiry, indication of interest or request for information made or submitted by Veraz or Dialogic, as the case may be) that would reasonably be expected to lead to an acquisition proposal, and an “acquisition proposal” is any offer or proposal (other than an offer or proposal made or submitted by Veraz or Dialogic, as the case may be) contemplating or otherwise relating to any acquisition transaction.

Under the Acquisition Agreement, an “acquisition transaction” is, other than the transactions contemplated by the Acquisition Agreement:

 

   

any acquisition or purchase, direct or indirect, of 25% or more of the consolidated assets of Dialogic and its subsidiaries or Veraz and its subsidiaries, as the case may be, or 25% or more of any class of equity or voting securities of Dialogic or Veraz or any of the equity or voting securities of their respective subsidiaries, as the case may be;

 

   

any tender offer (including a self-tender offer) or exchange offer that, if consummated, would result in a third party beneficially owning, directly or indirectly, 25% or more of any class of equity or voting securities of Dialogic or Veraz, as the case may be, or any of the equity or voting securities of their respective subsidiaries; or

 

   

a merger, consolidation, share exchange, business combination, sale of substantially all the assets, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving Dialogic or Veraz, as the case may be.

Notwithstanding the restrictions set forth above, if, prior to the special meeting, (i) Veraz or Dialogic receives a written acquisition proposal from an unaffiliated third party that the board of directors of Veraz or Dialogic, as the case may be, believes in good faith to be bona fide, (ii) the applicable board of directors determines in good faith, after consultation with its financial advisors and outside counsel, that such acquisition proposal constitutes, or is reasonably likely to result in, a superior proposal and (iii) after consultation with its outside counsel, the board of directors determines in good faith that the failure to take such action would be

 

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inconsistent with its fiduciary duties under any applicable legal requirement, then Veraz or Dialogic, as the case may be, may (A) furnish information with respect to itself and its subsidiaries to the person making such acquisition proposal and (B) enter into, participate in, facilitate and maintain discussions or negotiations with, and otherwise cooperate with or assist, the person making such acquisition proposal regarding such acquisition proposal; provided that Veraz or Dialogic, as the case may be, (x) will not, and will not allow any of its subsidiaries or representatives to, disclose any non-public information to such person without entering into an acceptable confidentiality agreement, and (y) will promptly provide to the company any material non-public information concerning Veraz or Dialogic, as the case may be, or its respective subsidiaries provided to such other person which was not previously provided to Dialogic or Veraz, as the case may be. Veraz or Dialogic, as the case may be, will promptly, but in any event within one business day, notify the other orally and in writing if it begins or determines to begin providing information or engaging in discussions concerning an acquisition proposal from a person or group of related persons.

Under the Acquisition Agreement, a “superior proposal” means a bona fide unsolicited written acquisition proposal from an unaffiliated third party that the board of directors of Veraz or Dialogic, as the case may be, in good faith determines would result in a transaction that is more favorable from a financial point of view to the stockholders of Veraz or shareholders of Dialogic, as the case may be, than the transactions contemplated by the Acquisition Agreement (a) after receiving the advice of a financial advisor (who shall be a nationally recognized investment banking firm), (b) after taking into account the likelihood and timing of consummation of such transaction, including the ability of the party making such proposal to obtain financing for such acquisition proposal, and (c) after taking into account all appropriate legal (with the advice of outside counsel), financial (including the financing terms of any such proposal), regulatory or other aspects of such proposal and any other relevant factors permitted by applicable legal requirement. For purposes of the definition of “superior proposal,” the references to “25% or more” in the definition of “acquisition proposal” shall be deemed to be references to “a majority.”

An “acceptable confidentiality agreement” under the Acquisition Agreement means a confidentiality and standstill agreement that contains provisions that are no less favorable to Veraz or Dialogic, as the case may be, than those contained in the confidentiality agreement between the parties and that does not prevent or impede Veraz’s compliance with any of its disclosure or other obligations under the Acquisition Agreement or other legal requirements.

Under the Acquisition Agreement, each of Dialogic and Veraz agreed to immediately cease and cause to be terminated any existing discussions with any person that relate to any acquisition proposal or acquisition inquiry. In addition, each of Dialogic and Veraz agreed to promptly (and in no event later than 48 hours after receipt of any acquisition proposal or acquisition inquiry) advise the other party orally and in writing of any acquisition proposal or acquisition inquiry (including the identity of the person making or submitting such acquisition proposal or acquisition inquiry, and the terms thereof) that is made or submitted by any person prior to the earlier to occur of the closing and the termination of the Acquisition Agreement. Such party shall also keep the other party informed with respect to: (i) the status of any such acquisition proposal or acquisition inquiry; and (ii) the status and terms of any modification or proposed modification thereto.

Material Adverse Effect

Several of the representations, warranties, covenants, closing conditions and termination provisions of Veraz and Dialogic in the Acquisition Agreement use the phrase “material adverse effect.” The Acquisition Agreement provides that “material adverse effect” includes, with respect to either Veraz or Dialogic, as the case may be, any effect, change, event or circumstance that, considered together with other effects, changes, events and circumstances, has a material adverse effect on the business, financial condition, operations or results of operations of the subject company and its subsidiaries taken as a whole.

 

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The Acquisition Agreement provides, however, that none of the following, alone or in combination, be deemed to constitute, nor shall any of the following be taken into account in determining whether there has occurred, a “material adverse effect” on the particular subject company:

 

   

effects, changes, events and circumstances resulting from conditions generally affecting the industries in which the subject company participates or the U.S., Canadian or global economy or capital markets as a whole, to the extent that such conditions do not have a disproportionate impact on the subject company and its subsidiaries taken as a whole relative to others in the industries in which the subject company and its subsidiaries participate;

 

   

effects, changes, events and circumstances resulting from regulatory, legislative or political conditions or securities, credit, financial or other capital markets conditions, in each case in Canada, the United States or any foreign jurisdiction, except to the extent such conditions have a disproportionate effect on the subject company and its subsidiaries, relative to others in the industries in which they operate;

 

   

with respect to Veraz only, changes in the trading price or trading volume of shares of Veraz common stock (it being understood, however, that any effects, changes, events and circumstances causing or contributing to such changes in the trading price or trading volume of shares of Veraz common stock may constitute a “material adverse effect” and may be taken into account in determining whether a “material adverse effect” has occurred);

 

   

any failure by the subject company or any of its subsidiaries to meet internal projections or forecasts or third party revenue or earnings predictions for any period ending (or for which revenues or earnings are released) on or after the date of the Acquisition Agreement (it being understood, however, that any effects, changes, events and circumstances causing or contributing to such failures to meet projections or predictions may constitute a “material adverse effect” and may be taken into account in determining whether a “material adverse effect” has occurred);

 

   

the execution, delivery, announcement or performance of the obligations under the Acquisition Agreement or the announcement, pendency or anticipated consummation of the Arrangement including the impact thereof on the relationships, contractual or otherwise, of the subject company and its subsidiaries with employees, labor unions, customers, suppliers or partners;

 

   

any natural disaster or any acts of terrorism, sabotage, military action or war or any escalation or worsening thereof;

 

   

any changes (after the date of the Acquisition Agreement) in GAAP or applicable legal requirements; and

 

   

the taking of any action required by the Acquisition Agreement.

The Acquisition Agreement also provides that “material adverse effect” includes, with respect to either Veraz or Dialogic, as the case may be, any effect, change, event or circumstance that, considered together with other effects, changes, events and circumstances, has a material adverse effect on the ability of the subject company to consummate the Arrangement or to perform any of its covenants or obligations under the Acquisition Agreement or, with respect to Dialogic only, Veraz’s ability to vote, transfer, receive dividends with respect to or otherwise exercise ownership rights with respect to the stock of Dialogic.

Conditions to the Arrangement

Conditions to the Obligations of Veraz. The Acquisition Agreement provides that the obligation of Veraz to cause the Arrangement to be effected and otherwise cause the transactions contemplated by the Acquisition Agreement to be consummated are subject to the satisfaction, at or prior to the closing, of each of the following conditions:

 

   

the accuracy of the representations and warranties made by Dialogic in the Acquisition Agreement, provided that inaccuracies in such representations and warranties will be disregarded to the extent that such inaccuracies (considered collectively) would not have and would not reasonably be expected to have or result in, a material adverse effect on Dialogic;

 

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compliance with or performance of in all material respects by Dialogic of all of its covenants and obligations in the Acquisition Agreement that are required to be complied with or performed by Dialogic at or prior to the closing;

 

   

meeting the conditions for reliance upon the exemption provided by Section (3)(a)(10) of the Securities Act, including, but not limited to: (a) the approval of the fairness of terms and conditions of the transactions contemplated by the Acquisition Agreement by a court or authorized governmental entity; (b) the holding of a hearing prior to approval of the fairness of the terms and conditions; and (c) adequate notice being provided;

 

   

adoption of the Acquisition Agreement and approval of the Arrangement resolutions by Dialogic’s shareholders, without amendment or with amendments acceptable to Dialogic and Veraz;

 

   

approval of the issuance of shares of Veraz common stock in the Arrangement by the Veraz stockholders;

 

   

obtaining the interim order and the final order in form and on terms reasonably satisfactory to each of Dialogic and Veraz, which interim order and the final order shall not have been set aside or modified in a manner unacceptable to such parties, acting reasonably, on appeal or otherwise;

 

   

conditional approval of the Nasdaq listing application and listing of the shares of Veraz common stock to be issued in the Arrangement on the Nasdaq Global Market, both subject only to completion of the closing and completion by Veraz of any reverse stock split required by Nasdaq;

 

   

the Dialogic support agreement shall not have been terminated or rescinded by any of the Dialogic shareholders;

 

   

filing of the articles of Dialogic confirming the Arrangement, issuance of the appropriate certificate by the Registrar of Companies appointed under Section 400 of the BCBCA, if required;

 

   

completion of the restructuring of Dialogic’s indebtedness substantially as set forth in the Commitment Letter;

 

   

obtaining specific consents of third parties and all other consents required to be obtained in connection with the Arrangement and the other transactions contemplated by the Acquisition Agreement, except where the failure to obtain such consents would not have and would not reasonably be expected to have or result in material adverse effect on Dialogic;

 

   

Dialogic’s chief executive officer and chief financial officer shall have delivered to Veraz a certificate confirming that certain conditions have been duly satisfied and certifying as to certain matters relating to Dialogic’s capitalization and share ownership as of immediately prior to the closing;

 

   

since the date of the Acquisition Agreement, there shall not have occurred and be continuing any material adverse effect on Dialogic, and no event shall have occurred or circumstance shall exist that, in combination with any other events or circumstances, would have or would reasonably be expected to have or result in a material adverse effect on Dialogic;

 

   

all applicable waiting periods under the HSR Act and under any applicable foreign antitrust law shall have expired or been terminated, and there shall not be in effect any voluntary agreement between Veraz or Dialogic and any foreign governmental body pursuant to which Veraz or Dialogic has agreed not to consummate the Arrangement for any period of time;

 

   

obtaining any governmental authorization or other consent required to be obtained with respect to the Arrangement under any applicable antitrust law, and no such governmental authorization or other consent so obtained shall require or contain any term, limitation, condition or restriction that would reasonably be expected to result in material harm to: (a) Veraz or Dialogic, or any subsidiary of Veraz or Dialogic; (b) any business or material asset of Veraz or Dialogic, or any of their subsidiaries; or (c) the future ability or authority of Veraz or Dialogic, or any of their subsidiaries to conduct business or to own, operate or retain exclusive rights to any material asset;

 

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Dialogic having obtained the necessary unanimous written consent of Dialogic shareholders to, effective upon the closing date, terminate specified Dialogic shareholder agreements;

 

   

no temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Arrangement shall have been issued by any court of competent jurisdiction or other governmental body and remain in effect, and there shall not be any legal requirement enacted or deemed applicable to the Arrangement that makes consummation of the Arrangement illegal; and

 

   

there being no pending or threatened legal proceeding in which a governmental body is or is threatened to become a party: (a) challenging or seeking to restrain, prohibit, rescind or unwind the consummation of the Arrangement or any of the other transactions contemplated by the Acquisition Agreement; (b) relating to the Arrangement or any of the other transactions contemplated by the Acquisition Agreement and seeking to obtain from Veraz or Dialogic or any of its subsidiaries any damages or other relief that would reasonably be expected to be material to Veraz or Dialogic or any of its subsidiaries; (c) seeking to prohibit or limit in any material respect Veraz’s ability to vote, transfer, receive dividends with respect to or otherwise exercise ownership rights with respect to the stock of Dialogic; (d) that could materially and adversely affect the right or ability of Veraz or Dialogic or any of its subsidiaries to own any of the material assets or operate the business of Dialogic or any of its subsidiaries; (e) seeking to compel any of Dialogic or any of its subsidiaries, Veraz or any subsidiary of Veraz to dispose of or hold separate any material assets or business as a result of the Arrangement or any of the other transactions contemplated by the Acquisition Agreement; or (f) seeking to impose (or that could result in the imposition of) any criminal sanctions or liability on Veraz or any of Dialogic or any of its subsidiaries.

Conditions to the Obligations of Dialogic. The Acquisition Agreement provides that the obligation of Dialogic to cause the Arrangement to be effected and otherwise cause the transactions contemplated by the Acquisition Agreement to be consummated is subject to the satisfaction, at or prior to the closing, of the following conditions:

 

   

the accuracy of the representations and warranties made by Veraz in the Acquisition Agreement, provided that inaccuracies in such representations and warranties will be disregarded to the extent that such inaccuracies (considered collectively) would not have and would not reasonably be expected to have or result in, a material adverse effect on Veraz;

 

   

compliance with or performance of in all material respects by Veraz of all of its covenants and obligations in the Acquisition Agreement that are required to be complied with or performed by Veraz at or prior to the closing;

 

   

meeting the conditions for reliance upon the exemption provided by Section (3)(a)(10) of the Securities Act, including, but not limited to: (a) the approval of the fairness of terms and conditions of the transactions contemplated by the Acquisition Agreement by a court or authorized governmental entity; (b) the holding of a hearing prior to approval of the fairness of the terms and conditions; and (c) adequate notice being provided;

 

   

adoption of the Acquisition Agreement and approval of the Arrangement resolutions by Dialogic’s shareholders, without amendment or with amendments acceptable to Dialogic and Veraz;

 

   

approval of the issuance of shares of Veraz common stock in the Arrangement by the Veraz stockholders;

 

   

obtaining the interim order and the final order in form and on terms reasonably satisfactory to each of Dialogic and Veraz, which interim order and the final order shall not have been set aside or modified in a manner unacceptable to such parties, acting reasonably, on appeal or otherwise;

 

   

Veraz shall have maintained its status as a company whose common stock is listed on the Nasdaq Global Market and no reason shall exist as to why such status shall not continue immediately following the closing;

 

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conditional approval of the Nasdaq listing application and listing of the shares of Veraz common stock to be issued in the Arrangement on the Nasdaq Global Market, both subject only to completion of the closing and completion by Veraz of any reverse stock split required by Nasdaq;

 

   

filing of the articles of Dialogic confirming the Arrangement, issuance of the appropriate certificate by the Registrar of Companies appointed under Section 400 of the BCBCA, if required;

 

   

Veraz’s chief executive officer and chief financial officer shall have delivered to Dialogic a certificate confirming that certain conditions have been duly satisfied;

 

   

since the date of the Acquisition Agreement, there shall not have occurred and be continuing any material adverse effect on Veraz, and no event shall have occurred or circumstance shall exist that, in combination with any other events or circumstances, would have or would reasonably be expected to have or result in a material adverse effect on Veraz;

 

   

all applicable waiting periods under the HSR Act and under any applicable foreign antitrust law shall have expired or been terminated, and there shall not be in effect any voluntary agreement between Veraz or Dialogic and any foreign governmental body pursuant to which Veraz or Dialogic has agreed not to consummate the Arrangement for any period of time;

 

   

obtaining any governmental authorization or other consent required to be obtained with respect to the Arrangement under any applicable antitrust law, and no such governmental authorization or other consent so obtained shall require or contain any term, limitation, condition or restriction that would reasonably be expected to result in material harm to: (a) Veraz or Dialogic, or any subsidiary of Veraz or Dialogic; (b) any business or material asset of Veraz or Dialogic, or any of their subsidiaries; or (c) the future ability or authority of Veraz or Dialogic, or any of their subsidiaries to conduct business or to own, operate or retain exclusive rights to any material asset;

 

   

no temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Arrangement shall have been issued by any court of competent jurisdiction or other governmental body and remain in effect, and there shall not be any legal requirement enacted or deemed applicable to the Arrangement that makes consummation of the Arrangement illegal;

 

   

there being no pending or threatened legal proceeding in which a governmental body is or is threatened to become a party: (a) challenging or seeking to restrain, prohibit, rescind or unwind the consummation of the Arrangement or any of the other transactions contemplated by the Acquisition Agreement; (b) relating to the Arrangement or any of the other transactions contemplated by the Acquisition Agreement and seeking to obtain from Veraz or Dialogic or any of its subsidiaries any damages or other relief that would reasonably be expected to be material to Veraz or Dialogic or any of its subsidiaries; (c) seeking to prohibit or limit in any material respect Veraz’s ability to vote, transfer, receive dividends with respect to or otherwise exercise ownership rights with respect to the stock of Dialogic; (d) that could materially and adversely affect the right or ability of Veraz or Dialogic or any of its subsidiaries to own any of the material assets or operate the business of Dialogic or any of its subsidiaries; (e) seeking to compel any of Dialogic or any of its subsidiaries, Veraz or any subsidiary of Veraz to dispose of or hold separate any material assets or business as a result of the Arrangement or any of the other transactions contemplated by the Acquisition Agreement; or (f) seeking to impose (or that could result in the imposition of) any criminal sanctions or liability on Veraz or any of Dialogic or any of its subsidiaries; and

 

   

Veraz shall have executed and delivered a registration rights agreement in favor of the Dialogic shareholders.

Termination of the Acquisition Agreement

The Acquisition Agreement provides that, at any time prior to the closing, whether before or after adoption of the Acquisition Agreement by the Dialogic shareholders and whether before or after approval of the issuance of shares of Veraz common stock in the Arrangement by Veraz’s stockholders, the acquisition may be terminated by either Veraz or Dialogic in specified circumstances.

 

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Mutual Consent to Termination. Veraz and Dialogic may terminate the Acquisition Agreement by mutual written consent upon due authorization by their respective boards of directors.

Termination by Either Veraz or Dialogic. Either company can terminate the Acquisition Agreement:

 

   

if the Arrangement shall not have been consummated by December 31, 2010; provided, however, that neither Veraz nor Dialogic will be permitted to terminate the Acquisition Agreement if the failure to consummate the Arrangement by such date is attributable to a failure on the part of such party to perform any covenant or obligation in the Acquisition Agreement required to be performed by such party at or prior to the closing;

 

   

if a court of competent jurisdiction or other governmental body shall have issued a final and non-appealable order, or shall have taken any other final and non-appealable action, having the effect of permanently restraining, enjoining or otherwise prohibiting the consummation of the Arrangement;

 

   

if the Arrangement shall not have been approved by the Dialogic shareholders;

 

   

if: (A) the special meeting (including any adjournments and postponements thereof) shall have been held and Veraz’s stockholders shall have taken a final vote on the issuance of shares of Veraz common stock in the Arrangement; and (B) the issuance of shares of Veraz common stock in the Arrangement shall not have been approved at the special meeting (and shall not have been approved at any adjournment or postponement thereof) by the affirmative vote of a majority of the total votes cast on the Proposal in person or by proxy at the special meeting; or

 

   

in the event any of the interim order, the final order or the plan of arrangement is amended, varied or modified by the Supreme Court of British Columbia in a manner that is not satisfactory to Dialogic or Veraz and is materially adverse to such party; provided, a termination of the Acquisition Agreement may only be effected by Dialogic prior to the acceptance by Dialogic of the final order at its registered and records office; provided, further, that a termination of the Acquisition Agreement may only be effected by Veraz following the decision by a court of competent jurisdiction on appeal by Dialogic, if Dialogic initiates an appeal, that does not have the effect of changing the amendment, variance or modification to the interim order, final order or the plan of arrangement, as the case may be, such that such amendment, variance or modification is no longer materially adverse to Veraz, and where no further appeal lies therefrom, and only until such time as Dialogic accepts the final order at its registered and records office.

Termination by Veraz. Veraz can terminate the Acquisition Agreement:

 

   

subject to certain limitations, if inaccuracies in the representations and warranties made by Dialogic in the Acquisition Agreement would have or would reasonably be expected to have or result in, a material adverse effect on Dialogic, or if Dialogic has failed to comply with its covenants and obligations in all material respects, provided that if any such inaccuracy or noncompliance is curable, Veraz may not terminate the Acquisition Agreement under this provision unless the inaccuracy or noncompliance remains uncured for a period of 30 days following notice thereof; or

 

   

prior to obtaining the affirmative vote of Veraz stockholders in favor of the Arrangement Proposal at the special meeting, in compliance with, and subject to, the terms and conditions of the Acquisition Agreement regarding the receipt by Veraz of a superior proposal, as described above under “Obligation of the Veraz Board of Directors with Respect to Its Recommendation; Receipt of Superior Proposal by Veraz or Dialogic.”

Termination by Dialogic. Dialogic can terminate the Acquisition Agreement:

 

   

subject to certain limitations, if inaccuracies in the representations and warranties made by Veraz in the Acquisition Agreement would have or would reasonably be expected to have or result in, a material adverse effect on Veraz, or if Veraz has failed to comply with its covenants and obligations in all material respects, provided that if any such inaccuracy or noncompliance is curable, Dialogic may not

 

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terminate the Acquisition Agreement under this provision unless the inaccuracy or noncompliance remains uncured for a period of 30 days following notice thereof;

 

   

if any of the following has occurred: (a) the failure of the Board to make (and include in this proxy statement) the recommendation that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement; (b) the withdrawal or modification by the Board in a manner adverse to Dialogic of the recommendation that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement; or (c) if the Board recommends an acquisition proposal or takes any action or makes any statement inconsistent with the recommendation that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement;

 

   

prior to obtaining the affirmative vote of Veraz stockholders in favor of the Arrangement Proposal at the special meeting, in compliance with, and subject to, the terms and conditions of the Acquisition Agreement regarding the receipt by Dialogic of a superior proposal, as described above under “Obligation of the Veraz Board of Directors with Respect to Its Recommendation; Receipt of Superior Proposal by Veraz or Dialogic”; or

 

   

if the resolution or settlement of the SEC’s inquiry of Veraz mandates any of the following: (i) the appointment of an external monitor of Veraz for any period of time or for any reason (regardless of whether the scope of such appointment is de minimus); (ii) compliance by Veraz with any regulatory scheme or plan that supplements or alters Veraz’s regulatory compliance obligations existing as of the date of the Acquisition Agreement, provided, however that a court order of any kind enjoining Veraz from violating the provisions of applicable state or federal laws, rules or regulations would not be deemed to constitute a regulatory scheme or plan that supplements or alters Veraz’s regulatory compliance obligations existing as of the date of the Acquisition Agreement; or (iii) payment of a fine, penalty or similar sanction, whether such payment is to be made in a single lump sum or in installment payments, of an aggregate amount equal to or in excess of $1,500,000.

Expenses and Termination Fees

The Acquisition Agreement provides that, subject to certain exceptions, all fees and expenses incurred in connection with the Acquisition Agreement and the transactions contemplated by the Acquisition Agreement will be paid by the party incurring such expenses.

The Acquisition Agreement provides that Veraz will pay Dialogic a termination fee of $1,500,000 in cash and will reimburse Dialogic for up to an aggregate $1,000,000 of actual out of pocket legal, accounting and investment advisory fees paid or payable in connection with the transactions contemplated by the Acquisition Agreement if any of the following events occurs:

 

   

the Acquisition Agreement is terminated by either Veraz or Dialogic under the provision of the Acquisition Agreement permitting such termination if: (A) the special meeting (including any adjournments and postponements thereof) shall have been held and Veraz’s stockholders shall have taken a final vote on the issuance of shares of Veraz common stock in the Arrangement; and (B) the issuance of shares of Veraz common stock in the Arrangement shall not have been approved at the special meeting (and shall not have been approved at any adjournment or postponement thereof) by the affirmative vote of a majority of the total votes cast on the Proposal in person or by proxy at the special meeting;

 

   

the Acquisition Agreement is terminated by Veraz under the provision of the Acquisition Agreement permitting such termination if Veraz receives a superior proposal, as described above under “Obligation of the Veraz Board of Directors with Respect to Its Recommendation; Receipt of Superior Proposal by Veraz or Dialogic”; or

 

   

the Acquisition Agreement is terminated by Dialogic under the provision of the Acquisition Agreement permitting such termination if any of the following has occurred: (a) the failure of the Board to make (and include in this proxy statement) the recommendation that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement; (b) the withdrawal or modification by

 

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the Board in a manner adverse to Dialogic of the recommendation that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement; or (c) if the Board recommends an acquisition proposal or takes any action or makes any statement inconsistent with the recommendation that Veraz’s stockholders vote to approve the issuance of shares of Veraz common stock in the Arrangement.

The Acquisition Agreement provides that Dialogic will pay Veraz a termination fee of $3,000,000 in cash and will reimburse Veraz for up to an aggregate $1,000,000 of actual out of pocket legal, accounting and investment advisory fees paid or payable in connection with the transactions contemplated by the Acquisition Agreement if any of the following events occurs:

 

   

the Acquisition Agreement is terminated by Dialogic or Veraz under the provision of the Acquisition Agreement permitting such termination if the Arrangement shall not have been approved by Dialogic shareholders; or

 

   

the Acquisition Agreement is terminated by Dialogic under the provision of the Acquisition Agreement permitting such termination if Dialogic receives a superior proposal, as described above under “Obligation of the Veraz Board of Directors with Respect to Its Recommendation; Receipt of Superior Proposal by Veraz or Dialogic.”

 

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DIALOGIC SUPPORT AGREEMENT AND VERAZ VOTING AGREEMENT

The following description of the Dialogic Support Agreement and Veraz Voting Agreement describes the material terms of such agreements. This description of the Dialogic Support Agreement and Veraz Voting Agreement is qualified in its entirety by reference to the form of Dialogic Support Agreement and form of Veraz Voting Agreement, copies of which are included as Annexes C and D hereto, respectively. We encourage you to read the entire form of Dialogic Support Agreement and form of Veraz Voting Agreement.

Support Agreement Relating to Dialogic Shares

Each of Dialogic’s shareholders have entered into a Dialogic Support Agreement with Veraz dated as of May 12, 2010. In the Dialogic Support Agreement, each of the signatories agreed to vote all Dialogic securities owned by them as follows:

 

   

in favor of approving the Arrangement and/or any matter that could reasonably be expected to facilitate it; and

 

   

against any acquisition proposal or any action that would delay, prevent or frustrate the Arrangement.

In addition, they each agreed not to exercise any rights of dissent that may be provided under the Arrangement, under any applicable legal requirements (including under the BCBCA) or otherwise in connection with the approval of the Arrangement or any other corporate transactions considered at any meeting of Dialogic’s shareholders. They also agreed that they will not transfer or agree to transfer any Dialogic securities owned by them (other than an exercise of any Dialogic stock options in accordance with their terms which, for greater certainty, will be subject to the support agreement upon their exercise for Dialogic shares), except in certain circumstances. Any Dialogic securities subsequently acquired by the signatories, or over which beneficial ownership and/or direction or control is directly or indirectly exercised, will also be subject to the provisions of the support agreement.

One hundred percent of the Dialogic shares outstanding, are subject to the Dialogic Support Agreement.

Voting Agreements Relating to Veraz Shares

Certain Veraz stockholders have entered into a Veraz Voting Agreement with Dialogic dated as of May 12, 2010. In the Veraz Voting Agreements, each of the signatories agreed to vote all Veraz common stock owned by it as follows:

 

   

in favor of, among other things, (a) the Arrangement, (b) the issuance of shares of Veraz common stock to the Dialogic shareholders pursuant to the terms of the Acquisition Agreement, (c) the amendment of one or more of the Veraz stock plans for the purpose of increasing the number of shares of Veraz common stock available for issuance thereunder to consummate the Arrangement in accordance with the terms of the Acquisition Agreement, and (d) any matter that could reasonably be expected to facilitate any of the foregoing; and

 

   

against any acquisition proposal or any action that could reasonably be expected to delay, prevent or frustrate the Arrangement.

In addition, they each granted Dialogic an irrevocable proxy to vote their shares of Veraz common stock in the same manner. They have also agreed that, before the Veraz special meeting of stockholders, they will not transfer any shares of Veraz common stock, any options to purchase shares of Veraz common stock or any other Veraz securities owned by them except in certain circumstances. Any Veraz securities subsequently acquired by the signatories will also be subject to the provisions of the voting agreement.

Approximately 15,801,403 shares in the aggregate, or 35.7% of the Veraz common stock outstanding on the Record Date for the Veraz special meeting of stockholders, are subject to Veraz Voting Agreements and irrevocable proxies.

 

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REGISTRATION RIGHTS AGREEMENT

In connection with the Arrangement, Veraz will enter into a registration rights agreement with certain Dialogic shareholders. Pursuant to the registration rights agreement, Veraz might be required to register shares of common stock issued in the Arrangement to Dialogic shareholders. For so long as the holders of registrable securities, as defined in the agreement, hold at least 1% of our common stock and all common stock held by and issuable to such holders (and its affiliates) may not be sold pursuant to Rule 144 under the Securities Act, such holders will have the right to require Veraz to use reasonable efforts to effect registration under the Securities Act of their registrable securities, subject to specific value minimums and the Board’s right to defer the registration for a period of up to 120 days. These stockholders also have the right to cause us to register their securities on Form S-3 if they propose to register securities having a value of at least $500,000, subject to the Board’s right to defer the registration for a period of up to 120 days. In addition, if Veraz proposes to register securities under the Securities Act, then the stockholders who are party to the agreement will have a right, subject to quantity limitations determined by underwriters if the offering involves an underwriting, to request that Veraz registers their registrable securities. Veraz will bear all registration expenses incurred in connection with registrations. Veraz has agreed to indemnify the investors against liabilities related to the accuracy of the registration statement used in connection with any registration effected under the agreement.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS REFLECTING THE ACQUISITION

On May 12, 2010, Veraz and Dialogic entered into a definitive acquisition agreement where upon the completion date of the transaction, Dialogic shareholders and option holders will hold approximately 70% and existing Veraz stockholders and option holders will hold approximately 30% of the outstanding securities of the combined company. Per the terms of the acquisition agreement, Veraz will acquire all the outstanding Dialogic shares in exchange for shares of Veraz common stock. Each share of Dialogic’s common stock then outstanding will be cancelled and automatically converted into the right to receive shares of Veraz common stock. Any fractional shares will be rounded up to the nearest whole number of shares. In addition, all outstanding options to purchase Dialogic common shares will be cancelled and new Veraz options, with substantially the same terms and conditions as the cancelled Dialogic options, will be issued. All of Dialogic’s outstanding warrants will be cancelled on the date of closing. Veraz will issue approximately 110.6 million of Veraz’s common shares, for all issued and outstanding Dialogic preferred and common stock. The total number of shares of Veraz’s common stock issuable as acquisition consideration is subject to adjustment if, after the date of the acquisition agreement, but prior to the effective time of the acquisition, the shares of issued and outstanding Veraz common stock increase, decrease or change into, or are exchanged for, a different kind or number of securities.

In addition, the relative size (as measured in terms of revenues and EBITDA (earnings before interest, taxes, depreciation and amortization)) of Dialogic is significantly larger than the relative size of Veraz, the majority of the directors of the combined company will be appointed from the Dialogic board of directors, and the Dialogic chief executive officer will be the chief executive officer of the combined company. Accordingly, the transaction will be reflected as a reverse acquisition pursuant to Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 805.

In a reverse acquisition, for legal purposes, Dialogic is the acquiree, but for accounting purposes, Dialogic is the acquirer of Veraz. Consolidated financial statements prepared following the closing of the reverse acquisition will be issued in the name of Dialogic, the proposed combined company name, but will be described in the notes as a continuation of the financial statements of Dialogic, with one adjustment: the legal capital will be retroactively adjusted to reflect the legal capital of Veraz. As the consolidated financial statements represent the continuation of the financial statements of Dialogic, except for the capital structure, consolidated financial statements after the closing of the reverse acquisition will reflect:

 

   

The assets and liabilities of Dialogic recognized and measured at their pre-combination carrying amounts;

 

   

The assets and liabilities of Veraz recognized and measured at fair value at the closing date in accordance with ASC 805;

 

   

The retained earnings and other equity balances of Dialogic before the business combination; and

 

   

The results of operations of Dialogic plus the results of operations of Veraz commencing on the date of the acquisition and the related purchase accounting adjustments to measure Veraz’s assets and liabilities at fair value.

Additionally, historical financial condition and results of operations shown for comparative purposes in periodic filings subsequent to the completion of the transaction will reflect those of Dialogic.

The estimated pro forma purchase price will be allocated to tangible and intangible assets acquired and liabilities assumed. The allocation of the pro forma purchase price is based on valuations derived from estimated fair value assessments and assumptions used by management. The actual purchase price allocation is pending the finalization of appraisal valuations, which may result in adjustments to the pro forma purchase price allocation. While management believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of negative goodwill.

 

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Furthermore, pursuant to ASC 350, Intangibles-Goodwill and Other, goodwill and indefinite-lived intangible assets arising from the transaction will be subject to at least an annual assessment for impairment. Identified intangible assets with finite lives will be amortized over those lives. A final determination of the intangible asset values and required purchase accounting adjustments, including the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values, has not been made. However, for purposes of disclosing unaudited pro forma information in this proxy statement, a pro forma determination has been made of the purchase price allocation, based upon current estimates and assumptions, which is subject to revision upon completion of the transaction.

The unaudited pro forma condensed combined balance sheet as of March 31, 2010, and unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2010 and the year ended December 31, 2009 reflecting the acquisition, are based upon the historical financial statements of Veraz and Dialogic. These pro forma condensed combined statements are prepared using the acquisition method of accounting and after applying the assumptions and adjustments described in the accompanying notes. The unaudited pro forma condensed combined balance sheet is presented as if the acquisition had occurred on March 31, 2010. The unaudited pro forma condensed combined statements of operation are presented as if the acquisition had occurred as of January 1, 2009.

The pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the dates indicated, nor is it indicative of future operating results or financial position. The unaudited pro forma condensed combined financial statements and the pro forma adjustments are based upon available information and certain assumptions that Veraz believes are reasonable. Such statements do not include the effect of the acquisition on future revenues or operating expenses, including future restructuring activities as the restructuring activities have not yet been determined. These future restructuring expenses may be material and may include costs for severance, costs to vacate or consolidate facilities, and costs to exit or terminate other duplicative activities. Future restructuring expenses are expected to be incurred principally over the one year period following the acquisition and will be recorded in operating expenses in the period that these expenses are incurred.

The unaudited pro forma condensed combined statements financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes of Veraz in the Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, which are incorporated by reference into this proxy statement, and of Dialogic for the audited financial statements for the years ended December 31, 2009 and 2008, and unaudited financial statements as of March 31, 2010 and for the three month periods ended March 31, 2010 and 2009 included elsewhere in this proxy statement.

 

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Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2010

(in thousands, except share data)

 

    Veraz
Historical
    Dialogic
Historical
    Proforma
Adjustments
        Proforma
Combined
 
ASSETS          

Current assets:

         

Cash and cash equivalents

  $ 27,258      $ 2,661      $ (2,720   B   $ 27,199   

Restricted cash

    951        —          —            951   

Short-term investments

    3,000        —          —            3,000   

Accounts receivable, net

    27,758        39,004        —            66,762   

Inventories

    8,255        16,588        (730   A     24,113   

Prepaid expenses and deposits

    1,526        7,209        —            8,735   

Deferred income taxes

    —          110        —            110   

Other receivable

    —          129        (129   G     —     

Other current assets

    2,603        55        —            2,658   

Due from related parties

    196        —          129      G     325   
                                 

Total current assets

    71,547        65,756        (3,450       133,853   

Property and equipment, net

    2,748        10,077        —            12,825   

Other assets

    122        1,206        —            1,328   

Deferred income taxes

    —          125        —            125   

Goodwill

    —          19,749        —            19,749   

Intangible assets

    —          48,994        3,400      A     52,394   

Deferred debt issuance costs

    —          1,630        1,787      B     3,417   
                                 

Total assets

  $ 74,417      $ 147,537      $ 1,737        $ 223,691   
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY          

Current liabilities:

         

Bank indebtedness

  $ —        $ 9,325      $ —          $ 9,325   

Accounts payable

    5,690        19,890        —            25,580   

Accrued expenses

    12,072        6,759        4,125      H     22,956   

Income tax payable

    470        848        —            1,318   

Deferred revenue

    13,038        5,885        (8,128   A     10,795   

Due to related parties

    1,367        —          —            1,367   

Long-term debt

    —          87,176        (87,176   B     —     

Interest payable on long-term debt

    —          2,774        —            2,774   
                                 

Total current liabilities

    32,637        132,657        (91,179       74,115   
                                 

Income taxes payable

    —          3,378        —            3,378   

Long-term debt

    —          3,354        87,176      B     90,530   
                                 

Total liabilities

    32,637        139,389        (4,003       168,023   
                                 

Redeemable equity, at maximum redemption amount:

         

Class A shares, no par value

    —          44,656        (44,656   C     —     

Class B shares, no par value

    —          28,504        (28,504   C     —     

Class C shares, no par value

    —          19,978        (19,978   C     —     
                                 

Total redeemable equity

    —          93,138        (93,138