1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
LHS GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7371 58-2224883
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
SIX CONCOURSE PARKWAY
SUITE 2700
ATLANTA, GEORGIA 30328
(770) 280-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
SCOTT A. WHARTON
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
LHS GROUP INC.
SIX CONCOURSE PARKWAY
SUITE 2700
ATLANTA, GEORGIA 30328
(770) 280-3000
FAX: (770) 280-3099
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
WITH COPIES TO:
M. HILL JEFFRIES JOHN R. UTZSCHNEIDER
ALSTON & BIRD LLP BINGHAM DANA LLP
1201 WEST PEACHTREE STREET 150 FEDERAL STREET
ATLANTA, GEORGIA 30309-3424 BOSTON, MASSACHUSETTS 02110-1726
(404) 881-7000 (617) 951-8000
FAX: (404) 881-4777 FAX: (617) 951-8736
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the merger described in this registration
statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
Common stock, $.01 par
value..................... 5,515,214 $1.84 $10,155,513 $2,824
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(1) Represents the estimated number of shares of common stock issuable by the
registrant upon consummation of the merger of a subsidiary of the registrant
with and into Priority Call Management, Inc., assuming exercise of all
outstanding options to purchase common stock of Priority Call.
(2) Pursuant to Rule 457(f)(2), the registration fee was computed on the basis
of the stockholders' equity of Priority Call as of March 31, 1999, which
represents the book value of the common stock and the preferred stock of
Priority Call to be received by the registrant in the merger.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), SHALL
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 3, 1999
(PRIORITY CALL MANAGEMENT LOGO) (LHS LOGO)
PROXY STATEMENT FOR A SPECIAL PROSPECTUS
MEETING OF STOCKHOLDERS OF OF
PRIORITY CALL MANAGEMENT, INC. LHS GROUP INC.
PROPOSED MERGER
To the Stockholders of Priority Call Management, Inc.:
Your board of directors has agreed to a merger which will result in the
acquisition of Priority Call Management, Inc. by LHS Group Inc., a
publicly-traded company headquartered in Atlanta, Georgia. The board believes
that, as a result of globalization and increasing competition within the
enhanced services industry, Priority Call requires broader resources in order to
increase the commercial success of its products and services and maximize value
to its stockholders. A combination with LHS offers us access to substantial
additional marketing, sales and financial resources and the opportunity to
cross-market our products and services to LHS's customers which we believe will
allow us to compete more successfully in an increasingly competitive global
marketplace.
If the merger is completed, you will be entitled to receive 2.3542 shares
of LHS common stock for each of your shares of Priority Call capital stock. Of
this amount, however, 5% will be placed in an escrow fund to satisfy unknown
claims LHS may have against Priority Call. See "DESCRIPTION OF THE
TRANSACTION -- INDEMNIFICATION" and " -- ESCROW AGREEMENT". We refer to the
2.3542 multiple as the "exchange ratio."
LHS common stock is traded on the Nasdaq National Market under the symbol
"LHSG" and on the Frankfurt Stock Exchange Neuer Markt under the symbol "LHI."
Based on the exchange ratio and the current trading price of LHS's common stock,
you will receive approximately $79.60 worth of LHS common stock for each of your
shares of Priority Call capital stock.
We estimate that LHS will issue approximately 4.1 million shares of its
common stock to Priority Call stockholders in the merger, not including shares
issuable upon exercise of Priority Call options assumed by LHS. Those shares
will represent approximately 7.2% of the outstanding common stock of LHS after
the merger.
A special meeting of Priority Call stockholders will be held on
, 1999 at a.m. at the offices of Bingham Dana LLP, 150 Federal
Street, Boston, Massachusetts. At the special meeting, we will ask you to
approve the merger agreement and the merger. We cannot complete the merger
unless the holders of more than two-thirds of the outstanding shares of Priority
Call preferred stock and common stock, voting together as a single class, and a
majority of the outstanding shares of Priority Call preferred stock, voting
together as a separate class, approve the merger agreement and the merger. YOUR
VOTE IS VERY IMPORTANT. Please complete the enclosed proxy card and return it in
the envelope provided, even if you plan to attend the special meeting.
THIS PROXY STATEMENT-PROSPECTUS PROVIDES YOU WITH DETAILED INFORMATION
ABOUT THE SPECIAL MEETING AND THE MERGER. WE URGE YOU TO READ THE ENTIRE
DOCUMENT CAREFULLY. IN PARTICULAR, YOU SHOULD READ THE "RISK FACTORS" SECTION
BEGINNING ON PAGE 17. YOU ALSO CAN OBTAIN ADDITIONAL INFORMATION ABOUT LHS FROM
DOCUMENTS THAT LHS FILES WITH THE SECURITIES AND EXCHANGE COMMISSION. TO OBTAIN
FREE COPIES OF THESE DOCUMENTS, SEE "WHERE YOU CAN FIND MORE INFORMATION" IN
THIS PROXY STATEMENT-PROSPECTUS.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THE SHARES OF LHS COMMON STOCK TO BE ISSUED IN THE MERGER OR
DETERMINED IF THIS PROXY STATEMENT-PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this proxy statement-prospectus is , 1999. It is first
being mailed to you on , 1999.
3
PRIORITY CALL MANAGEMENT, INC.
110 FORDHAM ROAD
WILMINGTON, MASSACHUSETTS 01887
-------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
-------------------------------------------
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Priority Call Management, Inc. to be held at the offices of Bingham Dana LLP,
150 Federal Street, Boston, Massachusetts on , ,
1999, at a.m.
At the special meeting, you will be asked to vote upon the approval of an
agreement and plan of merger, dated as of April 20, 1999, among Priority Call,
LHS Group Inc. and Patriot Acquisition Corp., and the transactions provided for
in the merger agreement. The merger agreement provides for the merger of Patriot
Acquisition Corp., a wholly owned subsidiary of LHS, into Priority Call. If the
merger is approved and completed, the holders of Priority Call common stock and
preferred stock will be entitled to receive 2.3542 shares of LHS common stock
for each of their shares of Priority Call capital stock, 5% of which will be
placed in an escrow fund.
The board of directors of Priority Call has carefully considered the terms
of the proposed merger and has determined that the merger agreement and the
merger are in the best interests of Priority Call and its stockholders. THE
PRIORITY CALL BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND THE MERGER AND RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT AND THE MERGER.
Stockholders of record at the close of business on , 1999 are
entitled to notice of and to vote at the special meeting and any adjournment or
postponement of the special meeting.
Whether or not you attend the special meeting, it is important that your
shares be represented and voted at the special meeting. Therefore, I urge you to
complete, sign, date and promptly return the enclosed proxy card in the enclosed
postage-paid envelope. If you decide to attend the special meeting and vote in
person, you will, of course, have that opportunity.
Sincerely,
--------------------------------------
Robert G. Ory
Clerk
4
TABLE OF CONTENTS
PAGE
----
Summary..................................................... 1
The Companies............................................ 1
The Merger............................................... 2
What You Will Receive in the Merger...................... 2
Escrow Agreement......................................... 2
Effect of the Merger on Priority Call Options............ 2
Material Federal Income Tax Consequences of the Merger... 3
Termination Fee.......................................... 3
Comparative Market Prices of Common Stock................ 3
Our Reasons for the Merger............................... 4
Fairness Opinion of Priority Call's Financial Advisor.... 4
Special Meeting of Stockholders.......................... 4
Stockholder Vote Required to Approve the Merger.......... 4
Voting Rights at the Special Meeting..................... 4
Appraisal Rights of Dissenting Stockholders.............. 5
Our Recommendation to Stockholders....................... 5
Priority Call Stock Ownership............................ 5
Voting Agreement......................................... 5
Interests of Certain Persons in the Merger That May Be
Different from Yours................................... 5
Completion of the Merger................................. 6
Exchange of Stock Certificates........................... 6
Regulatory Approval and Other Conditions................. 6
Waiver, Amendment, and Termination....................... 7
Accounting Treatment..................................... 7
Differences in Stockholders' Rights...................... 7
Listing of LHS Common Stock.............................. 7
Selected Historical Financial Data....................... 8
Pro Forma Combined Condensed Financial Data.............. 10
Risk Factors................................................ 17
A Warning About Forward-Looking Statements.................. 27
The Special Meeting......................................... 28
Purpose.................................................. 28
Date, Place and Time..................................... 28
Record Date.............................................. 28
Priority Call Stockholders Entitled to Vote.............. 28
Vote Required; Voting at the Meeting..................... 28
Voting of Proxies........................................ 29
Solicitation of Proxies.................................. 29
Rights of Dissenting Stockholders........................ 30
Recommendation of the Board of Directors................. 31
i
5
PAGE
----
Description of the Transaction.............................. 32
The Merger............................................... 32
What You Will Receive in the Merger...................... 32
Effect of the Merger on Priority Call Options............ 33
Material Federal Income Tax Consequences of the Merger... 33
Background of and Reasons for the Merger................. 35
Opinion of Priority Call's Financial Advisor............. 41
Completion of the Merger................................. 49
Distribution of LHS Stock Certificates................... 49
Conditions to Completion of the Merger................... 50
Indemnification.......................................... 52
Regulatory Approval...................................... 52
Waiver, Amendment, and Termination....................... 53
Conduct of Business Pending the Merger................... 55
Management and Operations After the Merger............... 55
Interests of Certain Persons in the Merger............... 55
Accounting Treatment..................................... 56
Fees and Expenses........................................ 56
Resales of LHS Common Stock.............................. 57
Voting Agreement......................................... 58
Escrow Agreement......................................... 59
Comparative Market Prices and Dividends..................... 60
Business of LHS............................................. 61
Business of Priority Call................................... 62
Customers................................................ 62
Products................................................. 62
Services................................................. 64
Competition.............................................. 64
Priority Call Selected Financial Data....................... 65
Priority Call's Discussion and Analysis of Financial
Condition and Results of Operations...................... 66
Results of Operations.................................... 66
Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997.................................... 66
Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996.................................... 68
Liquidity and Capital Resources.......................... 69
Year 2000 Readiness Disclosure Statement................. 71
Quantitative and Qualitative Disclosures about Market
Risk................................................... 72
Priority Call Stock Ownership............................... 74
Shares Beneficially Owned................................... 74
ii
6
PAGE
----
Effect of the Merger on Rights of Stockholders.............. 75
Description of LHS Capital Stock............................ 85
Other Matters............................................... 85
Experts..................................................... 85
Opinions.................................................... 85
Where You Can Find More Information......................... 86
APPENDICES:
Appendix A -- Agreement and Plan of Merger, dated as of
April 20, 1999, by and among Priority Call
Management, Inc., Patriot Acquisition Corp.
and LHS Group Inc.......................... A-1
Appendix B -- Escrow Agreement........................... B-1
Appendix C -- Opinion of Goldman Sachs & Co.............. C-1
Appendix D -- Priority Call Management, Inc. Financial
Statements................................. D-1
Appendix E -- Terms, Rights, Preferences and Privileges
of Priority Call Management, Inc. Preferred
Stock...................................... E-1
Appendix F -- Massachusetts Law Concerning Rights of
Dissenting Stockholders.................... F-1
iii
7
SUMMARY
This summary highlights selected information from this proxy statement-
prospectus and may not contain all of the information that is important to you.
You should carefully read this entire document and the other documents we refer
to in this document. These documents will give you a more complete description
of the transaction we are proposing. We have included page references in this
summary to direct you to other places in this proxy statement-prospectus where
you can find a more complete description of the topics we have summarized.
THE COMPANIES (SEE PAGE 62 FOR PRIORITY CALL AND PAGE 61 FOR LHS)
LHS GROUP INC.
Six Concourse Parkway
Suite 2700
Atlanta, Georgia 30328
(770) 280-3000
LHS provides client/server-based billing and customer care solutions to
providers of wireless and wireline telecommunications services in the Americas,
Europe and Asia. LHS's products enable its customers to compete more effectively
in a rapidly growing telecommunications market. The Company's Business Support
and Control System software, which we refer to as BSCS, is a scaleable, modular
billing and customer care solution that can be implemented quickly and can
support innovative marketing and pricing of telecommunications services. BSCS
has an installed base of approximately 134 customers supporting a total of 24.9
million subscribers worldwide.
For the year ended December 31, 1998, LHS generated revenues of approximately
$163 million and net earnings of approximately $17 million. On December 31,
1998, LHS had consolidated assets of approximately $188 million and consolidated
stockholders' equity of approximately $146 million. For more information about
LHS, see "WHERE YOU CAN FIND MORE INFORMATION" on page 86.
PRIORITY CALL MANAGEMENT, INC.
110 Fordham Road
Wilmington, Massachusetts 01887
(978) 658-4400
Priority Call develops and markets a proprietary platform and software
applications that enable wireless and wireline carriers to provide their
residential, business and wireless subscribers with a broad range of enhanced
services. Enhanced services are services in addition to traditional telephone
service that improve the efficiency and effectiveness of telecommunications,
such as messaging, prepaid calling and one number service. The enhanced services
offered by Priority Call help wireless and wireline carriers to retain
subscribers, increase revenue from current subscribers, attract new subscribers
and stimulate network usage.
For the year ended December 31, 1998, Priority Call generated net sales of
approximately $31 million and net income of approximately $1.3 million. On
December 31, 1998, Priority Call had consolidated assets of approximately $21.8
million and consolidated stockholders' equity of approximately $9.9 million. For
more information about Priority Call, see "BUSINESS OF PRIORITY CALL" on page
62.
8
THE MERGER (SEE PAGE 32)
LHS will acquire Priority Call by means of the merger of a wholly owned
subsidiary of LHS into Priority Call. After the merger, Priority Call will
operate as a wholly owned subsidiary of LHS. The merger agreement is attached as
Appendix A to this proxy statement-prospectus. We encourage you to read the
merger agreement as it is the legal document that governs the merger.
WHAT YOU WILL RECEIVE IN THE MERGER (SEE PAGE 32)
When we complete the merger, you will receive 2.3542 shares of LHS common stock
for each of your shares of Priority Call capital stock. Of the amount you are
entitled to receive, however, 5% will be placed in an escrow fund. See " --
ESCROW AGREEMENT".
Based on the closing price of $33.81 per share of LHS common stock on April 26,
1999, you will receive $79.60 worth of LHS common stock for each of your shares
of Priority Call capital stock. For more information about what you will receive
if the merger is completed, see "DESCRIPTION OF THE TRANSACTION -- WHAT YOU WILL
RECEIVE IN THE MERGER" on page 32.
LHS will not issue any fractions of a share of common stock. Rather, LHS will
pay cash for any fractional share interest any Priority Call stockholder would
otherwise receive in the merger. The cash payment will be in an amount equal to
the fraction multiplied by the closing price of one share of LHS common stock on
the Nasdaq National Market on the last trading day before the merger is
completed.
ESCROW AGREEMENT (SEE PAGE 58)
5% of the consideration to be received for each share of Priority Call capital
stock will be placed in escrow pursuant to the terms of an escrow agreement. The
shares of LHS common stock placed in the escrow fund will be used to pay any
currently unknown claims that LHS may have against Priority Call. Shares that
have not been used to satisfy claims will be released to you on the later of the
first anniversary of the merger or the date when any claims made prior to the
first anniversary of the merger are finally resolved. A copy of the escrow
agreement is attached hereto as Appendix B. We encourage you to read the escrow
agreement as it is the legal document that governs the disposition of the escrow
fund.
EFFECT OF THE MERGER ON PRIORITY CALL OPTIONS (SEE PAGE 33)
From time to time, Priority Call has granted options to buy shares of Priority
Call common stock under its stock option plan. When the merger is completed, LHS
will assume each outstanding option to buy Priority Call common stock. Each
option will then become an option to purchase LHS common stock. The number of
shares of LHS common stock that may be purchased and the exercise price of the
new options will be adjusted to reflect the exchange ratio. All other terms of
the Priority Call options will remain the same. LHS will assume all outstanding
options whether or not the option holder then has the right to exercise the
option.
2
9
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 33)
We expect that, for federal income tax purposes, you will not recognize any gain
or loss upon the exchange of all of your shares of Priority Call capital stock
solely for shares of LHS common stock. However, you may recognize taxable gain
or loss related to any cash you receive in lieu of a fractional share of LHS
common stock. See the discussion above under "-- WHAT YOU WILL RECEIVE IN THE
MERGER." Before the merger can be completed, LHS and Priority Call will receive
an opinion of LHS's counsel, Alston & Bird LLP, with respect to material federal
income tax consequences of the merger. If the merger does not qualify for this
tax treatment, LHS and Priority Call will not complete the merger.
Tax matters are very complicated, and the tax consequences of the merger to you
will depend on your own situation. You should consult your own tax advisors to
determine the effect of the merger on you under federal, state, local, and
foreign tax laws.
TERMINATION FEE (SEE PAGE 53)
Priority Call has agreed to pay LHS a termination fee of $4.5 million if the
merger agreement is terminated under circumstances in which:
- Priority Call's board of directors fails to reaffirm its recommendation
of the merger or recommends a proposal by a third party to acquire
Priority Call; or
- Priority Call is negotiating a proposal by a third party to acquire
Priority Call and the terms of such proposal have been communicated to
Priority Call's stockholders; and
- the Priority Call stockholders fail to approve the merger.
COMPARATIVE MARKET PRICES OF COMMON STOCK (SEE PAGE 60)
Shares of LHS common stock are traded on the Nasdaq National Market under the
symbol "LHSG." Shares of Priority Call capital stock are not traded in any
established market. The following table shows you the closing sales prices for
LHS common stock on April 20, 1999, the last trading day before we announced the
execution of the merger agreement, and on April 26, 1999, the latest practicable
date before the mailing of this proxy statement-prospectus. No equivalent market
price data is available for Priority Call. The table also shows you the
"equivalent price per Priority Call share" or the value you will receive in the
merger for each share of Priority Call capital stock you own. We computed the
equivalent price per Priority Call share at each date by multiplying the closing
sales price of a share of LHS common stock on that date by the exchange ratio.
See "COMPARATIVE MARKET PRICES AND DIVIDENDS," on page 60.
EQUIVALENT PRICE
LHS PER PRIORITY CALL
COMMON STOCK SHARE
------------ -----------------
April 20, 1999....... $31.25 $73.57
April 26, 1999....... $33.81 $79.60
The market price of LHS common stock will fluctuate prior the merger. We can
provide no assurance as to what the market price of LHS common stock will be
when the merger is completed. You should obtain current stock price quotations
for LHS common stock.
3
10
OUR REASONS FOR THE MERGER (SEE PAGE 38)
As a result of globalization and increasing competition within the enhanced
services industry, we believe Priority Call requires broader resources in order
to increase the commercial success of its products and services and maximize
value to its stockholders. A combination with LHS offers us access to
substantial additional marketing, sales and financial resources and the
opportunity to cross-market our products and services to LHS's customers, which
we believe will allow us to compete in an increasingly competitive global
marketplace.
FAIRNESS OPINION OF PRIORITY CALL'S FINANCIAL ADVISOR (SEE PAGE 41)
In deciding to approve the merger, Priority Call's board of directors considered
an opinion from Priority Call's financial advisor, Goldman Sachs & Co., that the
2.3542 exchange ratio is fair, from a financial point of view, to the Priority
Call stockholders. The full text of this opinion is attached to this proxy
statement-prospectus as Appendix C. We encourage you to read this opinion. This
opinion sets forth assumptions made, matters considered and limitations on the
review undertaken in connection with Goldman Sachs' opinion. Goldman Sachs'
opinion is directed to the board of directors of Priority Call and does not
constitute a recommendation to any Priority Call stockholder as to how to vote
that stockholder's shares of Priority Call capital stock.
SPECIAL MEETING OF STOCKHOLDERS (SEE PAGE 28)
The special meeting will be held at the offices of Bingham Dana LLP, 150 Federal
Street, Boston, Massachusetts, at a.m., on ,
1999. At the special meeting, we will ask you to approve the merger and the
merger agreement.
In order for the special meeting to be held, a quorum must be present. A quorum
is present if a majority of the outstanding shares of Priority Call preferred
stock, considered independently, and a majority of the outstanding shares of
Priority Call common stock and preferred stock, considered collectively, are
represented at the special meeting either in person or by proxy.
STOCKHOLDER VOTE REQUIRED TO APPROVE THE MERGER (SEE PAGE 28)
The affirmative vote of the holders of a majority of the outstanding shares of
Priority Call preferred stock, voting together as a separate class, as well as
the affirmative vote of the holders of at least two-thirds of the outstanding
shares of Priority Call preferred stock and common stock, voting together as a
class, is required to approve the merger agreement and the merger. In connection
with the merger, certain stockholders of Priority Call and their affiliates have
agreed to vote their shares in favor of the merger. See "THE SPECIAL
MEETING -- VOTE REQUIRED; VOTING AT THE SPECIAL MEETING" and "DESCRIPTION OF THE
TRANSACTION -- VOTING AGREEMENT."
VOTING RIGHTS AT THE SPECIAL MEETING (SEE PAGE 28)
You are entitled to vote at the special meeting if you owned shares as of the
close of business on , 1999, the record date. As of the record date,
there were shares of Priority Call common stock and 561,450
shares of Priority Call preferred stock outstanding and such shares of Priority
Call capital stock were held by holders of record. You will be
entitled to one vote for each share of Priority Call common stock and one vote
for each share of Priority Call preferred stock that you
4
11
owned on the record date. You may vote either by attending the special meeting
and voting your shares or by completing the enclosed proxy card and mailing it
to us in the enclosed envelope.
We are seeking your proxy to use at the special meeting. We have prepared this
proxy statement-prospectus to assist you in deciding how to vote. Whether or not
you plan to attend the meeting, please indicate on your proxy card how you want
to vote. Then sign, date and mail it to us as soon as possible so that your
shares will be represented at the special meeting. If you sign, date and mail
your proxy card without indicating how you wish to vote, your proxy will be
counted as a vote FOR approval of the merger agreement and the merger. If you
fail to return your proxy card and fail to vote at the meeting, the effect will
be a vote against approval of the merger agreement and the merger. If you sign a
proxy, you may revoke it at any time before the special meeting or by attending
and voting at the special meeting.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS (SEE PAGE 30)
Under Massachusetts law, Priority Call stockholders who do not vote in favor of
the merger and who follow the procedures prescribed under Massachusetts law may
require Priority Call to pay the "fair value" for their shares of Priority Call
capital stock. See "THE SPECIAL MEETING -- RIGHTS OF DISSENTING STOCKHOLDERS."
OUR RECOMMENDATION TO STOCKHOLDERS (SEE PAGE 31)
Priority Call's board of directors unanimously approved the merger agreement.
The board believes that the proposed merger is in your best interests and
unanimously recommends that you vote to approve the merger agreement and the
merger.
PRIORITY CALL STOCK OWNERSHIP (SEE PAGE 74)
On the record date, Priority Call's directors and executive officers and their
affiliates owned 100% of the outstanding shares of Priority Call preferred
stock, considered independently, and shares, or approximately %
of the outstanding shares of Priority Call common stock and preferred stock,
considered collectively. This number does not include stock that the Priority
Call directors and executive officers may acquire through the exercise of stock
options.
On the record date and as of the date of this proxy statement-prospectus, LHS's
directors and executive officers owned no shares of Priority Call capital stock.
VOTING AGREEMENT (SEE PAGE 58)
Each of the Priority Call directors and the holders of 100% of the Priority Call
preferred stock, who together own % of the outstanding shares of Priority
Call common stock and preferred stock, considered collectively, have agreed to
cast their votes in favor of the approval of the merger agreement and the
merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER THAT MAY BE DIFFERENT FROM YOURS (SEE
PAGE 55)
Priority Call's directors and certain officers have stock options and other
benefit plans and other arrangements that
5
12
may provide them with interests in and benefits from the merger that are
different from, or in addition to, yours. Your board of directors was aware of
these interests and considered them in approving and recommending the merger.
COMPLETION OF THE MERGER (SEE PAGE 48)
The merger will become final at the time specified in the articles of merger to
be filed with the Secretary of State of the Commonwealth of Massachusetts. If
the Priority Call stockholders approve the merger at the special meeting and all
required regulatory approvals are obtained, we currently anticipate that the
merger will be completed on or about , 1999.
LHS and Priority Call cannot assure you that they can obtain the necessary
stockholder and regulatory approvals or that the other conditions to
consummation of the merger can or will be satisfied.
EXCHANGE OF STOCK CERTIFICATES (SEE PAGE 49)
Promptly after the merger is completed, you will receive a letter and
instructions on how to surrender your Priority Call stock certificates in
exchange for LHS stock certificates. You will need to carefully review and
complete these materials and return them as instructed along with your stock
certificates for Priority Call capital stock. PLEASE DO NOT SEND PRIORITY CALL,
LHS OR LHS'S TRANSFER AGENT ANY STOCK CERTIFICATES UNTIL YOU RECEIVE THESE
INSTRUCTIONS. If you elect to exercise your appraisal rights, you should follow
the procedures outlined in "THE SPECIAL MEETING -- RIGHTS OF DISSENTING
STOCKHOLDERS" section beginning on page 30.
REGULATORY APPROVAL AND OTHER CONDITIONS (SEE PAGES 52 AND 50)
Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, the merger cannot be completed until LHS and Priority Call have given
certain information and materials to the Federal Trade Commission and the
Department of Justice and a required waiting period has expired or been
terminated. We expect to obtain all required regulatory approvals before the
special meeting, but we cannot assure this will happen.
In addition to the required regulatory approvals, the merger will be completed
only if certain conditions, including but not limited to the following, are met
or waived, if waivable:
- Priority Call stockholders approve the merger at the special meeting;
- Priority Call and LHS receive an opinion of counsel that the merger will
qualify as a tax-free reorganization;
- Priority Call and LHS receive letters from their accountants concerning
the pooling-of-interests accounting treatment of the merger (discussed
below under " -- ACCOUNTING TREATMENT");
- neither LHS nor Priority Call has breached any of its representations or
obligations under the merger agreement such that there is a material
adverse effect on LHS or Priority Call; and
- less than 5% of the Priority Call stockholders have properly exercised
appraisal rights.
6
13
In addition to these conditions, the merger agreement, attached to this proxy
statement-prospectus as Appendix A, describes other conditions that must be met
before the merger may be completed.
WAIVER, AMENDMENT, AND TERMINATION (SEE PAGE 53)
LHS and Priority Call may agree to terminate the merger agreement and elect not
to complete the merger at any time before the merger is completed, even if
Priority Call's stockholders have approved the merger.
Each of the parties also can terminate the merger in certain other
circumstances, including if the merger is not completed by November 30, 1999,
subject to extension by Priority Call under certain circumstances.
The merger agreement may be amended by the written agreement of LHS and Priority
Call. The parties can amend the merger agreement without stockholder approval,
even if you have already approved the merger.
ACCOUNTING TREATMENT (SEE PAGE 55)
LHS intends to account for the merger as a pooling-of-interests transaction for
accounting and financial reporting purposes. Pooling of interests is an
accounting method that assumes that each company's stockholders have combined
their ownership interests in such a manner that each group becomes an owner of
the combined, enlarged business.
DIFFERENCES IN STOCKHOLDERS' RIGHTS (SEE PAGE 75)
When the merger is completed, you will automatically become an LHS stockholder,
unless you exercise your appraisal rights. Your rights as a Priority Call
stockholder are governed by the Priority Call articles of organization and
bylaws and Massachusetts law. The rights of LHS stockholders differ from the
rights of Priority Call stockholders in many important ways. Many of these have
to do with provisions in LHS's certificate of incorporation and bylaws and
Delaware law.
LISTING OF LHS COMMON STOCK
LHS has agreed to list the shares of LHS common stock to be issued in connection
with the merger on the Nasdaq National Market.
7
14
SELECTED HISTORICAL FINANCIAL DATA
The following tables present selected consolidated financial data for LHS
and for Priority Call for each of the years in the five-year period ended
December 31, 1998. The information for LHS as of and for the years ended
December 31, 1998, 1997 and 1996 is based on the consolidated financial
statements of LHS incorporated by reference in this proxy statement-prospectus.
The selected consolidated financial data for LHS as of and for the years ended
December 31, 1995 and 1994 have been derived from audited consolidated financial
statements of LHS previously filed with the SEC but not incorporated by
reference. The information shown for LHS for all periods reflects a 2-for-1
stock split in May 1998 and a 20-for-1 stock split in October 1996. The
information for Priority Call as of December 31, 1998 and 1997 and for the
three-year period ended December 31, 1996 is based on the consolidated financial
statements of Priority Call included in this proxy statement-prospectus. The
selected consolidated financial data for Priority Call as of and for the years
ended December 31, 1995 and 1994 have been derived from audited consolidated
financial statements of Priority Call not included in this proxy
statement-prospectus. See "WHERE YOU CAN FIND MORE INFORMATION" and Appendix D.
You should read the following tables in conjunction with the consolidated
financial statements of LHS and Priority Call described above and with the notes
to them.
Historical results are not necessarily indicative of results to be expected
for any future period.
8
15
LHS SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues........................ $163,182 $105,411 $56,864 $26,967 $20,722
Earnings before interest and
taxes(1)..................... 29,823 16,440 5,581 1,217 4,182
Net income...................... 17,349 11,208 3,420 284 3,043
Net Earnings Per Share:
Basic........................ $ 0.33 $ 0.26 $ 0.11 $ 0.01 $ 0.14
======== ======== ======= ======= =======
Diluted...................... $ 0.32 $ 0.23 $ 0.09 $ 0.01 $ 0.14
======== ======== ======= ======= =======
DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................... $188,545 $127,223 $43,819 $24,462 $14,006
Long-term obligations........... 239 731 1,360 399 372
Total stockholders' equity...... 145,858 92,549 12,325 9,933 3,770
- ---------------
(1) The 1998 amounts include a charge relating to the write off of in-process
research and development of $8.2 million.
PRIORITY CALL SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.......................... $30,936 $20,111 $11,035 $5,866 $ 708
Income (loss) from operations...... 1,275 (911) (1,556) (379) (1,129)
Net income (loss).................. 1,337 (757) (1,405) (331) (1,168)
Net income (loss) per share:
Basic........................... $ 1.16 $ (0.66) $ (1.23) $(0.30) $ (1.11)
======= ======= ======= ====== =======
Diluted......................... $ 0.67 $ (0.66) $ (1.23) $(0.30) $ (1.11)
======= ======= ======= ====== =======
DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ ------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets........................ $21,780 $14,707 $12,250 $5,389 $1,494
Long-term obligations, less current
maturities....................... 2,533 514 333 21 106
Stockholders' equity................ 9,897 8,399 9,155 3,545 376
9
16
PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial statements
are based upon the historical consolidated financial statements of LHS and
Priority Call. The unaudited pro forma adjustments are based upon available
information and certain assumptions that the management of LHS believes are
reasonable. You should read these pro forma financial statements with the
historical consolidated financial statements of LHS and Priority Call. The
historical consolidated financial statements of LHS are incorporated by
reference in this proxy statement-prospectus. The historical consolidated
financial statements of Priority Call are included in Appendix D to this proxy
statement-prospectus. See APPENDIX D, "-- SELECTED FINANCIAL DATA" on page 8 and
"WHERE YOU CAN FIND MORE INFORMATION" on page 86.
The unaudited pro forma combined financial statements have been prepared as
if the merger is accounted for as a pooling-of-interests transaction. The
unaudited pro forma combined condensed balance sheet as of December 31, 1998 has
been prepared as if the merger had occurred on December 31, 1998. The unaudited
pro forma combined condensed statements of operations for the three years ended
December 31, 1998, have been prepared as if the merger had occurred on January
1, 1996.
Certain data and notes normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted. The unaudited pro forma combined condensed financial statements
provide information about the impact of the merger by showing how it might have
affected the financial condition and results of operations of LHS had the merger
actually been completed as of the dates indicated. The unaudited pro forma
combined condensed financial statements are provided for informational purposes
only and are not necessarily indicative of actual results that would have been
achieved had the merger been consummated at the beginning of the periods
presented or of future results. The unaudited pro forma combined condensed
financial statements should be read in conjunction with the historical financial
statements of LHS and Priority Call and the notes to them, which are
incorporated by reference or included in this proxy statement-prospectus.
10
17
PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1998
PRO FORMA COMBINED
LHS PRIORITY CALL ADJUSTMENTS PRO FORMA
-------- ------------- ----------- ---------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents....... $ 42,084 $ 4,710 $ -- $ 46,794
Short-term marketable debt
securities................... 62,218 -- -- 62,218
Trade accounts receivable,
net.......................... 60,860 7,329 -- 68,189
Inventory....................... -- 4,007 -- 4,007
Prepaid expenses and other
current assets............... 3,976 268 -- 4,244
-------- ------- ------- --------
Total current assets............... 169,138 16,314 -- 185,452
Property and equipment, net........ 15,589 3,544 -- 19,133
Deferred income taxes.............. 914 -- -- 914
Intangible assets, net............. 2,066 1,883 -- 3,949
Other.............................. 838 38 -- 876
-------- ------- ------- --------
Total assets....................... $188,545 $21,779 $ -- $210,324
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable................ $ 7,523 $ 2,730 $ -- $ 10,253
Accrued expenses and other
liabilities.................. 15,796 5,002 3,200(4c) 24,898
900(4d)
Deferred revenues............... 6,095 1,617 -- 7,712
Income taxes payable............ 8,907 -- -- 8,907
Deferred income taxes........... 4,127 -- -- 4,127
-------- ------- ------- --------
Total current liabilities.......... 42,448 9,349 4,100 55,897
Other long-term obligations........ 239 2,533 (900)(4d) 1,872
Stockholders' equity:
Preferred stock................. -- 6 (6)(4a) --
Common stock.................... 526 12 (12)(4a) 567
41(4a)
Additional paid-in-capital...... 110,583 15,068 18(4b) 125,628
(41)(4b)
Retained earnings (deficit)..... 34,858 (4,664) (3,200)(4c) 26,994
Shareholder loan................ -- (525) -- (525)
Accumulated other comprehensive
income....................... (109) -- -- (109)
-------- ------- ------- --------
Total stockholders' equity......... 145,858 9,897 (3,200) 152,555
-------- ------- ------- --------
Total liabilities and stockholders'
equity.......................... $188,545 $21,779 $ -- $210,324
======== ======= ======= ========
See accompanying notes.
11
18
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
LHS PRIORITY CALL COMBINED
-------- ------------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT
PER SHARE DATA)
Revenues:
License and hardware............... $ 66,780 $28,987 $ 95,767
Service............................ 96,402 1,949 98,351
-------- ------- --------
Total................................. 163,182 30,936 194,118
Cost of services...................... 59,953 14,131 74,084
-------- ------- --------
Gross margin.......................... 103,229 16,805 120,034
Operating expenses:
Sales and marketing................ 11,700 8,487 20,187
Research and development........... 36,530 3,191 39,721
General and administrative......... 16,976 3,852 20,828
Cost of purchased in-process
research and development related
to computer software
technology...................... 8,200 - 8,200
-------- ------- --------
73,406 15,530 88,936
-------- ------- --------
Earnings before interest and taxes.... 29,823 1,275 31,098
Interest (income) expense, net........ (4,557) (62) (4,619)
-------- ------- --------
Earnings before income taxes.......... 34,380 1,337 35,717
Income taxes.......................... 17,031 -- 17,031
-------- ------- --------
Net earnings.......................... $ 17,349 $ 1,337 $ 18,686
======== ======= ========
Net earnings per share:
Basic.............................. $ 0.33 $ 1.16 $ 0.34
======== ======= ========
Diluted............................ $ 0.32 $ 0.67 $ 0.32
======== ======= ========
Shares used in per share calculation:
Basic.............................. 51,799 1,154 54,516
======== ======= ========
Diluted............................ 54,495 1,990 59,180
======== ======= ========
See accompanying notes.
12
19
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
LHS PRIORITY CALL COMBINED
-------- ------------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT
PER SHARE DATA)
Revenues:
License and hardware............... $ 38,439 $18,995 $ 57,434
Service............................ 66,972 1,116 68,088
-------- ------- --------
Total................................. 105,411 20,111 125,522
Cost of services...................... 47,325 9,318 56,643
-------- ------- --------
Gross margin.......................... 58,086 10,793 68,879
Operating expenses:
Sales and marketing................ 8,454 6,157 14,611
Research and development........... 19,682 2,434 22,116
General and administrative......... 13,510 3,112 16,622
-------- ------- --------
41,646 11,703 53,349
-------- ------- --------
Earnings (loss) before interest and
taxes.............................. 16,440 (910) 15,530
Interest income, net.................. (2,238) (153) (2,391)
-------- ------- --------
Earnings (loss) before income taxes... 18,678 (757) 17,921
Income taxes.......................... 7,470 -- 7,470
-------- ------- --------
Net earnings (loss)................... $ 11,208 $ (757) $ 10,451
======== ======= ========
Net earnings (loss) per share:
Basic.............................. $ 0.26 $ (0.66) $ 0.23
======== ======= ========
Diluted............................ $ 0.23 $ (0.66) $ 0.20
======== ======= ========
Shares used in per share calculation:
Basic.............................. 42,906 1,140 45,590
======== ======= ========
Diluted............................ 49,164 1,140 53,293
======== ======= ========
See accompanying notes.
13
20
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
LHS PRIORITY CALL COMBINED
-------- -------------- ----------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT
PER SHARE DATA)
Revenues:
License and hardware....................... $23,701 $10,369 $ 34,070
Service.................................... 33,163 666 33,829
------- ------- ---------
Total......................................... 56,864 11,035 67,899
Cost of services.............................. 19,107 5,113 24,220
------- ------- ---------
Gross margin.................................. 37,757 5,922 43,679
Operating expenses:
Sales and marketing........................ 7,653 4,103 11,756
Research and development................... 16,236 1,654 17,890
General and administrative................. 8,287 1,721 10,008
------- ------- ---------
32,176 7,478 39,654
------- ------- ---------
Earnings (loss) before interest and taxes..... 5,581 (1,556) 4,025
Interest expense (income), net................ 77 (151) (74)
------- ------- ---------
Earnings (loss) before income taxes........... 5,504 (1,405) 4,099
Income taxes.................................. 2,084 -- 2,084
------- ------- ---------
Net earnings (loss)........................... $ 3,420 $(1,405) $ 2,015
======= ======= =========
Net earnings (loss) per share:
Basic...................................... $ 0.11 $ (1.23) $ 0.06
======= ======= =========
Diluted.................................... $ 0.09 $ (1.23) $ 0.05
======= ======= =========
Shares used in per share calculation:
Basic...................................... 31,000 1,140 33,684
======= ======= =========
Diluted.................................... 40,000 1,140 43,790
======= ======= =========
See accompanying notes.
14
21
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation. The merger will be accounted for using the
pooling-of-interests method of accounting and, as a result, the unaudited
pro forma combined condensed balance sheet and statements of operations are
presented as if the combining companies had been combined for all periods
presented. The unaudited pro forma combined condensed financial statements
for the years ended December 31, 1998 and 1997 will become the historical
financial statements of LHS upon issuance of financial statements for a
period that includes the date of the merger. No material adjustments were
required to conform the accounting policies of LHS and Priority Call.
(2) Stockholders' Equity. The common stockholders' equity account of LHS as of
December 31, 1998, has been adjusted to reflect the assumed issuance of
approximately 4.1 million shares of LHS common stock in exchange for all the
issued and outstanding Priority Call capital stock based upon the exchange
ratio of 2.3542 shares of LHS common stock for each share of Priority Call
capital stock. The actual number of shares of LHS common stock to be issued
will be determined at the effective time of the merger based on the exchange
ratio and the number of shares of Priority Call capital stock then
outstanding.
(3) Merger-Related Expenses. The unaudited pro forma data are presented for
informational purposes only and do not give effect to any synergies that may
occur due to the combining of LHS's and Priority Call's existing operations.
LHS expects to incur charges to operations currently estimated to be
approximately $5.0 million in the quarter ended , the quarter
in which the merger is expected to be consummated, to reflect costs
associated with combining the operations of the two companies, primarily the
transaction fees and costs incident to the merger. An estimate of
merger-related expenses of $3.2 million, after giving effect to estimated
tax benefits, is reflected in the unaudited pro forma combined condensed
balance sheet and is not included in the unaudited pro forma combined
condensed statement of operations. This is a preliminary estimate only and,
therefore, is subject to change.
(4) Pro Forma Adjustments. Adjustments have been included in the pro forma
combined condensed balance sheet to reflect the exchange ratio and the
merger related costs described in Note 3. Pro forma adjustments to reflect
the effect of the merger on the pro forma condensed combined balance sheet
at December 31, 1998, are as follows:
a. Common stock is increased by $41,000 to record the LHS common stock
issued in the merger and is decreased by $18,000 to record the retirement
of the Priority Call capital stock.
b. Combined additional paid-in capital is adjusted for the effects of the
pro forma adjustment (a) above.
15
22
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
c. Accrued liabilities and retained earnings reflect the estimated direct
costs of the merger of $3.2 million, after giving effect to estimated tax
benefits.
d. Amounts payable in connection with a license agreement of Priority Call
of $900 including a catch-up amount of $500 become due during 1999 in the
event of a change in control and have been reclassified from long term to
current.
(5) Net Earnings Per Share. Pro forma earnings per basic and diluted share for
each period are based on the combined weighted average number of shares of
common stock outstanding (and dilutive securities for diluted earnings per
share), after adjusting for the conversion of outstanding shares of Priority
Call capital stock into LHS common stock at the exchange ratio. In addition,
pro forma diluted earnings per share for the years ended December 31, 1997
and 1996 assume the dilutive effect of 614,000 and 470,000, respectively, of
Priority Call shares issuable, which were not included in the historical
calculation because they were antidilutive.
16
23
RISK FACTORS
If the merger is consummated, you will receive shares of LHS common stock
in exchange for your shares of Priority Call capital stock. You should be aware
of particular risks and uncertainties that are applicable to an investment in
LHS common stock. Specifically, there are risks and uncertainties that bear on
LHS's future financial results and that may cause LHS's future earnings and
financial condition to be less than LHS's expectations.
LHS MAY NOT ACHIEVE THE INCREASES IN OPERATING INCOME THAT IT EXPECTS TO RESULT
FROM THE INTEGRATION OF PRIORITY CALL INTO LHS.
LHS cannot guarantee that LHS will realize the increases in operating
income that it anticipates from integrating Priority Call's operations and LHS's
operations as fully or as quickly as it expects. Among other things, the
Priority Call acquisition is substantially larger than any previous acquisition
by LHS. Successful integration of Priority Call's operations will depend
primarily on LHS's ability to consolidate operations, systems and procedures and
to eliminate redundancies and costs. LHS may be unable to integrate its
operations without encountering difficulties, including, without limitation, the
loss of key employees and customers, the disruption of its businesses, or
possible inconsistencies in standards, controls, procedures, and policies.
PRIORITY CALL STOCKHOLDERS WILL RECEIVE LOWER MARKET VALUE FOR THEIR SHARES IN
THE MERGER IF THE MARKET PRICE OF LHS COMMON STOCK DECLINES BEFORE THE MERGER IS
COMPLETED.
Because the number of shares of LHS common stock that Priority Call's
stockholders will receive in the merger is fixed, the market value of these
shares on the date of the merger will depend on the market price of LHS common
stock when the merger is completed. If the LHS common stock price declines, the
market value of the LHS common stock to be received by Priority Call
stockholders in the merger will correspondingly decline. The price of LHS common
stock may vary from its price at the date of this proxy statement-prospectus
because of various factors, including:
- market assessments of the likelihood the merger will be completed;
- market assessments of the amount and timing of integration savings after
the merger;
- changes in the business, operations or prospects of LHS; and
17
24
- general industry, market and economic conditions.
Neither LHS nor Priority Call will have the right to terminate the merger
agreement as a result of changes in LHS's common stock price. You should obtain
current market quotations for the LHS common stock.
IF LHS CANNOT KEEP UP WITH CHANGES IN TECHNOLOGY, IT MIGHT BE UNABLE TO
EFFECTIVELY COMPETE AND MIGHT LOSE CUSTOMERS.
The telecommunications industry is characterized by rapidly changing
technology and evolving industry standards. Also, customer needs frequently
change, and competitors constantly introduce new products and services. To be
successful, LHS must:
- use leading technologies effectively;
- continue developing its technical expertise;
- enhance its existing products and services;
- develop new products and services; and
- meet changing customer needs on a timely and cost-effective basis.
If LHS fails to do any of these things, its customers may choose to purchase
products and services from its competitors.
LHS continually introduces its products and services into new markets. If
its products do not adequately meet the demands of these new markets, LHS could
experience decreased revenues. LHS could experience difficulties in the
development of products and services for new and existing markets that could
delay or prevent the successful development, introduction and marketing of these
products and services. LHS's failure to develop and introduce new products and
services in a timely manner, or the lack of success of a new release of a
product in the market, would likely result in a material adverse effect on its
business, operating results and financial condition.
IF LHS IS UNABLE TO EFFECTIVELY MANAGE ITS GROWTH, ITS BUSINESS COULD SUFFER.
Over the last three years, LHS has greatly expanded its operations, placing
considerable demand and strain on its administrative, operational and financial
personnel and systems. Further expansion may place additional strains on its
resources. To address these expansion issues, LHS may have to make substantial
expenditures and devote further management time and resources to:
- improve or replace its management information, administrative,
operational financial and other systems;
- standardize BSCS installation methods;
- develop and coordinate strategies, operations and product development
among its operations in the Americas, Europe and Asia;
- maintain customer satisfaction;
- manage changing business conditions; and
18
25
- recruit, train and retain qualified consulting, technical, sales,
financial, marketing and management personnel.
LHS cannot assure you that its existing resources, systems and space will
be able to adequately support its further expansion. LHS's failure to respond
appropriately to growth and change would likely result in a material adverse
effect on the quality of its services, its ability to retain key personnel and
its business.
LHS DEPENDS ON LARGE CONTRACTS FROM A LIMITED NUMBER OF CUSTOMERS SO THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD MATERIALLY AND ADVERSELY AFFECT LHS.
Although no single customer accounted for more than 10% of LHS's revenues
in 1998, LHS has traditionally relied upon, and expects to continue to rely
upon, large contracts from a limited number of customers. This can cause its
revenues and earnings to fluctuate between quarters based on the timing of
orders and realization of revenues from these orders.
Some of the telecommunications industry's established carriers are forming
alliances, while others are consolidating. If a consolidation or alliance
involves one of its customers, that customer may switch to another billing
system. In addition, none of its major customers has any obligation to purchase
additional products or services from LHS. The loss of one or more of its major
customers because of industry consolidation or otherwise would likely result in
a material adverse effect on its business, operating results and financial
condition.
IF LHS IS UNABLE TO DEVELOP RELATIONSHIPS WITH NEW CUSTOMERS OR IF LHS'S
CUSTOMERS ARE UNABLE TO COMPETE EFFECTIVELY IN THE VERY COMPETITIVE
TELECOMMUNICATIONS MARKET, ITS REVENUES AND EARNINGS MAY DECLINE.
LHS's failure to develop relationships with new customers, or the failure
of LHS's customers to compete effectively in the telecommunications market,
would likely result in a material adverse effect on its business, operating
results and financial condition. The wireline and wireless markets have grown
significantly and become much more competitive in recent years. This growth may
not continue, and LHS may not be able to successfully market and sell its
products in these competitive markets. It is critical to LHS's continued success
that LHS develops relationships with new customers.
Many of LHS's potential customers are new entrants in the
telecommunications market and lack significant financial and other resources.
LHS may be required to offer them alternative pricing arrangements, including
deferred payments, if LHS wants these new market entrants to be its customers.
LHS may not be able to develop customer relationships with these new entrants,
but even if it does, there is no guarantee that these customers will be
successful. If they are not successful, they may reduce or discontinue their
purchases from LHS. If LHS has permitted customers to pay it on a deferred
basis, LHS may be unable to collect payments from these customers. Any one of
these factors could have a material adverse effect on LHS's business, operating
results and financial condition.
19
26
EXPANSION OF LHS'S PRODUCTS AND SERVICES INTO NEW GEOGRAPHIC MARKETS AND
APPLICATIONS MAY NOT BE SUCCESSFUL.
LHS plans to continue expanding its products and services into new
geographic markets and to carriers offering new applications of their
telecommunications services. LHS's failure to successfully establish itself in
new markets would likely result in a material adverse effect on its business.
ANY FAILURE TO MAINTAIN LHS'S RELATIONSHIPS WITH CONSULTING FIRMS AND SYSTEMS
INTEGRATION FIRMS COULD PREVENT ITS FUTURE GROWTH.
Consulting firms and systems integration firms help LHS with marketing,
sales, lead generation, customer support and installation of its products. In
order to grow successfully, LHS must maintain its relationships with these firms
and generate new business opportunities through joint marketing and sales with
them.
LHS also serves as subcontractor to consulting firms and systems
integration firms where those firms provide information technology to end-user
customers. In these cases LHS depends heavily on these firms to install its
products and to train end-users to use its products. Incorrect product
installation, failure to properly train the end-user, or general failure of the
firm to satisfy the customer could have a negative effect on LHS's relationships
with the contracting firm and the customer. Such problems could damage LHS's
reputation and the reputation of its products and services.
Obstacles LHS may encounter to forging long-term relationships with
consulting and systems integration firms include:
- many consulting and systems integration firms have more established
relationships with its principal competitors; and
- many consulting and systems integration firms have the resources to
compete with LHS by developing their own products and services.
These firms may discontinue their relationships with LHS and/or develop
relationships with its competitors. LHS's inability to establish and maintain
effective, long-term relationships with these firms, and their failure to meet
the needs of its customers, would likely adversely affect its business.
Prior to 1996, LHS had contracts pursuant to which LHS gave certain systems
integration firms its kernel source code and the right to market and sell
versions of its products that these firms independently modified. A few U.S.
carriers had problems with LHS's products as modified and installed by these
firms. This damaged LHS's reputation and credibility and that of its products,
and LHS may have lost the confidence of the affected carriers. Although LHS has
terminated all of these types of contracts, LHS cannot assure you that there
will not be further damage to its reputation and credibility in the U.S. that
could have a material adverse effect on its business.
20
27
COMPETITION IN THE TELECOMMUNICATIONS BILLING AND CUSTOMER CARE SYSTEMS INDUSTRY
COULD LIMIT LHS'S ABILITY TO GROW.
The telecommunications billing and customer care systems industry is very
competitive. LHS expects competition to increase in the future.
Some of the independent providers LHS competes with are:
- Alltel
- AMDOCS
- CBIS
- ITDS
- Kenan
- Kingston-SCL
- SEMA Group
LHS also competes with systems integrators and internal billing departments
of larger telecommunications carriers.
Many of LHS's competitors have advantages over LHS, including:
- longer operating histories;
- larger customer bases;
- substantially greater financial, technical, sales, marketing and other
resources; and
- greater name recognition.
LHS's current and potential competitors have established, and may continue
to establish in the future, cooperative relationships among themselves or with
third parties to increase their ability to compete with LHS. In addition,
competitors may be able to adapt more quickly than LHS is to new or emerging
technologies and changes in customer needs, or to devote more resources to
promoting and selling their products. New competitors or alliances among
competitors could also result in these competitors quickly gaining significant
market share.
LHS believes that its ability to compete successfully in its markets is
affected by these principal factors:
- development of competing software and services;
- price of competing software and services;
- responsiveness to customer needs; and
- hiring, retaining and motivating key personnel.
LHS's failure to adapt to market demands and to compete successfully with
existing and new competitors would have a material adverse effect on its
business.
As LHS expands, it will market its products and services to carriers in
markets that LHS does not currently serve. LHS may encounter new competitors
upon entry into these markets that may have greater financial, technical,
personnel and marketing resources than LHS does. LHS cannot assure you that it
will be able to successfully
21
28
identify and address the demands for these new markets or that it can continue
to compete effectively in its current markets. LHS's failure to maintain its
competitiveness in current or new markets would have a material adverse effect
on its business, operating results and financial condition.
IF LHS IS UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, LHS MAY HAVE TO EMPLOY
LESS QUALIFIED PERSONNEL AND IT MAY EXPERIENCE HIGH TURNOVER COSTS.
LHS's future success depends in large part on the continued service of its
key management, sales, product development and operational personnel, including
Hartmut Lademacher, Chairman of the Board and Chief Executive Officer. Since it
is LHS's goal to continue its expansion, its success also depends on its ability
to attract and retain highly qualified technical, managerial, sales and
marketing personnel. Competition is intense for the recruitment of highly
qualified personnel in the software and telecommunications services industry.
LHS may not be able to successfully retain or integrate existing personnel or
identify and hire additional personnel. LHS's inability to hire and retain
qualified personnel would likely have a material adverse effect upon its current
business, new product development efforts and future business prospects. LHS
does not currently maintain key person insurance coverage for any of its
employees.
THE SUCCESS OF LHS'S INTERNATIONAL BUSINESS OPERATIONS IS SUBJECT TO MANY
UNCERTAINTIES.
LHS conducts a substantial portion of its business outside of the Americas.
In each of 1997 and 1998, its sales outside the Americas represented
approximately 60% of its total revenues. LHS expects a significant portion of
its revenues to continue to be provided from its European and Asian operations.
LHS's international business may be adversely affected by the following:
- unexpected changes in regulatory requirements;
- tariffs and other trade barriers;
- difficulties in customizing its products for use in foreign countries;
- longer accounts receivable payment cycles;
- difficulties in managing international operations;
- availability of trained personnel to install and implement its systems;
- political instability;
- potentially adverse tax obligations;
- restrictions on the repatriation of earnings; and
- the burdens of complying with a wide variety of foreign laws and
regulations.
In addition, the laws of some foreign countries do not protect LHS's
intellectual property rights to as great an extent as the laws of the United
States. There can be no assurance that such factors will not have a material
adverse effect on its international revenues and earnings or its overall
financial performance.
22
29
IF LHS CANNOT PROVIDE FINANCING FOR POTENTIAL CUSTOMERS, LHS MAY NOT GET THEIR
BUSINESS.
Certain of LHS's potential customers may require financing to fund
purchases of its products. In particular, its ability to increase sales to
start-up telecommunications carriers with limited financial resources in the
future will depend significantly upon its ability to arrange financing for these
customers. LHS may not be able to successfully implement a vendor financing
program for these customers or to assist them in obtaining alternative financing
for its products. In such event, LHS will have decreased revenues.
FAILURE TO OBTAIN YEAR 2000 COMPLIANCE MAY HARM LHS'S BUSINESS.
The term "Year 2000 issue" is used to describe the various problems that
may result from the improper processing of dates and date-sensitive calculations
by computers and other machinery as the Year 2000 is approached and reached.
These problems could result in a system failure or miscalculations causing
disruptions of LHS's operations, including an inability to process transactions,
send invoices, or engage in similar normal business activities.
Although LHS believes that its internal systems and software products are
Year 2000 compliant, LHS is vulnerable to the risk that its customers,
government agencies, significant suppliers and other third parties will not be
able to remedy their own Year 2000 issues. LHS relies, both domestically and
internationally, upon government agencies, utility companies, telecommunication
service companies and other service providers outside of its control. Such
suppliers, governmental agencies, or other third parties or its customers may
suffer a Year 2000 business disruption. Such failures could have a material
adverse effect on LHS's business, operating results and financial condition.
LHS has not developed a contingency plan to address the results of its
analysis of the most reasonably likely worst case Year 2000 scenarios.
Consequently, LHS is not able to determine at this time whether the consequences
of Year 2000 failures will have a material impact on its operations, but they
may.
EXCHANGE RATE FLUCTUATIONS BETWEEN THE U.S. DOLLAR AND OTHER CURRENCIES IN WHICH
LHS DOES BUSINESS MAY RESULT IN CURRENCY TRANSLATION LOSSES.
A significant portion of LHS's revenues are denominated in the German
Deutsche Mark. LHS also has revenues denominated in the Swiss Franc and the
Malaysian Ringgit. The value of the German Deutsche Mark against the Euro was
fixed upon the introduction of the Euro on January 1, 1999. Consequently,
fluctuations in exchange rates between the U.S. Dollar and the Euro may have a
material adverse effect on its business, operating results and financial
condition and could also result in significant exchange losses. Foreign currency
transaction gains and losses are a result of transacting business in certain
foreign locations in currencies other than the functional currency of the
location. LHS attempts to balance its revenues and expenses in each currency to
minimize net foreign currency risk. To the extent that LHS is unable to balance
23
30
revenues and expenses in a currency, fluctuations in the value of the currency
in which LHS conducts its business relative to the functional currency have
caused and will continue to cause currency transaction gains and losses. LHS
cannot accurately predict the impact of future exchange rate fluctuations on its
results of operations.
LHS has not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future. Any hedging
techniques which LHS implements in the future may not be successful, and
exchange rate losses could be exacerbated by hedging techniques that LHS uses.
LHS'S EUROPEAN OPERATIONS EXPOSE IT TO HEIGHTENED EURO CONVERSION RISKS.
Due to LHS's significant operations in Europe, LHS is particularly exposed
to risks resulting from the conversion by certain European Union member states
of their respective currencies to the Euro as legal currency on January 1, 1999.
The conversion rates between such European Union member states' currencies and
the Euro have been fixed by the European Union's council; however, the mandatory
switch to the Euro will not occur until June 30, 2002. LHS will be modifying its
software during the period of conversion to the Euro and intend to complete such
work and have its products Euro compliant by such time. Risks to LHS related to
the conversion of the Euro include:
- effects on pricing due to increased cross-border price transparency;
- costs of modifying information systems, including both software and
hardware;
- costs of modifying our software products to accommodate Euro conversion;
- costs of relying upon third parties whose systems also require
modification;
- changes in the conduct of business; and
- changes in the currency exchange rate.
The actual effects of the Euro conversion could have a material adverse effect
on LHS's business, operating results and financial condition.
BECAUSE LHS HAS ONLY LIMITED PROTECTION OF ITS PROPRIETARY RIGHTS AND
TECHNOLOGY, OTHERS MAY COPY ITS SOFTWARE OR SERVICES AND HARM ITS ABILITY TO
COMPETE.
LHS relies primarily on a combination of statutory and common law
copyright, trademark and trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights and technology. These laws and contractual provisions
provide only limited protection. LHS has no patents or patent applications
pending, no copyrights and only a limited number of registered trademarks. It
may be possible for a third party to copy or otherwise obtain and use its
technology without authorization or to develop similar technology independently.
Also, the laws of certain countries in which LHS sells its products do not offer
as much protection of its proprietary rights as the laws of the United States.
Unauthorized copying or misuse of its products or proprietary rights could have
a material adverse effect on its business, operating results and financial
condition.
24
31
LHS MAY NOT BE SUCCESSFUL IN AVOIDING CLAIMS THAT IT INFRINGES OTHERS'
PROPRIETARY RIGHTS AND COULD BE REQUIRED TO PAY JUDGMENTS OR LICENSING FEES.
Many patents, copyrights and trademarks have been issued in the general
areas of information and telecommunications. LHS expects that software
developers will be increasingly subject to infringement claims as the number of
products and competitors providing products and services to the
telecommunications industry grows. Third parties may claim that LHS's current or
future products infringe their proprietary rights. Infringement claims, with or
without merit, could:
- result in costly litigation;
- require significant management resources;
- cause product shipment delays;
- require LHS to enter into unfavorable royalty or licensing agreements; or
- cause LHS to discontinue the use of the challenged trade name, service
mark or technology.
Consequently, infringement claims could have a material adverse effect on LHS's
business, operating results and financial condition.
LHS'S SOFTWARE MAY CONTAIN UNDETECTED ERRORS THAT COULD AFFECT ITS PERFORMANCE,
CAUSING IT TO LOSE SUBSCRIBERS, SPEND LARGE AMOUNTS TO CORRECT THE PROBLEMS OR
BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS.
The software that LHS has developed and licensed to its customers may
contain undetected errors. Although LHS tests its software prior to installing
it in a customer's network, LHS may discover errors after the installation. The
cost to fix the errors or to develop the software further could be high. These
errors may subject LHS to product liability claims. LHS has not experienced any
product liability claims to date, but LHS may be subject to such claims in the
future. LHS has insurance that would cover certain of these claims; however, a
successful product liability claim brought against LHS could have a material
adverse effect on its business, operating results and financial condition.
LHS'S STOCK OWNERSHIP IS HIGHLY CONCENTRATED, WHICH WILL PREVENT YOU FROM
EXERTING CONTROL OVER LHS OR REPLACING ITS MANAGEMENT.
LHS's executive officers, directors and their affiliates beneficially own
approximately 24.6 million shares (approximately 46% prior to completion of the
merger and % after the completion of the merger) of the outstanding LHS
common stock. Also, its executive officers and directors and their affiliates
hold options to acquire an additional 700,000 shares of LHS common stock. If
exercised, these options, taken with the shares owned, would give the directors,
officers and their affiliates beneficial ownership of approximately 47% of its
common stock prior to completion of the merger and % after the completion
of the merger.
Substantially all such persons and certain other significant stockholders
have granted Hartmut Lademacher the right to vote, through December 31, 1999,
all shares of LHS
25
32
common stock owned by them. As a result, Mr. Lademacher may be able to exert
significant influence over the election of directors and the outcome of certain
corporate actions requiring stockholder approval. This concentration of
ownership may have the effect of delaying or preventing a change in control of
LHS or a change in its management team.
CERTAIN MEASURES THAT LHS HAS ADOPTED LIMIT INVESTORS' AND OTHERS' ABILITY TO
CHANGE OR GAIN CONTROL OF LHS.
The LHS board of directors has the authority to issue up to 225,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares, without stockholder
action. The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock could discourage or
make difficult the acquisition of a majority of its outstanding voting stock by
a third party.
Certain provisions of LHS's certificate of incorporation and by-laws and
the Delaware law could delay or make more difficult a merger, tender offer or
proxy contest involving LHS. In addition, LHS's board of directors is divided
into three classes with only one class being elected each year, and directors
may only be removed by the affirmative vote of 80% or more of all classes of
voting stock. Also, pursuant to LHS's stock incentive plan, all stock options
granted to employees automatically vest and become exercisable upon certain
triggering events leading up to a change of control. These factors may have the
effect of delaying or preventing a change of control.
THE MARKET PRICE OF LHS'S COMMON STOCK MAY BE VOLATILE.
There may be significant volatility in the market price of LHS's common
stock. The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. Factors such as the following will vary from period to
period:
- actual or anticipated operating results;
- growth rates;
- changes in estimates by analysts;
- industry conditions;
- competitors' announcements;
- regulatory actions; and
- general economic conditions.
As a result of these and other factors, LHS's operating results from time to
time may be below the expectations of public market analysts and investors. Any
such event would likely have a material adverse effect on the market price of
the common stock.
26
33
GOVERNMENT REGULATION OF LHS'S CUSTOMERS THAT NEGATIVELY AFFECTS THEIR
BUSINESSES ALSO COULD NEGATIVELY AFFECT LHS.
Currently, LHS's business is not subject to direct government regulation;
however, LHS's existing and potential customers are subject to extensive
regulation in many jurisdictions. Regulatory changes which affect its existing
and potential customers could have a material adverse effect on its business,
operating results and financial condition.
ADDITIONAL SHARES WILL BECOME ELIGIBLE FOR PUBLIC SALE IN THE FUTURE AND COULD
CAUSE LHS'S STOCK PRICE TO DROP.
The market price of LHS's common stock could drop as a result of sales of
large numbers of shares in the market, or the perception that such sales could
occur. Several of LHS's principal stockholders hold a significant portion of the
outstanding common stock.
LHS has approximately 53.0 million shares of common stock outstanding.
Approximately 39.0 million of these shares are freely transferable without
restriction or further registration under the Securities Act of 1933, except for
any shares purchased by our "affiliates," as defined in Rule 144 under the
Securities Act. Approximately 14 million of the shares of common stock
outstanding are "restricted securities" as defined in Rule 144. These shares may
be sold in the future without registration under the Securities Act to the
extent permitted by Rule 144 or an exemption under the Securities Act. In
addition, LHS has registered under the Securities Act 16 million shares of
common stock issuable under its long-term incentive plan.
Certain of LHS's stockholders are entitled to demand and piggyback
registration rights with respect to the shares that they own. Once registered,
such shares generally will be eligible for immediate sale in the public market.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements in this proxy statement-prospectus, including some
statements in "SUMMARY", "RISK FACTORS" and "DESCRIPTION OF THE TRANSACTION," as
well as some statements in LHS's SEC filings that are incorporated by reference
in this proxy statement-prospectus, are forward-looking statements about what
may happen in the future. They include statements regarding current beliefs,
goals and expectations of Priority Call and LHS about matters such as expected
financial position and operating results, business strategy and financing plans.
These statements can sometimes be identified by our use of forward-looking words
such as "anticipate," "estimate," "expect," "intend," "may," "will" and similar
expressions. We cannot guarantee that our forward-looking statements will turn
out to be correct or that our beliefs and goals will not change. Our actual
results could be very different from and worse than our expectations for various
reasons, including those discussed in "RISK FACTORS."
27
34
THE SPECIAL MEETING
PURPOSE
LHS and Priority Call are furnishing this proxy statement-prospectus to
Priority Call stockholders in connection with the solicitation of proxies by
Priority Call's board of directors. The Priority Call board of directors will
use the proxies at the special meeting of stockholders of Priority Call to be
held on , 1999 and at any adjournment or postponement thereof.
At the special meeting, Priority Call stockholders will be asked to vote
upon the proposal to approve the agreement and plan of merger attached to this
proxy statement-prospectus as Appendix A and to authorize the merger of a wholly
owned subsidiary of LHS into Priority Call. As a result, Priority Call will
become a wholly owned subsidiary of LHS.
DATE, PLACE AND TIME
The special meeting of Priority Call's stockholders will be held on
, , 1999, at the offices of Bingham Dana LLP, 150
Federal Street, Boston, Massachusetts, commencing at a.m.,
local time.
RECORD DATE
The Priority Call board of directors fixed the close of business on
, 1999 as the record date for the special meeting. Accordingly,
only holders of Priority Call capital stock of record at the close of business
on , 1999, will be entitled to notice of, and to vote at, the
special meeting.
PRIORITY CALL STOCKHOLDERS ENTITLED TO VOTE
As of , 1999, there were outstanding shares of
Priority Call common stock and 561,450 shares of Priority Call preferred stock
and such shares of Priority Call capital stock were held by holders of
record. Each share of Priority Call capital stock entitles the holder thereof to
one vote.
As of , 1999, directors and executive officers of Priority
Call may be deemed to be beneficial owners of 100% of the outstanding shares of
Priority Call preferred stock, considered independently, and % of the
outstanding shares of Priority Call common stock and preferred stock, considered
collectively.
VOTE REQUIRED; VOTING AT THE MEETING
The holders of a majority of the outstanding shares of Priority Call
preferred stock entitled to vote at the special meeting, considered
independently, and the holders of a majority of the outstanding shares of
Priority Call common stock and preferred stock
28
35
entitled to vote at the special meeting, considered collectively, is necessary
for a quorum to exist at the special meeting.
Approval of the agreement and plan of merger and authorization of the
merger requires both:
- the affirmative vote of the holders of a majority of the outstanding
shares of Priority Call preferred stock, voting together as a separate
class, and
- the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Priority Call preferred stock and common stock,
voting together as a class.
Each of the Priority Call directors and the holders of 100% of the Priority
Call preferred stock, who together own % of the outstanding shares of
Priority Call common stock and preferred stock, considered collectively, have
agreed to vote their shares in favor of the approval of the merger agreement and
the merger.
VOTING OF PROXIES
All properly executed proxies received before the vote at the special
meeting, and not revoked, will be voted in accordance with the instructions
indicated on the proxies. If no instructions are indicated, such proxies will be
voted FOR the proposal to approve the merger agreement and the merger, and the
proxy holder may vote the proxy in its discretion as to any other matter which
may properly come before the meeting.
Any abstention will have the same effect as a vote AGAINST the approval of
the merger agreement and the merger.
A Priority Call stockholder who has given a proxy solicited by Priority
Call's board of directors may revoke it by
- giving written notice of revocation to the Clerk of Priority Call,
- delivering a later dated proxy to the Clerk of Priority Call, or
- attending the special meeting and voting in person.
Any written notice of revocation or subsequent proxy must be sent so as to
be delivered at or before the taking of the vote at the special meeting to
Priority Call Management Inc., 110 Fordham Road, Wilmington, Massachusetts
01887, Attention: Robert G. Ory, Clerk.
SOLICITATION OF PROXIES
The expenses of the solicitation of proxies for the special meeting will be
borne by Priority Call, except that LHS will pay expenses incurred in connection
with filing, printing and mailing this proxy statement-prospectus and the forms
of proxy to the Priority Call stockholders, subject to Priority Call's
obligation to reimburse LHS for one-half of these expenses if the Priority Call
stockholders do not approve the merger
29
36
agreement and the merger and Priority Call is not otherwise required to pay LHS
the termination fee. See "DESCRIPTION OF THE TRANSACTION -- FEES AND EXPENSES".
In addition to solicitation by mail, directors, officers and key employees
of Priority Call may solicit proxies in person or by telephone, telegram or
other means of communication. These persons will receive no additional
compensation for solicitation of proxies, but may be reimbursed for reasonable
out-of-pocket expenses.
RIGHTS OF DISSENTING STOCKHOLDERS
If the merger is completed, holders of Priority Call capital stock who
object to the merger are entitled to appraisal rights under Massachusetts law.
In order to exercise appraisal rights, Priority Call stockholders must strictly
adhere to the provisions of Massachusetts law governing appraisal rights. The
following is a summary of the relevant provisions of Massachusetts law. The
description below is only a summary and is qualified by reference to the
relevant provisions of Massachusetts law, a copy of which is attached hereto as
Appendix F.
In order to exercise appraisal rights, you must take the following steps:
- send a written objection to the merger to Priority Call before the
special meeting stating your intention to demand payment for your shares
of Priority Call capital stock if the merger is approved and the merger
occurs;
- do not vote in favor of the merger; and
- send a written demand to Priority Call for payment for your shares of
Priority Call capital stock within twenty days after you receive notice
from Priority Call that the merger has occurred (Priority Call will send
the notice within 10 days after the merger is completed).
The written objection and written demand should be delivered to Priority
Call Management, Inc., 110 Fordham Road, Wilmington, Massachusetts 01887,
Attention: Robert G. Ory, Clerk, and we recommend that you send the objection
and demand by registered or certified mail, return receipt requested.
Please note that, if you file a written objection with Priority Call prior
to the special meeting, you do not need to vote against the merger. However, if
you file a written objection with Priority Call prior to the special meeting and
vote in favor of the merger, you will be deemed to have waived your right to
exercise appraisal rights.
If you have followed the procedures set forth above and the merger is
completed, Priority Call will contact you in order to determine the fair value
of your Priority Call capital stock. The "fair value" of your Priority Call
capital stock will be determined as of the day before approval of the merger by
the Priority Call stockholders and will exclude any value arising from the
expectation of the merger. If Priority Call and you have not agreed as to the
fair value of your stock within 50 days after you receive notice from Priority
Call that the merger has occurred, both you and Priority Call will have the
right
30
37
to have the court determine the fair value by filing a bill in equity in the
Superior Court Department of Middlesex County, Massachusetts no later than four
months after the expiration of the negotiation period.
After filing the bill in equity, the court or a special master will hold a
hearing and enter a decree determining the fair value of your Priority Call
capital stock and ordering Priority Call to make payment to you of such value.
You will also be paid interest from the date of the special meeting to the time
that you transfer your certificates representing your shares of Priority Call
capital stock. The determination of fair value made by the court or special
master will be binding on and enforceable by you and the other Priority Call
stockholders who have properly executed their appraisal rights.
The fair value of the Priority Call capital stock could be worth more than,
the same as or less than the value of the LHS common stock you would otherwise
have received by exchanging your shares of Priority Call capital stock for
shares of LHS common stock.
Your appraisal rights are your only remedy if you object to the merger,
unless the merger is determined to have been illegal, fraudulent or in breach of
the fiduciary duties of the Priority Call board of directors.
If you exercise your appraisal rights, after the merger is completed you
will not have any rights as a Priority Call or LHS stockholder, including the
right to receive notices of meetings, vote at meetings or receive dividends, if
any.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors of Priority Call has unanimously determined that the
terms of the merger agreement and the merger are in the best interests of
Priority Call and the Priority Call stockholders. Accordingly, the Priority Call
board of directors recommends that Priority Call stockholders vote FOR the
proposal to approve the merger agreement and the merger.
31
38
DESCRIPTION OF THE TRANSACTION
The following information describes material aspects of the merger. This
description is only a summary of the terms and conditions of the merger
agreement. It is qualified in its entirety by the Appendices hereto, including
the text of the merger agreement, which is attached as Appendix A to this proxy
statement-prospectus. You are urged to read the Appendices in their entirety.
THE MERGER
The merger agreement provides for the acquisition of Priority Call by LHS
pursuant to the merger of a wholly owned subsidiary of LHS with and into
Priority Call. Priority Call will be the surviving corporation resulting from
the merger and will be a wholly owned subsidiary of LHS.
WHAT YOU WILL RECEIVE IN THE MERGER
When we complete the merger, you will receive 2.3542 shares of LHS common
stock in exchange for each of your shares of Priority Call capital stock. Of
this amount, however, 5%, or .11771 of a share of LHS common stock, will be
placed in escrow in order to satisfy unknown claims LHS may have against
Priority Call. You will receive this portion of the exchange ratio, less amounts
used to pay unknown claims, when the escrow fund is distributed on the later of
the first anniversary of the completion of the merger or the final resolution of
any claims made against the escrow prior to the first anniversary of the
completion of the merger. The exchange ratio was determined by calculating the
average Nasdaq closing price of LHS common stock for the ten consecutive full
trading days ended at the close of trading on April 15, 1999.
Based on the exchange ratio of 2.3542, assuming no exercise of outstanding
Priority Call stock options prior to the merger, upon completion of the merger
LHS will
- issue approximately 4.1 million shares of its common stock to Priority
Call stockholders, and
- grant options for the purchase of approximately million shares of
LHS common stock to the holders of the Priority Call stock options.
After the merger, LHS would then have outstanding approximately shares
of common stock and options for the purchase of approximately shares of
common stock based on the number of shares of LHS common stock and the number of
stock options outstanding on April 20, 1999.
LHS will not issue any fractional shares of common stock in the merger.
Rather, LHS will pay cash for any fractional share any Priority Call stockholder
otherwise would have received in the merger. The cash payment will be in an
amount equal to the fraction multiplied by the closing price of one share of LHS
common stock on the Nasdaq National Market on the last trading day before the
merger becomes effective.
32
39
The actual market value of a share of LHS common stock at the time the
merger is completed and at the time certificates for those shares are delivered
to Priority Call stockholders may be more or less than the average closing price
used to determine the exchange ratio. You are urged to obtain current market
quotations for LHS common stock. See "COMPARATIVE MARKET PRICES AND DIVIDENDS."
EFFECT OF THE MERGER ON PRIORITY CALL OPTIONS
When the merger is completed, each option granted under Priority Call's
stock option plan that is outstanding, whether or not exercisable, will become
an option to purchase LHS common stock. LHS will assume each option in
accordance with the terms of Priority Call's stock option plan and the stock
option agreement that evidences the option and will deliver LHS common stock
upon the exercise of each option. After the merger becomes effective,
- LHS and its compensation committee will be substituted for Priority Call
and the committee of Priority Call's board of directors administering
Priority Call's plan;
- each option assumed by LHS may be exercised only for shares of LHS common
stock;
- the number of shares of LHS common stock subject to the option will be
equal to the number of shares of Priority Call common stock subject to
the option immediately before the merger is completed multiplied by the
exchange ratio and rounding down to the nearest whole share; and
- the per share exercise price of each option will be adjusted by dividing
it by the exchange ratio and rounding up to the nearest cent.
Notwithstanding the foregoing, each Priority Call option which is an
"incentive stock option" shall be adjusted as required by Section 424 of the
Internal Revenue Code so as not to constitute a modification, extension or
renewal of the option, within the meaning of Section 424(h) of the Internal
Revenue Code.
LHS will not issue any fractional part of a share of common stock upon
exercise of an option. Rather, LHS will pay cash for any fractional share any
former Priority Call option holder would otherwise receive upon exercise of the
option. The cash payment will be in an amount equal to the fraction multiplied
by the difference between the closing price of one share of LHS common stock on
the Nasdaq National Market on the last trading day preceding the date of
exercise and the exercise price of the option.
For information with respect to stock options held by Priority Call's
management, see "-- INTERESTS OF CERTAIN PERSONS IN THE MERGER."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
LHS and Priority Call have not and do not intend to seek a ruling from the
Internal Revenue Service as to the federal income tax consequences of the
merger. Instead, LHS
33
40
and Priority Call have obtained the opinion of counsel to LHS, Alston & Bird
LLP, as to certain of the expected federal income tax consequences of the
merger. In rendering its opinion, Alston & Bird LLP will rely on certain factual
statements and representations made to it by LHS and Priority Call. This opinion
may not be relied upon if any of the factual statements or representations are
incorrect or incomplete. A copy of this opinion is attached as an exhibit to the
registration statement.
The following is a discussion of the anticipated federal income tax
consequences of the merger to stockholders of Priority Call. This discussion
does not address, among other matters:
- state, local, or foreign tax consequences of the merger;
- federal income tax consequences to Priority Call stockholders who are
subject to special rules under the Internal Revenue Code, such as foreign
persons, tax-exempt organizations, insurance companies, financial
institutions, dealers in stocks and securities, persons who hold such
stock as part of a "straddle" or "conversion transaction" for federal
income tax purposes and persons who do not own such stock as a capital
asset;
- federal income tax consequences affecting shares of Priority Call common
stock acquired upon the exercise of stock options, stock purchase plan
rights, or otherwise as compensation;
- the tax consequences to holders of warrants, options, or other rights to
acquire shares of such stock;
- the tax consequences to LHS and Priority Call resulting from any required
change in accounting methods; and
- the tax consequences to LHS and Priority Call of any income and deferred
gain recognized pursuant to Treasury Regulations issued under Section
1502 of the Internal Revenue Code.
Assuming that the merger is completed in accordance with the merger
agreement, it is anticipated that the following federal income tax consequences
will occur.
- The merger will constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code and each of LHS and Priority Call
will be a party to the reorganization within the meaning of Section
368(b) of the Code.
- No gain or loss will be recognized by the stockholders of Priority Call
as a result of the exchange of all of the shares of Priority Call capital
stock that they own solely for LHS common stock pursuant to the merger.
- The aggregate tax basis of LHS common stock to be received by the
stockholders of Priority Call, who exchange all of their Priority Call
capital stock solely for LHS common stock in the merger, will be the same
as the aggregate tax basis of the Priority Call capital stock surrendered
in exchange therefor.
34
41
- The holding period of the LHS common stock to be received by stockholders
of Priority Call, who exchange all of their Priority Call capital stock
solely for LHS common stock in the merger, will include the holding
period of the Priority Call capital stock surrendered in exchange
therefor, provided the Priority Call shares were held as a capital asset
by the stockholders of Priority Call on the date of the exchange.
- The payment of cash to stockholders of Priority Call in lieu of
fractional share interests of LHS common stock will be treated for
federal income tax purposes as if the fractional shares were distributed
as part of the exchange and then were redeemed by LHS. These cash
payments will be treated as having been received as distributions in full
payment in exchange for the LHS common stock redeemed, as provided in
Section 302 of the Internal Revenue Code.
- Where solely cash is received by a stockholder of Priority Call in
exchange for Priority Call capital stock pursuant to the exercise of
dissenters' rights, such cash will be treated as having been received in
redemption of such holder's Priority Call capital stock subject to the
provisions and limitations of Section 302 of the Internal Revenue Code.
The obligation of LHS and Priority Call to complete the merger is
conditioned on, among other things, receipt by LHS and Priority Call of an
opinion of Alston & Bird LLP, with respect to certain of the federal income tax
consequences of the merger. The conditions relating to the receipt of the tax
opinion may be waived by both LHS and Priority Call. Neither LHS nor Priority
Call currently intends to waive the conditions relating to the receipt of the
tax opinion. If the conditions relating to the receipt of the tax opinion were
waived and the material federal income tax consequences of the merger were
substantially different from those described in this proxy statement-prospectus,
Priority Call would resolicit the approval of its stockholders prior to
completing the merger.
Tax consequences of the merger may vary depending upon the particular
circumstances of each stockholder of Priority Call. Accordingly, stockholders of
Priority Call are urged to consult their own tax advisors as to the specific tax
consequences to them of the merger, including the applicability and effect of
state, local, and foreign tax laws.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND TO THE MERGER. The enhanced services industry is undergoing a
period of rapid consolidation. Priority Call believes such consolidation has
resulted from two trends. First, as increasing numbers of carriers offer
enhanced services to their subscribers, the market has rewarded and will
continue to reward enhanced service providers who offer the broadest range of
software applications that allow carriers to differentiate themselves from their
competitors. Second, as the international markets undergo deregulation similar
to that recently experienced in the United States, opportunities for growth
internationally are increasing. Both of the foregoing trends favor
35
42
large scale providers that can quickly develop new and diverse software
applications and provide enhanced services to large scale carriers
internationally.
Priority Call believes that its smaller size relative to that of many of
its competitors and its limited access to capital resources may inhibit its
future growth in revenues and profitability. Accordingly, for a period of time
the Priority Call board of directors considered various alternative means of
increasing Priority Call's capital resources, either through an initial public
offering of its common stock or a possible combination, whether through sale,
merger or joint venture, with a strong partner in the telecommunications
industry which could provide Priority Call with additional capital resources as
well as a competitive advantage when competing for business from large scale
carriers. On January 1, 1999, Priority Call engaged Goldman Sachs to serve as
Priority Call's financial advisor.
On January 12, 1999, Priority Call authorized Goldman Sachs to approach LHS
regarding a potential combination. Later that week, Goldman Sachs contacted a
representative of LHS to inquire whether LHS had any interest in exploring a
business combination with Priority Call. As a provider of customer care
solutions to wireless and wireline telecommunications carriers, LHS periodically
conducts strategic reviews. During this review, LHS regularly examines its
strategic business alternatives in light of the current and future state of the
changing, competitive customer care and billing industry, LHS's strategic
position in that industry, and LHS's near- and long-term alternatives available
to further enhance stockholder value, including acquisitions, possible
partnerships, alliances or other significant transactions.
On January 25, 1999, Mr. Jon L. Limbird, LHS's Executive Vice President of
Customer Engineering, and Mr. John J. Ranieri, LHS's Vice President -- Corporate
Development, met at the Wilmington, Massachusetts offices of Priority Call with
Priority Call's Chief Executive Officer, Mr. Andrew D. Ory, Vice President of
Sales and Marketing, Mr. Andrew R. Dale, Chief Financial Officer, Mr. Keith
Seidman and representatives of Goldman Sachs. At the meeting, among other
things, the representatives described their respective business operations,
product technology and recent historical financial results.
On February 12, 1999, Mr. Limbird and Mr. Ranieri met at Priority Call's
offices in Wilmington, Massachusetts again with Mr. Ory, Mr. Dale, Mr. Seidman
and representatives of Goldman Sachs, as well as Priority Call's Vice President
of Engineering, Mr. Patrick MeLampy, to discuss further the nature of Priority
Call's technology and product offerings, as well as Priority Call's customer
base and sales distribution partners. In addition, attendees of the meeting held
preliminary discussions about the possibility of a combination of the two
companies and described briefly what each company could contribute to the
combination.
At a regularly scheduled meeting of the LHS board on February 24, 1999,
board members were updated on the discussions with Priority Call, including a
description of the business and product technology. At the conclusion of the
meeting, the LHS board
36
43
authorized LHS management to continue discussions with Priority Call regarding a
possible merger.
On March 4, 1999, LHS submitted a preliminary proposal of certain financial
terms for the acquisition of Priority Call by LHS. This preliminary offer was
rejected by Priority Call and the two parties held further discussions during
the next several weeks regarding both Priority Call's existing technology
portfolio and future product offerings currently in development, including a
meeting on March 29, 1999 at Priority Call's offices between Mr. Ranieri, Mr.
Limbird, Mr. Ory and a representative of Goldman Sachs.
On April 5, 1999, Mr. Ory, Mr. Dale and Mr. Seidman met in Atlanta, Georgia
with Mr. Limbird, Mr. Ranieri, Mr. Scott A. Wharton, LHS's Senior Vice President
and General Counsel, and Mr. Stefan Sieber, LHS's Executive Vice President and
Chief Divisional Officer to learn more about LHS's business, customers and
products.
From April 9, 1999 through April 12, 1999, Mr. Ory, Mr. Limbird and Mr.
Ranieri held further discussions regarding a number of important aspects of a
possible merger, including material financial terms and related organizational
issues.
During the week of April 12, 1999, LHS and Priority Call exchanged final
due diligence request lists and representatives of both companies and their
advisors participated in a series of meetings in Wilmington, Massachusetts and
Atlanta, Georgia, as well as numerous telephone calls to conduct reciprocal
legal, business, accounting and financial due diligence.
On April 15, 1999, LHS's counsel delivered a first draft of the merger
agreement to Priority Call and its counsel. On April 17, 1999, Priority Call and
its counsel provided written comments on this draft to LHS and its counsel and,
in the following days, LHS and Priority Call and their counsel continued to
negotiate the provisions of the merger agreement.
On April 20, 1999, the LHS board held a special telephonic meeting at which
it was briefed on the status of discussion between LHS and Priority Call and
reviewed the relevant financial, accounting and legal considerations of the
proposed transaction as contemplated by the merger agreement. After due
consideration, the LHS board approved the merger agreement and the related
matters described in this document in a unanimous vote of all voting board
members.
On April 20, 1999, the Priority Call board of directors held a special
telephonic meeting at which the Priority Call board of directors reviewed the
terms of the merger agreement, the stockholder voting agreement and the escrow
agreement and considered the factors set forth below under the heading
" -- PRIORITY CALL'S REASONS FOR THE MERGER." At the special meeting, Goldman
Sachs provided its opinion that the exchange ratio was fair to the Priority Call
stockholders from a financial point of view. After due consideration, the
Priority Call board unanimously approved the merger agreement and the merger,
subject to the approval of the Priority Call stockholders.
37
44
Following the approval of the merger by the LHS board and the Priority Call
board on April 20, 1999, LHS and Priority Call executed the merger agreement and
issued a joint press release immediately thereafter at the close of trading on
the Nasdaq National Market.
PRIORITY CALL'S REASONS FOR THE MERGER. The Priority Call board of
directors has determined that the merger is in the best interests of Priority
Call and its stockholders and has unanimously approved the merger agreement. In
reaching its determination, the Priority Call board of directors considered a
number of factors, without assigning any relative weights to such factors,
including, but not limited to, the following:
- the following determinations it had recently made:
Trends in the enhanced services industry, including globalization and
the increasing demand for a broad range of software applications, would
favor large scale providers of enhanced services.
Although Priority Call had demonstrated the ability to operate
profitably and generate sufficient cash flow to service its short-term
obligations, Priority Call believed its limited access to capital
resources may inhibit its growth in revenues and profitability.
- the effect on the Priority Call stockholders of Priority Call continuing
as an independent entity compared to the effect of a combination with
LHS. The Priority Call board determined that an integration of Priority
Call with LHS, given LHS's greater marketing, sales and financial
resources, may provide a better opportunity for the long-term success of
Priority Call's product offerings and thereby maximize value for the
Priority Call stockholders.
- the synergies that existed between LHS's business and operations and
Priority Call's business and operations. LHS and Priority Call share
similar customers and technologies. As a result, the combination provides
the combined entity with the opportunity to capitalize on the parties'
respective existing relationships with customers and vendors in order to
cross-market their respective products and services.
- the financial performance and condition, businesses and prospects of
Priority Call and LHS, including, but not limited to, information with
respect to the historical stock prices of LHS and the respective
operating performances of Priority Call and LHS.
- the terms of the merger agreement, including the form and amount of the
consideration to be received by the Priority Call stockholders, the terms
and structure of the merger, and the size and nature of the escrow. The
Priority Call board of directors deemed it significant that the merger
would provide the stockholders of Priority Call with LHS common stock for
which there is an active and liquid trading market, in exchange for their
Priority Call capital stock, for
38
45
which there is no established trading market or other means to readily
achieve liquidity.
- the opinion provided by Goldman Sachs that the exchange ratio was fair to
the Priority Call stockholders from a financial point of view. See
"-- OPINION OF PRIORITY CALL'S FINANCIAL ADVISOR."
- that the merger is expected to be a tax-free transaction to the Priority
Call stockholders and is expected to qualify as a pooling-of-interests
transaction for accounting and financial reporting purposes.
- that the merger affords the Priority Call stockholders the opportunity to
reduce the exposure inherent in Priority Call's reliance on a few
products and services in a relatively discrete market, and the
difficulties Priority Call faces in competing against larger companies
with more diversified product lines and greater financial resources.
In reaching its conclusion, the Priority Call board of directors also
considered the following factors, which it believed did not favor entering into
the merger agreement:
- a combination with LHS could prevent it from seeking other avenues of
maximizing the value of the Priority Call capital stock, including
pursuing an initial public offering of the Priority Call common stock or
seeking a business combination with a third party that offered greater
value to the Priority Call stockholders.
- the merger could prevent Priority Call from maximizing the value of the
Priority Call capital stock by pursuing its existing strategic plan as an
independent entity and that, after the merger, the holders of Priority
Call capital stock who receive shares of LHS common stock in the merger
will have to rely on the operating success of LHS to maximize the value
of their investment.
- all of the consideration that would be received by the Priority Call
stockholders in the merger would consist of LHS common stock, rather than
cash, and holders of Priority Call preferred stock would be forced to
relinquish certain preferential rights. See "-- EFFECT OF THE MERGER ON
RIGHTS OF STOCKHOLDER."
In making its determination to enter into the merger agreement, the
Priority Call board weighed each of the factors described above, both positive
and negative, and determined that the positive factors, including particularly
- the fact that the combination with LHS would provide the Priority Call
stockholders with shares of a security for which an active and liquid
market was available,
- the fact that the combination with LHS offered the greatest opportunity
for the development of Priority Call's products and the expansion of
Priority Call's market share, and
39
46
- the fact that Goldman Sachs had opined that the exchange ratio was fair
to the Priority Call stockholders from a financial point of view,
clearly outweighed the negative factors described above. Other than with respect
to these three factors, the Priority Call board did not find it practical to,
and did not, assign any relative or specific weights to any of the other
foregoing factors, and individual directors may have deemed different factors
more significant than others.
In reaching its conclusions set forth above, the Priority Call board was
aware of the potential benefits to be realized by its officers and directors in
the merger, including those described below under the caption "INTERESTS OF
CERTAIN PERSONS IN THE MERGER," but did not believe any of those benefits to be
different in any material way from those to be realized by other Priority Call
stockholders in the merger.
Other than those considerations described above which the Priority Call
board of directors believed did not favor entering into the merger agreement,
the Priority Call board of directors did not identify any particular risks or
adverse effects on non-affiliated Priority Call stockholders.
The foregoing discussion of certain information and factors deemed material
by the Priority Call board in considering the merger agreement and the merger is
not intended to be exhaustive but is believed to include all material factors
considered by the Priority Call board of directors.
THE BOARD OF DIRECTORS OF PRIORITY CALL HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND UNANIMOUSLY RECOMMENDS TO THE STOCKHOLDERS OF PRIORITY CALL THAT
YOU APPROVE THE MERGER AGREEMENT AND THE MERGER.
LHS'S REASONS FOR THE MERGER. In adopting the merger agreement and the
merger, LHS's board of directors considered a number of factors concerning the
benefits of the merger. Without assigning any relative or specific weights to
the factors, LHS's board of directors considered the following material factors,
among others,:
- a review, based in part on a presentation by LHS's management, of
Priority Call's business, operations, earnings, and financial
condition, including its customer base and proprietary technology, on
an historical, prospective, and pro forma basis and in comparison to
other competitors in the industry in the area,
the demographic, economic, and financial characteristics of the
markets in which Priority Call operates, including existing
competition and the demand for particular product mixes and services,
on an historical and prospective basis, and
the results of LHS's due diligence review of Priority Call; and
- a variety of factors affecting and relating to the overall strategic
focus of LHS.
40
47
LHS's board of directors determined that the merger was in the best
interests of LHS and its stockholders, and, with one director abstaining, it
unanimously approved the proposed merger on April 20, 1999.
OPINION OF PRIORITY CALL'S FINANCIAL ADVISOR
On April 20, 1999, Goldman Sachs delivered its oral opinion to Priority
Call's board of directors that, as of the date of its opinion, the exchange
ratio pursuant to the merger agreement is fair from a financial point of view to
Priority Call's stockholders. Goldman Sachs subsequently confirmed its opinion
in writing.
WE HAVE ATTACHED HERETO AS APPENDIX C TO THIS DOCUMENT AND INCORPORATE
HEREIN BY REFERENCE THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED
APRIL 20, 1999. THIS OPINION SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION. WE
ENCOURAGE PRIORITY CALL STOCKHOLDERS TO READ THIS OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things:
- the merger agreement;
- the Annual Report to Stockholders for the year ended December 31, 1997
and the Annual Reports on Form 10-K of LHS for the two years ended
December 31, 1998;
- the Registration Statement on Form S-1, dated May 16, 1997, related to
the initial public offering of LHS common stock, including the Prospectus
contained therein;
- audited financial statements for Priority Call for the years ended
December 31, 1996, 1997 and 1998;
- selected interim reports to stockholders and Quarterly Reports on Form
10-Q of LHS;
- selected unaudited quarterly financial information of Priority Call;
- selected other communications from LHS to its stockholders; and
- selected internal financial analyses and forecasts for Priority Call and
LHS prepared by Priority Call's management.
Goldman Sachs also held discussions with members of the senior management
of Priority Call and LHS regarding the strategic rationale for, and the
potential benefits of, the transaction contemplated by the merger agreement and
the past and current business operations, financial condition and future
prospects of their respective companies. In addition, Goldman Sachs reviewed the
reported price and trading activity for the LHS common stock, compared selected
financial and stock market information for LHS and selected financial
information for Priority Call with similar information for various other
companies the securities of which are publicly traded, reviewed the financial
terms of several recent business combinations in the messaging, pre-paid and
enhanced services
41
48
industries specifically and in the communications equipment industry generally
and performed such other studies and analyses as it considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and it assumed such accuracy and
completeness for purposes of rendering its opinion. Goldman Sachs was not
provided with financial projections for LHS prepared by the management of LHS.
Accordingly, Goldman Sachs' review of projected information for LHS for purposes
of rendering its opinion was limited to reviewing the financial projections for
LHS prepared by management of Priority Call and discussions with LHS management
concerning revenue budgets and revenue forecasts for the first nine months of
1999 and research analysts' estimates for the calendar year 1999. In that
regard, Goldman Sachs assumed with Priority Call's consent that the financial
forecasts for LHS prepared by the management of Priority Call had been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of Priority Call. In addition, Goldman Sachs did not make an
independent evaluation or appraisal of the assets and liabilities of Priority
Call or LHS or any of their respective subsidiaries and it was not furnished
with any such evaluation or appraisal. Goldman Sachs also assumed with Priority
Call's consent that the full amount of the consideration to be held in escrow
pursuant to the merger agreement will be released to Priority Call's
stockholders and that the transaction contemplated by the merger agreement will
be accounted for as a pooling-of-interests under generally accepted accounting
principles. Goldman Sachs' advisory services and its opinion were provided for
the information and assistance of the board of directors of Priority Call in
connection with its consideration of the transaction contemplated by the merger
agreement and Goldman Sachs' opinion does not constitute a recommendation as to
how any Priority Call stockholder should vote with respect to the merger.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with providing its opinion to Priority Call's board
of directors.
1. Selected Companies Analysis.
Priority Call
In order to assess how the public market values shares of similar publicly
traded companies, Goldman Sachs reviewed and compared specific financial
information relating to Priority Call to financial information, ratios and
public market multiples for publicly traded corporations in two sectors. In the
Software-Based Communications Technology Vendor sector, Goldman Sachs reviewed
the following corporations: Concord Communications, Inc., Comverse Technology,
Inc., Genesys Telecommunications Laboratories, Inc., GeoTel Communications
Corporation, Micromuse Inc. and Visual Networks, Inc. In the Systems sector,
Goldman Sachs reviewed the following corporations: 3Com Corporation, Alcatel,
Ascend Communications, Inc., Cisco Systems, Inc., Telefonaktiebolaget LM
Ericsson, Excel Switching Corporation, Lucent Technologies Inc., Motorola, Inc.,
Nokia Oyj and Northern Telecom Limited. Goldman Sachs calculated
42
49
and compared various financial multiples and ratios. The multiples and ratios
for the comparative companies were based on the most recent publicly available
information and recently published research estimates.
Goldman Sachs considered each of the selected companies' price/earnings
ratio based on the stock price of each company on April 16, 1999 and earnings
for the last reported quarter (annualized) and estimated earnings for the 1999
and 2000 calendar years as reported by the Institutional Brokers Estimate
Service (commonly referred to as IBES). Goldman Sachs also considered the IBES
estimated 5-year growth rate for each of the selected companies and calculated
the multiple of 1999 price/earnings to estimated 5-year growth rate. The
following table presents the ranges of these price/ earnings ratios, estimated
growth rates and multiples:
RANGES FOR
SOFTWARE-BASED
COMMUNICATIONS RANGES FOR
TECHNOLOGY VENDOR SYSTEMS
COMPANIES COMPANIES
----------------- ------------
Price/Earnings Ratio (last reported
quarter annualized)................... 20.2x - 87.9x 20.6x - 90.5x
Price/Earnings Ratio (calendar year 1999
estimated)............................ 21.1x - 58.1x 17.8x - 65.9x
Price/Earnings Ratio (calendar year 2000
estimated)............................ 13.1x - 83.6x 15.1x - 53.7x
IBES Estimated 5 year growth rate........ 35.0 - 50.0% 15.0 - 30.0%
Multiple of 1999 Price/Earnings Ratio to
estimated 5 year growth rate.......... 0.4x - 1.5x 0.9x - 2.5x
Goldman Sachs also compared each of the selected companies' stock price as
of April 16, 1999 to its 52-week high. Goldman Sachs then considered each
company's market capitalization as a multiple of its last reported quarter
(annualized) and estimated calendar year 1999 revenue. The following table
presents the ranges of the selected companies' stock prices and revenues
multiples for each of the two sectors analyzed:
RANGES FOR
SOFTWARE-BASED
COMMUNICATIONS
TECHNOLOGY RANGES FOR
VENDOR SYSTEMS
COMPANIES COMPANIES
-------------- ------------
Stock price as a percent of 52-week high... 44.1 - 89.6% 42.4 - 96.1%
Multiple of revenue (last reported quarter
annualized)............................. 3.3x - 20.8x 1.3x - 18.0x
Multiple of revenue (calendar year 1999
estimated).............................. 3.2x - 23.7x 1.0x - 14.4x
43
50
LHS
Goldman Sachs also reviewed and compared specific financial information
relating to LHS to corresponding financial information, ratios and public market
multiples for the following corporations: ACE*COMM Corporation, Amdocs Limited,
Convergys Corporation, Billing Concepts Corp., CSG Systems International, Inc.,
International Telecommunications Data Systems, Inc., Lightbridge, Inc. and
Saville Systems PLC. Goldman Sachs calculated and compared various financial
multiples and ratios. The multiples and ratios for the comparative companies
were based on the most recent publicly available information and recently
published research estimates.
Goldman Sachs considered each of the selected companies' price/earnings
ratio based on the stock price of each company on April 16, 1999 and earnings
for the last reported quarter (annualized) and estimated earnings for the 1999
and 2000 calendar years as reported by IBES. Goldman Sachs also considered the
IBES estimated 5-year growth rate for each of the selected companies and
calculated the multiple of 1999 price/earnings to estimated 5-year growth rate.
The following table presents the ranges of these price/earnings ratios,
estimated growth rates and multiples for each of the selected companies as
compared to LHS:
RANGES FOR
SELECTED COMPANIES LHS
------------------ ----
Price/Earnings Ratio (last reported quarter
annualized)............................... 10.8x - 66.5 x 60.8x
Price/Earnings Ratio (calendar year 1999
estimated)................................ 8.5x - 55.9 x 48.4x
Price/Earnings Ratio (calendar year 2000
estimated)................................ 5.7x - 37.8 x 37.8x
IBES estimated 5 year growth rate............ 20.0 - 40.0 % 40.0%
Multiple of 1999 Price/Earnings Ratio to
estimated 5 year growth rate.............. 0.3x - 1.6 x 1.2x
Goldman Sachs also compared each of the selected companies' stock price as
of April 16, 1999 to its 52-week high. Goldman Sachs then considered each
company's market capitalization as a multiple of its last reported quarter
(annualized) and estimated calendar year 1999 revenues. The following table
presents the ranges of the selected companies' stock prices and revenues
multiples for selected companies as compared to LHS:
RANGES FOR
SELECTED COMPANIES LHS
------------------ ----
Stock Price as a percent of 52-week high..... 18.5 - 98.2 % 45.6%
Multiple of Revenue (last reported quarter
annualized)............................... 0.6x - 10.2 x 10.0x
Multiple of Revenue (calendar year 1999
estimated)................................ 0.8x - 8.9 x 8.3x
44
51
2. Discounted Cash Flow Analysis.
Goldman Sachs performed a discounted cash flow analysis using Priority Call
management's projections using both a base case scenario and a downside
scenario. Goldman Sachs calculated a net present value of free cash flows for
the years 1999 through 2004 using discount rates ranging from 25% to 35%.
Goldman Sachs calculated Priority Call's terminal value in the year 2004 based
upon a terminal multiple of 1.0x price/earnings to growth and a 25% terminal
forward long-term growth rate. This terminal value was then discounted to
present value using discount rates from 25% to 35%. Adding the net present value
of free cash flows to the net present value of the terminal value, Goldman Sachs
calculated a range of implied enterprise values for Priority Call, which ranged
from approximately $120 to $192 million for the base case scenario and
approximately $76 to $123 million for the downside scenario.
Goldman Sachs then considered the impact of a change in EBIT margins in the
years 2003 and 2004 on Priority Call's implied enterprise value. Pursuant to
this sensitivity analysis, Goldman Sachs considered a range of changes in EBIT
margin from a 1.0% decrease to a 1.0% increase from the Priority Call
management's projected EBIT margins for the years 2003 and 2004. The change in
implied enterprise value resulting from this sensitivity analysis ranged from
approximately $113 to $203 million for the base case scenario and approximately
$72 to $130 million for the downside scenario.
Goldman Sachs further considered the impact of a change in the assumed
terminal multiple of price/earnings to growth. Pursuant to this sensitivity
analysis, Goldman Sachs considered a range of changes in exit multiples of
price/earnings to growth from .90x to 1.10x. The change in implied enterprise
value resulting from this sensitivity analysis ranged from approximately $107 to
$211 million for the base case scenario and approximately $68 to $135 million
for the downside scenario.
45
52
3. Selected Transactions Analysis. This analysis compares data with respect to
selected transactions in the messaging, pre-paid and enhanced services industry
since January 1, 1997 to similar data with respect to the merger. Goldman Sachs
analyzed various information relating to the following selected transactions:
the acquisition of Castle Networks by Siemens AG announced on March 8, 1999; the
acquisition of Aethos Communications Systems by Logica plc announced on December
18, 1998; the acquisition of Summa Four, Inc. by Cisco Systems, Inc. announced
on July 28, 1998; the acquisition of Boston Technology, Inc. by Comverse
Technologies, Inc. announced on August 21, 1997; and the acquisition of Octel
Communications Corporation by Lucent Technologies, Inc. announced on July 17,
1997. This analysis focused on the aggregate consideration as a multiple of
sales and a multiple of net income for the twelve months prior to the
transaction. The following table presents the ranges of these items in the
selected transactions:
RANGES FOR
SELECTED
TRANSACTIONS
----------------
Multiple of Sales (last twelve months) 2.7x - 4.2x
Multiple of Net Income (last twelve months) 33.6x - 35.1x
4. Analysis at Various Prices.
Goldman Sachs calculated various transaction multiples for the merger based
on the exchange ratio and per share LHS stock prices that ranged from $25.00 to
$40.00. In performing this analysis, Goldman Sachs considered Priority Call's
1999 and 2000 estimated earnings of $2.77 and $5.04 million, respectively, and
estimated revenues of $48.29 and $72.43 million, respectively. Goldman Sachs
relied upon Priority Call management's projections and the most recent publicly
available information and assumed a tax rate of 40% and an exchange ratio of
2.3542 in the merger. The following table presents the implied multiples of
earnings and revenue for Priority Call:
LHS STOCK PRICE
------------------------------------------------------------
$25.00 $27.50 $30.00 $32.50 $35.00 $37.50 $40.00
------ ------ ------ ------ ------ ------ ------
IMPLIED MULTIPLE OF
EARNINGS
1999 estimated net
income 47.1x 51.8x 56.5x 61.2x 65.9x 70.6x 75.3x
2000 estimated net
income 25.8x 28.4x 31.0x 33.6x 36.2x 38.8x 41.3x
IMPLIED MULTIPLE OF
REVENUE
1999 estimated revenue 2.7x 3.0x 3.2x 3.5x 3.8x 4.0x 4.3x
2000 estimated revenue 1.8x 2.0x 2.2x 2.3x 2.5x 2.7 2.9x
46
53
5. Pro Forma Merger Analysis.
This analysis demonstrates the potential percentage pro forma impact of the
merger on the earnings per share of LHS' stock after taking into account various
levels of potential annualized pre-tax synergies resulting from the merger.
Priority Call net income projections were based upon Priority Call management's
estimates. LHS net income and shares outstanding projections were based upon
publicly available research estimates. Goldman Sachs also assumed a 40% tax rate
for Priority Call and pooling of interests accounting treatment in the merger.
Goldman Sachs performed this analysis based on an exchange ratio for the merger
of 2.3542.
This analysis indicated that the merger would be accretive to LHS' earnings
per share in the 4th quarter of 1999 and fiscal year 2000, and accretive to LHS'
earnings per share in the 3rd quarter of 1999 assuming at least $1.0 million in
annualized pre-tax synergies are realized.
6. Contribution Analysis.
This analysis demonstrates the parties' respective historical and projected
contributions, on a percentage basis, to selected financial information of the
combined company resulting from the merger and compares these contributions to
the parties' stockholders' relative equity interests in the combined company
resulting from the merger. Goldman Sachs reviewed specific historical and
estimated future financial information, including revenue, earnings before
interest and taxes (commonly referred to as EBIT) and net income. LHS estimates
were based upon publicly available research estimates and the most recent
publicly available information. Priority Call estimates were based on Priority
Call management's projections.
This analysis indicated that Priority Call stockholders would receive 8.6%
of the fully diluted common equity of the combined entity after the merger,
assuming an exchange ratio for the merger of 2.3542.
This analysis also indicated, and the following table presents, the
percentages of revenue, EBIT and net income that Priority Call would have
contributed for the calendar year 1998, first and second halves of 1999
(estimated), and calendar year 2000 (estimated) to the combined entity resulting
from the merger.
1ST HALF 2ND HALF
1999 1999 2000
1998 ESTIMATED ESTIMATED ESTIMATED
---- --------- --------- ---------
Revenue.................................... 15.9% 16.0% 19.0% 19.2%
EBIT....................................... 3.2% 3.6% 10.9% 10.2%
Net Income................................. 5.0% 3.6% 9.3% 8.7%
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In
47
54
arriving at its fairness determination, Goldman Sachs considered the results of
all these analyses. No company or transaction used in the above analyses as a
comparison is directly comparable to Priority Call or LHS or the transaction
contemplated by the merger agreement. Goldman Sachs prepared the analyses for
purposes of allowing it to provide its opinion to Priority Call's board of
directors as to the fairness from a financial point of view of the exchange
ratio for the merger to Priority Call stockholders and these analyses do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, as they are based upon
numerous factors or events beyond the control of the parties or their respective
advisors, none of Priority Call, LHS, Goldman Sachs or any other person assumes
responsibility if future results are materially different from those forecasted.
As described above, Goldman Sachs' opinion to Priority Call's board of directors
was one of many factors taken into consideration by Priority Call's board of
directors in making its determination to approve the merger agreement. The
foregoing summary describes material financial analyses used by Goldman Sachs in
connection with providing its opinion to Priority Call's board of directors but
does not purport to be a complete description of the analyses performed by
Goldman Sachs in connection with its opinion and is qualified by reference to
the Goldman Sachs opinion as set forth in Appendix C hereto.
As part of its investment banking business, Goldman Sachs is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Priority Call selected
Goldman Sachs as its financial advisor because it is a nationally recognized
investment banking firm that has substantial experience in transactions similar
to the merger. Goldman Sachs is familiar with Priority Call, having acted as its
financial advisor in connection with, and having participated in certain of the
negotiations leading to, the merger agreement. Goldman Sachs has also provided
certain investment banking services to LHS from time to time, including having
acted as lead managing underwriter of the initial public offering of 4,800,000
LHS shares in May 1997, and may provide investment banking services to LHS in
the future. Goldman Sachs provides a full range of financial, advisory and
brokerage services and in the course of its normal trading activities may from
time to time effect transactions and hold positions in the securities or options
on securities of Priority Call and/or LHS for its own account and for the
account of customers.
Priority Call engaged Goldman Sachs on January 1, 1999 to act as its
financial advisor in connection with the contemplated transaction. Pursuant to
the terms of an engagement letter, Priority Call agreed to pay Goldman Sachs a
fee equal to 2.125% of the aggregate consideration paid for the outstanding
capital stock of Priority Call in the merger plus the principal amount of all
indebtedness for borrowed money as set forth on the most recent consolidated
balance sheet of Priority Call prior to the consummation of the merger. Priority
Call has further
48
55
agreed to reimburse Goldman Sachs for its reasonable out-of-pocket expenses,
including attorneys' fees, and to indemnify Goldman Sachs against specified
liabilities, including liabilities under the federal securities laws.
COMPLETION OF THE MERGER
Subject to the conditions to the obligations of the parties to effect the
merger, the merger will be completed on the date and at the time specified in
the articles of merger to be filed with the Secretary of State of the
Commonwealth of Massachusetts. Unless LHS and Priority Call agree otherwise,
they will use reasonable efforts to complete the merger within three business
days after the last to occur of:
- the date on which Priority Call's stockholders approve the merger
agreement; and
- the date on which all other conditions to the closing, other than those
conditions which relate to those actions to be taken at closing, have
been satisfied or waived.
LHS and Priority Call anticipate that the merger will become effective on
or about , 1999. However, delays could occur.
LHS and Priority Call cannot assure you that they will be able to obtain
necessary stockholder and regulatory approvals for the merger or that they will
be able to satisfy other conditions to completion of the merger. Either Priority
Call's or LHS's board of directors may terminate the merger agreement if the
merger is not completed by November 30, 1999, unless it is not completed because
of the breach of the merger agreement by the party seeking termination. In
addition, Priority Call may extend the date on which LHS may terminate the
merger agreement because of delays caused by the involvement of LHS in another
business combination transaction that has become "probable," as that term is
defined in the SEC's rules and regulations, or a public offering for which a
registration statement has been filed, until 35 days after the registration
statement related to this proxy statement-prospectus has been declared
effective. See "-- CONDITIONS TO COMPLETION OF THE MERGER" and "-- WAIVER,
AMENDMENT, AND TERMINATION."
DISTRIBUTION OF LHS STOCK CERTIFICATES
Promptly after the merger is completed, each Priority Call stockholder at
the time of completion of the merger will be mailed a letter of transmittal and
instructions for the exchange of the certificates representing shares of
Priority Call capital stock for certificates representing shares of LHS common
stock.
You should not send in your certificates until you receive a letter of
transmittal and instructions.
After you surrender to the exchange agent certificates for Priority Call
capital stock with a properly completed letter of transmittal, the exchange
agent will mail you a certificate or certificates representing the number of
shares of LHS common stock to which you are entitled and a check for the amount
to be paid in lieu of any fractional
49
56
share, without interest, if any, together with all undelivered dividends or
distributions in respect of the shares of LHS common stock, without interest
thereon, if any. LHS will not be obligated to deliver the consideration to you,
as a former Priority Call stockholder, until you have surrendered your Priority
Call capital stock certificates.
Whenever a dividend or other distribution is declared by LHS on LHS common
stock with a record date after the date on which the merger was completed, the
declaration will include dividends or other distributions on all shares of LHS
common stock that may be issued in the merger. However, LHS will not pay any
dividend or other distribution that is payable after the completion of the
merger to any former Priority Call stockholder who has not surrendered his or
her Priority Call stock certificate until the holder surrenders the certificate.
If any Priority Call stockholder's stock certificate has been lost, stolen, or
destroyed, the exchange agent will issue the shares of LHS common stock and any
cash in lieu of fractional shares upon the stockholder's submission of an
affidavit claiming the certificate to be lost, stolen, or destroyed by the
stockholder of record, the posting of a bond in such amount as LHS may
reasonably direct as indemnity against any claim that may be made against LHS
with respect to the certificate, and submission of any other documents necessary
to effect the exchange of the shares represented by the certificate.
At the time the merger is completed, the stock transfer books of Priority
Call will be closed to Priority Call's stockholders and no transfer of shares of
Priority Call capital stock by any stockholder will thereafter be made or
recognized. If certificates for shares of Priority Call capital stock are
presented for transfer after the merger is completed, they will be canceled and
exchanged for shares of LHS common stock, a check for the amount due in lieu of
fractional shares, if any, and any undelivered dividends on the LHS common
stock.
CONDITIONS TO COMPLETION OF THE MERGER
LHS and Priority Call are required to complete the merger only after the
satisfaction of various conditions. These conditions include:
- the holders of at least two-thirds of the outstanding shares of Priority
Call common stock and preferred stock, voting together as a class, and a
majority of the outstanding shares of Priority Call preferred stock,
voting together as a separate class, must approve the merger agreement;
- the waiting period under the HSR Act must have expired or been
terminated;
- LHS and Priority Call must receive written opinions of counsel as to the
tax-free nature of the merger and other matters;
- the Securities and Exchange Commission must declare the registration
statement, registering the shares of LHS common stock to be issued to
Priority Call stockholders in the merger effective under the Securities
Act;
50
57
- the shares of LHS common stock to be issued in the merger must be
approved for listing on the Nasdaq National Market;
- there must not be inaccuracies in the representations and warranties of
Priority Call and LHS as set forth in the merger agreement as of the date
of the merger agreement and as of the date the merger is completed such
that the aggregate effect of such inaccuracies has, or is reasonably
likely to have, a material adverse effect on such party; except, if LHS
is involved in another business combination transaction or a public
offering that delays the merger, the representations and warranties of
Priority Call must be accurate as of the date that transaction becomes
probable or the date a registration statement is filed with respect to a
public offering;
- Priority Call and LHS must perform all agreements and comply with all
covenants set forth in the merger agreement in all material respects;
- there must not have been an event, change or occurrence, or any
combination of events, changes or occurrences, that has, or is reasonably
likely to have, a material adverse effect on LHS or Priority Call from
the date of the merger agreement to the date the merger is completed,
except, if LHS is involved in another business combination transaction or
a public offering that delays the merger, there must not have been a
material adverse effect as of the date that transaction becomes probable
or the date a registration statement is filed with respect to a public
offering;
- LHS and Priority Call must receive a letter from Ernst & Young LLP
regarding the appropriateness of pooling-of-interests accounting
treatment for the merger under APB 16 if completed in accordance with the
merger agreement;
- LHS and Priority Call must receive a letter from Arthur Andersen LLP to
the effect that it is not aware of any matters relating to Priority Call
and its subsidiaries which would preclude Priority Call and its
subsidiaries from being a party to a transaction to be accounted for as a
pooling of interests.
- the absence of any law or order or any action taken by any court,
governmental, or regulatory authority of competent jurisdiction
prohibiting or restricting the merger or making it illegal;
- LHS must receive agreements from each person Priority Call reasonably
believes may be deemed an "affiliate," as such term is defined under the
rules and regulations of the SEC, of Priority Call;
- less than five percent of the holders of Priority Call capital stock
shall have dissented in connection with the merger; and
- other conditions must be satisfied, including the receipt of various
certificates from the officers of Priority Call and LHS.
51
58
We cannot assure you as to when or if all of the conditions to the merger
can or will be satisfied or waived by the party permitted to do so. If the
merger is not effected on or before November 30, 1999, except as described
otherwise in this proxy statement-prospectus or the merger agreement, the board
of directors of either Priority Call or LHS may terminate the agreement and plan
of merger and abandon the merger. See "-- WAIVER, AMENDMENT, AND TERMINATION."
INDEMNIFICATION
Under the merger agreement, if the merger is completed, the stockholders of
Priority Call have agreed to severally indemnify LHS against losses resulting
from:
- the inaccuracy or breach of any representation or warranty of Priority
Call made in the merger agreement or any related document provided by
Priority Call to LHS in connection with the merger as of the appropriate
date of assessment; and
- the breach or failure to perform any covenant or agreement of Priority
Call made in the merger agreement.
The stockholders of Priority Call will not have liability to LHS in
connection with the breach of certain representations and warranties unless
written notice asserting an indemnification claim is given to the indemnitor
representative prior to one year from the completion of the merger and with
respect to the breach of other representations and warranties prior to the
earlier of one year from the completion of the merger or the date of issuance of
audited consolidated financial statements of LHS reflecting the merger. The
stockholders of Priority Call will have no liability with respect to these
matters until the total of all losses exceeds $750,000, in which event the
stockholders shall be obligated to indemnify LHS for all such losses; provided,
however, that Priority Call stockholders will not be liable for each individual
claim for indemnification of $25,000 or less and such claims will not be
included in determining whether the $750,000 threshold has been reached. In no
event will the aggregate liability of the stockholders exceed the aggregate
value of the shares of LHS common stock deposited in the escrow.
In addition, stockholders of Priority Call have no liability to LHS for
certain existing suits relating to infringement of intellectual property by
Priority Call or other intellectual property infringement claims against
Priority Call of which Priority Call had no knowledge as of the date of the
merger agreement.
All disputes arising under the indemnification provisions of the merger
agreement shall be resolved by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association.
REGULATORY APPROVAL
Priority Call and LHS are not aware of any material governmental approvals
or actions that are required to complete the merger, except as described below.
Should any
52
59
other approval or action be required, LHS and Priority Call contemplate that
they would seek such approval or action.
Under the HSR Act, and the related rules, the merger may not be completed
until notifications have been given and certain information has been furnished
to the FTC and the Antitrust Division of the Department of Justice and the
applicable waiting period has expired or been terminated. LHS and Priority Call
filed notification and report forms under the HSR Act with the FTC and the
Antitrust Division on April 30, 1999. The statutory waiting period under the HSR
Act will expire on May 30, 1999. At any time before or after completion of the
merger, the Antitrust Division or the FTC could take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the completion of the merger or seeking divestiture
of substantial assets of LHS or Priority Call. At any time before or after the
completion of the merger, and even if the waiting period under the HSR Act has
expired, any state could take such action under the antitrust laws as it deems
necessary or desirable in the public interest. Such action could include seeking
to enjoin the completion of the merger or seeking divestiture of substantial
assets of LHS or Priority Call. Private parties may also seek to take legal
action under the antitrust laws under certain circumstances.
LHS and Priority Call believe that the merger can be effected in compliance
with the federal and state antitrust laws; however, there can be no assurance
that a challenge to the completion of the merger on antitrust grounds will not
be made or that, if such a challenge were made, LHS and Priority Call would
prevail or would not be required to accept certain adverse conditions in order
to complete the merger.
WAIVER, AMENDMENT, AND TERMINATION
To the extent permitted by law, the boards of directors of LHS and Priority
Call may agree in writing to amend the merger agreement, whether before or after
Priority Call's stockholders have approved it. In addition, before or at the
time the merger becomes effective, either Priority Call or LHS, or both, may
waive any default in the performance of any term of the merger agreement by the
other party or may waive or extend the time for the compliance or fulfillment by
the other party of any and all of its obligations under the merger agreement. In
addition, either LHS or Priority Call may waive any of the conditions precedent
to its obligations under the merger agreement, unless a violation of any law or
governmental regulation would result. To be effective, a waiver must be in
writing and signed by an authorized officer of Priority Call or LHS, as the case
may be.
At any time before the merger becomes effective, the boards of directors of
LHS and Priority Call may agree to terminate the merger agreement. In addition,
either Priority Call's board of directors or LHS's board of directors may
terminate the merger agreement in the following circumstances:
- if a material breach of any representation or warranty by the other party
cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach, which breach is
reasonably likely to have,
53
60
individually or in the aggregate, a material adverse effect on the
breaching party, provided that the terminating party is not then in
material breach of any representation, warranty, covenant or agreement
contained in the merger agreement;
- if a material breach by the other party of any covenant or agreement
contained in the merger agreement cannot be or has not been cured within
30 days after the giving of written notice to the breaching party of such
breach, which breach is reasonably likely to have, individually or in the
aggregate, a material adverse effect on the breaching party, provided
that the terminating party is not then in breach of any representation,
warranty, covenant or agreement contained in the merger agreement;
- if any consent of any regulatory authority required to complete the
merger has been denied by final nonappealable action, or if any action
taken by such authority is not appealed within the time limit for appeal;
- if the stockholders of Priority Call fail to approve the merger agreement
and the merger at the special meeting;
- if the merger is not completed by November 30, 1999, provided that the
failure to complete the merger is not caused by any breach of the merger
agreement by the party electing to terminate and provided that Priority
Call is not entitled to extend the deadline because of a delay caused by
the involvement of LHS in another business combination transaction or
public offering;
- if any of the conditions precedent to the merger cannot be satisfied or
fulfilled by November 30, 1999 or by any other date to which Priority
Call is entitled to extend the deadline, provided that the terminating
party is not then in breach of any representation, warranty, covenant or
agreement contained in the merger agreement; or
- if the board of directors of Priority Call has withdrawn or failed to
reaffirm, without recommending another acquisition proposal, its approval
of the merger or has resolved not to reaffirm the merger, or has
affirmed, recommended or authorized entering into any other acquisition
proposal or other similar transaction.
If the merger is terminated, the merger agreement will become void and have
no effect, except that certain provisions of the merger agreement, including
those relating to the obligations to share certain expenses and maintain the
confidentiality of certain information obtained, will survive. Termination of
the merger agreement will not relieve any breaching party from liability for any
uncured breach of a representation, warranty, covenant or agreement resulting in
termination of the merger agreement.
54
61
CONDUCT OF BUSINESS PENDING THE MERGER
The merger agreement obligates Priority Call to conduct its business only
in the usual, regular, and ordinary course before the merger becomes effective
and imposes certain limitations on the operations of Priority Call and its
subsidiaries. These items are listed in Article 7 of the merger agreement which
is attached as Appendix A to this proxy statement-prospectus.
Priority Call has also agreed that neither it nor any of its
representatives will directly or indirectly solicit, or participate in
negotiations with respect to, any proposal for the acquisition of Priority Call
by a third party; provided, that, to the extent necessary to comply with the
fiduciary duties of Priority Call's board of directors as advised by its
counsel, Priority Call may furnish information concerning Priority Call to, and
participate in negotiations with respect to the acquisition of Priority Call by,
a third party. Priority Call has also agreed to provide the name of the acquiror
and material terms of any acquisition proposal promptly to LHS.
LHS and Priority Call have also agreed not to take any action that would
(1) materially adversely affect their ability to obtain any consents required
for the merger, or (2) materially adversely affect their ability to perform
their covenants and agreements under the merger agreement.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
The merger will not change the present management team or board of
directors of LHS. Information concerning the management of LHS is included in
the documents incorporated by reference in this proxy statement-prospectus. See
"WHERE YOU CAN FIND MORE INFORMATION."
Priority Call will be the surviving corporation resulting from the merger
and will be a wholly owned subsidiary of LHS. Priority Call will continue to be
governed by the laws of the Commonwealth of Massachusetts.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Priority Call's management and board of directors may be
deemed to have interests in the merger that are in addition to their interests
as stockholders of Priority Call generally. Priority Call's board of directors
was aware of these interests and considered them, among other matters, in
approving the merger agreement.
Treatment of Priority Call Options. At the effective time, each outstanding
option granted by Priority Call to purchase shares of Priority Call common stock
will be converted into an option to acquire LHS common stock having the same
terms and conditions as the Priority Call option had before the merger was
completed. The number of shares that the new LHS option will be exercisable for
and the exercise price of the new LHS option will reflect the exchange ratio.
LHS has agreed to file with the SEC, as
55
62
soon as reasonably practicable after the merger is completed, a registration
statement on Form S-8 or other appropriate form under the Securities Act to
register the shares of LHS common stock issuable upon exercise of the options of
LHS exchanged for Priority Call options and to use reasonable efforts to cause
such registration statement to remain effective until the exercise or expiration
of such options.
Indemnification; Directors and Officers Insurance. LHS has agreed to
indemnify the present and former directors, officers, employees, and agents of
Priority Call and its subsidiaries against certain liabilities arising out of
actions or omissions occurring at or prior to the time the merger is completed,
including the merger, to the full extent permitted under Massachusetts law and
Priority Call's bylaws. LHS has also agreed to use its reasonable efforts to
maintain in effect for a period of six years after completion of the merger,
Priority Call's existing directors and officers liability insurance policy.
ACCOUNTING TREATMENT
It is anticipated that the merger will be accounted for as a pooling of
interests. Under the pooling-of-interests method of accounting, the recorded
amounts of the assets and liabilities of Priority Call will be carried forward
at their previously recorded amounts, and the consolidated financial statements
of LHS for all periods presented will be restated to include the financial
condition and results of operations of Priority Call.
In order for the merger to qualify for pooling-of-interests accounting
treatment, 90% or more of the outstanding Priority Call capital stock must be
exchanged for LHS common stock with substantially similar terms. There are
certain other criteria that must be satisfied in order for the merger to qualify
as a pooling of interests. Some of the criteria cannot be satisfied until after
the merger is completed. In addition, at the closing of the merger, LHS and
Priority Call shall have received letters from Ernst & Young LLP and Arthur
Andersen LLP, respectfully, regarding the appropriateness of pooling-
of-interests accounting for the merger under APB 16 if the merger is completed
in accordance with the merger agreement.
Certain conditions will be imposed on the exchange of Priority Call capital
stock for LHS common stock in the merger by affiliates of Priority Call. Certain
restrictions will also be imposed on the transferability of the LHS common stock
received by those affiliates in the merger. These conditions and restrictions
will be imposed in order, among other things, to ensure the availability of
pooling-of-interests accounting treatment. For information concerning these
conditions and restrictions, see "-- RESALES OF LHS COMMON STOCK."
FEES AND EXPENSES
In the event:
- the Priority Call board of directors withdraws or fails to reaffirm,
without recommending another acquisition proposal, its approval of the
merger or resolves
56
63
not to reaffirm the merger, or affirms, recommends or authorizes entering
into any other acquisition proposal or other similar transaction, or
- the terms of any other acquisition proposal with respect to Priority Call
are communicated, formally or informally, to any of Priority Call's
stockholders, who are not a party to the voting agreement, by Priority
Call, its affiliates, representatives or otherwise and at the time
Priority Call is negotiating another acquisition proposal, and
- the stockholders of Priority Call fail to approve the merger agreement
and the merger,
then Priority Call will immediately upon a termination of the merger agreement
pay LHS a break-up fee in the amount of $4,500,000.
LHS and Priority Call will each pay its own expenses in connection with the
merger, including filing, registration and application fees, printing fees, and
fees and expenses of its own financial or other consultants, investment bankers,
accountants, and counsel, except that, if LHS terminates the merger agreement
because the stockholders of Priority Call fail to approve the merger agreement
and the merger, and LHS does not receive the termination fee, Priority Call will
reimburse LHS for one-half of the SEC registration fees and related expenses,
other than attorneys' fees, incurred in connection with the transaction,
including the filing fees and printing and mailing costs incurred in connection
with the registration statement and this proxy statement-prospectus.
RESALES OF LHS COMMON STOCK
LHS common stock to be issued to stockholders of Priority Call in the
merger will be registered under the Securities Act of 1933, as amended. All
shares of LHS common stock received by stockholders of Priority Call in the
merger will be freely transferable after the merger by those stockholders of
Priority Call who are not considered to be "affiliates" of Priority Call or LHS.
"Affiliates" generally are defined as persons or entities who control, are
controlled by, or are under common control with Priority Call or LHS at the time
of the special meeting (generally, executive officers, directors, and 10% or
greater stockholders).
Rule 145 under the Securities Act of 1933, as amended, restricts the sale
of LHS common stock received in the merger by affiliates of Priority Call and
certain of their family members and related entities. Under the rule, during the
first 12-month period after the merger is completed, affiliates of Priority Call
or LHS may resell publicly the LHS common stock they receive in the merger but
only within certain limitations as to the amount of LHS common stock they can
sell in any three-month period and as to the manner of sale. After the one-year
period, affiliates of Priority Call who are not affiliates of LHS may resell
their shares without restriction. LHS must continue to satisfy its reporting
requirements under the Securities Exchange Act of 1934, in order for affiliates
to resell, under Rule 145, shares of LHS common stock received in the merger.
Affiliates also would be permitted to resell LHS common stock received in the
merger
57
64
pursuant to an effective registration statement under the Securities Act or an
available exemption from the registration requirements of the Securities Act.
This proxy statement-prospectus does not cover any resales of LHS common stock
received by persons who may be deemed to be affiliates of Priority Call or LHS.
The SEC's guidelines regarding qualifying for the pooling-of-interests
method of accounting also limit sales of shares of LHS and Priority Call by
their affiliates in connection with the merger. The SEC's guidelines indicate
that the pooling-of-interests method of accounting generally will not be
challenged on the basis of sales by affiliates of the acquiring or acquired
company if such affiliates do not dispose of any of the shares of the
corporation they own, or shares of a corporation they receive in connection with
a merger, during the period beginning 30 days before the merger is completed and
ending when financial results covering at least 30 days of post-merger
operations of the combined companies have been published.
Each person who may be deemed to be an affiliate of Priority Call or LHS
has executed and delivered to LHS an agreement intended to ensure compliance
with the Securities Act, and to preserve the ability of the merger to be
accounted for as a pooling of interests. Each Priority Call affiliate and LHS
affiliate has agreed not to sell, pledge, transfer, or otherwise dispose of any
Priority Call capital stock or LHS common stock as the case may be held by the
affiliate except as contemplated by the merger agreement or the affiliate
agreement. In addition, each Priority Call affiliate must agree not to sell,
pledge, transfer or otherwise dispose of any LHS common stock received in the
merger except in compliance with the Securities Act, and the applicable rules,
and until such time as financial results covering 30 days of combined operations
of LHS and Priority Call have been published. Prior to publication of such
results, LHS will not transfer on its books any shares of LHS common stock
received by an affiliate of Priority Call in the merger or held by an affiliate
of LHS. The stock certificates representing LHS common stock issued to
affiliates in the merger will bear a legend summarizing these restrictions on
transfer. See "-- CONDITIONS TO COMPLETION OF THE MERGER."
VOTING AGREEMENT
Holders of 100% of the outstanding shares of Priority Call preferred stock,
considered independently, and % of the outstanding shares of Priority Call
common stock and preferred stock, considered collectively, have agreed with LHS
to cast their votes in favor of the merger agreement and the merger at the
special meeting. With certain exceptions, this voting agreement terminates upon
the last to occur of the termination of the merger agreement or November 30,
1999. If LHS terminates the merger agreement in accordance with its terms, then
the voting agreement will terminate immediately, even if LHS terminates prior to
November 30, 1999. If Priority Call terminates the merger agreement because of a
breach by LHS that is reasonably likely to have a material adverse effect on
LHS, then the voting agreement will terminate immediately, even if Priority Call
terminates prior to November 30, 1999.
58
65
ESCROW AGREEMENT
Pursuant to the terms of the merger agreement, 5% of the LHS common stock
to be issued in the merger will be held by an escrow agent pursuant to the terms
of the escrow agreement, a copy of which is attached to this proxy
statement-prospectus as Appendix B. The shares of LHS common stock are reserved
to cover unknown claims by LHS and will be released to you upon the later of the
first anniversary of the completion of the merger or the final resolution of
claims made by LHS against Priority Call prior to the first anniversary of the
completion of the merger.
Andrew D. Ory, the current President and Chief Executive Officer of
Priority Call, will serve as the indemnitor representative under the escrow
agreement. The indemnitor representative will act on behalf of the Priority Call
stockholders with respect to the indemnification provisions of the merger
agreement and the terms and conditions of the escrow agreement. The indemnitor
representative is entitled, under the escrow agreement, to be reimbursed out of
the escrow for costs arising out of the performance of his duties as indemnitor
representative.
If you are not an affiliate of Priority Call on the date the merger is
completed, you may instruct the indemnitor representative, in writing, to direct
the escrow agent to sell shares in your account. If you are an affiliate of
Priority Call on the date the merger is completed, you may direct the sale of
your shares at any time after LHS has published financial results covering at
least 30 days of combined operations of LHS and Priority Call after the merger
is completed. Any and all cash proceeds from the sale of escrow shares shall
remain in and become a part of, the escrow.
If LHS or the indemnitor representative becomes entitled to payment for an
indemnification claim, the claim will be paid by distributing a combination of
shares of LHS common stock and cash proceeds out of escrow to LHS. Cash and
shares of LHS common stock will be distributed based on the closing price of the
LHS common stock on the day immediately preceding the completion of the merger.
If an indemnification claim is pending and unresolved on the first anniversary
of the completion of the merger, the escrow agent will retain the disputed
amount until the claim is resolved and deliver the balance to you. Upon
resolution of the claim, the balance of the shares of LHS common stock and cash
proceeds, if any, held in escrow and not used to satisfy the claim, will be
returned to you.
Any and all cash dividends on shares of LHS common stock held in escrow
will be retained in escrow until the escrow is distributed to you. You will have
the right to direct the escrow agent in writing to vote your shares held in your
account. If you do not provide directions with respect to voting your shares,
the escrow agent will not vote any of your shares.
59
66
COMPARATIVE MARKET PRICES AND DIVIDENDS
LHS common stock began trading on the Nasdaq National Market on May 16,
1997 under the symbol "LHSG" and the Frankfurt Stock Exchange Neuer Markt on May
21, 1997 under the symbol "LHI." Priority Call capital stock is not traded in
any established market. The following table sets forth, for the indicated
periods, the high and low closing sale prices for the LHS common stock as
reported on the Nasdaq National Market. No equivalent market price data is
available for Priority Call.
LHS
---------------
HIGH LOW
------ ------
1997
First Quarter............................................ $ -- $ --
Second Quarter........................................... 22.25 9.38
Third Quarter............................................ 30.75 21.56
Fourth Quarter........................................... 37.88 19.38
1998
First Quarter............................................ 50.38 25.50
Second Quarter........................................... 73.75 44.50
Third Quarter............................................ 76.50 43.94
Fourth Quarter........................................... 57.38 36.75
1999
First Quarter............................................ 59.13 28.63
Second Quarter (through April 26, 1999).................. 35.38 25.75
On April 26, 1999, the latest practicable date before the mailing of this
proxy statement-prospectus, the last sale price of LHS common stock as reported
on the Nasdaq National Market was $33.81 per share. On April 20, 1999, the last
business day prior to public announcement of the merger, the last sale price of
LHS common stock as reported on the Nasdaq National Market was $31.25 per share.
Neither LHS nor Priority Call declared or paid any dividends during the
periods indicated in the stock price table above. The holders of LHS common
stock and the holders of Priority Call common stock each are entitled to receive
dividends when and if declared by the respective board of directors out of funds
legally available therefor. LHS currently intends to retain its future earnings,
if any, to fund the development and growth of its business and therefore does
not anticipate paying any cash dividends in the foreseeable future.
60
67
BUSINESS OF LHS
LHS provides client/server-based billing and customer care solutions to
providers of wireless and wireline telecommunications services in the Americas,
Europe and Asia. LHS's products enable its customers to compete more effectively
in a rapidly growing telecommunications market. The Company's Business Support
and Control System software is a scaleable, modular billing and customer care
solution that can be implemented quickly and can support innovative marketing
and pricing of telecommunications services. LHS has installed its BSCS software
with approximately 134 of customers which support a total of 24.9 million
subscribers worldwide.
The principal executive offices of LHS are located at Six Concourse
Parkway, Suite 2700, Atlanta, Georgia 30328, and its telephone number at such
address is (770) 280-3000. Additional information with respect to LHS and its
subsidiaries is included in documents incorporated by reference in this proxy
statement-prospectus. See "WHERE YOU CAN FIND MORE INFORMATION."
61
68
BUSINESS OF PRIORITY CALL
Priority Call develops and markets a proprietary platform and software
applications that enable telecommunications carriers to provide their
residential, business and wireless subscribers with a broad range of enhanced
services. Enhanced services are services, in addition to traditional telephone
service, that improve the efficiency and effectiveness of telecommunications,
such as messaging, prepaid calling and one number services. Offering enhanced
services helps carriers to:
- retain subscribers;
- increase revenue from existing subscribers;
- attract new subscribers; and
- increase the ratio of completed calls.
The principal executive offices of Priority Call are located at 110 Fordham
Road, Wilmington, Massachusetts 01887, and its telephone number at such address
is (978) 658-4400.
CUSTOMERS
Priority Call primarily markets its platform and software applications to
telecommunication carriers. The market includes national and international
wireless, wireline and paging service providers. The carriers purchase and
install the platform and software applications on commercially available
components and offer enhanced services through their networks to their
residential, business and wireless subscribers. For a monthly flat rate and/or
usage-based charges, the subscribers receive access to a variety of enhanced
services without having to assume the capital, administrative or maintenance
requirements of purchasing their own systems.
Priority Call's domestic customers include AT&T, PageNet and Vanguard.
Priority Call's international customers include Europe's Cable and Wireless,
World Telecom and Cyber Office, South America's BellSouth (Chile), Pegaso
(Mexico), Miniphone (Argentina), and Telcel (Venezeula), and Asia's Nanjing
Telecom (China), Jinan PTT (China) and Xinjiang PTT (China).
PRODUCTS
Priority Call offers its enhanced services through its ORYX(R) platform.
The following features distinguish the ORYX platform from platforms offered by
other enhanced telecommunication services providers:
Scaleability. The ORYX platform is expandable. Scaleability is an
important feature because it allows Priority Call to provide service to
carriers with any size subscriber base and later adjust for increases in
the number of subscribers.
Modularity. Priority Call offers its enhanced services through
individual software applications. As a result, carriers can purchase the
software applications for
62
69
the enhanced services they initially require and purchase further software
applications as the need arises.
Flexibility. The ORYX platform features an open standards based
architecture. As a result, the ORYX platform can integrate different
networks, including both wired and wireless telecommunication networks,
paging networks and data networks, such as email and the Internet.
Reliability. The ORYX platform offers back-up systems with automatic
switchover so that no single failure will interrupt the service.
As a result of the features listed above, carriers can initially purchase
small systems and selected enhanced services software applications and grow
their systems into very large, fully redundant systems including a broad range
of enhanced services that work seamlessly with their existing networks and
services.
Priority Call offers a variety of software applications that run on the
ORYX platform. The software applications provide carriers with the opportunity
to offer the following services:
Enhanced Messaging Services. Enhanced messaging services provide
subscribers the opportunity to manage their messages more efficiently. For
example, subscribers can:
- access and manage messages from any telephone;
- store and forward messages with urgent or confidential labels;
- utilize the services of an automated attendant;
- return messages from voice mail with one key call return;
- unify the numbers and accounts for faxes and voice mail; and
- receive short messages over digital handsets, including caller name,
pages, emails and text messages.
Enhanced messaging service provides an additional source of revenue for
carriers, helps carriers attract and retain subscribers and, because it
increases the number of completed calls, increases revenues from existing usage.
Prepaid and Debit Calling. Prepaid calling and debit calling offer
subscribers an alternative payment method. By offering prepaid calling and debit
calling, carriers can expand their subscriber base to include budget-conscious
individuals, such as students and business travelers, and subscribers who
previously did not meet minimum credit requirements.
One Number Service. One number service links subscribers' wired and
wireless telephones, pagers and messaging devices to a single number. This
eliminates the need for callers to dial different numbers to reach subscribers
at various locations. One
63
70
number provides carriers with an additional source of revenue, increases the
percentage of calls that are completed and helps carriers attract and retain
subscribers.
Internet Personal Communications Management. Internet personal
communications management allows subscribers to manage calls and messages on
their personal computers. By using their mouse, subscribers can:
- listen to voice messages;
- view and print faxes
- place calls; and
- send voice or fax messages as email attachments
Priority call also offers software applications that integrate voice
recognition with other enhanced services permitting subscribers to dial and
manipulate other enhanced services with voice commands.
SERVICES
Priority Call complements its products with a range of support services and
training programs that provide additional sources of revenue and increase
customer loyalty, including twenty-four hour worldwide support through a toll
free support line and a customer service website and training courses for
carriers' employees who market and manage Priority Call's enhanced services.
COMPETITION
The enhanced services industry is highly competitive, and Priority Call
expects that competition will intensify as the market continues to grow and
mature. Priority Call's principal competitors are Comverse Technology Inc.,
Brite Voice Systems, Inc., Glenayre Electronics, Inc., Aethos Communication
Systems Ltd. and Logica Aldiscom plc. Priority Call believes competition for the
sale of enhanced services to carriers is based primarily on capacity,
reliability and ability to provide a broad range of applications. Priority Call
expects to continue to encounter substantial competition from its existing
competitors and other companies will enter the market. Certain existing
competitors possess considerably greater financial, technical, marketing and
sales resources than Priority Call and have substantial existing customer bases.
64
71
PRIORITY CALL SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Net Sales............................ $ 30,936 $ 20,111 $ 11,035 $ 5,866 $ 708
Cost of sales........................ 14,131 9,318 5,113 2,667 352
---------- ---------- ---------- ---------- ----------
Gross profit......................... 16,805 10,793 5,922 3,199 356
Operating expenses:
Research and development........... 3,191 2,435 1,654 851 560
Sales and marketing................ 8,487 6,157 4,103 1,683 422
General and administration......... 3,852 3,112 1,721 1,044 503
---------- ---------- ---------- ---------- ----------
Total operating expense.... 15,530 11,704 7,478 3,578 1,485
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 1,275 (911) (1,556) (379) (1,129)
Other income (expenses), net......... 62 154 151 48 (39)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 1,337 $ (757) $ (1,405) $ (331) $ (1,168)
========== ========== ========== ========== ==========
Net Income (Loss) per share:
Basic.............................. $ 1.16 $ (0.66) $ (1.23) $ (0.30) $ (1.11)
Diluted............................ $ 0.67 $ (0.66) $ (1.23) $ (0.30) $ (1.11)
Weighted average common shares
outstanding used to compute basic
net income (loss) per share........ 1,154,093 1,140,480 1,140,289 1,109,040 1,051,899
Weighted average common shares
outstanding used to compute diluted
net income (loss) per share........ 1,990,350 1,140,480 1,140,289 1,109,040 1,051,899
DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ ------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 4,710 $ 6,294 $ 5,207 $1,476 $ 543
Working capital.................................... 6,965 6,009 7,481 2,833 251
Total assets....................................... 21,780 14,707 12,250 5,389 1,494
Long-term obligations, less current maturities..... 2,533 514 333 21 106
Stockholders' equity............................... 9,897 8,399 9,155 3,545 376
65
72
PRIORITY CALL'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenues represented by certain items reflected in Priority Call's
Consolidated Statements of Operations:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
Net Sales.............................................. 100.0% 100.0% 100.0%
Cost of Sales.......................................... 45.7 46.3 46.3
----- ----- -----
Gross Profit......................................... 54.3 53.7 53.7
Operating Expenses
Research and Development............................. 10.3 12.1 15.0
Sales and Marketing.................................. 27.4 30.6 37.2
General and Administration........................... 12.5 15.5 15.6
----- ----- -----
Total Operating Expenses.................... 50.2 58.2 67.8
Income (loss) from Operations........................ 4.1 (4.5) (14.1)
Interest and Other Income.............................. .6 1.0 1.5
Interest Expense....................................... (.4) (.2) (.1)
----- ----- -----
Net Income (loss).................................... 4.3% (3.7)% (12.7)%
===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales.
Priority Call derives revenue from the sale of enhanced services platforms
and enhanced services software applications to domestic and international
customers and the provision of services related to the operation of these
systems.
Net sales increased approximately $10,825,000, or 53.8% from $20,111,342 in
1997 to $30,936,058 in 1998. The increase is attributable to increased sales of
systems to both new and existing customers. The increase in the average size of
systems sold was also a factor. Net sales benefited from the establishment of
two international sales organizations during 1998.
Net sales from Priority Call's five largest customers represented
approximately 55.3% and 57.2% of Priority Call's net sales in 1998 and 1997,
respectively. Four customers each accounted for more than 10% of Priority Call's
net sales in 1998. Two customers each accounted for more than 10% of Priority
Call's net sales in 1997. Priority Call believes that net sales in 1999 from its
largest customer may decrease as compared to the past two years on both an
absolute dollar basis and percentage of sales basis. Although Priority Call's
largest customers may vary from year to year, Priority Call believes that
revenues from current and large potential customers will continue to represent a
significant proportion of revenues and that its results of operations in any
given year will continue to depend to a significant extent upon sales to a
limited number
66
73
of customers. The volume level of future purchases, if any, by Priority Call's
principal customers cannot be estimated based upon historical purchasing trends.
Revenue from Priority Call's largest customers fluctuates year to year on both
an absolute dollar basis and as a percentage of sales.
Gross Profit.
Cost of sales consists primarily of the cost of purchased components and
sub-assemblies, labor and overhead related to final assembly, testing, and
quality control and warranty and post-sale support costs. Cost of sales
increased $4,813,000, or 51.7% from $9,318,212 in 1997 to $14,131,121 in 1998.
Gross profit, as a percentage of sales, increased from $10,793,130, or 53.7% of
sales, in 1997 to $16,804,937, or 54.3% of sales, in 1998 primarily as a result
of lower component prices.
Research and Development.
Research and development expenses consist primarily of compensation and
benefit related costs of engineering and development personnel and depreciation
of development and test equipment. All research and development costs, including
software development costs, have been expensed as incurred. Research and
development costs increased approximately $757,000, or 31.1%, from $2,434,261 in
1997 to $3,190,871 in 1998. As a percentage of net sales, research and
development costs decreased from 12.1% in 1997 to 10.3% in 1998. The dollar
increase is attributable to an increase in engineering personnel and
depreciation expense related to development and test equipment. Engineering
personnel increased from 27 employees at the end of 1997 to 33 employees at the
end of 1998.
Sales and Marketing.
Sales and marketing costs consist primarily of compensation and benefit
related costs for sales and marketing personnel, travel, advertising, trade
shows, collateral, consulting, and other related marketing programs. Sales and
marketing costs increased approximately $2,329,000, or 37.8%, from $6,157,208 in
1997 to $8,486,494 in 1998. As a percentage of net sales, sales and marketing
costs decreased from 30.6% in 1997 to 27.4% in 1998. The dollar increase was
attributable to an increase in sales and marketing personnel, increased travel
and related expenses and increased consulting fees. Sales and marketing
personnel increased from 39 employees at the end of 1997 to 47 employees at the
end of 1998.
General and Administrative.
General and administrative costs include compensation and benefit related
costs of management, finance, human resources, and management information
systems and administrative personnel, professional services, facilities related
expenses and other general corporate expenses. General and administrative
expenses increased approximately $740,000, or 23.8%, from $3,112,132 in 1997 to
$3,852,435 in 1998. As a percentage of
67
74
net sales, general and administrative expenses decreased from 15.5% in 1997 to
12.5% in 1998. The dollar increase was primarily related to an increase in
general and administrative personnel, professional services and depreciation
expense. General and administrative personnel increased from 10 employees at the
end of 1997 to 14 at the end of 1998.
Interest and Other Income.
Interest and other income consist primarily of interest income earned on
Priority Call's short-term investments. Interest and other income decreased
approximately $19,000 from $205,472 in 1997 to $186,570 in 1998 primarily as a
result of a lower average balance of invested cash and securities during 1998.
Interest Expense.
Interest expense primarily relates to expenses related to Priority Call's
equipment financing line and expenses associated with Priority Call's technology
license payable. Interest expense increased approximately $73,000, or 141%, from
$51,555 in 1997 to $124,209 in 1998, primarily as a result of the technology
license payable agreement entered into during 1998 as well as additional
borrowings under the equipment line used to finance capital expenditures.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales.
Net sales increased approximately $9,076,000, or 82.2%, from $11,035,439 in
1996 to $20,111,342 in 1997. The increase is attributable to increased system
sales to both new and existing customers. Priority Call also experienced
increased sales to its international customer base.
Net sales from Priority Call's five largest customers represented
approximately 57.2% and 48.4% of Priority Call's sales in 1997 and 1996,
respectively.
Gross Profit.
Cost of sales increased approximately $4,205,000, or 82.2% from $5,113,163
in 1996 to $9,318,212 in 1997. Gross profit of $5,922,276 in 1996 and
$10,793,130 in 1997, as a percentage of sales, was 53.7% in both 1996 and 1997.
Research and Development.
Research and development expenses increased approximately $780,000, or
47.2%, from $1,654,390 in 1996 to $2,434,261 in 1997. As a percentage of net
sales, research and development expenses decreased from 15.0% in 1996 to 12.1%
in 1997. The dollar increase was primarily attributable to increased engineering
and development personnel
68
75
and increased depreciation expense. Research and development personnel increased
from 18 employees at the end of 1996 to 27 employees at the end of 1997.
Sales and Marketing.
Sales and marketing expenses increased approximately $2,054,000, or 50%,
from $4,102,873 in 1996 to $6,157,208 in 1997. As a percentage of net sales,
sales and marketing expenses decreased from 37.2% in 1996 to 30.6% in 1997. The
dollar increase in sales and marketing expense is primarily attributable to
increased sales and marketing personnel and increased advertising, consulting,
travel, and other marketing programs. Sales and marketing personnel increased
from 32 employees at the end of 1996 to 39 employees at the end of 1997.
General and Administrative.
General and administrative expenses increased approximately $1,391,000, or
80.8%, from $1,721,202 in 1996 to $3,112,132 in 1997. As a percentage of net
sales, general and administrative expenses decreased from 15.6% in 1996 to 15.5%
in 1997. The dollar increase was primarily related to increased compensation and
related expenses, increased legal expenses associated with the protection of
Priority Call's intellectual property rights, increased professional fees
associated with recruiting activities and general overhead costs associated with
Priority Call's growth. General and administrative personnel increased from 9
employees at the end of 1997 to 10 at the end of 1998.
Interest and Other Income.
Interest and other income increased approximately $42,000, or 25.5%, from
$163,640 in 1996 to $205,472 in 1997, primarily as a result of larger invested
cash balances.
Interest Expense.
Interest expense increased $39,000, or 325%, from $12,025 in 1996 to
$51,555 in 1997 as a result of additional borrowings under the Company's
equipment line of credit.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, Priority Call funded its operations through operating profit,
trade credit and equipment financing lines of credit. Priority Call believes
that funds generated from operations, together with cash and cash equivalents on
hand at December 31, 1998 and funds available under its existing credit
facilities, will be sufficient to fund its operations through 1999.
At December 31, 1998, Priority Call's principal source of liquidity
consisted of cash and cash equivalents of approximately $4.7 million, working
capital of approximately $7.0 million and $2.0 million of funds available under
a bank line of credit.
69
76
During 1998, Priority Call's operations consumed operating cash flow of
approximately $505,000, primarily as a result of increased accounts receivable
attributable to the increase in sales volume in the fourth quarter of 1998
compared to the fourth quarter of 1997. The increase in accounts receivable was
partially offset by earnings from operations and increased accounts payable and
accrued expenses.
Priority Call's capital expenditures in 1998 were approximately $1,806,000
primarily related to engineering development and test equipment. Borrowings
under Priority Call's equipment financing line of credit were used to partially
fund these expenditures.
In 1997, Priority Call's operations generated cash flow from operations of
approximately $2,516,000 resulting primarily from a decrease in accounts
receivable and increased accounts payable and accrued expenses. The decrease in
accounts receivable is primarily the result of the timing of a payment from a
large customer of Priority Call in order to take advantage of an early payment
discount. This increase was partially offset by increased inventory levels in
anticipation of Priority Call's growth.
Priority Call's capital expenditures in 1997 were approximately $1,780,000,
primarily relating to engineering development and test equipment, prototypes for
new products, internal telecommunication systems, and furniture and equipment to
support the growth in Priority Call's employee base. Borrowings under Priority
Call's equipment financing line were used to partially fund these expenditures.
During 1996, Priority Call's operations consumed operating cash flow of
approximately $1,962,000, primarily due to losses from operations and increases
in accounts receivable and inventory, which were partially offset by increased
accounts payable and accrued expenses. Inventory levels increased in
anticipation of Priority Call's growth in revenues. The increase in accounts
receivable is attributable to the growth in Priority Call's net sales.
Priority Call's capital expenditures in 1996 were approximately $1,698,000,
primarily relating to leasehold improvements and furniture and fixtures
associated with Priority Call's relocation to its new headquarters, internal
telecommunications and network systems and engineering development and test
equipment. Borrowings under Priority Call's equipment financing line were used
to partially fund these expenditures.
In 1996, Priority Call received net proceeds of approximately $7.0 million
from the issuance of convertible preferred stock and the exercise of convertible
preferred stock warrants.
In April 1999, Priority Call amended its loan and security agreement. Under
the provisions of the modified agreement, Priority Call may borrow up to the
lesser of (1) $3,000,000, or (2) 80% of eligible accounts receivable (working
capital line) and up to $2,000,000 for equipment purchases (equipment line).
Borrowings under the working capital line accrue interest at the bank's prime
rate and borrowings under the equipment line accrue interest at the bank's prime
rate plus 0.5%. The Company is subject to certain financial covenants,
including, but not limited to, maximum debt-to-net worth, minimum tangible net
worth and minimum profitability requirements.
70
77
Priority Call does not have any other significant capital commitments and
believes that available funds and cash generated from operations will be
sufficient to meet Priority Call's working capital requirements for at least the
foreseeable future. Management plans to finance Priority Call's long-term
capital needs with available funds, together with available borrowings and cash
flow from operations. To the extent that such funds are insufficient to finance
Priority Call's activities, Priority Call may have to raise working capital
through the issuance of additional equity or debt securities. However, such
additional financial alternatives may not be available at such times or at
acceptable terms.
YEAR 2000 READINESS DISCLOSURE STATEMENT
Many currently installed computer systems and software products are
designed to accept only two-digit entries in the date code field. As a result,
they may have problems properly recognizing 1/1/00 as January 1, 2000. In less
than a year, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" or "Y2K" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with the Year 2000 issue.
In 1998, Priority Call commenced a program to review the Y2K compliance
status of Priority Call's product offerings and the software and systems used in
the internal business processes. The review of Priority Call's internal business
systems is expected to be completed by the end of the second quarter of 1999.
Suppliers of the components and sub-assemblies that make up Priority Call's
products, as well as service providers, are being contacted as part of Priority
Call's Y2K assessment.
Priority Call has integrated Y2K testing into the development process for
all of its current products. Priority Call believes that its current product
offerings are Y2K compliant. Priority Call has thus far reviewed all of its
current products for Year 2000 compliance. Priority Call found no discrepancies
with Y2K or leap year date processing during its internal testing. Accordingly,
management believes the use or occurrence of dates on or after January 1, 2000
and the occurrence of leap years will not affect the performance of Priority
Call's products with respect to the ability of such products to correctly
create, store, process and output information related to such date data.
Priority Call has completed an inventory of its existing products in the
field and has established revision levels by which each product will be Y2K
compliant. Certain of Priority Call's systems in the field may require both
hardware and software upgrades while certain systems will require only software
upgrades. Priority Call intends to charge for integration and installation of
compliant systems.
Based on the information available to date, management believes that
Priority Call will be able to complete its Y2K compliance review and make
modifications, if necessary, prior to the end of 1999. Priority Call is
prioritizing its efforts to focus on Y2K discrepancies that would significantly
impact operations. Nevertheless, to the extent Priority Call is relying on
vendors or suppliers to notify Priority Call or resolve Y2K issues within their
own products, Priority Call may experience delays in implementing
71
78
such changes. If key systems, or a significant number of systems were to fail as
a result of Y2K problems, Priority Call could incur substantial costs and
disruption of its business, which would potentially have a material adverse
effect on Priority Call's business and results of operations. In addition,
because Priority Call purchases many critical components from single or
sole-source suppliers, failure of any such supplier to adequately address issues
relating to the Y2K problem in its own products or internal systems may have a
material adverse effect on Priority Call's business, financial condition, and
results of operations.
To date, Priority Call has not required a complete and separate budget for
investigating and remedying issues related to Y2K compliance of Priority Call's
own products or the software underlying systems used in its internal operations.
The cost of Priority Call's Y2K initiative has been incorporated into existing
workloads and budgets within the quality, engineering and information technology
departments, and is not expected to be material to Priority Call's results of
operations or financial position. Management will develop a contingency plan in
the third quarter of 1999 based upon the results of its supplier readiness
reviews. To the extent Priority Call has not adequately assessed its Y2K
compliance, additional or significant resources may be spent on investigating
and remedying Y2K issues and the expenditure of such resources may have a
material adverse effect on Priority Call business, financial condition and
results of operation in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Priority Call, in the normal course of business, is subject to the risks
associated with fluctuations in interest rates and changes in foreign currency
exchange rates.
Interest and Market Risk.
Priority Call maintains a portfolio of marketable, primarily fixed income,
available-for-sale securities. Priority Call has not used derivative financial
instruments in its investment portfolio. Priority Call attempts to limit its
exposure to interest rate and credit risk by investing in treasury bills, with
an original maturity of three months or less. These cash equivalents are stated
at cost, plus accrued interest which approximates fair market value.
Priority Call's existing debt obligations are at variable interest rates
and will be affected by changes in market interest rates. Under Priority Call's
line of credit arrangements with a bank, borrowings under the working capital
line bear interest at the bank's base rate and borrowings under the equipment
line bear interest at the bank's base rate plus 0.5%. At December 31, 1998,
approximately $1,520,000 was outstanding under this line.
72
79
Foreign Currency Risk.
To date, Priority Call's exposure to foreign currency fluctuations has been
minimal. All sales transactions are denominated in U.S. Dollars. Letters of
credit are utilized when warranted. Priority Call funds its international
operations from U.S. Dollar bank accounts on an as-needed basis and,
accordingly, does not maintain a significant amount of funds in foreign
currencies. Presently, Priority Call does not hedge foreign currency exposure
for its non-U.S. Dollar denominated operating expenses as such amounts have not
been material in relation to Priority Call's domestic operating expense.
73
80
PRIORITY CALL STOCK OWNERSHIP
The following table sets forth beneficial ownership of Priority Call
capital stock as of April 30, 1999 by (1) each person or entity known to
Priority Call to beneficially own 5% or more of the outstanding shares of each
class of Priority Call's capital stock, (2) each of Priority Call's directors,
(3) Priority Call's Chief Executive Officer and each of the other four most
highly compensated executive officers of Priority Call whose salary and bonus
was greater than $100,000 in 1998 ("Named Executive Officers"), and (4) all
directors and executive officers of Priority Call as a group.
SHARES BENEFICIALLY OWNED (1)
PRIORITY CALL PRIORITY CALL PRIORITY CALL
PRIORITY CALL SERIES A-0 SERIES B-0 SERIES C-0
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
NAME OF ----------------- ----------------- ----------------- -----------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
- ---------------- ------- ------- ------- ------- ------- ------- ------- -------
PRINCIPAL STOCKHOLDERS:
Thomas A. Bredt(2).......... -- -- 234,232 100% 117,635 100% 84,583 40.4%
Menlo Ventures(3)
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025...... -- -- 234,232 100% 117,635 100% 84,583 40.4%
Deepak Kamra(4)............. -- -- -- -- -- -- 125,000 59.6%
Canaan Partners(5)
105 Rowayton Avenue
Rowayton, CT 06853........ -- -- -- -- -- -- 125,000 59.6%
Wendell W. Hughes
164 Granite Street
Leominster, MA 01453...... 130,806 [%] -- -- -- -- -- --
DIRECTORS AND NAMED
EXECUTIVE OFFICERS:
Andrew D. Ory(6)............ 277,951 [%] -- -- -- -- -- --
Robert G. Ory(7)............ 80,055 [%] -- -- -- -- -- --
Andrew R. Dale(8)........... 44,825 [%] -- -- -- -- -- --
Patrick MeLampy(9).......... 38,031 [%] -- -- -- -- -- --
Keith Seidman(10)........... 11,875 [%] -- -- -- -- -- --
Jean Paul Gagnon(11)........ 5,000 -- -- -- -- -- -- --
All executive officers and
directors as a group
(8 persons)............... 457,757 [%] 234,232 100% 117,635 100% 209,583 100%
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and includes voting or investment power with respect to the shares.
(2) Consists of shares held by certain entities related to Menlo Ventures. Mr.
Bredt is a general partner of Menlo Ventures VI, L.P. and Menlo
Entrepreneurs Fund VI, L.P. and, as such, may be deemed to beneficially own
all such shares. Mr. Bredt disclaims beneficial ownership of such shares,
except to the extent of his
74
81
proportionate pecuniary interest therein. The address of Mr. Bredt is c/o
Menlo Ventures, 3000 Sand Hill Road Building 4, Suite 100, Menlo Park, CA
94025.
(3) Consists of shares held by the following entities related to Menlo Ventures
(Series A-0 Convertible Preferred Stock / Series B-0 Convertible Preferred
Stock / Series C-0 Convertible Preferred Stock): Menlo Ventures VI, L.P.
(230,770 / 115,897 / 83,333) and Menlo Entrepreneurs Fund VI, L.P. (3,462 /
1,738/ 1,250).
(4) Consists of shares held by certain entities related to Canaan Partners. Mr.
Kamra is general partner of Canaan Capital Offshore Limited Partnership,
C.V., Canaan Capital Limited Partnership and Canaan S.B.I.C., L.P., and, as
such, may be deemed to beneficially own all such shares. Mr. Kamra
disclaims beneficial ownership of such shares, except to the extent of his
proportionate pecuniary interest therein. The address of Mr. Kamra is c/o
Canaan Ventures, 105 Rowayton Avenue, Rowayton, CT 06853.
(5) Consists of shares held by the following entities related to Canaan
Partners: Canaan Capital Offshore Limited Partnership, C.V. (37,209),
Canaan Capital Limited Partnership (4,458) and Canaan S.B.I.C., L.P.
(83,333).
(6) Includes 21,625 shares issuable pursuant to options exercisable within 60
days after April 30, 1999.
(7) Includes 16,313 shares issuable pursuant to options exercisable within 60
days after April 30, 1999.
(8) Includes 44,825 shares issuable pursuant to options exercisable within 60
days after April 30, 1999.
(9) Includes 34,281 shares issuable pursuant to options exercisable within 60
days after April 30, 1999.
(10) Includes 11,875 shares issuable pursuant to options exercisable within 60
days after April 30, 1999.
(11) Includes 5,000 shares issuable pursuant to options exercisable within 60
days after April 30, 1999.
EFFECT OF THE MERGER ON RIGHTS OF STOCKHOLDERS
The rights of Priority Call stockholders are currently governed by
Massachusetts law and the Priority Call articles of organization and bylaws. The
rights of LHS stockholders are currently, and after the merger the rights of
Priority Call stockholders will be, governed by Delaware law and the LHS
certificate of incorporation and bylaws. The following is a summary of the
material differences between the rights of Priority Call stockholders and LHS
stockholders. The description below is only a summary and is qualified by
reference to Delaware law, Massachusetts law, the LHS certificate of
incorporation and bylaws, and the Priority Call articles of organization and
bylaws. Copies of the LHS certificate of incorporation and the LHS bylaws are
incorporated by reference into this proxy statement-prospectus and will be sent
to Priority Call stockholders upon request. See "WHERE YOU CAN FIND MORE
INFORMATION" on
75
82
page 86. A copy of the terms, rights, preferences and privileges relating to the
Priority Call preferred stock is attached as Appendix E.
- ----------------------------------------------------------------------------------
PRIORITY CALL STOCKHOLDER RIGHTS LHS STOCKHOLDER RIGHTS
-------------------------------- ----------------------
- ----------------------------------------------------------------------------------
Corporate The rights of Priority Call The rights of LHS stockholders
Governance stockholders are governed by are currently governed by
Massachusetts law and Priority Delaware law and the LHS
Call's articles of organization certificate of incorporation
and bylaws. and bylaws.
Upon completion of the merger, Upon completion of the merger,
the rights of Priority Call the rights of LHS stockholders
stockholders who become LHS will continue to be governed
stockholders in the merger will by Delaware law and the LHS
be governed by Delaware law and certificate of incorporation
the LHS certificate of and bylaws.
incorporation and bylaws.
- ----------------------------------------------------------------------------------
Authorized The authorized capital stock of The authorized capital of LHS
Capital Stock Priority Call consists of is set forth under
4,000,000 shares of common stock "DESCRIPTION OF LHS CAPITAL
and 1,500,000 shares of STOCK" on page 85.
preferred stock designated as
follows:
Series No.
Shares
Series A Convertible
Preferred Stock 234,463
Series A-1 Convertible
Preferred Stock 234,463
Series A-0 Convertible
Preferred Stock 234,232
Series B Convertible
Preferred Stock 117,751
Series B-1 Convertible
Preferred Stock 117,751
Series B-0 Convertible
Preferred Stock 117,635
Series C-1 Convertible
Preferred Stock 209,583
Series C-0 Convertible
Preferred Stock 209,583
- ----------------------------------------------------------------------------------
Preferences Priority Call preferred stock Holders of LHS preferred
entitles its holders to the stock, when and if issued, are
following preferences over the entitled to preferences over
holders of Priority Call common LHS common stock, if any, as
stock: set forth in the resolutions
of LHS board of directors
- Preferential right to authorizing the issuance of a
distributions upon the series of preferred stock and
liquidation, dissolution or the related certificate of
winding up of Priority Call. designations. As of the date
hereof, there are no shares of
- Preferential right to LHS preferred stock
dividends and other outstanding.
distributions.
- The right to veto any
76
83
- ----------------------------------------------------------------------------------
PRIORITY CALL STOCKHOLDER RIGHTS LHS STOCKHOLDER RIGHTS
-------------------------------- ----------------------
- ----------------------------------------------------------------------------------
amendments to the Priority
Call articles of organization
or bylaws which adversely
affect their rights, the
authorization of a senior
series or class of capital
stock, the disposal of
Priority Call's assets or any
transaction resulting in a
change of control of Priority
Call.
- Right of first refusal to
purchase Priority Call
securities issued in the
future.
- Anti-dilution rights with
respect to Priority Call
securities issued in the
future.
In the merger, each share of
Priority Call preferred stock
will be converted into the right
to receive LHS common stock. As
a result, holders of Priority
Call preferred stock will not
retain any of their preferential
rights following the merger.
- ----------------------------------------------------------------------------------
Number of Priority Call's bylaws provide LHS's bylaws provide that the
Directors that the number of directors number of directors will be as
will be as determined by the determined by the LHS board
Priority Call board or the but shall not be fewer than
Priority Call stockholders but seven and will be divided into
shall not be fewer than three or three classes as equal as
greater than seven. The Priority possible in number with each
Call board currently consists of class serving three year
5 directors. terms. The LHS board currently
consists of seven directors.
- ----------------------------------------------------------------------------------
Election of Priority Call's articles of The LHS bylaws provide that
Directors organization provides that each certain LHS stockholders are
of the following groups, voting entitled to designate three
as a separate class, is entitled directors for nomination to
to elect one director: LHS's board of directors.
- Certain holders of Priority
Call Series A-0, Series A-1,
Series B-0 and Series B-1
Convertible Preferred Stock
- Certain holders of Priority
Call Series C-0 and Series C-1
Convertible Preferred Stock
- Holders of Series A and Series
B Convertible Preferred Stock
77
84
- ----------------------------------------------------------------------------------
PRIORITY CALL STOCKHOLDER RIGHTS LHS STOCKHOLDER RIGHTS
-------------------------------- ----------------------
- ----------------------------------------------------------------------------------
Removal of Massachusetts law and the The LHS certificate of
Directors Priority Call bylaws provide incorporation provides that
that holders of a majority of holders of 80% of the shares
the shares of Priority Call of LHS capital stock entitled
capital stock entitled to vote to vote in an election of
in an election of directors may directors may remove a
remove a director with or director with or without
without cause, and a majority of cause.
the board of directors may
remove a director for cause.
However, a director may only be
removed for cause after
receiving notice and an
opportunity to be heard by the
group proposing to remove him or
her.
- ----------------------------------------------------------------------------------
Quorum The Priority Call bylaws provide The LHS bylaws provide that
that the presence at a meeting, the presence at a meeting, in
in person or by proxy, of the person or by proxy, of the
holders of at least a majority holders of at least a majority
of the shares of each class of of the shares of stock
stock entitled to vote as a entitled to vote at the
separate class at the meeting is meeting is a quorum.
a quorum.
- ----------------------------------------------------------------------------------
Special The Priority Call bylaws provide The LHS bylaws provide that
Meetings of that the President of Priority the board of directors, the
Stockholders Call, the Priority Call board or President or the Secretary of
Priority Call stockholders who LHS may call a special meeting
hold at least 10% of the shares of the LHS stockholders.
of capital stock entitled to
vote at the meeting may call a
special meeting of the Priority
Call stockholders.
- ----------------------------------------------------------------------------------
Stockholder Under Massachusetts law and the Under Delaware law and the LHS
Action by Priority Call bylaws, Priority bylaws, LHS stockholders may
Written Consent Call stockholders may act only act by written consent if LHS
by unanimous written consent. stockholders having the number
of votes required to take such
action at a meeting at which
all stockholders are present
consent to such action.
- ----------------------------------------------------------------------------------
Amendment of Under Massachusetts law, the Under Delaware law, the LHS
Charter and Priority Call articles of charter may be amended by the
Bylaws organization may be amended by affirmative vote of a majority
the affirmative vote of of the outstanding stock
two-thirds of the shares of each entitled to vote thereon at a
class of stock entitled to vote stockholders meeting and a
thereon. However, the majority of the outstanding
affirmative vote of only a stock of each class entitled
majority of the shares of each to vote thereon as a class.
class of stock entitled to vote Generally, the LHS bylaws may
thereon is required to approve be amended by the affirmative
the
78
85
- ----------------------------------------------------------------------------------
PRIORITY CALL STOCKHOLDER RIGHTS LHS STOCKHOLDER RIGHTS
-------------------------------- ----------------------
- ----------------------------------------------------------------------------------
following: vote a majority of votes
present in person or by proxy
- change in par value; and entitled to vote at a
stockholders meeting. A
- change in authorized number of majority of the LHS board may
shares; or also adopt, amend or repeal
the bylaws of LHS.
- change in corporate name.
Under the Priority Call articles
of organization, any amendment
that alters or adversely affects
any series of Priority Call
preferred stock requires the
affirmative vote of a majority
of the shares of the effected
series.
The Priority Call bylaws may be
amended by vote of the Priority
Call stockholders at a meeting
called for such purpose or a
majority of the Priority Call
board (so long as the provision
does not require stockholder
approval under Massachusetts law
or the Priority Call articles of
organization or bylaws).
- ----------------------------------------------------------------------------------
Removal of Under Massachusetts law and the Under Delaware law and the LHS
Officers Priority Call bylaws, a majority bylaws, a majority of the LHS
of the Priority Call board may board may remove any officer
remove any officer with or with or without cause.
without cause. However, an
officer may only be removed for
cause after notice and an
opportunity to be heard by the
board.
- ----------------------------------------------------------------------------------
Dividends, Under Massachusetts law, a Under Delaware law, a
Repurchases and corporation may pay dividends or corporation may pay dividends
Liquidation repurchase stock so long as the out of surplus or net profits
Preferences corporation is not insolvent, for the current or preceding
the dividend or repurchase does fiscal year, provided that the
not render the corporation capital of the corporation is
insolvent and the dividend or not less than the aggregate
repurchase does not violate the liquidation preference of the
corporation's articles of corporation's outstanding
organization. preferred stock. In addition,
under Delaware law, a
corporation may generally
redeem or repurchase shares of
its stock unless the capital
of the corporation is impaired
or would be impaired by such
redemption or repurchase.
- ----------------------------------------------------------------------------------
Exculpation of The Priority Call articles of The LHS certificate of
Directors organization provide that no incorporation provides that no
79
86
- ----------------------------------------------------------------------------------
PRIORITY CALL STOCKHOLDER RIGHTS LHS STOCKHOLDER RIGHTS
-------------------------------- ----------------------
- ----------------------------------------------------------------------------------
director shall be personally director shall be personally
liable to Priority Call or its liable to LHS or its
stockholders for monetary stockholders for monetary
damages for breach of fiduciary damages for breach of
duty except for acts or fiduciary duty except for
omissions which
- any breach of the director's
- were in violation of the duty of loyalty to LHS or its
director's duty of loyalty; stockholders,
- were not in good faith or - acts or omissions not in
involved intentional good faith or which involve
misconduct or knowing intentional misconduct or a
violation of the law; knowing violation of law,
- involved unauthorized loans to - unlawful payment of
insiders or distributions in dividends or unlawful
violation of Priority Call's repurchases or redemptions
articles of organization or of stock, or
Massachusetts law; or
- any transactions from which
- involved an improper personal the director derived an
benefit to the director. improper personal benefit.
- ----------------------------------------------------------------------------------
Indemnification Massachusetts law permits, and Delaware law permits, and the
of Directors, the Priority Call articles of LHS certificate of
Officers and organization provide for, incorporation and bylaws
Others indemnification of directors, provide for, indemnification
officers, employees and certain of directors, officers,
others for expenses incurred by employees and certain others
reason of their position with for expenses incurred by
the corporation, if he or she reason of their position with
has acted in good faith with a the corporation, if he or she
reasonable belief that his or has acted in good faith with a
her conduct was in the best reasonable belief that his or
interest of the corporation. her conduct was in the best
interest of the corporation.
Such determination must be
made by:
- a majority of disinterested
directors,
- a committee of disinterested
directors designated by the
disinterested directors,
- at the disinterested
directors' direction or if
there are no disinterested
directors, independent legal
counsel, or
- the stockholders holding a
majority of the shares of
stock entitled to vote at a
meeting called for such
purpose.
However, indemnification is
not available in actions
brought by or in the right of
the corporation,
80
87
- ----------------------------------------------------------------------------------
PRIORITY CALL STOCKHOLDER RIGHTS LHS STOCKHOLDER RIGHTS
-------------------------------- ----------------------
- ----------------------------------------------------------------------------------
unless approved by the
Delaware Court of Chancery.
- ----------------------------------------------------------------------------------
Interested Massachusetts law contains no Under Delaware law,
Director provision governing interested transactions between a
Transactions director transactions. However, corporation and any of its
the Priority Call bylaws provide directors or officers, or
that, in the absence of fraud, entities in which any of its
no transaction shall be void directors or officers have an
solely because it is interest, are not voidable
solely because the director or
- with one or more of Priority officer participated in the
Call's officers, directors or authorization of the
stockholders, or transaction so long as
- with an entity in which an - the director's or officer's
officer, director or interest in the transaction is
stockholder of Priority Call disclosed and the
has an interest, transaction is approved by a
majority of the
provided that the nature of the disinterested directors,
interest is disclosed to the
Priority Call board. - the director's or officer's
interest in the transaction is
The Priority Call bylaws provide disclosed and the
that interested directors cannot transaction is approved by
be counted in determining the stockholders holding a
presence of a quorum and cannot majority of the shares of
vote at the meeting of the stock having a right to vote
Priority Call board that on the transaction, or
authorizes the transaction.
- the transaction is fair to
the corporation at the time it
is approved by the directors
or stockholders.
Interested directors may be
counted in determining the
presence of a quorum at the
meeting held to authorize the
transaction.
- ----------------------------------------------------------------------------------
Fundamental Under Massachusetts law, Under Delaware law, approval
Transactions approval of mergers and of mergers and consolidations,
consolidations and sales, and sales, leases or exchanges
mortgages, leases or exchanges of all or substantially all of
of all or substantially all of a a corporation's property and
corporation's property requires assets requires the approval
the affirmative vote of of the directors and holders
two-thirds of the shares of each of a majority of the
class of stock outstanding and outstanding stock entitled to
entitled to vote on the vote on the transaction. A
transaction. A corporation's corporation's certificate of
articles of organization may incorporation may require a
provide for a vote of a lesser greater vote.
proportion, but not less than a
majority of each such class. In addition, under Delaware
law, such transactions do not
In addition, Massachusetts law require the approval of the
provides that, unless otherwise surviving corporation's
stockholders if:
- each share of the surviving
81
88
- ----------------------------------------------------------------------------------
PRIORITY CALL STOCKHOLDER RIGHTS LHS STOCKHOLDER RIGHTS
-------------------------------- ----------------------
- ----------------------------------------------------------------------------------
required by the articles of corporation's stock
organization, a merger may be outstanding prior to the
approved solely by vote of a merger remains outstanding
surviving corporation's in identical form after the
directors if: merger;
- there is no amendment to the - there is no amendment to the
surviving corporation's surviving corporation's
articles of organization; charter, and
- the shares of any class of - the consideration received
stock of the corporation issued by stockholders of the non-
in the merger do not exceed surviving corporation is not
fifteen percent (15%) of the common stock (or securities
shares of the same class convertible into common
outstanding immediately prior stock) or the aggregate
to the merger; and number of shares of common
stock (or securities
- any stock issued in the merger convertible into common
has been authorized in stock) does not exceed 20%
accordance with Massachusetts of the shares of common
law. stock outstanding prior to
the merger.
The Priority Call articles of
organization provide that,
subject to certain exceptions, a
liquidation, dissolution,
recapitalization,
reorganization, consolidation,
merger or sale of substantially
all of the assets requires the
affirmative vote of a majority
of the preferred stock, voting
separately as a class.
- ----------------------------------------------------------------------------------
Certain Chapter 110F of the Section 203 of the Delaware
Business Massachusetts General Laws General Corporation Law
Combinations provides that, if a person provides that, if a person
acquires 5% or more of the stock acquires 15% or more of the
of a Massachusetts corporation stock of a Delaware
without the prior approval of corporation without the prior
the board of directors of that approval of the board of
corporation, thereby becoming an directors of that corporation,
"interested stockholder," that thereby becoming an
person may not engage in certain "interested stockholder," that
transactions with the person may not engage in
corporation for a period of two certain transactions with the
years, unless one of the corporation for a period of
following two exceptions three years, unless one of the
applies: following three exceptions
applies:
- the person became an
interested stockholder and 90% - the board of directors
owner of the voting stock of approved the acquisition of
the corporation in the stock or the transaction
transaction, excluding voting prior to the time that
stock owned by directors who person became an interested
are also officers and certain stockholder,
employee stock plans, or
- the person became an
interested stockholder and 85%
owner of the voting stock of
the
82
89
- ----------------------------------------------------------------------------------
PRIORITY CALL STOCKHOLDER RIGHTS LHS STOCKHOLDER RIGHTS
-------------------------------- ----------------------
- ----------------------------------------------------------------------------------
- the transaction is approved by corporation in the
the board of directors and by transaction, excluding
the affirmative vote of two- voting stock owned by
thirds of the outstanding directors who are also
voting stock which is not officers and certain
owned by the interested employee stock plans, or
stockholder.
- the transaction is approved
The applicability of Chapter by the board of directors and
110F is subject to certain by the affirmative vote of
exceptions, and does not apply two- thirds of the
to corporations with less than outstanding voting stock
200 stockholders or corporations which is not owned by the
that elect not to be governed by interested stockholder.
Chapter 110F. Priority Call has
not so elected but had only A Delaware corporation may
stockholders of record as elect not to be governed by
of , 1999. Thus, so Section 203. LHS has not so
long as Priority Call has less elected.
than 200 stockholders, Chapter
110F will not apply.
- ----------------------------------------------------------------------------------
Control Share Chapter 110E of the Delaware has no control share
Acquisition Massachusetts General Laws acquisition statute.
Statute provides that a person who
acquires in excess of one-fifth,
one-third or one-half of the
voting stock of a corporation, a
"control share acquisition",
must obtain approval of a
majority of the shares entitled
to vote (excluding shares owned
by the person engaging in the
control share acquisition, any
officer of the corporation or
any employee of the corporation
who is also a director of the
corporation) in order to vote
the shares acquired in excess of
the threshold.
A Massachusetts corporation may
elect not to be governed by
Chapter 110E. Priority Call has
not so elected.
- ----------------------------------------------------------------------------------
Appraisal A discussion of Massachusetts Under Delaware law, the rights
Rights appraisal rights is set forth of dissenting stockholders to
under "DESCRIPTION OF THE obtain the fair value for
TRANSACTION -- RIGHTS OF their shares (so- called
DISSENTING STOCKHOLDERS" on page "appraisal rights") may be
70. available in connection with a
statutory merger or
consolidation in certain
specific situations. Appraisal
rights are not available to a
corporation's stockholders
83
90
- ----------------------------------------------------------------------------------
PRIORITY CALL STOCKHOLDER RIGHTS LHS STOCKHOLDER RIGHTS
-------------------------------- ----------------------
- ----------------------------------------------------------------------------------
under Delaware law when the
corporation is to be the
surviving corporation and no
vote of its stockholders is
required to approve the
merger.
In addition, unless otherwise
provided in the certificate of
incorporation, no appraisal
rights are available under
Delaware law to holders of
shares of any class of stock
which is either:
- listed on a national
securities exchange or
designated as a national
market system security on an
interdealer quotation system
by the NASD, or
- held of record by more than
2,000 stockholders,
unless such stockholders are
required by the terms of the
merger to accept anything
other than (1) shares of stock
of the surviving corporation,
(2) shares of stock of another
corporation which, as of the
effective date of the merger
or consolidation, are of the
kind described above, (3) cash
instead of fractional shares
of such stock; or (4) any
combination of the
consideration set forth in (1)
through (3).
Appraisal rights are not
available under Delaware law
in the event of the sale of
all or substantially all of
the corporation's assets or
the adoption of an amendment
to its certificate of
incorporation, unless such
rights are granted in the
corporation's certificate of
incorporation. The LHS
certificate of incorporation
does not grant such rights.
84
91
DESCRIPTION OF LHS CAPITAL STOCK
LHS is authorized to issue 200,000,000 shares of LHS common stock, of which
52,973,318 shares were issued and outstanding as of March 31, 1999. LHS is also
authorized to issue 225,000 shares of LHS preferred stock, par value $0.01 per
share, none of which is issued and outstanding.
Holders of LHS common stock are entitled to receive such dividends as may
be declared by the board of directors out of funds legally available therefore.
For a further description of LHS capital stock, see "EFFECT OF THE MERGER
ON RIGHTS OF STOCKHOLDERS" on page 75.
OTHER MATTERS
As of the date of this proxy statement-prospectus, Priority Call's board of
directors knows of no matters that will be presented for consideration at the
special meeting other than as described in this proxy statement-prospectus.
However, if any other matters properly come before the special meeting or any
adjournment or postponement of the special meeting and are voted upon, the
enclosed proxy will be deemed to confer discretionary authority to the
individuals named as proxies to vote the shares represented by such proxy as to
any such matters.
EXPERTS
The consolidated financial statements and schedule of LHS Group Inc.
incorporated by reference in LHS's Annual Report (Form 10-K) for the year ended
December 31, 1998, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon incorporated by reference therein and
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Priority Call Management, Inc. and
subsidiary as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998 included in this registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein, in reliance upon the authority of said firm as experts in giving said
reports.
OPINIONS
The legality of the shares of LHS common stock to be issued in the merger
will be passed upon by Scott A. Wharton, General Counsel and Corporate Secretary
of LHS. Scott A. Wharton is an officer of, and receives compensation from, LHS.
Certain tax matters related to the merger will be passed upon by Alston & Bird
LLP, counsel to LHS.
85
92
Certain tax consequences of the transaction have been passed upon by Alston
& Bird LLP, Atlanta, Georgia.
WHERE YOU CAN FIND MORE INFORMATION
LHS files annual, quarterly and current reports, proxy and information
statements, and other information with the SEC under the Securities Exchange
Act. You may read and copy this information at the Public Reference Room at the
SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information about issuers that file
electronically with the SEC. The address of that site is http://www.sec.gov. You
can also inspect reports, proxy and information statements, and other
information about LHS at the offices of The Nasdaq Stock Market at Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C.
LHS filed a registration statement with the SEC under the Securities Act,
relating to the LHS common stock offered to the Priority Call stockholders. This
proxy statement-prospectus is one part of that registration statement. The
registration statement contains additional information about LHS and the LHS
common stock. The SEC allows LHS to omit certain information included in the
registration statement from this proxy statement-prospectus. The registration
statement may be inspected and copied at the SEC's Public Reference Room
described above.
This proxy statement-prospectus incorporates important business and
financial information about LHS that is not included in or delivered with this
proxy statement-prospectus. The following documents filed by LHS with the SEC
are incorporated by reference in this proxy statement-prospectus (SEC File No.
000-22409):
(1) LHS's Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
(2) LHS's Quarterly Report on Form 10-Q/A filed on January 29, 1999,
amending LHS's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998;
(3) LHS's Current Reports on Form 8-K dated March 1 and April 8, 1999;
(4) The description of the current management and board of directors of LHS
contained in the proxy statement of LHS filed pursuant to Section 14(a)
of the Securities Exchange Act for LHS's Annual Meeting of Stockholders
to be held on June 7, 1999; and
(5) The description of the LHS common stock contained in LHS's registration
statement under Section 12(g) of the Securities Exchange Act and any
amendment or report filed for the purpose of updating such description.
86
93
LHS also incorporates by reference additional documents filed by LHS
pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act
after the date of this proxy statement-prospectus and prior to final adjournment
of the special meeting. Any statement contained in this proxy
statement-prospectus or in a document incorporated by reference in this proxy
statement-prospectus shall be deemed to be modified or superseded to the extent
that a statement contained in this document or in any subsequently filed
document which also is incorporated by reference modifies or supersedes such
statement.
You may obtain copies of the information incorporated by reference in this
proxy statement-prospectus upon written or oral request.
All information contained in this proxy statement-prospectus or
incorporated herein by reference with respect to LHS was supplied by LHS, and
all information contained in this proxy statement-prospectus with respect to
Priority Call was supplied by Priority Call.
PLEASE NOTE
We have not authorized anyone to provide you with any information other
than the information included in this document and the documents we refer you
to. If someone provides you with other information, please do not rely on it as
being authorized by Priority Call or LHS.
YOU CAN OBTAIN FREE COPIES OF THIS INFORMATION BY WRITING OR CALLING:
Scott A. Wharton
Senior Vice President and General Counsel
LHS GROUP INC.
Six Concourse Parkway
Suite 2700
Atlanta, Georgia 30328
Telephone: (770) 280-3000
IN ORDER TO OBTAIN TIMELY DELIVERY OF THE DOCUMENTS, YOU MUST REQUEST THE
INFORMATION BY , 1999.
87
94
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
LHS GROUP INC.,
PATRIOT ACQUISITION CORP.,
AND
PRIORITY CALL MANAGEMENT, INC.
DATED AS OF APRIL 20, 1999
95
TABLE OF CONTENTS
PAGE
----
PARTIES.............................................................. A-1
PREAMBLE............................................................. A-1
ARTICLE 1 -- TRANSACTIONS AND TERMS OF MERGER........................ A-1
1.1 Merger...................................................... A-1
1.2 Effective Time.............................................. A-2
1.3 Time and Place of Closing................................... A-2
ARTICLE 2 -- TERMS OF MERGER......................................... A-2
2.1 Charter..................................................... A-2
2.2 Bylaws...................................................... A-2
2.3 Directors and Officers...................................... A-2
2.4 Effect of Stockholder Approval.............................. A-2
ARTICLE 3 -- MANNER OF CONVERTING SHARES............................. A-3
3.1 Conversion of Shares........................................ A-3
3.2 Anti-Dilution Provisions.................................... A-4
3.3 Shares Held by PCM or LHS................................... A-4
3.4 Dissenting Stockholders..................................... A-4
3.5 Fractional Shares........................................... A-4
3.6 Conversion of Stock Options; Restricted Stock............... A-5
ARTICLE 4 -- EXCHANGE OF SHARES...................................... A-6
4.1 Exchange Procedures......................................... A-6
4.2 Rights of Former PCM Stockholders........................... A-7
4.3 Escrow Agreement............................................ A-8
ARTICLE 5 -- REPRESENTATIONS AND WARRANTIES OF PCM................... A-8
5.1 Organization, Standing, and Power........................... A-8
5.2 Authority of PCM; No Breach By Agreement.................... A-8
5.3 Capital Stock............................................... A-9
5.4 PCM Subsidiaries............................................ A-10
5.5 Financial Statements........................................ A-11
5.6 Absence of Undisclosed Liabilities.......................... A-12
5.7 Absence of Certain Changes or Events........................ A-12
5.8 Tax Matters................................................. A-13
5.9 Assets...................................................... A-14
5.10 Intellectual Property....................................... A-15
5.11 Environmental Matters....................................... A-17
5.12 Compliance with Laws........................................ A-17
5.13 Labor Relations............................................. A-18
5.14 Employee Benefit Plans...................................... A-18
i
96
PAGE
----
5.15 Material Contracts.......................................... A-19
5.16 Legal Proceedings........................................... A-20
5.17 Statements True and Correct................................. A-21
5.18 Accounting, Tax and Regulatory Matters...................... A-21
5.19 State Takeover Laws......................................... A-21
5.20 Charter Provisions.......................................... A-21
5.21 Stockholders' Voting Agreements............................. A-21
5.22 Opinion of Financial Advisor................................ A-22
5.23 Board Recommendation........................................ A-22
ARTICLE 6 -- REPRESENTATIONS AND WARRANTIES OF LHS................... A-22
6.1 Organization, Standing, and Power........................... A-22
6.2 Authority; No Breach By Agreement........................... A-22
6.3 Capital Stock............................................... A-23
6.4 SEC Filings; Financial Statements........................... A-24
6.5 Absence of Undisclosed Liabilities.......................... A-24
6.6 Absence of Certain Changes or Events........................ A-24
6.7 Statements True and Correct................................. A-24
6.8 Authority of Sub............................................ A-25
6.9 Accounting, Tax and Regulatory Matters...................... A-25
6.10 Insider Trading Policy...................................... A-26
ARTICLE 7 -- CONDUCT OF BUSINESS PENDING CONSUMMATION................ A-26
7.1 Affirmative Covenants of PCM................................ A-26
7.2 Negative Covenants of PCM................................... A-26
7.3 Covenants of LHS............................................ A-28
7.4 Adverse Changes in Condition................................ A-29
7.5 Reports..................................................... A-29
7.6 Rule 144.................................................... A-30
ARTICLE 8 -- ADDITIONAL AGREEMENTS................................... A-30
8.1 Registration Statement; Proxy Statement; Stockholder A-30
Approval....................................................
8.2 Exchange Listing............................................ A-30
8.3 Applications; Antitrust Notification........................ A-31
8.4 Filings with State Offices.................................. A-31
8.5 Agreement as to Efforts to Consummate....................... A-31
8.6 Investigation and Confidentiality........................... A-32
8.7 Press Releases.............................................. A-32
8.8 No Solicitation by PCM...................................... A-32
8.9 Accounting and Tax Treatment................................ A-34
8.10 Agreements of Affiliates.................................... A-34
8.11 Employee Benefits and Contracts............................. A-35
8.12 Indemnification............................................. A-35
8.13 Technology Conversions...................................... A-37
ii
97
PAGE
----
ARTICLE 9 -- CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE....... A-37
9.1 Conditions to Obligations of Each Party..................... A-37
9.2 Conditions to Obligations of LHS............................ A-38
9.3 Conditions to Obligations of PCM............................ A-40
ARTICLE 10 -- INDEMNIFICATION........................................ A-41
10.1 Agreement of Indemnitors to Indemnify....................... A-41
10.2 Procedures for Indemnification.............................. A-42
10.3 Third Party Claims.......................................... A-42
10.4 Exclusive Remedy............................................ A-44
10.5 Survival.................................................... A-44
10.6 Time Limitations............................................ A-44
10.7 Limitations as to Amount, Liabilities, Recourse, Etc........ A-45
10.8 Tax Effect and Insurance.................................... A-45
10.9 Escrow...................................................... A-46
10.10 Subrogation................................................. A-46
10.11 Appointment of Indemnitor Representative.................... A-46
10.12 Arbitration................................................. A-47
10.13 Litigation Fees and Expenses................................ A-47
10.14 Termination of Agreement.................................... A-47
ARTICLE 11 -- TERMINATION............................................ A-48
11.1 Termination................................................. A-48
11.2 Effect of Termination....................................... A-49
ARTICLE 12 -- MISCELLANEOUS.......................................... A-49
12.1 Definitions................................................. A-49
12.2 Expenses, Break-Up Fee...................................... A-59
12.3 Brokers and Finders......................................... A-59
12.4 Entire Agreement............................................ A-60
12.5 Amendments.................................................. A-60
12.6 Waivers..................................................... A-60
12.7 Assignment.................................................. A-60
12.8 Notices..................................................... A-61
12.9 Governing Law............................................... A-61
12.10 Counterparts................................................ A-61
12.11 Captions; Articles and Sections............................. A-62
12.12 Interpretations............................................. A-62
12.13 Enforcement of Agreement.................................... A-62
12.14 Severability................................................ A-62
SIGNATURES........................................................... A-63
iii
98
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of April 20, 1999, by and among LHS GROUP INC. ("LHS"), a Delaware
corporation; PATRIOT ACQUISITION CORP. ("Sub"), a Massachusetts corporation; and
PRIORITY CALL MANAGEMENT, INC. ("PCM"), a Massachusetts corporation.
PREAMBLE
The respective Boards of Directors of PCM, Sub and LHS are of the opinion
that the transactions described herein are in the best interests of the parties
to this Agreement and their respective stockholders. This Agreement provides for
the acquisition of PCM by LHS pursuant to the merger of Sub with and into PCM.
At the effective time of such merger, the outstanding shares of the capital
stock of PCM shall be converted into the right to receive shares of the common
stock of LHS (except as provided herein). As a result, stockholders of PCM shall
become stockholders of LHS and PCM shall continue to conduct its business and
operations as a wholly owned subsidiary of LHS. The transactions described in
this Agreement are subject to the approvals of the stockholders of PCM,
expiration of the required waiting period under the HSR Act, and the
satisfaction of certain other conditions described in this Agreement. It is the
intention of the parties to this Agreement that the Merger for federal income
tax purposes shall qualify as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code and for accounting purposes shall qualify
for treatment as a pooling of interests under United States generally accepted
accounting principles.
Certain terms used in this Agreement are defined in Section 12.1 of this
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants, and agreements set forth herein, the parties agree
as follows:
ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER
1.1 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time, Sub shall be merged with and into PCM in accordance with the
provisions of Section 78 of the Massachusetts Business Corporation Law ("MBCL")
and with the effect provided in Sections 80 and 81 of the MBCL (the "Merger").
PCM shall be the Surviving Corporation resulting from the Merger and shall
become a wholly-owned Subsidiary of LHS and shall continue to be governed by the
Laws of the Commonwealth of Massachusetts. The Merger shall be consummated
pursuant to the terms of this Agreement, which has been approved and adopted by
the respective Boards of Directors of PCM, Sub and LHS and by LHS, as the sole
stockholder of Sub.
A-1
99
1.2 Effective Time. The Merger shall become effective at such time as the
articles of merger are duly filed with the Secretary of State of the
Commonwealth of Massachusetts or at such later time as is specified in the
articles of merger (the "Effective Time").
1.3 Time and Place of Closing. The closing of the Merger (the "Closing")
shall take place (i) at the offices of Alston & Bird LLP in Atlanta, Georgia, as
soon as practicable, but in any event within three business days after the day
on which the last to be fulfilled or waived of the conditions set forth in
Article 9 (other than those conditions that by their nature are to be fulfilled
at the Closing, but subject to the fulfillment or waiver of such conditions)
shall be fulfilled or waived in accordance with this Agreement, or (ii) at such
other place and time or on such other date as PCM and LHS may agree in writing.
At the conclusion of the Closing, the parties hereto will cause the articles of
merger to be filed with the Secretary of State of the Commonwealth of
Massachusetts and make all other filings or recordings required by Law in
connection with the Merger.
ARTICLE 2
TERMS OF MERGER
2.1 Charter. The Articles of Organization of Sub in effect immediately
prior to the Effective Time shall be the Articles of Organization of the
Surviving Corporation until duly amended or repealed.
2.2 Bylaws. The Bylaws of Sub in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation until duly
amended or repealed.
2.3 Directors and Officers. The directors of Sub in office immediately
prior to the Effective Time, together with such additional persons as may
thereafter be elected, shall serve as the directors of the Surviving Corporation
from and after the Effective Time in accordance with the Bylaws of the Surviving
Corporation. The officers of PCM in office immediately prior to the Effective
Time, together with such additional persons as may thereafter be elected, shall
serve as the officers of the Surviving Corporation from and after the Effective
Time in accordance with the Bylaws of the Surviving Corporation.
2.4 Effect of Stockholder Approval. The adoption of this Agreement by the
Stockholders shall constitute ratification of this Agreement, the appointment of
the Indemnitor Representative in accordance with Section 10.11 and authorization
for the Indemnitor Representative to execute and deliver the Escrow Agreement on
behalf of the Stockholders. In addition, upon such adoption and upon execution
and delivery of the Escrow Agreement by the Indemnitor Representative, the terms
of the Escrow Agreement shall be legal and binding on each Stockholder.
A-2
100
ARTICLE 3
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of LHS, PCM, Sub or the stockholders of any of the foregoing:
(a) Each share of capital stock of LHS issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding
from and after the Effective Time.
(b) Each share of Sub Common Stock issued and outstanding immediately
prior to the Effective Time shall cease to be outstanding and shall be
converted into one share of PCM Common Stock.
(c) Each share of PCM Common Stock, excluding shares held by any PCM
Entity or any LHS Entity and excluding shares held by stockholders who
perfect their statutory dissenters' rights as provided in Section 3.4,
issued and outstanding immediately prior to the Effective Time shall cease
to be outstanding and shall be converted into and exchanged for the right
to receive (i) 2.23649 of a share of LHS Common Stock (the "Common Stock
Base Exchange Ratio") and (ii) (subject to the provisions of Section 4.3)
.11771 of a share of LHS Common Stock (the "Common Stock Escrow Exchange
Ratio" and together with the Common Stock Base Exchange Ratio, the "Common
Stock Exchange Ratios").
(d) Each share of PCM Series A Preferred Stock, excluding shares held
by any PCM Entity or any LHS Entity and excluding shares held by
stockholders who perfect their statutory dissenters' rights as provided in
Section 3.4, issued and outstanding immediately prior to the Effective Time
shall cease to be outstanding and shall be converted into and exchanged for
the right to receive (i) 2.23649 of a share of LHS Common Stock (the
"Series A Preferred Stock Base Exchange Ratio") and (ii) (subject to the
provisions of Section 4.3) .11771 of a share of LHS Common Stock (the
"Series A Preferred Stock Escrow Exchange Ratio" and together with the
Series A Preferred Stock Base Exchange Ratio, the "Series A Preferred Stock
Exchange Ratios").
(e) Each share of PCM Series B Preferred Stock, excluding shares held
by any PCM Entity or any LHS Entity and excluding shares held by
stockholders who perfect their statutory dissenters' rights as provided in
Section 3.4, issued and outstanding immediately prior to the Effective Time
shall cease to be outstanding and shall be converted into and exchanged for
the right to receive (i) 2.23649 of a share of LHS Common Stock (the
"Series B Preferred Stock Base Exchange Ratio") and (ii) (subject to the
provisions of Section 4.3) .11771 of a share of LHS Common Stock (the
"Series B Preferred Stock Escrow Exchange Ratio" and together with the
Series B Preferred Stock Base Exchange Ratio, the "Series B Preferred Stock
Exchange Ratios").
A-3
101
(f) Each share of PCM Series C Preferred Stock, excluding shares held
by any PCM Entity or any LHS Entity and excluding shares held by
stockholders who perfect their statutory dissenters' rights as provided in
Section 3.4, issued and outstanding immediately prior to the Effective Time
shall cease to be outstanding and shall be converted into and exchanged for
the right to receive (i) 2.23649 of a share of LHS Common Stock (the
"Series C Preferred Stock Base Exchange Ratio") and (ii) (subject to the
provisions of Section 4.3) .11771 of a share of LHS Common Stock (the
"Series C Preferred Stock Escrow Exchange Ratio" and together with the
Series C Preferred Stock Base Exchange Ratio, the "Series C Preferred Stock
Exchange Ratios").
3.2 Anti-Dilution Provisions. In the event LHS changes the number of
shares of LHS Common Stock issued and outstanding prior to the Effective Time as
a result of a stock split, stock dividend, or similar recapitalization with
respect to such stock and the record date therefor (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split or similar
recapitalization for which a record date is not established) shall be prior to
the Effective Time, the Common Stock Exchange Ratios and Preferred Stock
Exchange Ratios shall be equitably adjusted.
3.3 Shares Held by PCM or LHS. Each of the shares of PCM Capital Stock
held by any PCM Entity or by any LHS Entity shall be canceled and retired at the
Effective Time and no consideration shall be issued in exchange therefor.
3.4 Dissenting Stockholders. Any holder of shares of PCM Common Stock or
PCM Preferred Stock who perfects his dissenters' rights in accordance with and
as contemplated by Section 86 of the MBCL shall be entitled to receive the value
of such shares in cash as determined pursuant to such provision of Law;
provided, that no such payment shall be made to any dissenting stockholder
unless and until such dissenting stockholder has complied with the applicable
provisions of the MBCL and surrendered to PCM the certificate or certificates
representing the shares for which payment is being made. In the event that after
the Effective Time a dissenting stockholder of PCM fails to perfect, or
effectively withdraws or loses, his right to appraisal and of payment for his
shares, LHS shall issue and deliver the consideration to which such holder of
shares of PCM Common Stock or PCM Preferred Stock is entitled under this Article
3 (without interest) upon surrender by such holder of the certificate or
certificates representing shares of PCM Common Stock or PCM Preferred Stock held
by him. If and to the extent required by applicable Law, PCM will establish (or
cause to be established) an escrow account with an amount sufficient to satisfy
the maximum aggregate payment that may be required to be paid to dissenting
stockholders. Upon satisfaction of all claims of dissenting stockholders, the
remaining escrowed amount, reduced by payment of the fees and expenses of the
escrow agent, will be returned to the Surviving Corporation.
3.5 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of PCM Capital Stock exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of a share
of LHS Common
A-4
102
Stock (after taking into account all certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of LHS Common Stock multiplied by the market
value of one share of LHS Common Stock at the Effective Time. The market value
of one share of LHS Common Stock at the Effective Time shall be the last sale
price of such common stock on the Nasdaq National Market (as reported by The
Wall Street Journal or, if not reported thereby, any other authoritative source
selected by LHS) on the last trading day preceding the Effective Time. No such
holder will be entitled to dividends, voting rights, or any other rights as a
stockholder in respect of any fractional shares.
3.6 Conversion of Stock Options; Restricted Stock.
(a) At the Effective Time, each option or other rights to PCM Common
Stock pursuant to stock options or stock appreciation rights ("PCM
Options") granted by PCM under the PCM Stock Plan, which are outstanding at
the Effective Time, whether or not exercisable, shall be converted into and
become rights with respect to LHS Common Stock, and LHS shall assume each
PCM Option, in accordance with the terms of the PCM Stock Plan and stock
option agreement by which it is evidenced, except that from and after the
Effective Time, (i) LHS and its Compensation Committee shall be substituted
for PCM and the Committee of PCM's Board of Directors (including, if
applicable, the entire Board of Directors of PCM) administering the PCM
Stock Plan, (ii) each PCM Option assumed by LHS once exercisable may be
exercised solely for shares of LHS Common Stock, (iii) the number of shares
of LHS Common Stock subject to such PCM Option shall be equal to the number
of shares of PCM Common Stock subject to such PCM Option immediately prior
to the Effective Time multiplied by the Common Stock Exchange Ratios, and
(iv) the per share exercise price under each such PCM Option shall be
adjusted by dividing the per share exercise price under each such PCM
Option by the Common Stock Exchange Ratios and rounding up to the nearest
cent. Notwithstanding the provisions of clause (iii) of the preceding
sentence, LHS shall not be obligated to issue any fraction of a share of
LHS Common Stock upon exercise of PCM. In addition, notwithstanding the
provisions of clauses (iii) and (iv) of the first sentence of this Section
3.6(a), each PCM Option which is an "incentive stock option" shall be
adjusted as required by Section 424 of the Internal Revenue Code, and the
regulations promulgated thereunder, so as not to constitute a modification,
extension or renewal of the option, within the meaning of Section 424(h) of
the Internal Revenue Code. Each of PCM and LHS agrees to take all necessary
steps to effectuate the foregoing provisions of this Section 3.6, including
using its reasonable efforts to obtain from each holder of a PCM Option any
Consent or Contract that may be deemed necessary or reasonably requested by
PCM or LHS in order to effect the transactions contemplated by this Section
3.6. Anything in this Agreement to the contrary notwithstanding, LHS shall
have the right, in its sole discretion, not to deliver the consideration
provided in this Section 3.6 to a former holder of a PCM Option who has not
delivered such Consent or Contract.
A-5
103
(b) As soon as practicable after the Effective Time, LHS shall deliver
to the participants in the PCM Stock Plan an appropriate notice setting
forth such participant's rights pursuant thereto and the grants subject to
the PCM Stock Plan shall continue in effect on the same terms and
conditions (subject to the adjustments required by Section 3.6(a) after
giving effect to the Merger), and LHS shall comply with the terms of the
PCM Stock Plan to ensure, to the extent required by, and subject to the
provisions of, the PCM Stock Plan, that PCM Options which qualified as
incentive stock options prior to the Effective Time continue to qualify as
incentive stock options after the Effective Time. At or prior to the
Effective Time, LHS shall take all corporate action necessary to reserve
for issuance sufficient shares of LHS Common Stock for delivery upon
exercise of PCM Options assumed by it in accordance with this Section 3.6.
As soon as practicable after the Effective Time, LHS shall file a
registration statement on Form S-3 or Form S-8, as the case may be (or any
successor or other appropriate forms), with respect to the shares of LHS
Common Stock subject to such options and shall use its reasonable efforts
to maintain the effectiveness of such registration statements (and maintain
the current status of the prospectus or prospectuses contained therein) for
so long as such options remain outstanding.
(c) All contractual restrictions or limitations on transfer with
respect to shares of PCM Common Stock awarded under the PCM Stock Plan or
awarded under any other plan, program, Contract or arrangement of any PCM
Entity, to the extent that such restrictions or limitations shall not have
already lapsed (whether as a result of the Merger or otherwise), and except
as otherwise expressly provided in such plan, program, Contract or
arrangement, shall remain in full force and effect with respect to shares
of LHS Common Stock into which such restricted stock is converted pursuant
to Section 3.1.
ARTICLE 4
EXCHANGE OF SHARES
4.1 Exchange Procedures. Promptly after the Effective Time, LHS and PCM
shall cause the bank or trust company selected by LHS as the exchange agent (the
"Exchange Agent") to mail to each holder of record of a certificate or
certificates which represented shares of PCM Capital Stock immediately prior to
the Effective Time (the "Certificates") appropriate transmittal materials and
instructions (which shall specify that delivery shall be effected, and risk of
loss and title to such Certificates shall pass, only upon proper delivery of
such Certificates to the Exchange Agent). The Certificate or Certificates of PCM
Capital Stock so delivered shall be duly endorsed as the Exchange Agent may
require. In the event of a transfer of ownership of shares of PCM Capital Stock
represented by Certificates that are not registered in the transfer records of
PCM, the consideration provided in Sections 3.1 and 3.5 may be issued to a
transferee if the Certificates representing such shares are delivered to the
Exchange Agent, accompanied by all documents required to evidence such transfer
and by evidence
A-6
104
satisfactory to the Exchange Agent that any applicable stock transfer taxes have
been paid. If any Certificate shall have been lost, stolen, mislaid or
destroyed, upon receipt of (i) an affidavit of that fact from the record holder
of a Certificate claiming such Certificate to be lost, mislaid, stolen or
destroyed, (ii) such bond, security or indemnity as LHS and the Exchange Agent
may reasonably require and (iii) any other documents necessary to evidence and
effect the bona fide exchange thereof, the Exchange Agent shall issue to such
holder the consideration into which the shares represented by such lost, stolen,
mislaid or destroyed Certificate shall have been converted. The Exchange Agent
may establish such other reasonable and customary rules and procedures in
connection with its duties as it may deem appropriate. After the Effective Time,
each holder of shares of PCM Capital Stock (other than shares to be canceled
pursuant to Section 3.3) issued and outstanding at the Effective Time shall
surrender the Certificate or Certificates representing such shares to the
Exchange Agent and shall promptly upon surrender thereof receive in exchange
therefor the consideration provided in Section 3.1, together with all
undelivered dividends or distributions in respect of such shares (without
interest thereon) pursuant to Section 4.2. To the extent required by Section
3.5, each holder of shares of PCM Capital Stock issued and outstanding at the
Effective Time also shall receive, upon surrender of the Certificate or
Certificates, cash in lieu of any fractional share of LHS Common Stock to which
such holder may be otherwise entitled (without interest). LHS shall not be
obligated to deliver the consideration to which any former holder of PCM Capital
Stock is entitled as a result of the Merger until such holder surrenders such
holder's Certificate or Certificates for exchange as provided in this Section
4.1. Any other provision of this Agreement notwithstanding, neither LHS, the
Surviving Corporation nor the Exchange Agent shall be liable to a holder of PCM
Capital Stock for any amounts paid or property delivered in good faith to a
public official pursuant to any applicable abandoned property, escheat or
similar Law. Adoption of this Agreement by the Stockholders of PCM shall
constitute ratification of the appointment of the Exchange Agent.
4.2 Rights of Former PCM Stockholders. At the Effective Time, the stock
transfer books of PCM shall be closed as to holders of PCM Capital Stock
immediately prior to the Effective Time and no transfer of PCM Capital Stock by
any such holder shall thereafter be made or recognized. Until surrendered for
exchange in accordance with the provisions of Section 4.1, each Certificate
theretofore representing shares of PCM Capital Stock (other than shares to be
canceled pursuant to Section 3.3) shall from and after the Effective Time
represent for all purposes only the right to receive the consideration provided
in Sections 3.1 and 3.5 in exchange therefor, subject, however, to the Surviving
Corporation's obligation to pay any dividends or make any other distributions
with a record date prior to the Effective Time which have been declared or made
by PCM in respect of such shares of PCM Capital Stock in accordance with the
terms of this Agreement and which remain unpaid at the Effective Time. Whenever
a dividend or other distribution is declared by LHS on the LHS Common Stock, the
record date for which is at or after the Effective Time, the declaration shall
include dividends or other distributions on all shares of LHS Common Stock
issuable pursuant to this Agreement, but no dividend or other distribution
payable to the holders of record
A-7
105
of LHS Common Stock as of any time subsequent to the Effective Time shall be
delivered to the holder of any Certificate until such holder surrenders such
Certificate for exchange as provided in Section 4.1. However, upon surrender of
such Certificate, both the LHS Common Stock certificate (together with all such
undelivered dividends or other distributions without interest) and any
undelivered dividends and cash payments payable hereunder (without interest)
shall be delivered and paid with respect to each share represented by such
Certificate.
4.3 Escrow Agreement. In connection with the Closing, LHS and the
Indemnitor Representative shall have executed and delivered to the other an
escrow agreement (the "Escrow Agreement"), which shall be in the form of Exhibit
1. The LHS Common Stock to be paid pursuant to Sections 3.1(c)(ii), 3.1(d)(ii),
3.1(e)(ii) and 3.1(f)(ii) shall be paid to and held by the escrow agent pursuant
to the terms of the Escrow Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PCM
PCM hereby represents and warrants to LHS as follows:
5.1 Organization, Standing, and Power. PCM is a corporation duly
organized, validly existing and in corporate good standing under the Laws of the
Commonwealth of Massachusetts, and has the corporate power and authority to
carry on its business as now conducted and to own, lease and operate its Assets.
PCM is duly qualified or licensed to transact business as a foreign corporation
in corporate good standing in the States of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a PCM Material
Adverse Effect. The minute books and other organizational documents for PCM have
been made available to LHS for its review and, except as disclosed in Section
5.1 of the PCM Disclosure Memorandum, are true and complete in all material
respects as in effect as of the date of this Agreement and accurately reflect in
all material respects all amendments to the organizational documents and all
proceedings of the Board of Directors (and committees thereof) and stockholders.
5.2 Authority of PCM; No Breach By Agreement.
(a) PCM has all requisite corporate power and authority, and has taken
all corporate action necessary, in order to execute, deliver, and perform
its obligations under this Agreement and to consummate the transactions
contemplated hereby and thereby, subject only to the approval of the Merger
by the holders of two-thirds of the outstanding shares of PCM Common Stock
and two-thirds of the outstanding shares of PCM Preferred Stock, which are
the only stockholder votes required for approval of this Agreement and
consummation of the Merger by PCM, and to the receipt of any required
approvals by any Regulatory Authority. Assuming due
A-8
106
execution and delivery by LHS and Sub, this Agreement represents a legal,
valid, and binding obligation of PCM, enforceable against PCM in accordance
with its terms (except in all cases as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the
equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by PCM, nor
the consummation by PCM of the transactions contemplated hereby, nor
compliance by PCM with any of the provisions hereof, will (i) conflict with
or result in a breach of any provision of PCM's Articles of Organization or
Bylaws or the certificate or articles of incorporation or bylaws or other
organizational documents of any PCM Subsidiary or any resolution adopted by
the board of directors or the stockholders of any PCM Entity, or (ii)
except as disclosed in Section 5.2 of the PCM Disclosure Memorandum,
constitute or result in a Default under, or require any Consent pursuant
to, or result in the creation of any Lien on any Asset of any PCM Entity
under, any material Contract or Permit of any PCM Entity, or (iii) subject
to receipt of the requisite Consents referred to in Section 9.1(b) and
Section 9.1(d), constitute or result in a Default under, or require any
Consent pursuant to, any Law or Order applicable to any PCM Entity or any
of their respective material.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules
of the NASD, and other than Consents required from Regulatory Authorities,
and other than notices to or filings with the Internal Revenue Service or
the Pension Benefit Guaranty Corporation with respect to any employee
benefit plans, or under the HSR Act, no notice to, filing with, or Consent
of, any public body or authority is necessary for the consummation by PCM
of the Merger and the other transactions contemplated in this Agreement.
5.3 Capital Stock.
(a) The authorized capital stock of PCM consists of (i) 4,000,000
shares of PCM Common Stock, of which 1,181,730 shares are issued and
outstanding as of the date of this Agreement, and not more than 1,181,730
shares will be issued and outstanding at the Effective Time, other than any
increase in shares resulting from option exercises or conversion of shares
of PCM Preferred Stock in accordance with their applicable terms, and (ii)
1,500,000 shares of Preferred Stock authorized, designated as follows:
(A) 234,436 of which are designated as Series A Convertible
Preferred Stock, none of which are issued and outstanding, and none of
which will be issued and outstanding at the Effective Time;
A-9
107
(B) 234,232 of which are designated as Series A-0 Convertible
Preferred Stock of which 234,232 are issued and outstanding, and not
more than 234,232 shares will be issued and outstanding at the
Effective Time;
(C) 234,436 of which are designated as Series A-1 Convertible
Preferred Stock, none of which are issued and outstanding, and none of
which will be issued and outstanding at the Effective Time;
(D) 117,751 of which are designated as Series B Convertible
Preferred Stock, none of which are issued and outstanding, and none of
which will be issued and outstanding at the Effective Time;
(E) 117,635 of which are designated as Series B-0 Convertible
Preferred Stock of which 117,635 are issued and outstanding, and not
more than 117,635 shares will be issued and outstanding at the
Effective Time;
(F) 117,751 of which are designated as Series B-1 Convertible
Preferred Stock, none of which are issued and outstanding, and none of
which will be issued and outstanding at the Effective Time;
(G) 209,583 of which are designated as Series C-0 Convertible
Preferred Stock of which 209,583 are issued and outstanding, and not
more than 209,583 shares will be issued and outstanding at the
Effective Time; and
(H) 209,583 of which are designated as Series C-1 Convertible
Preferred Stock, none of which are issued and outstanding, and none of
which will be issued and outstanding at the Effective Time.
(b) Except as set forth in Section 5.3(a) or Section 5.3(b) of the PCM
Disclosure Memorandum, there are no shares of capital stock or other equity
securities of PCM outstanding and no outstanding Equity Rights relating to
the capital stock of PCM. Section 5.3(b) of the PCM Disclosure Memorandum
includes a correct and complete list of each outstanding PCM Option, the
holder of the PCM Option, the date of grant, the exercise price and the
number of shares subject to the PCM Option.
5.4 PCM Subsidiaries. PCM has disclosed in Section 5.4 of the PCM
Disclosure Memorandum all of the PCM Subsidiaries that are corporations
(identifying its jurisdiction of incorporation, each jurisdiction in which it is
qualified and/or licensed to transact business, and the number of shares owned
and percentage ownership interest represented by such share ownership) and all
of the PCM Subsidiaries that are general or limited partnerships, limited
liability companies, or other non-corporate entities (identifying the Law under
which such entity is organized, each jurisdiction in which it is qualified
and/or licensed to transact business, and the amount and nature of the ownership
interest therein). Except as disclosed in Section 5.4 of the PCM Disclosure
Memorandum, PCM or one of its wholly-owned Subsidiaries owns all of the issued
and outstanding shares of capital stock (or other equity interests) of each PCM
Subsidiary. Except as disclosed in Section 5.4 of the PCM Disclosure Memorandum,
no capital
A-10
108
stock (or other equity interest) of any PCM Subsidiary is or may become required
to be issued (other than to another PCM Entity) by reason of any Equity Rights,
and, except as disclosed in Section 5.4 of the PCM Disclosure Memorandum, there
are no Contracts by which any PCM Subsidiary is bound to issue (other than to
another PCM Entity) additional shares of its capital stock (or other equity
interests) or Equity Rights or by which any PCM Entity is or may be bound to
transfer any shares of the capital stock (or other equity interests) of any PCM
Subsidiary (other than to another PCM Entity). Except as disclosed in Section
5.4 of the PCM Disclosure Memorandum, there are no Contracts relating to the
rights of any PCM Entity to vote or to dispose of any shares of the capital
stock (or other equity interests) of any PCM Subsidiary. All of the shares of
capital stock (or other equity interests) of each PCM Subsidiary held by a PCM
Entity are fully paid and nonassessable under the applicable corporation Law of
the jurisdiction in which such Subsidiary is incorporated or organized and are
owned by the PCM Entity free and clear of any Lien. Except as disclosed in
Section 5.4 of the PCM Disclosure Memorandum, each PCM Subsidiary is duly
organized, validly existing, and (as to corporations) in corporate good standing
under the Laws of the jurisdiction in which it is incorporated or organized, and
has the power and authority necessary for it to own, lease, and operate its
Assets and to carry on its business as now conducted. Each PCM Subsidiary is
duly qualified or licensed to transact business as a foreign corporation in
corporate good standing in the States of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a PCM Material
Adverse Effect. The minute books and other organizational documents for each PCM
Subsidiary have been made available to LHS for its review, and, except as
disclosed in Section 5.4 of the PCM Disclosure Memorandum, are true and complete
in all material respects as in effect as of the date of this Agreement and
accurately reflect in all material respects all amendments to the organizational
documents and all proceedings of the Board of Directors and stockholders
thereof.
5.5 Financial Statements.
(a) Each of the PCM Financial Statements (including, in each case, any
related notes) was prepared in accordance with GAAP applied on a consistent
basis throughout the periods involved, and fairly presented in all material
respects the consolidated financial position of PCM and its Subsidiaries as
at the respective dates and the consolidated results of operations and cash
flows for the periods indicated, except that the financial statement as of
or for any period subsequent to December 31, 1998 (i) were or will be
unaudited internal financial statements prepared by management, (ii)
consisted and may consist only of a consolidated balance sheet, a
consolidated statement of operations and a consolidated statement of cash
flows, (iii) did not and may not contain the footnotes required by GAAP and
(iv) will be subject to normal and recurring year-end adjustments which
were not or are not expected to be material in amount or effect.
A-11
109
(b) Each of the PCM Financial Statements for the years ended 1996, 1997
and 1998 and for the three months ended March 31, 1999 is set forth in
Section 5.5 of the PCM Disclosure Memorandum.
5.6 Absence of Undisclosed Liabilities. Except as set forth in Section
5.6 of the PCM Disclosure Memorandum, as of the date of this Agreement, no PCM
Entity has any Liabilities that would be required to be reflected or reserved
against in a balance sheet prepared in accordance with GAAP, except Liabilities
which are accrued or reserved against in the consolidated balance sheets of PCM
as of December 31, 1998, included in the PCM Financial Statements or reflected
in the notes thereto or incurred in the ordinary course of business since
December 31, 1998. During the period from December 31, 1998 to the date of this
Agreement, no PCM Entity has incurred or paid any Liability, except for such
Liabilities incurred or paid (i) in the ordinary course of business consistent
with past business practice and which are not reasonably likely to have,
individually or in the aggregate, a PCM Material Adverse Effect or (ii) in
connection with the transactions contemplated by this Agreement.
5.7 Absence of Certain Changes or Events. During the period from December
31, 1998 to the date of this Agreement, except as disclosed in Section 5.7 of
the PCM Disclosure Memorandum, (i) there have been no events, changes, or
occurrences which have had individually or in the aggregate, a PCM Material
Adverse Effect, and (ii) PCM has not:
(a) incurred any additional debt obligation or other obligation for
borrowed money; or
(b) repurchased, redeemed, or otherwise acquired or exchanged, directly
or indirectly, any shares, or any securities convertible into any shares,
of the capital stock of any PCM Entity, or declared or paid any dividend or
made any other distribution in respect of any PCM Entity's capital stock;
or
(c) except for this Agreement, issued, sold, pledged, encumbered,
authorized the issuance of, entered into any Contract to issue, sell,
pledge, encumber, or authorize the issuance of, or otherwise permitted to
become outstanding, any additional shares of PCM Capital Stock or any other
capital stock of any PCM Entity, or any stock appreciation rights, or any
option, warrant, or other Equity Right with respect to any capital stock of
any PCM Entity; or
(d) sold, leased, mortgaged or otherwise disposed of or otherwise
encumbered any Asset other than in the ordinary course of business; or
(e) granted any increase in compensation or benefits to the employees
or officers of any PCM Entity, except as required by Law or pursuant to the
express terms of Contracts or policies which are described in Section
5.7(e) of the PCM Disclosure Memorandum and other than ordinary and
customary increases in employee salaries in connection with periodic
employee evaluations; paid any severance or termination pay or any bonus
other than pursuant to written policies or written Contracts in effect on
the date of this Agreement and disclosed in
A-12
110
Section 5.7(e) of the PCM Disclosure Memorandum; or entered into or amended
any severance agreements with officers or other employees of any PCM
Entity; granted any increase in fees or other increases in compensation or
other benefits to directors of any PCM Entity; or
(f) entered into any employment Contract between any PCM Entity and any
Person that such PCM Entity does not have the unconditional right to
terminate without Liability (other than Liability for services already
rendered), at any time on or after the Effective Time; or
(g) adopted any new employee benefit plan of any PCM Entity or
terminated or withdrawn from, or made any material change in or to, any
existing employee benefit plans of any PCM Entity other than any such
change that was required by Law or that, in the opinion of counsel, was
necessary or advisable to maintain the tax qualified status of any such
plan, or made any distributions from such employee benefit plans, except as
required by Law, the terms of such plans or consistent with past practice;
or
(h) made any change in any Tax or accounting methods or systems of
internal accounting controls; or
(i) commenced any Litigation other than in accordance with past
practice, settled any Litigation involving any Liability of any PCM Entity
for money damages or restrictions upon the operations of PCM; or
(j) entered into, modified in any material respects, amended in any
material respects or terminated any material Contract (including any loan
Contract) or waived, released, compromised or assigned any material rights
or claims.
5.8 Tax Matters. Except as disclosed in Section 5.8 of the PCM Disclosure
Memorandum:
(a) All Tax Returns required to be filed by or on behalf of any of the
PCM Entities have been timely filed or requests for extensions have been
timely filed, granted, and have not expired for periods ended on or before
December 31, 1998, and all Tax Returns filed are complete and accurate in
all material respects. All Taxes shown on filed Tax Returns have been paid.
There is no audit examination, deficiency, or refund Litigation with
respect to any Taxes, except as reserved against in the PCM Financial
Statements or as disclosed in Section 5.8 of the PCM Disclosure Memorandum.
All Taxes and other Liabilities due with respect to completed and settled
examinations or concluded Litigation have been paid. There are no Liens
with respect to Taxes upon any of the Assets of the PCM Entities.
(b) None of the PCM Entities has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due
(excluding such statutes that relate to years currently under examination
by the Internal Revenue Service or other applicable taxing authorities)
that is currently in effect.
A-13
111
(c) The provision for any Taxes due or to become due for any of the PCM
Entities for the period or periods through and including the date of the
PCM Financial Statements for periods ending on or prior to December 31,
1998 that has been made and is reflected on such PCM Financial Statements
is sufficient in all material respects to cover all such Taxes for periods
ending on or prior to December 31, 1998.
(d) Deferred Taxes of the PCM Entities have been provided for in
accordance with GAAP through December 31, 1998.
(e) None of the PCM Entities is a party to any Tax allocation or
sharing agreement and none of the PCM Entities has been a member of an
affiliated group filing a consolidated federal income Tax Return (other
than a group the common Parent of which was PCM) or has any Liability for
Taxes of any Person (other than PCM and its Subsidiaries) under Treasury
Regulation Section 1.1502-6 (or any similar provision of state, local or
foreign Law) as a transferee or successor or by Contract or otherwise.
(f) Each of the PCM Entities is in compliance in all material respects
with, and its records contain in all material respects all information and
documents (including properly completed IRS Forms W-9) necessary to comply
with, all applicable information reporting and Tax withholding requirements
under federal, state, and local Tax Laws, and such records identify with
the legally required specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code.
(g) None of the PCM Entities has made any payments, is obligated to
make any payments, or is a party to any Contract that could obligate it to
make any payments that would be disallowed as a deduction under Sections
280G or 162(m) of the Internal Revenue Code.
(h) There has not been an ownership change, as defined in Internal
Revenue Code Section 382(g), of the PCM Entities that occurred during or
after any Taxable Period in which the PCM Entities incurred a net operating
loss that carries over to any Taxable Period ending after December 31,
1998.
(i) No PCM Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention
between the United States and such foreign country.
5.9 Assets.
(a) Except as disclosed in Section 5.9 of the PCM Disclosure
Memorandum, the PCM Entities have good and valid title, free and clear of
all Liens, to all of their respective material tangible Assets.
Substantially all tangible properties, including inventory, used in the
businesses of the PCM Entities are in good condition, reasonable wear and
tear excepted, and substantially all properties
A-14
112
(whether tangible or intangible) are usable in the ordinary course of
business consistent with PCM's past practices.
(b) All tangible Assets which are material to PCM's business on a
consolidated basis and which are held under leases or subleases by any of
the PCM Entities, are held under valid Contracts enforceable in all
material respects in accordance with their respective terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other Laws affecting the enforcement of
creditors' rights generally and except that the availability of the
equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceedings may be brought),
and each such Contract is in full force and effect in all material
respects.
(c) Section 5.9 of the PCM Disclosure Memorandum lists all of the
insurance policies owned or held by PCM as of the date of this Agreement
and names each insurer. As of the date of this Agreement, none of the PCM
Entities has received notice from any insurance carrier that (i) any policy
of insurance will be canceled or that coverage thereunder will be reduced
or eliminated, or (ii) premium costs with respect to such policies of
insurance will be substantially increased. Except as set forth on Section
5.9 of the PCM Disclosure Memorandum, there are presently no claims for
amounts exceeding in any individual case $50,000 pending under such
policies of insurance and no notices of claims in excess of such amounts
have been given by any PCM Entity under such policies.
(d) The tangible Assets owned or leased by the PCM Entities include all
tangible Assets required to operate the business of the PCM Entities in all
material respects as presently conducted.
5.10 Intellectual Property.
(a) Section 5.10 of the PCM Disclosure Memorandum sets forth a complete
and accurate list as of the date of this Agreement of (i) all patents
pending and patent applications, copyright registrations and registration
applications and trademark and service mark registrations and registration
applications owned by PCM or any PCM Entity, (ii) all software programs
owned by PCM and licensed to unaffiliated third parties, and (iii) all
licenses to any PCM Entity of Intellectual Property of any unaffiliated
third party(ies) which are used in the conduct of PCM's business, except
for "shrink-wrap" software licenses and licenses for software imbedded in
hardware used by PCM or in PCM's products. PCM has used commercially
reasonable efforts to protect its trade secrets pursuant to the procedures
set forth in Section 5.10 of the PCM Disclosure Memorandum.
(b) To the Knowledge of PCM, each PCM Entity is the owner of or has a
license to such Intellectual Property covering products or services sold or
licensed to a third party by such PCM Entity in connection with such PCM
Entity's business operations as is necessary to give such PCM Entity the
right to convey by sale or license such products or services so conveyed.
No PCM Entity is in Default under
A-15
113
any of its Intellectual Property licenses identified in Section 5.10 of the
PCM Disclosure Memorandum. Except as disclosed in Section 5.10 of the PCM
Disclosure Memorandum, as of the date of this Agreement, no proceedings
have been instituted, or are pending or, to the Knowledge of PCM,
threatened, which challenge the rights of any PCM Entity to sell or license
the products or services sold or licensed by it, or to use the Intellectual
Property used by it in the course of its business, nor to the Knowledge of
PCM has any Person claimed or alleged any rights which would, if
established, adversely affect such right of any PCM Entity. To the
Knowledge of PCM, as of the date of this Agreement, the conduct of the
business of the PCM Entities does not infringe any Intellectual Property of
any other Person. Except as disclosed in Section 5.10 of the PCM Disclosure
Memorandum, as of the date of this Agreement no PCM Entity is obligated to
pay any recurring royalties to any other Person with respect to such other
Person's Intellectual Property.
(c) Except as disclosed in Section 5.10 of the PCM Disclosure
Memorandum, every officer, director, employee or consultant of any PCM
Entity is a party to a Contract which requires such officer, director,
employee or consultant to assign his or her interest in any Intellectual
Property developed in the course and scope of such person's employment with
PCM to a PCM Entity and to keep confidential any trade secrets,
confidential proprietary data, confidential customer information, or other
confidential business information of a PCM Entity, and to the Knowledge of
PCM, no such officer or employee is a party to any Contract, currently in
force, with any Person other than a PCM Entity which was entered into while
he or she was an officer or employee of PCM and which requires such officer
or employee to assign any interest in any Intellectual Property to any
Person other than a PCM Entity or to keep confidential any trade secrets,
confidential proprietary data, confidential customer information, or other
confidential business information of any Person other than a PCM Entity.
Except as disclosed in Section 5.10 of the PCM Disclosure Memorandum, to
the Knowledge of PCM, no officer, director, employee or consultant of any
PCM Entity is party to any Contract, currently in force, which restricts or
prohibits such officer, director, employee or consultant from engaging in
activities competitive with any PCM Entity.
(d) To the Knowledge of PCM, the products currently sold by PCM are
"Millennium Compliant." For purposes of this Agreement, "Millennium
Compliant" means as to any software, that the software correctly performs
all date-related operations (1) without human intervention, other than
original data entry of any date, and (2) without regard to the system date
at the time the calculation is performed; provided that no failure to be
Millennium Compliant shall be deemed to have occurred if PCM demonstrates
that the non-compliance is due to hardware, firmware, software or data not
supplied by PCM (other than such third party hardware, firmware, software
or data that falls into either of the two following categories: (i) with
which PCM software is intended to interface, if any agreement assigns to
PCM the responsibility for ensuring the correct operation of such
interface; or (ii) that is required, selected, embedded or supplied by
PCM).
A-16
114
(e) PCM has taken commercially reasonable steps to maintain the
Technical Documentation. PCM has taken commercially reasonable steps to
insure that the performance of computer software used or licensed by PCM,
when used as intended in the ordinary course of business, is not materially
adversely affected by any computer viruses. "Technical Documentation" means
the source code, system documentation, statements of principles of
operation, and schematics for all computer software owned by PCM, and any
confidential proprietary documentation provided to PCM by third parties
with respect to such third parties' software licensed to PCM, as all of the
foregoing exist and are in the PCM's possession as of the date hereof.
(f) PCM owns, leases or has the right to use all Intellectual Property
required to operate the business of the PCM Entities in all material
respects as presently conducted.
5.11 Environmental Matters. Except as set forth in Section 5.11 of the
PCM Disclosure Memorandum,
(a) Each PCM Entity and its Participation Facilities are, and have
been, in compliance in all material respects with all Environmental Laws.
(b) There is no Litigation or, to the Knowledge of PCM, any
investigation pending or, to the Knowledge of PCM, threatened in writing
before any court, governmental agency, or authority or other forum in which
any PCM Entity or any of its Participation Facilities (or PCM in respect of
such Participation Facility) has been or, with respect to threatened
Litigation, may be named as a defendant (i) for alleged noncompliance
(including by any predecessor) with any Environmental Law or (ii) relating
to the release, discharge, spillage, or disposal into the environment of
any Hazardous Material, whether or not occurring at, on, under, adjacent
to, or affecting (or potentially affecting) a site owned, leased, or
operated by any PCM Entity or any of its Participation Facilities.
(c) During or, to the Knowledge of PCM, prior to the period of (i) any
PCM Entity's ownership or operation of any of their respective current
properties, or (ii) any PCM Entity's participation in the management of any
Participation Facility, there have been no releases, discharges, spillages,
or disposals of Hazardous Material in, on, under, adjacent to, or affecting
(or potentially affecting) such properties or Participation Facility.
5.12 Compliance with Laws. Each PCM Entity has in effect all Permits
necessary for it to own, lease, or operate its material Assets and to carry on
its business as now conducted and there has occurred no Default under any such
Permit. Except as disclosed in Section 5.12 of the PCM Disclosure Memorandum,
none of the PCM Entities:
(a) is in Default under any of the provisions of its Articles of
Organization or Bylaws (or other governing instruments);
A-17
115
(b) is in Default under any Laws, Orders, or Permits applicable to its
business or employees conducting its business; or
(c) Since January 1, 1997, has received any written notification or
communication from any agency or department of federal, state, or local
government or any Regulatory Authority or the staff thereof (i) asserting
that any PCM Entity is not in compliance with any of the Laws or Orders
which such governmental authority or Regulatory Authority enforces, (ii)
threatening to revoke any Permits the revocation of which would reasonably
likely have a PCM Material Adverse Effect, or (iii) requiring any PCM
Entity to enter into or consent to the issuance of a cease and desist
order, formal agreement, directive, commitment, or memorandum of
understanding, or to adopt any Board resolution or similar undertaking.
Copies of all material reports, correspondence, notices and other documents
relating to any inspection, audit, monitoring or other form of review or
enforcement action by a Regulatory Authority have been made available to LHS.
5.13 Labor Relations. Except as set forth in Section 5.13 of the PCM
Disclosure Memorandum, no PCM Entity is the subject of any Material Litigation
asserting that it or any other PCM Entity has committed an unfair labor practice
(within the meaning of the National Labor Relations Act or comparable state law)
or seeking to compel it or any other PCM Entity to bargain with any labor
organization as to wages or conditions of employment, nor is any PCM Entity
party to any collective bargaining agreement, which such Litigation is
reasonably likely to have a PCM Material Adverse Effect nor is there any strike
or other labor dispute involving any PCM Entity, pending or, to the Knowledge of
PCM, threatened, nor, to the Knowledge of PCM, is there any activity involving
any PCM Entity's employees seeking to certify a collective bargaining unit or
engaging in any other organization activity which is reasonably likely to have a
PCM Material Adverse Effect.
5.14 Employee Benefit Plans.
(a) PCM has disclosed in Section 5.14 of the PCM Disclosure Memorandum,
and has delivered or made available to LHS prior to the execution of this
Agreement copies in each case of, all pension, retirement, profit-sharing,
deferred compensation, stock option, employee stock ownership, severance
pay, vacation, bonus, or other incentive plan, all other written employee
programs, arrangements, or agreements, all medical, vision, dental, or
other health plans, all life insurance plans, and all other employee
benefit plans or fringe benefit plans, including "employee benefit plans"
as that term is defined in Section 3(3) of ERISA, currently adopted,
maintained by, sponsored in whole or in part by, or contributed to by any
PCM Entity or any entity which is considered one employer with PCM under
Sections 302 or 4001 of ERISA or Section 414 of the Internal Revenue Code
(an "ERISA Affiliate") thereof for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors, or other
beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate (collectively, the "PCM Benefit Plans") in
A-18
116
each case as in effect as of the date of this Agreement. No PCM Entity or
ERISA Affiliate has ever maintained or contributed to an "employee pension
benefit plan" as that term is defined in Section 3(2) of ERISA which is
subject to Title IV of ERISA. Any of the PCM Benefit Plans which is an
"employee pension benefit plan," as that term is defined in Section 3(2) of
ERISA, is referred to herein as a "PCM ERISA Plan." Each PCM ERISA Plan
which is also a "defined benefit plan" (as defined in Section 414(j) of the
Internal Revenue Code) is referred to herein as an "PCM Pension Plan." No
PCM Pension Plan is or has been a multiemployer plan within the meaning of
Section 3(37) of ERISA.
(b) All PCM Benefit Plans are in compliance with the applicable terms
of ERISA, the Internal Revenue Code, and any other applicable Laws the
breach or violation of which are reasonably likely to have, individually or
in the aggregate, a PCM Material Adverse Effect. Each PCM ERISA Plan which
is intended to be qualified under Section 401(a) of the Internal Revenue
Code has received a favorable determination letter from the Internal
Revenue Service, and PCM is not aware of any circumstances likely to result
in revocation of any such favorable determination letter. No PCM Entity has
engaged in a transaction with respect to any PCM Benefit Plan that,
assuming the taxable period of such transaction expired as of the date
hereof, would subject any PCM Entity to a Tax imposed by either Section
4975 of the Internal Revenue Code or Section 502(i) of ERISA.
(c) Except as disclosed in Section 5.14 of the PCM Disclosure
Memorandum, other than as otherwise required by Part 6, Title I of ERISA or
applicable state insurance laws, no PCM Entity has any Liability for
retiree health and life benefits under any of the PCM Benefit Plans and
there are no restrictions on the rights of such PCM Entity to amend or
terminate any such retiree health or benefit plan without incurring any
Liability thereunder.
(d) Except as disclosed in Section 5.14 of the PCM Disclosure
Memorandum, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute,
or otherwise) becoming due to any director or any employee of any PCM
Entity from any PCM Entity or successor entity under any PCM Benefit Plan,
or otherwise, (ii) increase any benefits otherwise payable under any PCM
Benefit Plan, or (iii) result in any acceleration of the time of payment or
vesting of any such benefit.
5.15 Material Contracts. Except as disclosed in Section 5.15 of the PCM
Disclosure Memorandum, as of the date of this Agreement none of the PCM
Entities, nor any of their respective Assets, businesses, or operations, is a
party to, or is bound or affected by, or receives benefits under, (i) any
severance, termination or retirement Contract and any employment or consulting
Contract providing for aggregate payments to any Person in any calendar year in
excess of $50,000 or continuing for more than one year and not disclosed
pursuant to Section 5.14 of the PCM Disclosure Memorandum, (ii) any Contract
relating to the borrowing of money by any PCM Entity or the
A-19
117
guarantee by any PCM Entity of any such obligation (other than Contracts
evidencing trade payables and Contracts relating to borrowings or guarantees
made in the ordinary course of business), (iii) any Contract which prohibits or
restricts any PCM Entity from engaging in any business activities in any
geographic area, line of business or otherwise in competition with any other
Person, (iv) any Contract between or among PCM Entities, (v) any Contract
involving Intellectual Property (other than "shrink-wrap" software licenses) and
providing for annual payments of $50,000 or more, other than software license
agreements entered into by PCM incident to the sale of its products in the
ordinary course of business, (vi) any Contract relating to the provision of
computer software, computer hardware, data processing systems or equipment,
network communication, transactional billing, management information or other
technical systems or services, including maintenance with respect to the
foregoing matters, to or by any PCM Entity, and providing for annual payments of
$100,000 or more, other than agreements entered into by PCM incident to the sale
of products in the ordinary course of business, (vii) any Contract relating to
the purchase or lease of real property, and (viii) any Contract providing for
aggregate payments to any Person in excess of $100,000, other than the purchase
of inventory, capital expenditures, and sales of products in the ordinary course
of business (together with all Contracts referred to in Sections 5.9 and
5.14(a), the "PCM Contracts"). With respect to each PCM Contract listed in
Sections 5.9, 5.14(a) and 5.15 of the PCM Disclosure Memorandum and except as
disclosed in Section 5.15 of the PCM Disclosure Memorandum: (i) the PCM Contract
is in full force and effect in all material respects; (ii) no PCM Entity is in
Default thereunder; (iii) no PCM Entity has repudiated or waived any material
provision of any such PCM Contract; (iv) no other party to any such PCM Contract
is, to the Knowledge of PCM, in Default in any respect or has repudiated or
waived any material provision thereunder; (v) there exists no actual, or, to the
Knowledge of PCM, threatened, cancellation, termination, or limitation of, or
any material amendment, modification, or change to any PCM Contract; (vi) no PCM
Entity has received formal notice that any party to a PCM Contract will not
renew such PCM Contract at the end of its existing term; and (vii) no PCM
Contract requires consent in connection with the transactions contemplated by
this Agreement. All of the indebtedness of any PCM Entity for money borrowed is
prepayable at any time by such PCM Entity without penalty or premium.
5.16 Legal Proceedings. Section 5.16 of the PCM Disclosure Memorandum
contains a list of all Litigation as of the date of this Agreement to which any
PCM Entity is a party and which names a PCM Entity as a defendant or
cross-defendant or for which any PCM Entity has any potential Liability. As of
the date of this Agreement, there is no other Litigation, or, to the Knowledge
of PCM, any investigation, instituted or pending, or, to the Knowledge of PCM,
threatened in writing (or unasserted but considered probable of assertion and
which if asserted would have at least a reasonable probability of an unfavorable
outcome) against any PCM Entity, or against any director, employee or employee
benefit plan of any PCM Entity, or against any Asset, interest, or right of any
of them, nor are there any Orders of any Regulatory Authorities, other
governmental authorities, or arbitrators outstanding against any PCM Entity.
A-20
118
5.17 Statements True and Correct. None of the information supplied or to
be supplied by any PCM Entity or any Affiliate thereof for inclusion in the
Registration Statement to be filed by LHS with the SEC will, when the
Registration Statement becomes effective, be false or misleading with respect to
any material fact, or omit to state any material fact necessary to make the
statements therein not misleading. None of the information supplied or to be
supplied by any PCM Entity or any Affiliate thereof for inclusion in any
documents to be filed by a PCM Entity or any Affiliate thereof with any
Regulatory Authority in connection with the transactions contemplated hereby,
will, at the respective time such documents are filed, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. All documents that any PCM Entity or any Affiliate
thereof is responsible for filing with any Regulatory Authority in connection
with the transactions contemplated hereby will comply as to form in all material
respects with the provisions of applicable Law.
5.18 Accounting, Tax and Regulatory Matters. No PCM Entity or any
Affiliate thereof has taken or agreed to take any action or has any Knowledge of
any fact or circumstance that is reasonably likely to (i) prevent the Merger
from qualifying for pooling-of-interests accounting treatment or as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, or (ii) materially impede or delay receipt of any Consents of Regulatory
Authorities referred to in Section 9.1(b) or result in the imposition of a
condition or restriction of the type referred to in the last sentence of such
Section.
5.19 State Takeover Laws. Each PCM Entity has taken all necessary action
to exempt the transactions contemplated by this Agreement from, or if necessary
to challenge the validity or applicability of, any applicable "moratorium,"
"fair price," "business combination," "control share," or other anti-takeover
Laws (collectively, "Takeover Laws"), including the provisions of Ch. 110F of
the Massachusetts General Laws.
5.20 Charter Provisions. Each PCM Entity has taken all action so that the
entering into of this Agreement and the consummation of the Merger and the other
transactions contemplated by this Agreement do not and will not result in the
grant of any rights to any Person under the Articles of Organization, Bylaws or
other governing instruments of any PCM Entity or restrict or impair the ability
of LHS or any of its Subsidiaries to vote, or otherwise to exercise the rights
of a stockholder with respect to, shares of any PCM Entity that may be directly
or indirectly acquired or controlled by them.
5.21 Stockholders' Voting Agreements. Holders of approximately thirty
percent (30%) of the outstanding shares of PCM Common Stock and all of the
outstanding shares of PCM Preferred Stock have executed and delivered to LHS an
agreement in substantially the form of Exhibit 2 (the "Voting Agreements"). In
addition, PCM shall use its commercially reasonable efforts to deliver a Voting
Agreement to LHS executed by Wendell H. Hughes as soon as practicable after the
date of this Agreement.
A-21
119
5.22 Opinion of Financial Advisor. PCM has received the opinion of
Goldman Sachs & Co., dated the date of this Agreement, to the effect that the
Common Stock Exchange Ratios and the Preferred Stock Exchange Ratios are fair,
from a financial point of view, to PCM's Stockholders.
5.23 Board Recommendation. The Board of Directors of PCM, at a meeting
duly called and held, has by unanimous vote of those directors present (who
constituted all of the directors then in office) (i) approved the Merger and
declared it to be advisable, (ii) determined that this Agreement and the
transactions contemplated hereby, including the Merger and the transactions
contemplated thereby, and the Voting Agreements and the transactions
contemplated thereby, taken together, are in the best interests of the
Stockholders and (iii) resolved to recommend that the Stockholders of PCM adopt
this Agreement.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF LHS
LHS hereby represents and warrants to PCM as follows:
6.1 Organization, Standing, and Power. LHS is a corporation duly
organized, validly existing, and in corporate good standing under the Laws of
the State of Delaware, and has the corporate power and authority to carry on its
business as now conducted and to own, lease and operate its material Assets. LHS
is duly qualified or licensed to transact business as a foreign corporation in
good standing in the States of the United States and foreign jurisdictions where
the character of its Assets or the nature or conduct of its business requires it
to be so qualified or licensed, except for such jurisdictions in which the
failure to be so qualified or licensed is not reasonably likely to have,
individually or in the aggregate, a LHS Material Adverse Effect. The Articles of
Organization and Bylaws of Sub have been made available to PCM for its review
and are true and complete in all material respects as in effect as of the date
of this Agreement and accurately reflect in all material respects all amendments
thereto.
6.2 Authority; No Breach By Agreement.
(a) LHS has all requisite corporate power and authority, and has taken
all corporate action necessary, in order to execute, deliver and perform
its obligations under this Agreement and to consummate the transactions
contemplated hereby, subject only to the approval of the Merger by the
holders of a majority of the outstanding shares of LHS Common Stock, which
is the only stockholder vote required for approval of this Agreement and
consummation of the Merger by LHS and to the receipt of any required
approvals by any Regulatory Authority. This Agreement represents a legal,
valid, and binding obligation of LHS, enforceable against LHS in accordance
with its terms (except in all cases as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the
equitable remedy of specific
A-22
120
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by LHS, nor
the consummation by LHS of the transactions contemplated hereby, nor
compliance by LHS with any of the provisions hereof, will (i) conflict with
or result in a breach of any provision of LHS's Certificate of
Incorporation or Bylaws, or (ii) constitute or result in a Default under,
or require any Consent pursuant to, or result in the creation of any Lien
on any Asset of any LHS Entity under, any Contract or Permit of any LHS
Entity, where such Default or Lien, or any failure to obtain such Consent,
is reasonably likely to have, individually or in the aggregate, a LHS
Material Adverse Effect, or, (iii) subject to receipt of the requisite
Consents referred to in Section 9.1(b), constitute or result in a Default
under, or require any Consent pursuant to, any Law or Order applicable to
any LHS Entity or any of their respective material Assets.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules
of the NASD, and other than Consents required from Regulatory Authorities,
and other than notices to or filings with the Internal Revenue Service or
the Pension Benefit Guaranty Corporation with respect to any employee
benefit plans, or under the HSR Act, no notice to, filing with, or Consent
of, any public body or authority is necessary for the consummation by LHS
of the Merger and the other transactions contemplated in this Agreement.
6.3 Capital Stock.
(a) The authorized capital stock of LHS consists of (i) 200,000,000
shares of LHS Common Stock, of which approximately 53 million shares are
issued and outstanding as of the date of this Agreement, and (ii) 225,000
shares of LHS Preferred Stock, of which no shares are issued and
outstanding. All of the issued and outstanding shares of LHS Capital Stock
are, and all of the shares of LHS Common Stock to be issued in exchange for
shares of PCM Common Stock upon consummation of the Merger, when issued in
accordance with the terms of this Agreement, will be, duly and validly
issued and outstanding and fully paid and nonassessable under the DGCL.
None of the outstanding shares of LHS Capital Stock has been, and none of
the shares of LHS Common Stock to be issued in exchange for shares of PCM
Common Stock upon consummation of the Merger will be, issued in violation
of any preemptive rights of the current or past stockholders of LHS.
(b) Except as set forth in Section 6.3(a), or as provided pursuant to
LHS's employee stock purchase plan or employee stock option plan, there are
no shares of capital stock or other equity securities of LHS outstanding
and no outstanding Equity Rights relating to the capital stock of LHS as of
the date of this Agreement.
A-23
121
6.4 SEC Filings; Financial Statements.
(a) LHS has timely filed and made available to PCM all SEC Documents
required to be filed by LHS (the "LHS SEC Reports"). The LHS SEC Reports
(i) at the time filed, complied in all material respects with the
applicable requirements of the Securities Laws and other applicable Laws
and (ii) do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated in such LHS SEC Reports or
necessary in order to make the statements in such LHS SEC Reports, in light
of the circumstances under which they were made, not misleading (except to
the extent that any such statement or omission has been corrected, updated
or supplemented by a subsequent LHS SEC Report filed prior to the date of
this Agreement). No LHS Subsidiary is required to file any SEC Documents.
(b) Each of the LHS Financial Statements (including, in each case, any
related notes) contained in the LHS SEC Reports, including any LHS SEC
Reports filed after the date of this Agreement until the Effective Time,
complied as to form in all material respects with the applicable published
rules and regulations of the SEC with respect thereto, was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved, and fairly presented in all material respects the consolidated
financial position of LHS and its Subsidiaries as at the respective dates
and the consolidated results of operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or
are subject to normal and recurring year-end adjustments which were not or
are not expected to be material in amount or effect.
6.5 Absence of Undisclosed Liabilities. No LHS Entity has any Liabilities
that are reasonably likely to have, individually or in the aggregate, a LHS
Material Adverse Effect, except Liabilities which are accrued or reserved
against in the consolidated balance sheets of LHS as of December 31, 1998,
included in the LHS Financial Statements delivered prior to the date of this
Agreement or reflected in the notes thereto, or have been incurred in the
ordinary course since December 31, 1998.
6.6 Absence of Certain Changes or Events. Since December 31, 1998, except
as disclosed in the LHS Financial Statements contained in LHS's filings with the
SEC, (i) there have been no events, changes or occurrences which have had, or
are reasonably likely to have, individually or in the aggregate, a LHS Material
Adverse Effect, and (ii) the LHS Entities have not taken any action, or failed
to take any action, prior to the date of this Agreement, which action or
failure, if taken after the date of this Agreement, would represent or result in
a material breach or violation of any of the covenants and agreements of LHS
provided in Article 7.
6.7 Statements True and Correct. No statement, certificate, instrument or
other writing furnished or to be furnished by any LHS Entity or any Affiliate
thereof to PCM pursuant to this Agreement or any other document, agreement or
instrument referred to herein contains or will contain any untrue statement of
material fact or will omit to state a material fact necessary to make the
statements therein, in light of the circumstances
A-24
122
under which they were made, not misleading. None of the information supplied or
to be supplied by any LHS Entity or any Affiliate thereof for inclusion in the
Registration Statement to be filed by LHS with the SEC, will, when the
Registration Statement becomes effective, be false or misleading with respect to
any material fact, or omit to state any material fact necessary to make the
statements therein not misleading. None of the information supplied or to be
supplied by any LHS Entity or any Affiliate thereof for inclusion in any
documents to be filed by any LHS Entity or any Affiliate thereof with the SEC or
any other Regulatory Authority in connection with the transactions contemplated
hereby, will, at the respective time such documents are filed, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. All documents that any LHS Entity or any
Affiliate thereof is responsible for filing with any Regulatory Authority in
connection with the transactions contemplated hereby will comply as to form in
all material respects with the provisions of applicable Law.
6.8 Authority of Sub. Sub is a corporation duly organized, validly
existing and in good standing under the Laws of the Commonwealth of
Massachusetts as a wholly owned Subsidiary of LHS. The authorized capital stock
of Sub shall consist of 1,000 shares of common stock, par value $.01 per share,
all of which are validly issued and outstanding, fully paid and nonassessable
and owned by LHS free and clear of any Lien. Sub has the corporate power and
authority necessary to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein, including the Merger, have been duly and
validly authorized by all necessary corporate action in respect thereof on the
part of Sub. This Agreement represents a legal, valid, and binding obligation of
Sub, enforceable against Sub in accordance with its terms (except in all cases
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought). LHS, as the sole
stockholder of Sub, has, or will have, voted prior to the Effective Time the
shares of Sub Common Stock in favor of adoption of this Agreement, as and to the
extent required by applicable Law.
6.9 Accounting, Tax and Regulatory Matters. No LHS Entity or any
Affiliate thereof has taken or agreed to take any action or has any Knowledge of
any fact or circumstance that is reasonably likely to (i) prevent the Merger
from qualifying for pooling-of-interests accounting treatment or as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
or (ii) materially impede or delay receipt of any Consents of Regulatory
Authorities referred to in Section 9.1(b) or result in the imposition of a
condition or restriction of the type referred to in the last sentence of such
Section.
A-25
123
6.10 Insider Trading Policy. LHS has previously provided to PCM a written
summary of LHS's internal policies regarding the sale of LHS Common Stock by LHS
"insiders."
ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION
7.1 Affirmative Covenants of PCM.
(a) From the date of this Agreement until the earlier of the Effective
Time or the termination of this Agreement, unless the prior written consent
of LHS shall have been obtained, and except as otherwise expressly
contemplated herein, PCM shall and shall cause each of its Subsidiaries to
(a) operate its business only in the usual, regular, and ordinary course,
except as disclosed in Section 7.1 of the PCM Disclosure Memorandum, (b)
use commercially reasonable efforts to preserve intact its business
organization and Assets and maintain its rights and franchises, and (c)
take no action which would (i) materially adversely affect the ability of
any Party to obtain any Consents required for the transactions contemplated
hereby, or (ii) materially adversely affect the ability of any Party to
perform its covenants and agreements under this Agreement.
(b) PCM shall deliver to LHS as soon as reasonably practicable, but not
later than twenty days, after the end of each fiscal quarter, the
consolidated balance sheets of PCM (including related notes and schedules,
if any) and related statements of income and cash flows (including related
notes and schedules, if any) with respect to such periods, prepared by
management of PCM in a manner consistent with past practices without review
of PCM's accountants.
7.2 Negative Covenants of PCM. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of LHS shall have been obtained, and except as otherwise
expressly contemplated herein, PCM covenants and agrees that it will not do or
agree or commit to do, or permit any of its Subsidiaries to do or agree or
commit to do, any of the following:
(a) amend the Articles of Organization, Bylaws or other governing
instruments of any PCM Entity (including the Certificates of Vote of
Directors Establishing a Series of a Class of Stock for the PCM Preferred
Stock or any other PCM Entity), or
(b) incur any additional debt obligation or other obligation for
borrowed money (other than indebtedness of a PCM Entity to another PCM
Entity) in excess of an aggregate of $4,000,000 (for the PCM Entities on a
consolidated basis) except in the ordinary course of the business of PCM
Entities consistent with past practices, or impose, or suffer the
imposition, on any Asset of any PCM Entity of any Lien or permit any such
Lien to exist (other than in connection with Liens in
A-26
124
effect as of the date hereof that are disclosed in the PCM Disclosure
Memorandum); or
(c) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of
the capital stock of any PCM Entity, or declare or pay any dividend or make
any other distribution in respect of PCM's capital stock; or
(d) except for this Agreement, or pursuant to the exercise of stock
options outstanding as of the date hereof and pursuant to the terms thereof
in existence on the date hereof, or as disclosed in Section 7.2(d) of the
PCM Disclosure Memorandum, issue, sell, pledge, encumber, authorize the
issuance of, enter into any Contract to issue, sell, pledge, encumber, or
authorize the issuance of, or otherwise permit to become outstanding, any
additional shares of PCM Capital Stock or any other capital stock of any
PCM Entity, or any stock appreciation rights, or any option, warrant, or
other Equity Right; or
(e) adjust, split, combine or reclassify any capital stock of any PCM
Entity or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of PCM Capital Stock, or sell,
lease, mortgage or otherwise dispose of or otherwise encumber (x) any
shares of capital stock of any PCM Subsidiary (unless any such shares of
stock are sold or otherwise transferred to another PCM Entity) or (y) any
Asset other than in the ordinary course of business for reasonable and
adequate consideration; or
(f) except for purchases of U.S. Treasury securities or U.S. Government
agency securities, which in either case have maturities of three years or
less, purchase any securities or make any material investment, either by
purchase of stock of securities, contributions to capital, Asset transfers,
or purchase of any Assets, in any Person other than an existing
wholly-owned PCM Subsidiary, or otherwise acquire direct or indirect
control over any Person, other than in connection with (i) foreclosures in
the ordinary course of business, or (ii) the creation of new wholly-owned
Subsidiaries organized to conduct or continue activities otherwise
permitted by this Agreement; or
(g) grant any increase in compensation or benefits to the employees or
officers of any PCM Entity, except in accordance with past practice or as
required by Law; pay any severance, change in control or termination pay or
any bonus other than pursuant to written policies or written Contracts in
effect on the date of this Agreement; and enter into or amend any severance
agreements with officers of any PCM Entity; grant any material increase in
fees or other increases in compensation or other benefits to directors of
any PCM Entity except in accordance with past practice; or voluntarily
accelerate the vesting of any stock options or other stock-based
compensation or employee benefits or other Equity Rights; or
A-27
125
(h) enter into or amend any employment Contract between any PCM Entity
and any Person (unless such amendment is required by Law) that the PCM
Entity does not have the unconditional right to terminate without Liability
(other than Liability for services already rendered), at any time on or
after the Effective Time; or
(i) adopt any new employee benefit plan of any PCM Entity or terminate
or withdraw from, or make any material change in or to, any existing
employee benefit plans of any PCM Entity other than any such change that is
required by Law or that, in the opinion of counsel, is necessary or
advisable to maintain the tax qualified status of any such plan, or make
any distributions from such employee benefit plans, except as required by
Law, the terms of such plans or consistent with past practice; or
(j) make any significant change in any Tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in Tax Laws or regulatory accounting requirements or
GAAP; or
(k) commence any Litigation other than in accordance with past
practice, settle any Litigation involving any Liability of any PCM Entity
for material money damages or restrictions upon the operations of any PCM
Entity; or
(l) modify, amend or terminate any material Contract or waive, release,
compromise or assign any material rights or claims, which action would
adversely affect PCM; or
(m) enter into any Contract that would have been disclosed in Sections
5.9, 5.14(a) and 5.15 of the PCM Disclosure Memorandum if such Contract had
been entered into prior to the date of this Agreement; or
(n) elect or appoint any new officer or director of any PCM Entity; or
(o) take any action or omit to take any action that would cause any of
its representations and warranties contained in or made pursuant to this
Agreement or in any certificate, Exhibit or Disclosure Schedule furnished
by PCM in connection herewith to be untrue, inaccurate, incomplete or
breached; or
(p) authorize or enter into any agreement to do any of the foregoing.
The consent of LHS for actions to be taken by PCM restricted by Sections
7.2(l) and 7.2(m), shall be deemed given if LHS does not respond to a written
request for consent within two business days after the oral confirmation of
receipt of such request by the Chief Financial Officer or General Counsel of
LHS.
7.3 Covenants of LHS. From the date of this Agreement until the earlier
of the Effective Time or the termination of this Agreement, unless the prior
written consent of PCM shall have been obtained, and except as otherwise
expressly contemplated herein, LHS covenants and agrees that it shall and shall
cause its subsidiaries and Affiliates to (a) continue to conduct its business
and the business of its Subsidiaries in a manner
A-28
126
designed, in its reasonable judgment, to enhance the long-term value of the LHS
Common Stock and the business prospects of the LHS Entities and to the extent
consistent therewith use all reasonable efforts to preserve intact the LHS
Entities' core businesses and goodwill with their respective employees and the
communities they serve, (b) take no action which would (i) materially adversely
affect the ability of any Party to obtain any Consents required for the
transactions contemplated hereby, or (ii) materially adversely affect the
ability of any Party to perform its covenants and agreements under this
Agreement (c) not declare or pay any dividend or make any other distribution in
respect of the LHS Capital Stock; provided, that the foregoing shall not prevent
any LHS Entity from acquiring any Assets or other businesses or from
discontinuing or disposing of any of its Assets or business if such action is,
in the reasonable judgment of LHS, desirable in the conduct of the business of
LHS and its Subsidiaries. LHS further covenants and agrees that it will not,
without the prior written consent of PCM, which consent shall not be
unreasonably withheld, amend the Certificate of Incorporation or Bylaws of LHS,
in each case, in any manner adverse to the holders of PCM Capital Stock as
compared to rights of holders of LHS Common Stock generally as of the date of
this Agreement. Nothing in this Agreement shall restrict the right of LHS to
negotiate and enter into a LHS Acquisition Agreement (as hereinafter defined) or
any other definitive agreement for an acquisition or business combination
transaction.
7.4 Adverse Changes in Condition. Each Party agrees to give written
notice promptly to the other Party upon becoming aware of the occurrence or
impending occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a PCM Material Adverse Effect or a LHS Material Adverse Effect, as
applicable, or (ii) would cause or constitute a material breach of any of its
representations, warranties, or covenants contained herein, and to use its
reasonable efforts to prevent or promptly to remedy the same.
7.5 Reports. Each Party and its Subsidiaries shall file all reports
required to be filed by it with Regulatory Authorities between the date of this
Agreement and the Effective Time and shall deliver to the other Party copies of
all such reports promptly after the same are filed. If financial statements are
contained in any such reports filed with the SEC, such financial statements will
fairly present the consolidated financial position of the entity filing such
statements as of the dates indicated and the consolidated results of operations,
changes in stockholders' equity, and cash flows for the periods then ended in
accordance with GAAP (subject in the case of interim financial statements to
normal recurring year-end adjustments that are not material). As of their
respective dates, such reports filed with the SEC will comply in all material
respects with the Securities Laws and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Any financial statements contained
in any other reports to another Regulatory Authority shall be prepared in
accordance with Laws applicable to such reports.
A-29
127
7.6 Rule 144. LHS shall comply with the requirements of Rule 144(c) under
the 1933 Act, as such rule may be amended from time to time (or any similar rule
or regulation hereafter adopted by the SEC), regarding the availability of
current public information to the extent required to enable each Stockholder to
sell shares of LHS Common Stock received in the Merger without registration
under the Securities Act pursuant to the resale provisions of Rule 144 or Rule
145(d) (or any similar rules or regulations). Upon the request of a Stockholder,
LHS will deliver to such Stockholder a written statement as to whether it has
complied with such requirements and, upon a Stockholder's compliance with the
applicable provisions of Rule 144 or 145(d), will take such action as may be
required (including, without limitation, causing legal counsel to issue an
appropriate opinion) to cause its transfer agent to effectuate any transfer of
such shares properly requested by such Stockholder, in accordance with the terms
and conditions of Rule 144 or 145(d).
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 Registration Statement; Proxy Statement; Stockholder Approval. As
soon as reasonably practicable, but in no event later than May 3, 1999, LHS
shall file the Registration Statement with the SEC, and shall use its reasonable
efforts to cause the Registration Statement to become effective under the 1933
Act as soon as possible thereafter and take any action required to be taken
under the applicable state Blue Sky or securities Laws in connection with the
issuance of the shares of LHS Common Stock upon consummation of the Merger;
provided, however, this filing requirement date is conditioned on timely receipt
by LHS of all information required to be furnished by PCM for inclusion in the
Registration Statement. PCM shall cooperate in the preparation and filing of the
Registration Statement and shall promptly furnish all information concerning it
and the holders of its capital stock as LHS may reasonably request in connection
with such action. PCM shall call a Stockholders' Meeting, to be held as soon as
reasonably practicable after the Registration Statement is declared effective by
the SEC, for the purpose of voting upon adoption of this Agreement and such
other related matters as it deems appropriate. In connection with the
Stockholders' Meeting, (i) PCM and LHS shall prepare and mail a Proxy Statement
to PCM's Stockholders, (ii) the Parties shall furnish to each other all
information concerning them that they may reasonably request in connection with
such Proxy Statement, (iii) the Board of Directors of PCM shall recommend to its
Stockholders the approval of the matters submitted for approval (subject to
Section 8.8), and (iv) the Board of Directors and officers of PCM and LHS shall
use their reasonable efforts to obtain such Stockholders' approval. LHS and PCM
shall make all necessary filings with respect to the Merger under the Securities
Laws.
8.2 Exchange Listing. LHS shall list, prior to the Effective Time, on the
Nasdaq National Market the shares of LHS Common Stock to be issued to the
holders of PCM Capital Stock pursuant to the Merger and the shares of LHS Common
Stock to be
A-30
128
issued to holders of PCM Options upon the exercise of such options following the
Effective Time, and LHS shall give all notices and make all filings with the
NASD required in connection with the transactions contemplated herein.
8.3 Applications; Antitrust Notification. LHS and PCM shall promptly
prepare and file applications with all Regulatory Authorities having
jurisdiction over the transactions contemplated by this Agreement seeking the
requisite Consents necessary to consummate the transactions contemplated by this
Agreement. To the extent required by the HSR Act, each of the Parties will
promptly file following the date hereof with the United States Federal Trade
Commission and the United States Department of Justice the notification and
report form required for the transactions contemplated hereby and any
supplemental or additional information which may reasonably be requested in
connection therewith pursuant to the HSR Act and will comply in all material
respects with the requirements of the HSR Act. The Parties shall deliver to each
other copies of all filings, correspondence and orders to and from all
Regulatory Authorities in connection with the transactions contemplated hereby.
8.4 Filings with State Offices. Upon the terms and subject to the
conditions of this Agreement, PCM and Sub shall execute and file the Articles of
Merger with the Secretary of State of the Commonwealth of Massachusetts in
connection with the Closing.
8.5 Agreement as to Efforts to Consummate.
(a) Subject to the terms and conditions of this Agreement, each Party
agrees to use, and to cause its Subsidiaries to use, its reasonable efforts
to take, or cause to be taken, all actions, and to do, or cause to be done,
all things necessary, proper, or advisable under applicable Laws to
consummate and make effective, as soon as reasonably practicable after the
date of this Agreement, the transactions contemplated by this Agreement,
including using its reasonable efforts to lift or rescind any Order
adversely affecting its ability to consummate the transactions contemplated
herein and to cause to be satisfied the conditions referred to in Article
9; provided, that nothing herein shall preclude either Party from
exercising its rights under this Agreement. Each Party shall use, and shall
cause each of its Subsidiaries to use, its reasonable efforts to obtain all
Consents necessary or desirable for the consummation of the transactions
contemplated by this Agreement.
(b) From the date hereof through the earlier of termination of this
Agreement or the Effective Time, PCM shall permit LHS to use an office
within PCM's offices to afford LHS's internal auditors reasonable access to
monitor the operations and financial activities of the PCM Entities. In
addition, the PCM Entities shall cooperate with LHS, upon LHS's reasonable
request, to develop plans for the integration of the business of the PCM
Entities with that of the LHS Entities.
(c) Each of LHS and PCM agrees that for a period of two (2) years
following the expiration or termination of this Agreement pursuant to
Article 11, it will not, without the prior written consent of the other,
either directly or indirectly, on its
A-31
129
own behalf or in the service or on behalf of others, solicit, divert, or
hire away, or attempt to solicit, divert, or hire away, from the employment
of the other Party (or its Subsidiaries or Affiliates) any Person employed
by such Party, whether or not such employee is a full-time employee or
temporary employee of such Party, and whether or not such employment is
pursuant to written agreement of such Party, and whether or not such
employment is for a determined period or is at will; provided, however,
that the foregoing shall not prohibit LHS or PCM from hiring any Person who
is an employee of the other Party when such Person is identified through
advertisements or other general solicitations of employees used by such
Party.
8.6 Investigation and Confidentiality.
(a) Prior to the Effective Time, each Party shall keep the other Party
advised of all material developments relevant to its business and to the
consummation of the Merger and shall permit the other Party to make or
cause to be made such investigation of the business and properties of it
and its Subsidiaries and of their respective financial and legal conditions
as the other Party reasonably requests, provided that such investigation
shall be reasonably related to the transactions contemplated hereby and
shall not interfere unnecessarily with normal operations. No investigation
by a Party shall affect the representations and warranties of the other
Party.
(b) Each Party shall, and shall cause its advisers and agents to,
maintain the confidentiality of all confidential information furnished to
it by the other Party concerning its and its Subsidiaries' businesses,
operations, and financial positions and shall not use such information for
any purpose except in furtherance of the transactions contemplated by this
Agreement. If this Agreement is terminated prior to the Effective Time,
each Party shall promptly return or certify the destruction of all
documents and copies thereof, and all work papers containing confidential
information received from the other Party.
8.7 Press Releases. Prior to the Effective Time, PCM and LHS shall
consult with each other as to the form and substance of any press release or
other public disclosure materially related to this Agreement or any other
transaction contemplated hereby, and neither party shall issue any such press
release or make any other public disclosure without the consent of the other
party, which consent shall not be unreasonably withheld; provided, that nothing
in this Section 8.7 shall be deemed to prohibit any Party from making any
disclosure which its counsel deems necessary or advisable in order to satisfy
such Party's disclosure obligations imposed by Law or any Regulatory Authority.
8.8 No Solicitation by PCM.
(a) PCM shall not, nor shall it permit any of its Subsidiaries to, nor
shall it authorize or permit any of its directors, officers or employees or
any Representative retained by it or any of its Subsidiaries to, directly
or indirectly through another Person, (i) solicit, initiate or encourage
(including by way of furnishing informa-
A-32
130
tion), or take any other action to facilitate, any inquiries or the making
of any proposal which constitutes any Acquisition Proposal or (ii)
participate in any discussions or negotiations regarding any Acquisition
Proposal; provided, however, that if, at any time, the Board of Directors
of PCM determines in good faith, after consultation with and receipt of
advice from outside counsel, that it is necessary to do so in order to
comply with its fiduciary duties to PCM's Stockholders under applicable
law, PCM may, in response to what is reasonably likely to lead to a
Superior Proposal and subject to providing prior written notice of its
decision to take such action to LHS (the "PCM Notice") and compliance with
Section 8.8(c), following delivery of the PCM Notice (x) furnish
information with respect to PCM and its Subsidiaries to any Person making
such Acquisition Proposal pursuant to a confidentiality agreement entered
into between such Person and PCM with terms no less favorable to PCM than
those contained in the Confidentiality Agreement and (y) participate in
discussions or negotiations regarding such Acquisition Proposal. PCM will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to the foregoing. PCM also will promptly request each Person that
has heretofore executed a confidentiality agreement in connection with its
consideration of an Acquisition Proposal to return or destroy all
confidential information heretofore furnished to such Person by or on
behalf of PCM or any of its Subsidiaries.
(b) Except as expressly permitted by this Section 8.8, neither the
Board of Directors of PCM nor any committee thereof shall (i) withdraw or
modify, or propose publicly to withdraw or modify, in a manner adverse to
LHS, the approval or recommendation by such Board of Directors or such
committee of the Merger or this Agreement, (ii) approve or recommend, or
propose publicly to approve or recommend, any Acquisition Proposal, or
(iii) cause PCM to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement (each, a "PCM Acquisition
Agreement") related to any Acquisition Proposal. Notwithstanding the
foregoing, in the event that the Board of Directors of PCM determines in
good faith, after consultation with and receipt of advice from outside
counsel, that in light of a Superior Proposal it is necessary to do so in
order to act in a manner consistent with its fiduciary duties to PCM's
Stockholders under applicable law, the Board of Directors of PCM may
withdraw or modify, or propose publicly to withdraw or modify, its position
with respect to this Agreement or the Merger or approve or recommend, or
propose publicly to approve or recommend, an Acquisition Proposal;
provided, however, nothing in this Section 8.8 shall release the Board of
Directors of PCM from its obligation to call a Stockholders' Meeting and
submit this Agreement and the Merger for a vote of the PCM Stockholders.
For purposes of this Agreement, a "Superior Proposal" means any proposal
made by a third party to acquire, directly or indirectly, including
pursuant to a tender offer, exchange offer, merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or securities, more
than 50% of the combined voting power of the shares of capital stock of PCM
then outstanding or all or substantially all the assets of PCM, and the
A-33
131
Board of Directors of PCM determines in its good faith judgment (after
consultation with its financial advisor) that such Acquisition Proposal, if
accepted, is reasonably likely to be consummated, taking into account the
Person making the proposal and all legal, financial and regulatory aspects
of the proposal, including any break-up fees, expense reimbursement
provisions and conditions to consummation, and would, if consummated,
result in a more favorable transaction to all of PCM's Stockholders than
the transaction contemplated by this Agreement, taking into account, to the
extent relevant, the long-term prospects and interests of PCM and its
Stockholders.
(c) In addition to the obligations of PCM set forth in paragraphs (a)
and (b) of this Section 8.8, PCM shall promptly (and in no event later than
48 hours after receipt of any Acquisition Proposal) advise LHS orally and
in writing of any request for non-public information or of any Acquisition
Proposal and shall provide in such PCM Notice the name of such Person
involved and any and all of the material proposed terms of any Acquisition
Proposal. PCM will keep LHS reasonably informed of the status of any such
request or Acquisition Proposal and will update the information required to
be provided in the PCM Notice upon the request of LHS.
8.9 Accounting and Tax Treatment. Each of the Parties undertakes and
agrees to use its reasonable efforts to cause the Merger, and to take no action
which would cause the Merger not, to qualify for treatment as a
pooling-of-interests for accounting purposes or as a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code for federal income tax
purposes.
8.10 Agreement of Affiliates.
(a) Each of PCM and LHS has identified in a letter dated the date of
this Agreement to the other, after consultation with outside counsel, all
persons who, at the time of obtaining any approval of its stockholders to
the consummation of the transactions contemplated hereby, it believes may
be deemed to be "affiliates" of such party, as that term, in the case of
PCM, is (i) defined for purposes of paragraphs (c) and (d) of Rule 145
under the Securities Act and (ii) used in and for purposes of Accounting
Series, Releases 130 and 135, as amended, of the SEC (the "PCM Affiliates")
and, in the case of LHS, is used in and for purposes of Accounting Series,
Releases 130 and 135, as amended, of the SEC (the "LHS Affiliates"). Each
of LHS and PCM shall use commercially reasonable efforts to cause each LHS
Affiliate and each PCM Affiliate, as the case may be, to deliver to LHS an
executed copy of an Affiliates Agreement in the form of Exhibits 3-1 and
3-2 hereto, as applicable (an "Affiliates Agreement"), within five business
days of the date of this Agreement. Prior to the Effective Time, each of
LHS and PCM shall amend and supplement such letter and each party shall use
all reasonable efforts to cause each additional person who is identified as
a LHS Affiliate or a PCM Affiliate, as the case may be, to execute a copy
of the applicable Affiliates Agreement.
A-34
132
(b) In the event LHS has entered into a definitive agreement (other
than this Agreement) for an acquisition or business combination
transaction, or such a transaction has otherwise become "probable" within
the meaning of Rule 3-05 and Article 11 of Regulation S-X, which would
require LHS to include or incorporate by reference in the prospectus
contained in the Registration Statement any pro forma or historical
financial information required under Rule 3-05 or Article 11 of Regulation
S-X (a "LHS Acquisition Agreement") and, as a result, the declaration of
effectiveness of the Registration Statement by the SEC has been delayed by
more than fifteen days or, after the date of effectiveness of the
Registration Statement, the consummation of the Merger has been delayed by
more than fifteen days, or LHS has made a primary or secondary public
equity offering during the period after the date of this Agreement and, as
a result, the declaration of effectiveness of the Registration Statement or
the consummation of the Merger has been delayed by more than fifteen days
(with any of the foregoing referred to as a "Delaying Event") and if the
Effective Time has not occurred on or before August 31, 1999, then, as soon
as reasonably practicable after the request of the Indemnitor
Representative, LHS shall publish financial results covering at least 30
days of combined operations of LHS and PCM within the meaning of Section
201.01 of the SEC's Codification of Financial Reporting Policies.
8.11 Employee Benefits and Contracts.
Following the Effective Time, LHS shall provide generally to officers and
employees of the PCM Entities employee benefits under employee benefit and
welfare plans (other than stock option or other plans involving the potential
issuance of LHS Common Stock), on terms and conditions which, when taken as a
whole with any benefits being provided by PCM, are substantially similar to
those currently provided by the LHS Entities to their similarly situated
officers and employees. For purposes of participation, vesting and (except in
the case of LHS retirement plans) benefit accrual under LHS's employee benefit
plans, the service of the employees of the PCM Entities prior to the Effective
Time shall be treated as service with a LHS Entity participating in such
employee benefit plans. LHS also shall cause the Surviving Corporation and its
Subsidiaries to honor in accordance with their terms all employment, severance,
consulting and other compensation Contracts disclosed in Section 8.11 of the PCM
Disclosure Memorandum to LHS between any PCM Entity and any current or former
director, officer, or employee thereof, and all provisions for vested benefits
or other vested amounts earned or accrued through the Effective Time under the
PCM Benefit.
8.12 Indemnification.
(a) To the extent, if any, not provided by an existing right of
indemnification or other agreement or policy, from and after the Effective
Time, the Surviving Corporation shall, to the fullest extent permitted by
applicable law and the Bylaws of PCM, indemnify, defend and hold harmless
each person who is now, or has been at any time prior to the date hereof,
or who becomes prior to the Effective Time, an officer or director of PCM
or any of its Subsidiaries (each an "Indemnified Party"
A-35
133
and collectively, the "Indemnified Parties") against (i) all losses,
expenses (including reasonable attorney's fees and expenses), claims,
damages or liabilities or, subject to the proviso of the next succeeding
sentence, amounts paid in settlement, arising out of actions or omissions
occurring at or prior to the Effective Time (and whether asserted or
claimed prior to, at or after the Effective Time) that are, in whole or in
part, based on or arising out of the fact that such person is or was a
director or officer of such party (the "Indemnified Liabilities"), and (ii)
all Indemnified Liabilities to the extent they are based on or arise out of
or pertain to the transactions contemplated by this Agreement. In the event
of any such loss, expense, claim, damage or liability arising before the
Effective Time, (i) the Surviving Corporation shall pay the reasonable fees
and expenses of counsel selected by PCM, which counsel shall be reasonably
satisfactory to LHS and the Surviving Corporation, promptly after
statements therefor are received, and otherwise advance to such Indemnified
Party upon request reimbursement of documented expenses reasonably
incurred, in either case to the extent not prohibited by the MBCL, and (ii)
any determination required to be made with respect to whether an
Indemnified Party's conduct complies with the standards set forth under the
MBCL and the Articles of Organization of the Surviving Corporation shall be
made by independent counsel mutually acceptable to LHS and the Indemnified
Party; provided, however, that the Surviving Corporation shall not be
liable for any settlement affected without its written consent (which
consent shall not be unreasonably withheld), and provided, further that
this indemnity shall be secondary to any existing insurance policies
providing such indemnity and it is contemplated that all such insurance
policies shall continue in full force and effect after the Closing. The
Indemnified Parties as a group may retain only one law firm with respect to
each related matter except to the extent there is, in the opinion of
counsel to an Indemnified Party, under applicable standards of professional
conduct, a conflict on any significant issue between positions of such
Indemnified Party and any other Indemnified Party or Indemnified Parties.
(b) LHS hereby agrees to guarantee unconditionally the performance of
the Surviving Corporation's obligations pursuant to Section 8.12(a).
(c) For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect policies of directors
and officers' liability insurance maintained by PCM for the benefit of
those persons who are currently covered by such policies on terms not
materially less favorable than the terms of such current insurance coverage
and all insurers having equal or better ratings than PCM's current
insurers; provided, however, that the Surviving Corporation shall not be
required to expend in any year an amount in excess of 150% of the annual
aggregate premiums currently paid by PCM for such insurance; and provided,
further, that if the annual premiums of such insurance coverage exceed such
amount, the Surviving Corporation shall be obligated to obtain a policy
with the best coverage available, in the reasonable judgment of the Board
of Directors of LHS, for a cost not exceeding such amount.
A-36
134
(d) If LHS, the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person or entity and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all of substantially all of its
properties and assets to any person or entity, then and in either such
case, proper provisions shall be made so that the successors and assigns of
LHS shall assume the obligations set forth in this Section 8.12.
(e) The provisions of this Section 8.12 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and his or her Representative.
8.13 Technology Conversions. From the date hereof through the earlier of
termination of this Agreement or the Effective Time, the PCM Entities shall
continue to take all commercially reasonable actions as may be necessary to
ensure that the PCM Entities computer software systems are able to become Year
2000 compliant on a timely basis acting in the ordinary course of business. In
addition, from the date hereof through the earlier of termination of this
Agreement or the Effective Time, the PCM Entities shall permit LHS's officers,
employees and Representatives to be involved to the extent reasonably requested
by LHS, in the conversion of the PCM Entities' computer software systems to
systems that are Year 2000 compliant, and PCM shall use commercially reasonable
efforts to comply with all reasonable requests of LHS in respect of the design
and implementation of such conversion in anticipation of consummation of the
Merger. Notwithstanding the foregoing, all final decisions with respect to such
conversion design and implementation shall be made by the appropriate PCM
Entity. In the event that this Agreement is terminated and the Merger is not
consummated for any reason, neither Party shall have any Liability to the other
with respect to the involvement of LHS's officers, employees and Representatives
in such conversion project.
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
9.1 Conditions to Obligations of Each Party. The respective obligations
of each Party to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parties pursuant to Section 12.6:
(a) Stockholder Approval. The Stockholders of PCM shall have adopted
this Agreement, and the consummation of the transactions contemplated
hereby, including the Merger, as and to the extent required by Law.
(b) HSR Act. Any waiting period (and any extension thereof)
applicable to the Consummation of the Merger under the HSR Act shall have
expired or been terminated.
A-37
135
(c) Legal Proceedings. No court or governmental or regulatory
authority of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any Law or Order (whether temporary,
preliminary or permanent) or taken any other action which prohibits,
restricts or makes illegal consummation of the transactions contemplated by
this Agreement.
(d) Registration Statement. The Registration Statement shall be
effective under the 1933 Act, no stop orders suspending the effectiveness
of the Registration Statement shall have been issued, no action, suit,
proceeding or investigation by the SEC to suspend the effectiveness thereof
shall have been initiated and be continuing, and all necessary approvals
under state securities Laws or the 1933 Act or 1934 Act relating to the
issuance or trading of the shares of LHS Common Stock issuable pursuant to
the Merger shall have been received.
(e) Tax Matters. Each Party shall have received a written opinion of
counsel from Alston & Bird LLP, counsel to LHS, in form reasonably
satisfactory to LHS and PCM (the "Tax Opinion"), dated as of the Effective
Time to the effect that (i) the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code, (ii) the
exchange in the Merger of PCM Capital Stock for LHS Common Stock will not
give rise to gain or loss to the Stockholders of PCM with respect to such
exchange under the federal Tax Laws of the United States (except to the
extent of any cash received), and (iii) the aggregate tax basis of the LHS
Common Stock received by stockholders who exchange all of their PCM Capital
Stock solely for LHS Common Stock in the Merger will be the same as the
aggregate tax basis of the PCM Capital Stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional share interest
for which cash is received). In rendering such Tax Opinion, such counsel
shall be entitled to rely upon representations of officers of PCM and LHS
reasonably satisfactory in form and substance to such counsel.
9.2 Conditions to Obligations of LHS. The obligations of LHS to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by LHS pursuant to Section 12.6(a):
(a) Representations and Warranties. For purposes of this Section
9.2(a), the accuracy of the representations and warranties of PCM set forth
in this Agreement shall be assessed as of the date of this Agreement and as
of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to a
specified date shall speak only as of such date). Notwithstanding the
foregoing, in the event a Delaying Event has occurred, the accuracy of the
representations and warranties shall not be assessed as of the Effective
Time but as of the date such acquisition or other business combination
giving rise to the Delaying Event becomes "probable" or, in the case of a
public offering giving rise to a Delaying Event, the date of filing of the
applicable registration statement, and in
A-38
136
each case as of no date subsequent to such time. The representations and
warranties set forth in Section 5.3 shall be true and correct. There shall
not exist inaccuracies in the representations and warranties of PCM set
forth in this Agreement (including the representations and warranties set
forth in Section 5.3) such that the aggregate effect of such inaccuracies
has, or is reasonably likely to have, a PCM Material Adverse Effect;
provided that, for purposes of this sentence only, those representations
and warranties which are qualified by references to "material" or "Material
Adverse Effect" shall be deemed not to include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of PCM to be performed and complied with pursuant
to this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all
material respects.
(c) Certificates. PCM shall have delivered to LHS (i) a certificate,
dated as of the Effective Time and signed on its behalf by its chief
executive officer and its chief financial officer, to the effect that the
conditions set forth in Section 9.1 as relates to PCM and in Section 9.2(a)
and 9.2(b) have been satisfied, and (ii) certified copies of resolutions
duly adopted by PCM's Board of Directors and stockholders evidencing the
taking of all corporate action necessary to authorize the execution,
delivery and performance of this Agreement, and the consummation of the
transactions contemplated hereby, all in such reasonable detail as LHS and
its counsel shall request.
(d) Affiliates Agreements. LHS shall have received from each
affiliate of PCM the affiliate letter referred to in Section 8.10, to the
extent necessary to assure in the reasonable judgment of LHS that the
transactions contemplated hereby will qualify for pooling-of-interests
accounting treatment.
(e) Opinion of Counsel. LHS shall have received an opinion of Bingham
Dana LLP, counsel to PCM, dated as of the Closing, as to the matters set
forth in Exhibit 4.
(f) Pooling Letters. LHS shall have received letters, dated as of the
date of filing of the Registration Statement with the SEC and as of the
Effective Time, addressed to LHS, in form and substance reasonably
acceptable to LHS, from Ernst & Young LLP (Atlanta) regarding the
appropriateness of pooling-of-interests accounting for the Merger under APB
16 if closed and consummated in accordance with this Agreement. LHS and PCM
shall have received letters, dated as of the date of filing of the
Registration Statement with the SEC and as of the Effective Time, addressed
to LHS and PCM, in form and substance reasonably acceptable to LHS and PCM,
from Arthur Andersen LLP (Boston) to the effect that such firm is not aware
of any matters relating to PCM and its Subsidiaries which would preclude
PCM and its Subsidiaries from being a party to a transaction to be
accounted for as a pooling-of-interests.
A-39
137
(g) Material Adverse Change. From the date of this Agreement there
shall have been no event, change or occurrence, which individually or
together with any other event, change or occurrence, has, or is reasonably
likely to have, a PCM Material Adverse Effect; provided, however, that the
foregoing shall not include any Material Adverse Effect attributable to the
following: (i) crises or change in economic conditions or in the financial
markets of the United States or elsewhere or (ii) any circumstances, event
or change generally affecting PCM's industry. Notwithstanding the
foregoing, in the event a Delaying Event has occurred, this Section 9.2(g)
shall be assessed as of the date such acquisition or other business
combination giving rise to the Delaying Event becomes "probable" or, in the
case of a public offering giving rise to a Delaying Event, the date of
filing of the applicable registration statement, and as of no date
subsequent to such time.
(h) Stockholder Dissent. Less than five percent (5%) of the holders
of PCM Preferred Stock or PCM Common Stock shall have perfected their
dissenters' rights pursuant to Section 3.4 hereof and Section 86 of the
MBCL.
9.3 Conditions to Obligations of PCM. The obligations of PCM to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by PCM pursuant to Section 12.6(b):
(a) Representations and Warranties. For purposes of this Section
9.3(a), the accuracy of the representations and warranties of LHS set forth
in this Agreement shall be assessed as of the date of this Agreement and as
of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to a
specified date shall speak only as of such date). There shall not exist
inaccuracies in the representations and warranties set forth in this
Agreement such that the aggregate effect of such inaccuracies has, or is
reasonably likely to have, a LHS Material Adverse Effect; provided that,
for purposes of this sentence only, those representations and warranties
which are qualified by references to "material" or "Material Adverse
Effect" shall be deemed not to include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of LHS to be performed and complied with pursuant
to this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all
material respects.
(c) Certificates. LHS shall have delivered to PCM (i) a certificate,
dated as of the Effective Time and signed on its behalf by its chief
executive officer and its chief financial officer, to the effect that the
conditions set forth in Section 9.1 as relates to LHS and in Section 9.3(a)
and 9.3(b) have been satisfied, and (ii) certified copies of resolutions
duly adopted by LHS's Board of Directors and Sub's Board of Directors and
sole stockholder evidencing the taking of all corporate action necessary to
authorize the execution, delivery and performance of this
A-40
138
Agreement, and the consummation of the transactions contemplated hereby,
all in such reasonable detail as PCM and its counsel shall request.
(d) Pooling Letters. LHS and PCM shall have received letters, dated
as of the date of filing of the Registration Statement with the SEC and as
of the Effective Time, addressed to LHS and PCM, in form and substance
reasonably acceptable to LHS and PCM, from Arthur Andersen LLP (Boston) to
the effect that such firm is not aware of any matters relating to PCM and
its Subsidiaries which would preclude PCM and its Subsidiaries from being a
party to a transaction to be accounted for as a pooling-of-interests.
(e) Opinion of Counsel. PCM shall have received an opinion of Alston
& Bird LLP, counsel to LHS, dated as of the Closing, as to the matters set
forth in Exhibit 5.
(f) Nasdaq Listing. The shares of LHS Common Stock issuable to PCM's
Stockholders pursuant to the Merger and the shares of LHS Common Stock to
be issued to holders of PCM Options upon the exercise of such options
following the Effective Time shall have been approved for listing on the
Nasdaq National Market.
(g) Material Adverse Change. From the date of this Agreement there
shall have been no event, change or occurrence, which individually or
together with any other event, change or occurrence, has, or is reasonably
likely to have, a LHS Material Adverse Effect; provided, however, that the
foregoing shall not include any Material Adverse Effect attributable to the
following: (i) crises or change in economic conditions or in the financial
markets of the United States or elsewhere or (ii) any circumstance, event
or change generally affecting LHS's industry.
ARTICLE 10
INDEMNIFICATION
10.1 Agreement of Indemnitors to Indemnify. Subject to the occurrence of
the Merger and the terms and conditions of this Article 10 and the Escrow
Agreement, Indemnitors severally (but not jointly and severally) agree to
indemnify, defend, and hold harmless Indemnitees, and each of them, from,
against, for and in respect of any and all Losses asserted against, or paid,
suffered or incurred by, an Indemnitee and resulting from, based upon, or
arising out of:
(a) the inaccuracy, untruth, incompleteness or breach of any
representation or warranty of PCM contained in or made pursuant to this
Agreement as of the date of assessment as provided in Section 9.2(a) or in
any certificate, Exhibit or Disclosure Schedule furnished by PCM in
connection herewith and for purposes of this Section 10.1(a) any
qualification of such representations and warranties by reference to
"material" or "Material Adverse Effect" shall be deemed not to include such
qualifications in determining any inaccuracy, untruth, incompleteness or
breach thereof; and
A-41
139
(b) a breach of or failure to perform prior to the Effective Time any
covenant or agreement of PCM made in this Agreement.
10.2 Procedures for Indemnification.
(a) An Indemnification Claim shall be made by an Indemnitee by delivery
of a written notice to the Indemnitor Representative requesting
indemnification and specifying in reasonable detail the basis on which
indemnification is sought and the amount of asserted Losses and, in the
case of a Third Party Claim, containing (by attachment or otherwise) such
other information as such Indemnitee shall have concerning such Third Party
Claim.
(b) If the Indemnification Claim involves a Third Party Claim the
procedures set forth in Section 10.3 hereof shall be observed by the
Indemnitee and the Indemnitor Representative.
(c) If the Indemnification Claim involves a matter other than a Third
Party Claim, the Indemnitor Representative shall have 30 days to object to
such Indemnification Claim by delivery of a written notice of such
objection to such Indemnitee specifying in reasonable detail the basis for
such objection. Failure to timely so object shall constitute a final and
binding acceptance of the Indemnification Claim by the Indemnitor
Representative on behalf of all Indemnitors, and the Indemnification Claim
shall be paid in accordance with subsection (d) hereof. If an objection is
timely interposed by the Indemnitor Representative and the dispute is not
resolved by such Indemnitee and the Indemnitor Representative within 15
days from the date the Indemnitee receives such objection, such dispute
shall be resolved by arbitration as provided in Section 10.12.
(d) Upon determination of the amount of an Indemnification Claim,
whether by agreement between the Indemnitor Representative and the
Indemnitee or by an arbitration award or by any other final adjudication,
subject to Section 10.9, the Escrow Agent shall pay out of the Escrow the
amount of such Indemnification Claim within ten days of the date such
amount is determined.
10.3 Third Party Claims. The obligations and liabilities of the parties
hereunder with respect to a Third Party Claim shall be subject to the following
terms and conditions:
(a) The Indemnitee shall give the Indemnitor Representative written
notice of a Third Party Claim promptly after receipt by the Indemnitee of
notice thereof, and the Indemnitor Representative, on behalf of the
Indemnitors, may undertake the defense, compromise and settlement thereof
by representatives of its own choosing reasonably acceptable to the
Indemnitee. The failure of the Indemnitee to notify the Indemnitor
Representative of such claim shall not relieve the Indemnitors of any
Liability that they may have with respect to such claim except to the
extent the Indemnitor Representative demonstrates that the defense of such
claim is prejudiced by such failure. The assumption of the defense,
compromise and settlement of any such Third Party Claim by the Indemnitor
Representative shall be an acknowledg-
A-42
140
ment of the obligation of the Indemnitors to indemnify the Indemnitee with
respect to such claim hereunder, unless the Indemnitor gives written notice
to the Indemnitee within ten (10) days after receipt of the Indemnitee's
notice that it disputes its liability to Indemnitee with respect to such
Third Party Claim notwithstanding its assumption of the defense thereof. If
the Indemnitee desires to participate in, but not control, any such
defense, compromise and settlement, it may do so at its sole cost and
expense. If, however, the Indemnitor Representative fails or refuses to
undertake the defense of such Third Party Claim within ten (10) days after
written notice of such claim has been given to the Indemnitor
Representative by the Indemnitee, the Indemnitee shall have the right to
undertake the defense, compromise and settlement of such claim with counsel
of its own choosing. In the circumstances described in the preceding
sentence, the Indemnitee shall, promptly upon its assumption of the defense
of such claim, be deemed to have made an Indemnification Claim as specified
in this Section 10.3 which is not a Third Party Claim for the purposes of
the procedures set forth herein.
(b) If, in the reasonable opinion of the Indemnitee, any Third Party
Claim or the litigation or resolution thereof involves an issue or matter
which could reasonably have a material adverse effect on the business,
operations, assets, properties or prospects of the Indemnitee (including,
without limitation, the administration of the tax returns and
responsibilities under the tax laws of the Indemnitee), the Indemnitee
shall have the right to control the defense, compromise and settlement of
such Third Party Claim undertaken by the Indemnitor Representative, and the
fees, costs and expenses of any attorney representing the Indemnitee in
connection therewith, together with the fees, costs and expenses of any
consultant, accountant or other party retained by such Indemnitee in
connection with the aforementioned defense, compromise and settlement,
shall be paid by the Indemnitee and all other Losses paid, suffered or
incurred by the Indemnitee resulting from, based upon or arising out of
such Third Party Claim shall be included as part of the indemnification
obligations of the Indemnitors hereunder. If the Indemnitee shall elect to
exercise such right, the Indemnitor Representative shall have the right to
participate in, but not control, the defense, compromise and settlement of
such Third Party Claim at its sole cost and expense.
(c) No settlement of a Third Party Claim involving the asserted
Liability of the Indemnitors under this Article shall be made without the
prior written consent by or on behalf of the Indemnitor Representative,
which consent shall not be unreasonably withheld or delayed. If the
Indemnitor Representative assumes the defense of such a Third Party Claim,
(x) no compromise or settlement thereof may be effected by the Indemnitor
Representative without the Indemnitee's consent unless (i) there is no
finding or admission of any violation of law or any violation of the rights
of any person and no effect on any other claim that may be made against the
Indemnitee, (ii) the sole relief provided is monetary damages in an amount
for which there are sufficient assets in the Escrow, and (iii) the
compromise or settlement includes, as an unconditional term thereof, the
giving by the claimant or
A-43
141
the plaintiff to the Indemnitee of a release, in form and substance
satisfactory to the Indemnitee, from all Liability in respect of such Third
Party Claim, and (y) the Indemnitee shall have no Liability with respect to
any compromise or settlement thereof effected without its consent.
(d) In connection with the defense, compromise or settlement of any
Third Party Claim, the parties to this Agreement shall execute such powers
of attorney as may reasonably be necessary or appropriate to permit
participation of counsel selected by any party hereto and, as may
reasonably be related to any such claim or action, shall provide access to
the counsel, accountants and other representatives of each party during
normal business hours to all properties, personnel, books, tax records,
contracts, commitments and all other business records of such other party
and will furnish to such other party copies of all such documents as may
reasonably be requested (certified, if requested).
10.4 Exclusive Remedy. This Article 10 shall provide the sole and
exclusive remedy for any and all Losses sustained or incurred by any Indemnitee,
and for any breach or purported breach by PCM of any representation, warranty,
covenant, agreement, obligation or undertaking contained in this Agreement
(including any schedule or exhibit hereto) or any other agreement, instrument,
certificate or other document delivered by or on behalf of PCM in connection
with this Agreement, the Merger or any other transaction contemplated hereunder.
10.5 Survival. Subject to the time limitations set forth in Section 10.6,
all representations, warranties, covenants and agreements contained in this
Agreement or in any certificate delivered pursuant to this Agreement shall
survive the Closing notwithstanding any investigation conducted with respect
thereto or any knowledge acquired as to the accuracy or inaccuracy of any such
representation or warranty.
10.6 Time Limitations. The Indemnitees shall not be able to assert a
claim for indemnification under or in connection with a breach of any of the
representations, warranties, covenants or agreements made or to be performed by
PCM contained in this Agreement unless written notice asserting an
Indemnification Claim based thereon is given to the Indemnitor Representative
(i) with respect to an Indemnification Claim asserted under Section 10.1(a)
based upon the inaccuracy, untruth, incompleteness or breach of any
representation or warranty of PCM contained in Sections 5.1, 5.2, 5.4, 5.9,
5.10, 5.11, 5.12, 5.13, 5.14, 5.15, 5.16, 5.17, 5.19, 5.20, 5.21, 5.22 and 5.23
prior to one (1) year from the Effective Time and (ii) with respect to all other
Indemnification Claims not covered by (i), the earlier of (A) one (1) year from
the Effective Time or (B) the date of issuance of the first independent
accountant's report on the consolidated financial statements of LHS which
reflect the combined results of LHS and PCM subsequent to the Effective Time
(but in no event shall any such time period be longer than the maximum period
permitted in order for the Merger to qualify for "pooling of interests"
accounting treatment).
A-44
142
10.7 Limitations as to Amount, Liabilities, Recourse, Etc.
(a) Indemnitors shall have no Liability with respect to the matters
described in this Article 10 unless the total of all Losses with respect
thereto exceeds $750,000 in which event the Indemnitees will be entitled to
indemnification as provided in this Article 10 for all such Losses
including the first $750,000; provided, however, that each individual claim
of $25,000 or less shall not be indemnifiable, and shall not be includable
in determining whether the $750,000 threshold has been reached. The
limitations set forth in this Section 10.7(a) shall not apply to any
intentional breaches by PCM prior to the Effective Time of any covenant or
agreement contained in this Agreement.
(b) Notwithstanding anything in this Agreement expressed or implied to
the contrary, in no event shall the Indemnitors have any Liability, nor
shall any of the Indemnitees have the right to make an Indemnification
Claim or a claim against the Escrow pursuant to the Escrow Agreement, with
respect to, based upon or arising out of the Intellectual Property
Litigation or any claim that any of PCM's Intellectual Property or business
operations infringe on the rights of any third party; provided that PCM had
no Knowledge of such claim as of the date of this Agreement.
(c) Notwithstanding anything in this Agreement expressed or implied to
the contrary, (i) no Indemnitor shall have any personal liability for any
breach or purported breach by PCM or the Indemnitors of any representation,
warranty, covenant, agreement, obligation or undertaking contained in this
Agreement (including any schedule or exhibit hereto) or any other
agreement, instrument, certificate or other document delivered by or on
behalf of PCM or any Indemnitor in connection with this Agreement, the
Merger or any other transaction contemplated hereunder and (ii) the sole
recourse of the Indemnitees with respect to any Indemnification Claim shall
be to make a claim against the Escrow pursuant to, and in accordance with,
the provisions of this Article 10 and the Escrow Agreement.
10.8 Tax Effect and Insurance. The Liability of the Indemnitors with
respect to any Indemnification Claim shall be reduced by the tax benefit
actually realized and any insurance proceeds received by the Indemnitees as a
result of any Losses upon which such Indemnification Claim is based, and shall
include any tax detriment actually suffered by the Indemnitees as a result of
such Losses. The amount of any such tax benefit or detriment shall be determined
by taking into account the effect, if any and to the extent determinable, of
timing differences resulting from the acceleration or deferral of items of gain
or loss resulting from such Losses and shall otherwise be determined so that
payment by the Indemnitors of the Indemnification Claim, as adjusted to give
effect to any such tax benefit or detriment, will make the Indemnitee as
economically whole as is reasonably practical with respect to the Losses upon
which the Indemnification Claim is based. Any dispute as to the amount of such
tax benefit or detriment shall be resolved by arbitration as provided in Section
10.12 of this Agreement.
A-45
143
10.9 Escrow. Upon notice to the Indemnitor Representative specifying in
reasonable detail the basis therefor, the Indemnitee may give notice of an
Indemnification Claim in any amount to which it may be entitled under this
Article 10 under the Escrow Agreement.
10.10 Subrogation. Upon payment in full of any Indemnification Claim,
whether such payment is effected by set-off or otherwise, or the payment of any
judgment or settlement with respect to a Third Party Claim, the Indemnitors
shall be subrogated to the extent of such payment to the rights of the
Indemnitee against any person or entity with respect to the subject matter of
such Indemnification Claim or Third Party Claim.
10.11 Appointment of Indemnitor Representative. Each Indemnitor
constitutes and appoints the Indemnitor Representative as his or her true and
lawful attorney-in-fact to act for and on behalf of such Indemnitor in all
matters relating to or arising out of this Article 10 and the Liability or
asserted Liability of such Indemnitor hereunder, including specifically, but
without limitation, accepting and agreeing to the Liability of such Indemnitor
with respect to any Indemnification Claim, objecting to any Indemnification
Claim, disputing the Liability of such Indemnitor, or the amount of such
Liability, with respect to any Indemnification Claim and prosecuting and
resolving such dispute as herein provided, accepting the defense, compromise and
settlement of any Third Party Claim on behalf of such Indemnitor or refusing to
accept the same, settling and compromising the Liability of such Indemnitor
hereunder, instituting and prosecuting such actions (including arbitration
proceedings) as the Indemnitor Representative shall deem appropriate in
connection with any of the foregoing, retaining counsel, accountants, appraisers
and other advisers in connection with any of the foregoing, all for the account
of the Indemnitor, such Indemnitor agreeing to be fully bound by the acts,
decisions and agreements of the Indemnitor Representative taken and done
pursuant to the authority herein granted. The Indemnitor Representative shall
have power of substitution to appoint a successor. In the event that the
Indemnitor Representative dies, becomes unable to perform his duties or resigns,
in each case without having appointed a successor, then Indemnitors holding,
immediately prior to the Effective Time, a majority of the combined voting power
of the PCM Capital Stock shall elect a successor Indemnitor Representative. No
Indemnitor shall have any cause of action against the Indemnitor Representative
for any action taken, decision made or instruction given by the Indemnitor
Representative under this Agreement or the Escrow Agreement or in connection
with the transactions contemplated under this Agreement, except for any action
taken, decision made or instruction given that constitutes gross negligence or
willful misconduct of the Indemnitor Representative. Each Indemnitor hereby
agrees to indemnify and to save and hold harmless the Indemnitor Representative
from any Liability incurred by the Indemnitor Representative based upon or
arising out of any act, whether of omission or commission, of the Indemnitor
Representative pursuant to the authority herein granted, other than acts,
whether of omission or commission, of the Indemnitor Representative that
constitute gross negligence or willful misconduct in the exercise by the
Indemnitor Representative of the authority herein granted. Notwithstanding the
foregoing, no Indemnitor shall have any personal liability with respect to or in
connection with any Indemnification Claim made by the Indemnitor Representative
A-46
144
pursuant to the foregoing sentence. In the event that the Indemnitor
Representative shall be entitled to indemnification pursuant to this Section
10.11, the Indemnitor Representative's sole recourse to enforce his right of
indemnification shall be to make a claim and proceed against the escrow
established pursuant to the Escrow Agreement.
10.12 Arbitration. All disputes arising under this Article 10 shall be
resolved by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association. Arbitration shall be by a single
arbitrator experienced in the matters at issue and selected by the Indemnitor
Representative and LHS in accordance with the Commercial Arbitration Rules of
the American Arbitration Association. The arbitration shall be held in such
place in Atlanta, Georgia as may be specified by the arbitrator (or any place
agreed to by the Indemnitor Representative, LHS and the arbitrator). The
decision of the arbitrator shall be final and binding as to any matters
submitted under this Article 10; provided, that, if necessary, such decision and
satisfaction procedure may be enforced by either the Indemnitor Representative
or the LHS in any court of record having jurisdiction over the subject matter or
over any of the parties to this Agreement. All costs and expenses incurred in
connection with any such arbitration proceeding (including reasonable attorneys
fees) shall be borne by the party against which the decision is rendered, or, if
no decision is rendered, such costs and expenses shall be borne equally by the
Indemnitors as one party and the Indemnitees as the other party. If the
arbitrator's decision is a compromise, the determination of which party or
parties bears the costs and expenses incurred in connection with any such
arbitration proceeding shall be made by the arbitrator on the basis of the
arbitrator's assessment of the relative merits of the parties' positions. In no
event may the arbitrator award damages or other amounts against the Indemnitors
for punitive damages or for any amounts in excess of the limit set forth in
Section 10.7.
10.13 Litigation Fees and Expenses. All fees and expenses incurred by the
Indemnitor Representative in connection with the performance of his duties under
this Agreement and the Escrow Agreement, and all fees, expenses and settlement
amounts or payments incurred, paid or required to be paid by the Indemnitors or
the Indemnitor Representative pursuant to the provisions of this Article 10
(including, without limitation, all costs, fees and expenses incurred in
connection with investigating, defending, litigating or settling any Third Party
Claim or in connection with any arbitration proceeding pursuant to Section
10.12) shall be satisfied out of the escrow established pursuant to the Escrow
Agreement.
10.14 Termination of Agreement. This Article 10 shall not apply to claims
any Party may have (i) prior to the Effective Time or (ii) after termination of
this Agreement pursuant to Article 11.
A-47
145
ARTICLE 11
TERMINATION
11.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement by the Stockholders of PCM,
this Agreement may be terminated and the Merger abandoned at any time prior to
the Effective Time:
(a) By mutual consent of LHS and PCM; or
(b) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material breach by
the other Party of any representation or warranty contained in this
Agreement which cannot be cured or has not been cured within 30 days after
the giving of written notice to the breaching Party of such breach and
which breach is reasonably likely to have, individually or in the
aggregate, a PCM Material Adverse Effect or a LHS Material Adverse Effect,
as applicable, on the breaching Party; or
(c) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material breach by
the other Party of any covenant or agreement contained in this Agreement
which cannot be cured or has not been cured within 30 days after the giving
of written notice to the breaching Party of such breach and which breach is
reasonably likely to have, individually or in the aggregate, a PCM Material
Adverse Effect or a LHS Material Adverse Effect, as applicable, on the
breaching Party; or
(d) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event (i) any Consent of any
Regulatory Authority required for consummation of the Merger shall have
been denied by final nonappealable action of such authority or if any
action taken by such authority is not appealed within the time limit for
appeal, or (ii) the Stockholders of PCM fail to vote their approval of the
matters relating to this Agreement and the transactions contemplated hereby
at the Stockholders' Meetings where such matters were presented to such
stockholders for approval and voted upon; or
(e) By either Party in the event that the Merger shall not have been
consummated by November 30, 1999, if the failure to consummate the
transactions contemplated hereby on or before such date is not caused by
any breach of this Agreement by the Party electing to terminate pursuant to
this Section 11.1(e); provided, however, in the event the Merger is not
consummated by November 30, 1999 and a Delaying Event has occurred, PCM
shall have the right to extend the date on which LHS can terminate this
Agreement pursuant to this Section 11.1(e) until 35 days after the date on
which the Registration Statement is declared
A-48
146
effective or, after effectiveness, the prospectus in the Registration
Statement has been appropriately updated; or
(f) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event that any of the
conditions precedent to the obligations of such Party to consummate the
Merger cannot be satisfied or fulfilled by the date specified in Section
11.1(e); or
(g) By LHS, in the event that the Board of Directors of PCM shall have
withdrawn or failed to reaffirm (to the exclusion of any other Acquisition
Proposal) its approval of the Merger and the transactions contemplated by
this Agreement, or shall have resolved not to reaffirm the Merger, or shall
have affirmed, recommended or authorized entering into any other
Acquisition Proposal or other transaction involving a merger, share
exchange, consolidation or transfer of substantially all of the Assets of
PCM.
11.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 11.1, this Agreement shall
become void and have no effect, except that (i) the agreements contained in this
Section 11.2, Article 12, Section 8.6(b) and the Confidentiality Agreement shall
survive any such termination and abandonment, and (ii) a termination pursuant to
Sections 11.1(b), 11.1(c) or 11.1(f) shall not relieve the breaching Party from
Liability for an uncured breach of a representation, warranty, covenant, or
agreement giving rise to such termination.
ARTICLE 12
MISCELLANEOUS
12.1 Definitions.
(a) Except as otherwise provided herein, the capitalized terms set
forth below shall have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Acquisition Proposal" with respect to a Party shall mean any
tender offer or exchange offer or any proposal for a merger,
acquisition of 15% or more of the stock or assets of, or other business
combination involving the acquisition of such Party or any of its
Subsidiaries or the acquisition of a 15% or greater equity interest in,
or a 15% or greater portion of the assets of, such Party or any of its
Subsidiaries.
"Affiliate" of a Person shall mean: (i) any other Person
directly, or indirectly through one or more intermediaries,
controlling, controlled by or under common control with such Person;
(ii) any officer, director, partner,
A-49
147
employer, or direct or indirect beneficial owner of any 10% or greater
equity or voting interest of such Person; or (iii) any other Person for
which a Person described in clause (ii) acts in any such capacity.
"Agreement" shall mean this Agreement and Plan of Merger,
including the Exhibits delivered pursuant hereto and incorporated
herein by reference.
"Articles of Merger" shall mean the Articles of Merger to be
executed by PCM and Sub and filed with the Secretary of State of the
Commonwealth of Massachusetts relating to the Merger as contemplated by
Section 1.1.
"Assets" of a Person shall mean all of the assets, properties and
rights of such Person of every kind, nature, character and description,
whether real, personal or mixed, tangible or intangible, accrued or
contingent, or otherwise relating to or utilized in such Person's
business, directly or indirectly, in whole or in part, whether or not
carried on the books and records of such Person, and whether or not
owned in the name of such Person or any Affiliate of such Person and
wherever located.
"Closing Date" shall mean the date on which the Closing occurs.
"Confidentiality Agreement" shall mean that Confidentiality
Agreement entered into between LHS and PCM dated January 22, 1999.
"Consent" shall mean with respect to any person any consent,
approval, authorization, clearance, exemption, waiver, or similar
affirmation by such Person pursuant to any Contract, Law, Order, or
Permit.
"Contract" shall mean with respect to any person any written or
oral agreement or other legally binding arrangement, authorization,
commitment, contract, indenture, instrument, lease, obligation, plan,
practice, restriction, understanding, or undertaking of any kind or
character to which such Person is a party or that is binding on such
Person or its capital stock, Assets or business.
"Default" shall mean with respect to any person (i) any breach or
violation of, default under, contravention of, or conflict with, any
Contract, Law, Order, or Permit with respect to such Person (ii) any
occurrence of any event that with the passage of time or the giving of
notice or both would constitute a breach or violation of, default
under, contravention of, or conflict with, any Contract, Law, Order, or
Permit, with respect to such Person or (iii) any occurrence of any
event that with or without the passage of time or the giving of notice
would give rise to a right of such Person to exercise any remedy or
obtain any relief under, terminate or revoke, suspend, cancel, or
modify or change the current terms of, or renegotiate, or to accelerate
the maturity or performance of, or to increase or impose any Liability
under, any Contract, Law, Order, or Permit with respect to such Person.
A-50
148
"Environmental Laws" shall mean all Laws in effect at or prior to
the date of this Agreement relating to pollution or protection of human
health or the environment (including ambient in effect at or prior to
the date of this Agreement air, surface water, ground water, land
surface, or subsurface strata) and which are administered, interpreted,
or enforced by the United States Environmental Protection Agency and
state and local agencies with jurisdiction over, and including common
law in respect of, pollution or protection of the environment,
including the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the
Resource Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et
seq. ("RCRA"), and other Laws in effect at or prior to the date of this
Agreement relating to emissions, discharges, releases, or threatened
releases of any Hazardous Material, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of any Hazardous Material.
"Equity Rights" shall mean all arrangements, calls, commitments,
Contracts, options, rights to subscribe to, scrip, understandings,
warrants, or other binding obligations of any character whatsoever
relating to, or securities or rights convertible into or exchangeable
for, shares of the capital stock of a Person or by which a Person is or
may be bound to issue additional shares of its capital stock or other
Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Escrow" shall mean the assets held by the Escrow Agent pursuant
to the Escrow Agreement.
"Exhibits" 1 through 5, inclusive, shall mean the Exhibits so
marked, copies of which are attached to this Agreement. Such Exhibits
are hereby incorporated by reference herein and made a part hereof, and
may be referred to in this Agreement and any other related instrument
or document without being attached hereto.
"GAAP" shall mean generally accepted accounting principles,
consistently applied during the periods involved.
"Hazardous Material" shall mean (i) any hazardous substance,
hazardous material, hazardous waste, or toxic substance (as those terms
are defined by any applicable Environmental Laws) and (ii) any
chemicals, pollutants, contaminants, petroleum, petroleum products, or
oil (and specifically shall include asbestos requiring abatement,
removal, or encapsulation pursuant to the requirements of governmental
authorities and any polychlorinated biphenyls).
"HSR Act" shall mean Section 7A of the Clayton Act, as added by
Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
A-51
149
"Indemnification Claim" shall mean a claim for indemnification
hereunder.
"Indemnitees" shall mean LHS, PCM as the surviving corporation of
the Merger, and their Affiliates and Representatives.
"Indemnitors" shall mean the Stockholders.
"Indemnitor Representative" shall mean Andrew Ory, or such
successor Indemnitor Representative as may be chosen by a majority of
the Stockholders.
"Intellectual Property" shall mean copyrights, patents,
trademarks, service marks, service names, trade names, applications or
registration applications for any of the foregoing, computer software
(including any source or object codes therefor or documentation
relating thereof), trade secrets, know-how, or inventions.
"Intellectual Property Litigation" shall mean (i) Comverse
Network Systems Inc. v. Priority Call Management, Inc. (Civil Action
No. 98CD12259BPW) filed with the District Court of the Commonwealth of
Massachusetts] and (ii) Phonetel Communications, Inc., et al. v. AT&T
Corp., et al. (Civil Action No. 4-98CV-CV-0019E) filed with the
District Court of the Northern District of Texas (Fort Worth Division).
"Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended, and the rules and regulations promulgated thereunder.
"Knowledge" as used with respect to a PCM (including references
to such Person being aware of a particular matter) shall mean those
facts that are known or should reasonably have been known after due
inquiry by the following individuals:
Andrew Ory
Andrew Dale
Keith Seidman
Patrick Melampy
Robert Ory
Vincent Salvi
"Law" shall mean any code, law (including common law), ordinance,
regulation, reporting or licensing requirement, rule, or statute
applicable to a Person or its Assets, Liabilities, or business,
including those promulgated, interpreted or enforced by any Regulatory
Authority.
"LHS Capital Stock" shall mean, collectively, the LHS Common
Stock, the LHS Preferred Stock and any other class or series of capital
stock of LHS.
"LHS Common Stock" shall mean the $.01 par value common stock of
LHS.
"LHS Entities" shall mean, collectively, LHS and all LHS
subsidiaries.
A-52
150
"LHS Financial Statements" shall mean (i) the consolidated
balance sheets (including related notes and schedules, if any) of LHS
as of December 31, 1998, 1997 and 1996, and the related statements of
income, changes in stockholders' equity, and cash flows (including
related notes and schedules, if any) for each of the three fiscal years
ended December 31, 1998, 1997 and 1996, as filed by LHS in SEC
Documents, and (ii) the consolidated balance sheets of LHS (including
related notes and schedules, if any) and related statements of income,
changes in stockholders' equity, and cash flows (including related
notes and schedules, if any) included in SEC Documents filed with
respect to periods ended subsequent to December 31, 1998.
"LHS Material Adverse Effect" shall mean a material adverse
impact on (i) the financial position, business, or results of
operations of LHS and its Subsidiaries, taken as a whole, or (ii) the
ability of LHS to perform its obligations under this Agreement or to
consummate the Merger or the other transactions contemplated by this
Agreement.
"LHS Preferred Stock" shall mean the $1.00 par value preferred
stock of LHS.
"Liability" shall mean any direct or indirect, primary or
secondary, liability, indebtedness, obligation, penalty, cost or
expense (including costs of investigation, collection and defense),
claim, deficiency, guaranty or endorsement of or by any Person (other
than endorsements of notes, bills, checks, and drafts presented for
collection or deposit in the ordinary course of business) of any type,
whether accrued, absolute or contingent, liquidated or unliquidated,
matured or unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of
title, easement, encroachment, encumbrance, hypothecation, lien,
mortgage, pledge, reservation, security interest, title retention or
other security arrangement, on, or with respect to any property or
property interest, other than (i) Liens for current property Taxes not
yet due and payable, and (iii) Liens which do not materially impair the
use of or title to the Assets subject to such Lien.
"Litigation" shall mean any action, arbitration, cause of action,
claim, filed complaint, criminal prosecution, governmental or other
examination or investigation, hearing, administrative or other
proceeding relating to or affecting a Party, its business, its Assets
(including Contracts related to it), or the transactions contemplated
by this Agreement.
"Loss" or "Losses" shall mean any direct or indirect demand,
claim, payment, obligation, action or cause of action, assessment,
loss, Liability, cost or expense, including without limitation,
penalties, interest on any amount payable to a third party as a result
of the foregoing, and any legal or other expense reasonably incurred in
connection with investigation or defending any claim or action.
A-53
151
"Material" and "material" for purposes of this Agreement shall be
determined in light of the facts and circumstances of the matter in
question; provided that any specific monetary amount stated in this
Agreement shall determine materiality in that instance.
"MBCL" shall mean the Massachusetts Business Corporation Law.
"NASD" shall mean the National Association of Securities Dealers,
Inc.
"Nasdaq National Market" shall mean the National Market System of
the National Association of Securities Dealers Automated Quotations
System.
"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling,
or writ of any federal, state, local or foreign or other court,
arbitrator, mediator, tribunal, administrative agency, or Regulatory
Authority.
"Participation Facility" shall mean any facility or property in
which the Party in question or any of its Subsidiaries participates in
the management and, where required by the context.
"Party" shall mean either PCM or LHS, and "Parties" shall mean
both PCM and LHS.
"PCM Capital Stock" shall mean the PCM Preferred Stock and the
PCM Common Stock.
"PCM Common Stock" shall mean the $0.01 par value common stock of
PCM.
"PCM Disclosure Memorandum" shall mean the written information
entitled "PCM, Inc. Disclosure Memorandum" delivered prior to the date
of this Agreement to LHS describing the matters contained therein and,
with respect to each disclosure made therein, referencing each Section
of this Agreement under which such disclosure is being made. For
purposes of this Agreement, with respect to any matter that is clearly
disclosed in any portion of the PCM Disclosure Memorandum in such a way
as to make its relevance to the information called for by another
Section of this Agreement readily apparent, such matter shall be deemed
to have been included in the PCM Disclosure Memorandum in response to
such other Section, notwithstanding the omission of any appropriate
cross-reference thereto.
"PCM Entities" shall mean, collectively, PCM and all PCM
Subsidiaries.
"PCM Financial Statements" shall mean (i) the consolidated
balance sheets (including related notes and schedules, if any) of PCM
as of December 31, 1998, 1997 and 1996, and the related statements of
income, changes in stockholders' equity, and cash flows (including
related notes and schedules, if any) for each of the three fiscal years
ended December 31, 1998,
A-54
152
1997 and 1996, and (ii) the consolidated balance sheets of PCM and
related statements of income and cash flows with respect to the period
ended March 31, 1999, as set forth in Section 5.5 of the PCM Disclosure
Memorandum prepared by management of PCM in a manner consistent with
past practices without review of PCM's accountants.
"PCM Material Adverse Effect" shall mean a material adverse
impact on (i) the financial position, business, or results of
operations of PCM and its Subsidiaries, taken as a whole, or (ii) the
ability of PCM to perform its obligations under this Agreement or to
consummate the Merger or the other transactions contemplated by this
Agreement.
"PCM Preferred Stock" shall mean the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock,
collectively.
"PCM Stock Plan" shall mean PCM's Amended and Restated Stock
Option Plan.
"PCM Subsidiaries" shall mean the Subsidiaries of PCM, which
shall include the PCM Subsidiaries described in Section 5.4 and any
corporation or other organization acquired as a Subsidiary of PCM in
the future and held as a Subsidiary by PCM at the Effective Time.
"Permit" shall mean any federal, state, local, and foreign
governmental approval, authorization, certificate, easement, filing,
franchise, license, notice or permit to which any Person is a party or
that is or may be binding upon or inure to the benefit of any Person or
its securities, Assets, or business.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation,
general partnership, joint venture, limited partnership, limited
liability company, trust, business association, group acting in
concert, or any person acting in a representative capacity.
"Preferred Stock Base Exchange Ratio" shall mean, collectively,
the Series A Preferred Stock Base Exchange Ratios, the Series B
Preferred Stock Base Exchange Ratios and the Series C Preferred Stock
Base Exchange Ratios.
"Preferred Stock Escrow Exchange Ratio" shall mean, collectively,
the Series A Preferred Stock Escrow Exchange Ratios, the Series B
Preferred Stock Escrow Exchange Ratios and the Series C Preferred Stock
Escrow Exchange Ratios.
"Preferred Stock Exchange Ratios" shall mean, collectively, the
Series A Preferred Stock Exchange Ratios, the Series B Preferred Stock
Exchange Ratios and the Series C Preferred Stock Exchange Ratios.
"Proxy Statement" shall mean the proxy statement used by PCM to
solicit the approval of its Stockholders of the transactions
contemplated by this
A-55
153
Agreement, which shall include the prospectus of LHS relating to the
issuance of the LHS Common Stock to holders of PCM Capital Stock.
"Registration Statement" shall mean the Registration Statement on
Form S-4, or other appropriate form, including any pre-effective or
post-effective amendments or supplements thereto, filed with the SEC by
LHS under the 1933 Act with respect to the shares of LHS Common Stock
to be issued to the Stockholders of PCM in connection with the
transactions contemplated by this Agreement.
"Regulatory Authorities" shall mean, collectively, the SEC, the
NASD, the Federal Trade Commission, the United States Department of
Justice, and all other federal, state, county, local or other
governmental or regulatory agencies, authorities (including
self-regulatory authorities), instrumentalities, commissions, boards or
bodies having jurisdiction over the Parties and their respective
Subsidiaries (whether domestic or foreign).
"Representative" shall mean any investment banker, financial
advisor, attorney, accountant, consultant, or other representative
engaged by a Person.
"SEC Documents" shall mean all forms, proxy statements,
registration statements, reports, schedules, and other documents filed,
or required to be filed, by a Party or any of its Subsidiaries with any
Regulatory Authority pursuant to the Securities Laws.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the
Investment Company Act of 1940, as amended, the Investment Advisors Act
of 1940, as amended, the Trust Indenture Act of 1939, as amended, and
the rules and regulations of any Regulatory Authority promulgated
thereunder.
"Series A Preferred Stock" shall mean, collectively, the $.01 par
value Series A Convertible Preferred Stock of PCM, the $.01 par value
Series A-0 Convertible Preferred Stock of PCM and the $.01 par value
Series A-1 Convertible Preferred Stock of PCM.
"Series B Preferred Stock" shall mean, collectively, the $.01 par
value Series B Convertible Preferred Stock of PCM, the $.01 par value
Series A-0 Convertible Preferred Stock of PCM and the $.01 par value
Series A-1 Convertible Preferred Stock of PCM.
"Series C Preferred Stock" shall mean, collectively, the $.01 par
value Series C Convertible Preferred Stock of PCM, the $.01 par value
Series A-0 Convertible Preferred Stock of PCM and the $.01 par value
Series A-1 Convertible Preferred Stock of PCM.
"Stockholders' Meeting" shall mean the meeting of the
Stockholders of PCM to be held pursuant to Section 8.1, including any
adjournment or adjournments thereof.
A-56
154
"Sub Common Stock" shall mean the $.01 par value common stock of
Sub.
"Subsidiaries" shall mean all those corporations, associations,
or other business entities of which the entity in question either (i)
owns or controls 50% or more of the outstanding equity securities
either directly or through an unbroken chain of entities as to each of
which 50% or more of the outstanding equity securities is owned
directly or indirectly by its LHS (provided, there shall not be
included any such entity the equity securities of which are owned or
controlled in a fiduciary capacity), (ii) in the case of partnerships,
serves as a general partner, (iii) in the case of a limited liability
company, serves as a managing member, or (iv) otherwise has the ability
to elect a majority of the directors, trustees or managing members
thereof.
"Surviving Corporation" shall mean PCM as the surviving
corporation resulting from the Merger.
"Tax Return" shall mean any report, return, information return,
or other information required to be supplied to a taxing authority in
connection with Taxes, including any return of an affiliated or
combined or unitary group that includes a Party or its Subsidiaries.
"Tax" or "Taxes" shall mean any federal, state, county, local, or
foreign taxes, charges, fees, levies, imposts, duties, or other
assessments, including income, gross receipts, excise, employment,
sales, use, transfer, license, payroll, franchise, severance, stamp,
occupation, windfall profits, environmental, federal highway use,
commercial rent, customs duties, capital stock, paid-up capital,
profits, withholding, Social Security, single business and
unemployment, disability, real property, personal property,
registration, ad valorem, value added, alternative or add-on minimum,
estimated, or other tax or governmental fee of any kind whatsoever,
imposed or required to be withheld by the United States or any state,
county, local or foreign government or subdivision or agency thereof,
including any interest, penalties, and additions imposed thereon or
with respect thereto.
"Third Party Claim" shall mean any Litigation that is instituted
against an Indemnitee by a person or entity other than an Indemnitor
and which, if prosecuted successfully, would result in a Loss for which
such Indemnitee is entitled to indemnification under Article 10.
(b) The terms set forth below shall have the meanings ascribed thereto
in the referenced sections:
Affiliate Agreements................ Section 8.10
Business Combination................ Section 12.2(d)
Certificates........................ Section 4.1
Closing............................. Section 1.3
A-57
155
Common Stock Base Exchange Ratio.... Section 3.1(c)
Common Stock Escrow Exchange Ratio.. Section 3.1(c)
Common Stock Exchange Ratios........ Section 3.1(c)
Effective Time...................... Section 1.2
ERISA Affiliate..................... Section 5.14(a)
Exchange Agent...................... Section 4.1
Exchange Ratio...................... Section 3.1(c)
Indemnified Parties................. Section 8.12
LHS SEC Reports..................... Section 6.4(a)
LHS Acquisition Agreement........... Section 8.10(b)
Merger.............................. Section 1.1
PCM Acquisition Agreement........... Section 8.8(b)
PCM Affiliates...................... Section 8.10
PCM Benefit Plans................... Section 5.14
PCM Contracts....................... Section 5.15
PCM ERISA Plan...................... Section 5.14
PCM Notice.......................... Section 8.8(c)
PCM Options......................... Section 3.5
Series A Preferred Stock Base
Exchange Ratio................... Section 3.1(d)
Series A Preferred Stock Escrow
Exchange Ratio................... Section 3.1(d)
Series A Preferred Stock Exchange
Ratios........................... Section 3.1(d)
Series B Preferred Stock Base
Exchange Ratio................... Section 3.1(e)
Series B Preferred Stock Escrow
Exchange Ratio................... Section 3.1(e)
Series B Preferred Stock Exchange
Ratios........................... Section 3.1(e)
Series C Preferred Stock Base
Exchange Ratio................... Section 3.1(f)
Series C Preferred Stock Escrow
Exchange Ratio................... Section 3.1(f)
Series C Preferred Stock Exchange
Ratios........................... Section 3.1(f)
Superior Proposal................... Section 8.8(b)
Takeover Laws....................... Section 5.19
Tax Opinion......................... Section 9.1(h)
Technical Documentation............. Section 5.10(e)
Voting Agreements................... Section 5.21
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes"
A-58
156
or "including" are used in this Agreement, they shall be deemed followed by
the words "without limitation."
12.2 Expenses; Break-Up Fee.
(a) Except as otherwise provided in this Section 12.2 or agreed in
writing by the parties, each of the Parties shall bear and pay all direct
costs and expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder, including fees and expenses of its own
financial or other consultants, investment bankers, accountants, and
counsel.
(b) If (i) the Board of Directors of PCM shall have withdrawn or failed
to reaffirm its approval of the Merger and the transactions contemplated by
this Agreement (to the exclusion of any other Acquisition Proposal with
respect to PCM), or shall have resolved not to reaffirm the Merger, or
shall have affirmed, recommended or authorized entering into any other
Acquisition Proposal with respect to PCM or (ii) the terms of any other
Acquisition Proposal with respect to PCM have been communicated, formally
or informally, to any of PCM's Stockholders (who are not a Party to a
Voting Agreement) by PCM, its Affiliates, Representatives or otherwise and
at the time PCM is negotiating another Acquisition Proposal, and (iii) the
Stockholders of PCM fail to vote their approval of the matters relating to
this Agreement and the transactions contemplated hereby, then PCM shall
immediately upon a termination of this Agreement pay LHS a break-up fee in
the amount of $4,500,000.
(c) If this Agreement is terminated pursuant to Section 11.1(d)(ii) and
the fee referred to in paragraph (b) above is not payable, PCM shall
promptly pay LHS one-half of all expenses, other than attorneys fees,
related to printing, filing and mailing the Registration Statement and the
Proxy Statement and all SEC and other regulatory filing fees incurred in
connection with the Registration Statement.
(d) Except as otherwise provided in Article 10 with respect to
Indemnification Claims, all costs and expenses incurred in connection with
the litigation of any claim or cause of action arising out of this
Agreement, including legal fees reasonably incurred, shall be borne by the
Party against which the decision on such claim is reached.
12.3 Brokers and Finders. Except for Goldman Sachs & Co. as to PCM, each
of the Parties represents and warrants that neither it nor any of its officers,
directors, employees, or Affiliates has employed any broker or finder or
incurred any Liability for any financial advisory fees, investment bankers'
fees, brokerage fees, commissions, or finders' fees in connection with this
Agreement or the transactions contemplated hereby. In the event of a claim by
any broker or finder based upon his or its representing or being retained by or
allegedly representing or being retained by PCM or by LHS, each of PCM and LHS,
as the case may be, agrees to indemnify and hold the other Party harmless of and
from any Liability in respect of any such claim.
A-59
157
12.4 Entire Agreement. Except as otherwise expressly provided herein,
this Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. Nothing in this Agreement
expressed or implied, is intended to confer upon any Person, other than the
Parties or their respective successors, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, other than as provided in
Section 8.12 and Section 7.6.
12.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of each of the Parties, whether before or after stockholder approval of this
Agreement has been obtained; provided, that after any such approval by the
holders of PCM Capital Stock, there shall be made no amendment that pursuant to
requires further approval by such Stockholders without the further approval of
such Stockholders.
12.6 Waivers.
(a) Prior to or at the Effective Time, LHS, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have
the right to waive any Default in the performance of any term of this
Agreement by PCM, to waive or extend the time for the compliance or
fulfillment by PCM of any and all of its obligations under this Agreement,
and to waive any or all of the conditions precedent to the obligations of
LHS under this Agreement, except any condition which, if not satisfied,
would result in the violation of any Law. No such waiver shall be effective
unless in writing signed by a duly authorized officer of LHS.
(b) Prior to or at the Effective Time, PCM, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have
the right to waive any Default in the performance of any term of this
Agreement by LHS, to waive or extend the time for the compliance or
fulfillment by LHS of any and all of its obligations under this Agreement,
and to waive any or all of the conditions precedent to the obligations of
PCM under this Agreement, except any condition which, if not satisfied,
would result in the violation of any Law. No such waiver shall be effective
unless in writing signed by a duly authorized officer of PCM.
(c) The failure of any Party at any time or times to require
performance of any provision hereof shall in no manner affect the right of
such Party at a later time to enforce the same or any other provision of
this Agreement. No waiver of any condition or of the breach of any term
contained in this Agreement in one or more instances shall be deemed to be
or construed as a further or continuing waiver of such condition or breach
or a waiver of any other condition or of the breach of any other term of
this Agreement.
12.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written
A-60
158
consent of the other Party. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the Parties
and their respective successors and assigns.
12.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth below
(or at such other address as may be provided hereunder), and shall be deemed to
have been delivered as of the date so delivered:
PCM: Priority Call Management, Inc.
110 Fordham Road
Wilmington, Massachusetts 01887
Telecopy Number: (978) 658-4400
Attention: Andy Ory
Copy to Counsel:
Bingham Dana LLP
150 Federal Street
Boston, MA 02110
Telecopy Number: (617) 951-8736
Attention: Edward A. Saxe, Esq.
LHS: LHS Group Inc.
Six Concourse Parkway, Suite 2700
Atlanta, Georgia 30328
Telecopy Number: (770) 280-3099
Attention: Scott Wharton
Copy to Counsel:
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Telecopy Number: (404) 881-4777
Attention: B. Harvey Hill, Jr.
12.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the Commonwealth of Massachusetts, without regard to
any applicable conflicts of Laws.
12.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
A-61
159
12.11 Captions; Articles and Sections. The captions contained in this
Agreement are for reference purposes only and are not part of this Agreement.
Unless otherwise indicated, all references to particular Articles or Sections
shall mean and refer to the referenced Articles and Sections of this Agreement.
12.12 Interpretations. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any party, whether under
any rule of construction or otherwise. No party to this Agreement shall be
considered the draftsman. The parties acknowledge and agree that this Agreement
has been reviewed, negotiated, and accepted by all parties and their attorneys
and shall be construed and interpreted according to the ordinary meaning of the
words used so as fairly to accomplish the purposes and intentions of all parties
hereto.
12.13 Enforcement of Agreement. The Parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the Parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
12.14 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
A-62
160
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf by its duly authorized officers as of the day and year
first above written.
LHS GROUP INC.
By: /s/ HARTMUT LADEMACHER
-----------------------------------
Hartmut Lademacher
Chairman and Chief Executive
Officer
PATRIOT ACQUISITION CORP.
By: /s/ JERRY W. BRAXTON
------------------------------------
Jerry W. Braxton
President
By: /s/ SCOTT A. WHARTON
------------------------------------
Scott A. Wharton
Assistant Treasurer
PRIORITY CALL MANAGEMENT, INC.
By: /s/ ANDREW ORY
------------------------------------
Andrew Ory
President
By: /s/ KEITH SEIDMAN
------------------------------------
Keith Seidman
Assistant Treasurer
A-63
161
APPENDIX B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made and entered into as of
, 1999, by and among LHS Group Inc., a Delaware corporation
("LHS"), Andrew D. Ory, in his capacity as the Indemnitor Representative (he or
his successor, in such capacity, being referred to as the "Indemnitor
Representative") for the stockholders identified on Schedule I hereto (each a
"Stockholder" and collectively the "Stockholders") of Priority Call Management,
Inc., a Massachusetts corporation ("PCM") and SunTrust Bank, Atlanta, a Georgia
banking corporation ("Escrow Agent").
WITNESSETH
Patriot Acquisition Corp., a Massachusetts corporation ("Sub"), is a wholly
owned subsidiary of LHS, and each of LHS and Sub is a party to an Agreement and
Plan of Merger (the "Merger Agreement") with PCM, dated as of April 20, 1999,
pursuant to which Sub has on this date merged (the "Merger") with and into PCM,
with PCM surviving the Merger and becoming a wholly owned subsidiary of LHS.
Pursuant to the Merger, the Stockholders received the shares of LHS Common Stock
to be paid pursuant to Sections 3.1(c)(ii), 3.1(d)(ii), 3.1(e)(ii) and
3.1(f)(ii) (the "Escrow Shares") and have agreed to deposit the Escrow Shares in
escrow with the Escrow Agent pursuant to the terms hereof.
Pursuant to the terms of the Merger Agreement, the Escrow Shares have been
issued and will be held by the Escrow Agent pursuant to the terms of this
Agreement until delivered or canceled pursuant to the terms of this Agreement or
until termination of this Agreement as provided herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1
ESTABLISHMENT OF ESCROW
1.1 Escrow Shares. On this date, LHS has executed one or more stock
certificates in negotiable form representing the Escrow Shares and delivered to
the Escrow Agent the Escrow Shares. The Escrow Agent acknowledges receipt of the
Escrow Shares and agrees to hold and disburse the Escrow Shares for the benefit
of LHS and the Stockholders, as the case may be, in accordance with the
provisions of this Agreement, with the same force and effect as if the Escrow
Shares had been delivered by LHS to each Stockholder and subsequently delivered
by such Stockholder to the Escrow Agent.
B-1
162
1.2 Stockholder Percentage Interests. Attached as Schedule I hereto is a
schedule showing for each Stockholder (i) the respective percentage interest
(the "Percentage Interest") of each such Stockholder in the Escrow Shares and
(ii) the corresponding interests of each Stockholder in the Escrow Shares
(hereinafter, for each Stockholder, such Stockholder's "Account"), initially
expressed in shares of LHS Common Stock. From time to time after the date
hereof, the term Account shall include, for any Stockholder, Cash Proceeds (as
defined in Section 3.3(b) of this Agreement) received upon the sale of Escrow
Shares in such Stockholder's Account.
ARTICLE 2
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
"Closing Date" shall mean the date of this Agreement.
"Closing Price" shall mean the closing price for the shares of LHS
Common Stock on the trading day immediately preceding the Closing Date,
written notice of which shall be given to Escrow Agent upon request.
"Distribution Date" shall mean the date that is one year from the
Closing Date.
"Initial Escrow Value" shall mean multiplied by the
Closing Price.
Any other capitalized term used herein but not defined herein shall have
the same meaning as provided in the Merger Agreement.
ARTICLE 3
TERM; DISTRIBUTION OF ESCROW SHARES; LIMITS
3.1 Term. The term of this Agreement shall commence at the Closing Date
and shall terminate at such time as all Escrow Shares and Cash Proceeds, if any,
shall have been distributed to the Stockholders or canceled pursuant to the
terms of this Agreement.
3.2 Adjustment of Escrow Shares. The number of Escrow Shares subject to
this Agreement shall be adjusted from time to time, as follows: If, between the
date of this Agreement and the Distribution Date, LHS shall be entitled to be
indemnified pursuant to an Indemnification Claim under Article 10 of the Merger
Agreement, then LHS shall deliver to the Indemnitor Representative a notice
thereof (a "Notice of Indemnification Obligation"), and LHS and the Indemnitor
Representative shall agree in writing on the dollar amount owed by the
Stockholders pursuant to such Indemnification Claim (the "Indemnification
Amount"), or upon determination by an arbitration award or by any other final
adjudication, then upon execution by the parties of the agreement or upon
B-2
163
determination by an arbitration award or by any other final adjudication setting
forth the Indemnification Amount, LHS shall, if any Account contains Cash
Proceeds, (A) issue (or cause to be issued), for each Account, new stock
certificates representing the number of shares of LHS Common Stock equal to the
number of Escrow Shares remaining in such Account after effecting the
distribution required for such Indemnification Amount in accordance with Section
3.3(b) (the "Replacement Certificates") to the Escrow Agent to be held in escrow
pursuant to this Agreement and (B) cancel the LHS Common Stock certificates
received from the Escrow Agent. If Replacement Certificates are to be issued at
such time as no Account contains Cash Proceeds, then LHS shall (A) issue or
cause to be issued, for each Account, new stock certificates representing the
number of shares of LHS Common Stock equal to the difference between (i) the
number of Escrow Shares in escrow immediately prior to such Notice of
Indemnification Obligation minus (ii) the quotient (rounded to the next highest
whole number) obtained by dividing the Indemnification Amount by the Closing
Price (in such instance, the "Replacement Certificates") to the Escrow Agent to
be held in escrow pursuant to this Agreement and (B) cancel the LHS Common Stock
certificates received from the Escrow Agent. Upon the issuance of any
Replacement Certificates, the shares represented by such Replacement
Certificates shall be deemed to be "Escrow Shares" for all purposes of this
Agreement.
3.3 Distribution of Escrow Shares; Right to Sell; Treatment of Cash
Proceeds.
(a) On the Distribution Date, the Escrow Agent shall deliver to LHS for
cancellation certificates representing the Escrow Shares. If an
Indemnification Claim is not pending as of the Distribution Date, LHS shall
promptly issue and deliver to the Stockholders (in accordance with their
respective Percentage Interests) new certificates representing such number
of the Escrow Shares. If there are Indemnification Claims pending as of the
Distribution Date, LHS and the Indemnitor Representative shall use their
reasonable efforts to agree in writing on the Indemnification Amount with
respect to any such pending Indemnification Claims; provided, that if LHS
and the Indemnitor Representative are not able to agree on the
Indemnification Amount with respect to such Indemnification Claims by the
Distribution Date, the amount of the Indemnification Amount solely for
purposes of the calculations in the following sentence of this Section
3.3(a) shall be the amount claimed by LHS in its notice of Indemnification
Claim in connection with such Indemnification Claim. Upon determination of
the Indemnification Amount in accordance with the preceding sentence,
Escrow Agent shall deliver to LHS for cancellation the above number of
Escrow Shares and LHS shall promptly:
(i) issue and deliver to the Stockholders (in accordance with
their respective Percentage Interests) new certificates representing
the number of shares of LHS Common Stock (the "Distribution Shares")
equal to the difference between the Escrow Shares and the Disputed
Escrow Shares (as defined below) (the "Undisputed Escrow Shares"), and
such certificates shall be denominated in the names of the respective
Stockholders in amounts equal
B-3
164
to the product of the Undisputed Escrow Shares and each Stockholder's
Percentage Interest, and
(ii) issue and deliver to the Escrow Agent for retention in
escrow pending final determination of the Indemnification Amount, new
certificates representing the number of shares of LHS Common Stock
equal to the quotient obtained by dividing (A) the aggregate
Indemnification Amount with respect to such pending Indemnification
Claims by (B) the Closing Price ("Disputed Escrow Shares").
Any delivery of LHS Common Stock to Stockholders pursuant to this Section
3.3(a) shall be of full shares, and any fractional portions shall be rounded to
the nearest whole number by the Escrow Agent so that the number of shares
remaining in escrow to be delivered will be fully allocated among such
Stockholders. Upon the final resolution of all Indemnification Claims for which
Disputed Escrow Shares are retained in escrow after the Distribution Date, the
Escrow Agent shall promptly deliver to LHS for cancellation the Disputed Escrow
Shares and LHS shall promptly deliver to the Stockholders (in accordance with
their respective Percentage Interests) new certificates representing the number
of shares of LHS Common Stock equal to the result obtained by subtracting (A)
the quotient obtained by dividing the finally resolved Indemnification Amount
with respect to such Indemnification Claim by the Closing Price from (B) the
Disputed Escrow Shares.
(b) Notwithstanding anything to the contrary contained herein, (i)
Stockholders who were not affiliates of PCM on the Closing Date may, at any
time after the Closing Date, direct the Indemnitor Representative, in
writing, to sell for cash any amount of Escrow Shares in such Stockholder's
Account and (ii) Stockholders who were affiliates of PCM on the Closing
Date may, at any time after LHS has published the financial results
covering at least thirty days of combined operations of LHS and PCM after
the Effective Time, direct the Indemnitor Representative, in writing, to
sell for cash any amount of Escrow Shares in such Stockholder's Account.
Any Stockholder shall be entitled to direct the Indemnitor Representative
to sell only whole Escrow Shares in such Stockholder's Account and no sales
may be made of fractional shares in such Stockholder's Account. Promptly
after receiving notice from a Stockholder directing the sale of Escrow
Shares in such Stockholder's Account, the Indemnitor Representative shall
direct the Escrow Agent, in writing, to sell for cash any such Escrow
Shares. The cash proceeds of any such sale (collectively, the "Cash
Proceeds") shall be retained by the Escrow Agent and shall be subject to
the escrow covered by this Agreement. Notwithstanding anything to the
contrary contained herein, if any distribution is made pursuant to this
Section 3.3 at such time as Cash Proceeds, in addition to Escrow Shares,
are held in escrow, then the Escrow Agent shall distribute a number of
Escrow Shares equal to the number of Escrow Shares remaining in each
Account times a fraction, the numerator of which is (i) the Indemnification
Amount for which the distribution is being made to LHS or (ii) the value of
the shares to be distributed to the Stockholders on the Distribution Date
for which the calculation is
B-4
165
being performed, and the denominator of which is (i) the Initial Escrow
Value less (ii) the sum of all Indemnification Amounts theretofore paid
with Cash Proceeds out of escrow (if any) and the value of all Escrow
Shares theretofore distributed on any Distribution Date (such fraction
being hereinafter referred to as the "Fraction"), and shall distribute Cash
Proceeds equal to the Cash Proceeds remaining in escrow times the Fraction.
As used in this Section 3.3(b), the phrase "value of shares to be
distributed on the Distribution Date" shall mean the number of Escrow
Shares to be distributed on such date as set forth in this Section 3.3
multiplied by the Closing Price. If any distribution is made pursuant to
this Section 3.3 at such time as only Cash Proceeds are held in escrow,
then the Escrow Agent shall distribute pro rata from each Account Cash
Proceeds equal to the Cash Proceeds remaining in escrow times the Fraction.
Interest on any Cash Proceeds shall accrue for the benefit of the
Stockholders. Interest earned on Cash Proceeds that are distributed to LHS
in satisfaction of an Indemnification Claim shall be distributed to LHS
together with such Cash Proceeds, but shall not be counted in calculating
the amount of Cash Proceeds or Escrow Shares necessary to satisfy such
Indemnification Claim. Cash Proceeds and interest thereon may be invested
at the direction of the Indemnitor Representative in interest-bearing
investments reasonably acceptable to LHS.
3.4 Effect of Final Delivery. This Agreement shall continue in full force
and effect until the Escrow Agent has delivered or canceled all of the Escrow
Shares pursuant to the terms hereof. After all of such shares have been so
delivered or canceled, all rights, duties and obligations of the respective
parties hereunder shall terminate; provided, however, the provisions of Section
6.1 hereof shall survive the term of this Agreement.
3.5 Pooling. Notwithstanding anything to the contrary contained herein,
any distribution effected, or restriction enforced, pursuant to the terms hereof
shall be effected or enforced only in a manner permitted in order for the Merger
to qualify for "pooling-of-interests" accounting treatment. It is the intent of
the parties hereto that this Escrow Agreement qualify for "pooling-of-interests"
accounting treatment. In no event shall any provision of this Agreement be
interpreted or construed in a manner that would preclude the Merger from
qualifying for "pooling-of-interests" accounting treatment. In no event shall
this Section 3.5 preclude a distribution on the Distribution Date in accordance
with Section 3.3 of this Agreement.
ARTICLE 4
ESCROW STOCK CERTIFICATES
The Escrow Agent may, with the prior written consent of the Indemnitor
Representative, at any time request LHS to issue new certificates representing
the Escrow Shares in such denominations as may be necessary or appropriate in
carrying out the Escrow Agent's obligations under this Agreement.
B-5
166
ARTICLE 5
DIVIDENDS; VOTING RIGHTS
5.1 Cash Dividends; Voting Rights. Cash dividends shall be paid into the
escrow for the benefit of the Stockholders. In the event of a distribution to
LHS in satisfaction of an Indemnification Claim, cash dividends paid with
respect to Escrow Shares distributed in satisfaction of such Indemnification
Claim (or Cash Proceeds attributable to Escrow Shares upon which such cash
dividends were paid) shall be distributed to LHS together with such Escrow
Shares or Cash Proceeds, but shall not be counted in calculating the amount of
Escrow Shares or Cash Proceeds necessary to satisfy such Indemnification Claim.
Each Stockholder shall have the right to direct the Escrow Agent in writing as
to the exercise of voting rights with respect to such Escrow Shares held by the
Escrow Agent on behalf of such Stockholder, and the Escrow Agent shall comply
with any such directions if received in a timely manner. In the absence of such
directions, the Escrow Agent shall not vote any such Escrow Shares.
5.2 Stock Splits; Stock Dividends. In the event of any stock split or
stock dividend with respect to LHS Common Stock that becomes effective during
the term of this Agreement, the additional shares so issued with respect to the
Escrow Shares shall be added to the Escrow Shares and subject to the escrow
covered by this Agreement and any other references herein to a specific number
of shares of LHS Common Stock or references herein to Closing Price shall be
adjusted accordingly.
ARTICLE 6
THE ESCROW AGENT
6.1 Liability. The Escrow Agent, in its capacity as such, or any
successor escrow agent, shall be liable only to hold the Escrow Shares and to
deliver the same to the persons named herein in accordance with the provisions
of this Agreement. By acceptance of this Agreement, the Escrow Agent, in its
capacity as such, or any successor escrow agent, is acting in the capacity of a
depository only, and shall not be liable or responsible for any damages, losses
or expenses unless such damages, losses or expenses shall be caused by its own
gross negligence or willful misconduct. Neither the Escrow Agent, in its
capacity as such, nor any successor Escrow Agent, shall incur any liability with
respect to (i) any action taken or omitted in good faith upon the advice of its
counsel with respect to any questions relating to the duties and
responsibilities of the Escrow Agent under this Agreement; or (ii) any action
taken or omitted in reliance upon any instrument, including the written
instructions provided for herein, not only as to the due execution of such
instrument, or the identity or authority of any person executing such
instrument, or the validity and effectiveness of such instrument, but also as to
the truth and accuracy of any information contained therein, provided that the
Escrow Agent shall in good faith believe such instrument to be genuine, to have
been signed by a proper person or persons, and to conform to the provisions of
this Agreement. In the event of any disagreement or the presentation of adverse
claims or
B-6
167
demands in connection with or for any item affected hereby, the Escrow Agent
shall, at its option, be entitled to refuse to comply with any such claims or
demands during the continuance of such disagreement and may refrain from
delivering any item affected hereby, and in so doing the Escrow Agent shall not
become liable to the parties, or to any other person, due to its failure to
comply with any such adverse claim or demand. The Escrow Agent shall be entitled
to continue, without liability, to refrain and refuse to act until all of the
rights of the adverse claimants have been either fully resolved among
themselves, arbitrated to a final award, or finally adjudicated by a court
having jurisdiction over the dispute with written notice thereof delivered to
Escrow Agent. The Escrow Agent shall be held harmless and jointly and severally
indemnified by the other parties hereto in connection with any claims against it
in connection with its service as escrow agent hereunder, except to the extent
such claims arise out of the gross negligence or willful misconduct of the
Escrow Agent. Any action requested to be taken by the Escrow Agent hereunder and
not otherwise specifically set forth herein shall require the agreement in
writing of the Indemnitor Representative, Escrow Agent and LHS.
6.2 Resignation of Escrow Agent, Successor. Escrow Agent may resign at
any time, upon 30 days prior written notice to LHS and Indemnitor Representative
and shall deposit the Escrow Shares and any Cash Proceeds with a successor
escrow agent to be jointly designated in writing by LHS and Indemnitor
Representative. Any such successor escrow agent must agree to be, and shall be,
bound by, and shall have all the rights, duties and responsibilities of the
Escrow Agent, under this Agreement. If, upon the effective date of such
resignation, no successor escrow agent shall have been designated, Escrow Agent
shall have the right to tender into the registry or custody of any court of
competent jurisdiction any part or all of the Escrow Shares and any Cash
Proceeds and shall be relieved of any further obligations under this Agreement.
Such resignation shall not deprive Escrow Agent of its compensation earned prior
thereto, and the provisions of Section 6.1 hereof shall survive any resignation
by the Escrow Agent.
6.3 Expenses. Compensation for the normal services of the Escrow Agent
shall be borne by LHS. The Escrow Agent shall be reimbursed for any reasonable
expenses, including the actual out-of-pocket cost of outside legal services
should the Escrow Agent deem it necessary in its reasonable discretion to retain
an outside attorney, and LHS shall reimburse such expenses of the Escrow Agent,
except as otherwise provided in Section 8.10 hereof.
ARTICLE 7
INDEMNITOR REPRESENTATIVE
7.1 Power and Authority. The adoption of the Merger Agreement by the
Stockholders shall constitute ratification of this Escrow Agreement, and the
Indemnitor Representative shall have full power and authority to represent the
Stockholders and their successors with respect to all matters arising under this
Agreement, and all action taken by the Indemnitor Representative hereunder shall
be binding upon such
B-7
168
Stockholders and their successors as if expressly ratified and confirmed in
writing by each of them. Without limiting the generality of the foregoing, the
Indemnitor Representative shall have full power and authority, on behalf of all
the Stockholders and their successors, to interpret all the terms and provisions
of this Agreement, to dispute or fail to dispute any Indemnification Claim, to
negotiate and compromise any dispute which may arise under this Agreement, to
sign any releases or other documents with respect to any such dispute, and to
authorize payments to be made with respect thereto.
7.2 Resignation; Successors. The Indemnitor Representative, or any
successor hereafter appointed, may resign and shall be discharged of his duties
hereunder upon the appointment of a successor Indemnitor Representative as
hereinafter provided. The Indemnitor Representative shall have power of
substitution to appoint a successor. In the event that the Indemnitor
Representative dies, becomes unable to perform his duties or resigns, in each
case without having appointed a successor, then Indemnitors holding, immediately
prior to the Effective Time, a majority of the combined voting power of the PCM
Capital Stock shall elect a successor Indemnitor Representative. No Indemnitor
shall have any cause of action against the Indemnitor Representative for any
action taken, decision made or instruction given by the Indemnitor
Representative under this Agreement or the Merger Agreement or in connection
with the transactions contemplated by this Agreement, except for any action
taken, decision made or instruction given that constitutes gross negligence or
willful misconduct of the Indemnitor Representative. All fees and expenses
incurred by the Indemnitor Representative in connection with the performance of
his duties under this Agreement and the Merger Agreement, and all fees, expenses
and settlement amounts or payments incurred, paid or required to be paid by the
Indemnitors or the Indemnitor Representative pursuant to the provisions of this
Agreement and Article 10 of the Merger Agreement (including, without limitation,
all costs, fees and expenses incurred in connection with investigating,
defending, litigating or settling any Third Party Claim or in connection with
any arbitration proceeding pursuant to Section 8.10) shall be satisfied pro rata
from each Stockholder's Account out of the escrow established pursuant to this
Agreement. Any payment required to be made to the Indemnitor Representative
pursuant to this Section 7.2 shall be effected in the same manner as a
distribution to LHS would be effected pursuant to Section 3.3, including without
limitation, the applications of the Fraction in the event Cash Proceeds are held
in escrow.
ARTICLE 8
MISCELLANEOUS
8.1 Transferability. A Stockholder may not transfer any interest in the
Escrow Shares or any other right under this Agreement to any other party, except
that upon written notice from the legal representative of the estate of a
deceased Stockholder to the Escrow Agent and LHS, the rights of such Stockholder
under this Agreement shall be transferred to the estate of such Stockholder, and
subsequently to any beneficiary thereof, in the event of the Stockholder's
death; provided, however, that any such
B-8
169
beneficiary or the legal representative of any such estate shall be bound by the
provisions of this Agreement without taking any further action. The Escrow Agent
or LHS, as the case may be, shall be entitled to treat the legal representative
of the estate of such Stockholder, and subsequently any beneficiary thereof, as
the absolute owner of the rights of such Stockholder under this Agreement in all
respects and shall incur no liability for distributions made in good faith to
the legal representatives of such Stockholder or such beneficiary in accordance
with the terms of this Agreement.
8.2 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission (with confirmation received by the sender), by registered
or certified mail, postage pre-paid, or by courier or overnight courier, to the
persons at the addresses set forth below (or at such other address as may be
provided hereunder), and shall be deemed to have been delivered as of the date
so delivered:
If to LHS:
LHS Group Inc.
6 Concourse Parkway, Suite 2700
Atlanta, Georgia 30328
Attn: Scott Wharton
Telephone: (770) 280-3000
Telecopy: (770) 280-3099
with a copy to:
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attn: B. Harvey Hill, Jr. Esq.
Telephone: (404) 881-7000
Telecopy: (404) 881-4777
If to the Indemnitor Representative:
Andrew D. Ory
110 Fordham Road
Wilmington, Massachusetts 01887
Telephone: (978) 658-4400
Telecopy: (978) 694-2688
with a copy to:
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Attn: Edward A. Saxe
Telephone: (617) 951-8000
B-9
170
Telecopy: (617) 951-8736
If to Escrow Agent:
SunTrust Bank, Atlanta
3495 Piedmont Road
Building 10, Suite 810
Atlanta, Georgia 30305-1727
Attn:
-------------------------
Telephone: ( )
-----------
Telecopy: ( )
-----------
or such other person or address as shall be furnished in writing by any of the
parties and any such notice or communication shall be deemed to have been given
as of the date so mailed.
8.3 Construction. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia, without regard to any
applicable conflicts of laws.
8.4 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the respective heirs, executors, administrators, successors and
assigns of the parties hereto.
8.5 Separability. If any provision or section of this Agreement is
determined to be void or otherwise unenforceable, it shall not affect the
validity or enforceability of any other provisions of this Agreement which shall
remain enforceable in accordance with their terms.
8.6 Headings. The headings and subheadings contained in this Agreement
are for reference only and for the benefit of the parties and shall not be
considered in the interpretation or construction of this Agreement.
8.7 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
8.8 Amendments. This Agreement may be amended from time to time but only
by written agreement signed by all of the parties hereto.
8.9 Third Party Beneficiaries. Each Subsidiary of LHS and each of the
directors, officers and employees of LHS and each of its Subsidiaries are
expressly intended to be third party beneficiaries of this Agreement as if they
were parties to this Agreement.
8.10 Arbitration. Any dispute, claim or controversy relating in any way
to this Agreement or the transactions contemplated hereby or thereby, whether in
contract, in tort or otherwise, except a request for equitable, injunctive or
restraining relief, shall be resolved by arbitration in Atlanta, Georgia, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"), subject to the limitations of this Section 8.10. This
agreement to arbitrate will be specifically
B-10
171
enforceable under the prevailing law of any court having jurisdiction. Notice of
a demand for arbitration will be filed in writing with the applicable other
signatory hereto and with AAA. The demand for arbitration shall be made within a
reasonable time after the claim, dispute or other matter in question has arisen,
and in no event shall any such demand be made after the date when institution of
legal or equitable proceedings based on such claim, dispute or other matter in
question would be barred by the applicable statute of limitations. The
signatories hereto agree that one (1) arbitrator experienced in the matters at
issue shall arbitrate all disputes. The arbitrator shall be selected by the
joint agreement of LHS and the Indemnitor Representative, but if they do not so
agree within twenty (20) days after the date of the notice of a demand for
arbitration referred to above, the selection shall be made pursuant to the
Commercial Arbitration Rules of AAA from the panels of arbitrators maintained by
AAA. The award rendered by the arbitrators will be final, judgment may be
entered upon it in any court having jurisdiction thereof, and the award will not
be subject to vacation, modification or appeal, except to the extent permitted
by Sections 10 and 11 of the Federal Arbitration Act, the terms of which
Sections the signatories hereto agree shall apply. Subject to the provisions of
Section 7.2, each participant in the arbitration shall pay its own expenses of
arbitration, and the expenses of the arbitrators shall be equally shared;
provided, however, that if in the opinion of the arbitrators any claim, or any
defense or objection thereto, was unreasonable, the arbitrators may assess, as
part of their award, all or any part of the arbitration expenses against the
participant(s) raising such unreasonable claim, defense or objection.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
LHS GROUP INC.:
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
INDEMNITOR REPRESENTATIVE:
By:
--------------------------------------
Name: ANDREW D. ORY
---------------------------------
ESCROW AGENT:
SUNTRUST BANK, ATLANTA
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
B-11
172
SCHEDULE I
TO ESCROW AGREEMENT
STOCKHOLDERS
NUMBER OF SHARES
OF COMMON STOCK PERCENTAGE
NAME OWNED INTEREST
- ---- ---------------- ----------
173
SCHEDULE OF FEES
LHS
ESCROW SERVICES
The annual fee of $ for administering this Escrow Agreement is
payable in advance at the time of closing and, if applicable, will be invoiced
each year to the appropriate party(ies) on the anniversary date of the closing
of the Escrow Agreement.
Out of pocket expenses such as, but not limited to, postage, courier, overnight
mail, insurance, money wire transfer, long distance telephone charges,
facsimile, stationery, travel legal or accounting, etc., will be billed at cost.
These fees do not include extraordinary services which will be priced according
to time and scope of duties. The fees shall be deemed earned in full upon
receipt by the Escrow Agent, and no portion shall be refundable for any reason,
including, without limitation, termination of the Escrow Agreement.
It is acknowledged that the schedule of fees shown above are acceptable for the
services mutually agreed upon and the undersigned authorizes SunTrust Bank,
Atlanta to perform said services.
174
APPENDIX C
PERSONAL AND CONFIDENTIAL
April 20, 1999
Board of Directors
Priority Call Management, Inc.
110 Fordham Road
Wilmington, MA 01887
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $0.01
per share, Preferred Series A Stock, par value $0.01 per share, Preferred Series
B Stock, par value $0.01 per share, and Preferred Series C Stock, par value
$0.01 per share (collectively, the "Shares"), of Priority Call Management, Inc.
(the "Company") of the exchange ratio of 2.3542 shares of Common Stock, par
value $0.01 per share (the "LHS Shares"), of LHS Group Inc. ("LHS") to be
received for each Share (the "Exchange Ratio") pursuant to the Agreement and
Plan of Merger, dated as of April 20, 1999, among LHS, Priority Call Management
Acquisition Corporation, a wholly-owned subsidiary of LHS, and the Company (the
"Agreement"). Pursuant to the terms of the Agreement, 0.11771 of the 2.3542 LHS
Shares to be exchanged for each Share will be held in escrow subject to the
terms of an escrow agreement, the form of which is attached as Exhibit 1 to the
Agreement to be entered into by and among LHS, an Indemnitor Representative
specified in the Agreement, and SunTrust Bank, Atlanta.
Goldman Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with, and having participated in certain of the negotiations leading to, the
Agreement. We also have provided certain investment banking services to LHS from
time to time, including having acted as lead managing underwriter of the initial
public offering of 4,800,000 LHS Shares in May 1997, and may provide investment
banking services to LHS in the future. Goldman Sachs & Co. provides a full range
of financial advisory and securities services and, in the course of its normal
trading activities, may from time to time effect transactions and hold
securities, including derivative securities, of the Company or LHS for its own
account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Annual Report to Stockholders for the year ended December 31,
1997,
C-1
175
Board of Directors
Priority Call Management, Inc.
Page 2
and the Annual Reports on Form 10-K of LHS for the two years ended December 31,
1998; the Registration Statement on Form S-1, dated May 16, 1997, related to the
initial public offering of LHS Shares, including the Prospectus therein; audited
financial statements for the Company for the years ended December 31, 1996, 1997
and 1998; certain interim reports to stockholders and Quarterly Reports on Form
10-Q of LHS; certain unaudited quarterly financial information of the Company;
certain other communications from LHS to its stockholders; and certain internal
financial analyses and forecasts for the Company and LHS prepared by the
Company's management. We also have held discussions with members of the senior
management of the Company and LHS regarding the strategic rationale for, and the
potential benefits of, the transaction contemplated by the Agreement and the
past and current business operations, financial condition and future prospects
of their respective companies. In addition, we have reviewed the reported price
and trading activity for the LHS Shares, compared certain financial and stock
market information for LHS and certain financial information for the Company
with similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the messaging, pre-paid and enhanced services industries
specifically and in the communications equipment industry generally and
performed such other studies and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. As you are aware, we were
not provided with financial projections for LHS prepared by the management of
LHS. Accordingly, we note that our review of such information for purposes of
rendering this opinion was limited to reviewing the financial projections for
LHS prepared by management of the Company and discussions with LHS management
concerning revenue budgets and revenue forecasts for the first nine months of
1999 and research analysts' estimates for the calendar year 1999. In that
regard, we have assumed with your consent that the financial forecasts for LHS
prepared by the management of the Company have been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
Company. In addition, we have not made an independent evaluation or appraisal of
the assets and liabilities of the Company or LHS or any of their respective
subsidiaries and we have not been furnished with any such evaluation or
appraisal. We also have assumed with your consent that the full amount of the
consideration to be held in escrow pursuant to the Agreement will be released to
the holders of Shares and that the transaction contemplated by the Agreement
will be accounted for as a pooling-of-interests under generally accepted
accounting principles. Our advisory services and the opinion expressed herein
are provided for the information and assistance of the Board of Directors of the
Company in connection with its consideration of the transaction
C-2
176
Board of Directors
Priority Call Management, Inc.
Page 3
contemplated by the Agreement and such opinion does not constitute a
recommendation as to how any holder of Shares should vote with respect to such
transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Exchange Ratio pursuant to the Agreement is fair from a financial point of view
to the holders of Shares.
Very truly yours,
C-3
177
APPENDIX D
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1998
TOGETHER WITH AUDITORS' REPORT
178
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Priority Call Management, Inc.:
We have audited the accompanying consolidated balance sheets of Priority
Call Management, Inc. (a Massachusetts corporation) and subsidiary as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Priority
Call Management, Inc. and subsidiary as of December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 4, 1999
D-1
179
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,293,771 $ 4,710,384
Accounts receivable, net of allowances of $280,000 and
$400,000 at December 31, 1997 and 1998, respectively... 1,573,152 7,329,350
Inventory (Note 2)........................................ 3,761,556 4,007,322
Prepaid expenses and other current assets................. 174,361 267,871
----------- -----------
Total current assets.............................. 11,802,840 16,314,927
PROPERTY AND EQUIPMENT, NET (Note 3)........................ 2,817,365 3,544,015
OTHER ASSETS (Note 6)....................................... 86,814 1,920,733
----------- -----------
Total assets...................................... $14,707,019 $21,779,675
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable (Note 4)................. $ 333,334 $ 666,672
Current portion of technology license payable (Note 6).... -- 244,105
Accounts payable.......................................... 1,825,882 2,729,528
Accrued expenses (Note 10)................................ 2,513,393 3,957,163
Customer deposits......................................... 114,985 135,567
Deferred revenue.......................................... 1,006,641 1,616,740
----------- -----------
Total current liabilities......................... 5,794,235 9,349,775
NOTES PAYABLE, NET OF CURRENT PORTION (Note 4).............. 513,889 853,160
TECHNOLOGY LICENSE PAYABLE, NET OF CURRENT PORTION (Note
6)........................................................ -- 1,679,892
----------- -----------
Total liabilities................................. 6,308,124 11,882,827
----------- -----------
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock, $.01 par value --
Authorized -- 1,500,000 shares
Series A-0 convertible preferred stock --
Issued and outstanding -- 234,232 shares at December
31, 1997 and 1998 (liquidation preference
$3,045,016)........................................... 2,342 2,342
Series B-0 convertible preferred stock --
Issued and outstanding -- 117,635 shares at December
31, 1997 and 1998 (liquidation preference
$2,030,380)........................................... 1,176 1,176
Series C-0 convertible preferred stock --
Issued and outstanding -- 209,583 shares at December
31, 1997 and 1998 (liquidation preference
$5,029,992)........................................... 2,096 2,096
Common stock, $.01 par value --
Authorized -- 4,000,000 shares
Issued and outstanding -- 1,140,480 and 1,180,355 shares
at December 31, 1997 and 1998, respectively............ 11,405 11,804
Additional paid-in capital................................ 14,383,393 15,068,449
Note receivable (Note 9).................................. -- (525,000)
Accumulated deficit....................................... (6,001,517) (4,664,019)
----------- -----------
Total stockholders' equity........................ 8,398,895 9,896,848
----------- -----------
Total liabilities and stockholders' equity........ $14,707,019 $21,779,675
=========== ===========
The accompanying notes are an integral part of these financial statements.
D-2
180
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
NET SALES............................... $11,035,439 $20,111,342 $30,936,058
COST OF SALES........................... 5,113,163 9,318,212 14,131,121
----------- ----------- -----------
Gross profit...................... 5,922,276 10,793,130 16,804,937
----------- ----------- -----------
OPERATING EXPENSES:
Research and development............. 1,654,390 2,434,261 3,190,871
Sales and marketing.................. 4,102,873 6,157,208 8,486,494
General and administrative........... 1,721,202 3,112,132 3,852,435
----------- ----------- -----------
Total operating expenses.... 7,478,465 11,703,601 15,529,800
----------- ----------- -----------
Income (loss) from
operations............... (1,556,189) (910,471) 1,275,137
INTEREST AND OTHER INCOME............... 163,640 205,472 186,570
INTEREST EXPENSE........................ (12,025) (51,555) (124,209)
----------- ----------- -----------
Net income (loss)........... $(1,404,574) $ (756,554) $ 1,337,498
=========== =========== ===========
NET INCOME (LOSS) PER SHARE
Basic................................ $ (1.23) $ (.66) $ 1.16
Diluted.............................. $ (1.23) $ (.66) $ .67
Basic weighted average common shares
outstanding....................... 1,140,289 1,140,480 1,154,093
Diluted weighted average common
shares outstanding................ 1,140,289 1,140,480 1,990,350
PRO FORMA NET INCOME PER SHARE
Pro forma basic net income per
share............................. $ .78
Pro forma diluted net income per
share............................. $ .67
Pro forma basic weighted average
common shares outstanding......... 1,715,523
Pro forma diluted weighted average
common shares outstanding......... 1,990,350
The accompanying notes are an integral part of these financial statements.
D-3
181
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES A-0 SERIES B SERIES B-0 SERIES C-0
----------------- ---------------- ------------------ ---------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------ ------- ------ -------- ------- ------- ------ ------- ------
BALANCE, DECEMBER 31, 1995....... 234,232 $2,342 -- $ -- -- $ -- -- $ -- -- $ --
Exercise of common stock
options....................... -- -- -- -- -- -- -- -- -- --
Issuance of Series B convertible
preferred stock upon exercise
of warrants................... -- -- -- -- 117,635 1,176 -- -- -- --
Issuance of Series A-0 convertible
preferred stock in exchange
for Series A convertible
preferred stock............... (234,232) (2,342) 234,232 2,342 -- -- -- -- -- --
Issuance of Series B-0 convertible
preferred stock in exchange
for Series B convertible
preferred stock............... -- -- -- -- (117,635) (1,176) 117,635 1,176 -- --
Issuance of Series C-0 convertible
preferred stock at a price of
$24.00 per share, net of
issuance costs of $60,900..... -- -- -- -- -- -- -- -- 209,583 2,096
Net loss........................ -- -- -- -- -- -- -- -- --
-------- ------ ------- ------ -------- ------- ------- ------ ------- ------
BALANCE, DECEMBER 31, 1996....... -- -- 234,232 2,342 -- -- 117,635 1,176 209,583 2,096
Net loss........................ -- -- -- -- -- -- -- -- -- --
-------- ------ ------- ------ -------- ------- ------- ------ ------- ------
BALANCE, DECEMBER 31, 1997....... -- -- 234,232 2,342 -- -- 117,635 1,176 209,583 2,096
Exercise of common stock
options....................... -- -- -- -- -- -- -- -- -- --
Compensation expense related to
stock options................. -- -- -- -- -- -- -- -- -- --
Net income...................... -- -- -- -- -- -- -- -- -- --
-------- ------ ------- ------ -------- ------- ------- ------ ------- ------
BALANCE, DECEMBER 31, 1998....... -- $ -- 234,232 $2,342 -- $ -- 117,635 $1,176 209,583 $2,096
======== ====== ======= ====== ======== ======= ======= ====== ======= ======
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN NOTE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
--------- ------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1995....... 1,139,230 $11,392 $ 7,371,581 $ -- $(3,840,389) $3,544,926
Exercise of common stock
options....................... 1,250 13 15,612 -- -- 15,625
Issuance of Series B convertible
preferred stock upon exercise
of warrants................... -- -- 2,029,204 -- -- 2,030,380
Issuance of Series A-0
convertible
preferred stock in exchange
for Series A convertible
preferred stock............... -- -- -- -- -- --
Issuance of Series B-0
convertible
preferred stock in exchange
for Series B convertible
preferred stock............... -- -- -- -- -- --
Issuance of Series C-0
convertible
preferred stock at a price of
$24.00 per share, net of
issuance costs of $60,900..... -- -- 4,966,996 -- -- 4,969,092
Net loss........................ -- -- -- -- (1,404,574) (1,404,574)
--------- ------- ----------- --------- ----------- ----------
BALANCE, DECEMBER 31, 1996....... 1,140,480 11,405 14,383,393 -- (5,244,963) 9,155,449
Net loss........................ -- -- -- -- (756,554) (756,554)
--------- ------- ----------- --------- ----------- ----------
BALANCE, DECEMBER 31, 1997....... 1,140,480 11,405 14,383,393 -- (6,001,517) 8,398,895
Exercise of common stock
options....................... 39,875 399 589,056 (525,000) -- 64,455
Compensation expense related to
stock options................. -- -- 96,000 -- -- 96,000
Net income...................... -- -- -- -- 1,337,498 1,337,498
--------- ------- ----------- --------- ----------- ----------
BALANCE, DECEMBER 31, 1998....... 1,180,355 $11,804 $15,068,449 $(525,000) $(4,664,019) $9,896,848
========= ======= =========== ========= =========== ==========
The accompanying notes are an integral part of these financial statements.
D-4
182
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $(1,404,574) $ (756,554) $ 1,337,498
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating
activities --
Depreciation and amortization..... 444,686 883,212 1,359,826
Compensation expense from issuance
of stock options............... -- -- 96,000
Gain on disposal of equipment..... (2,754) (3,100) --
Changes in operating assets and
liabilities --
Accounts receivable............... (447,906) 882,367 (5,756,198)
Inventory......................... (1,328,410) (1,292,736) (426,971)
Prepaid expenses and other current
assets......................... (79,790) (62,664) (93,510)
Accounts payable.................. 385,934 680,090 903,646
Accrued expenses.................. 416,088 1,866,408 1,443,770
Customer deposits................. (48,583) (104,735) 20,582
Deferred revenue.................. 103,459 424,204 610,099
----------- ----------- -----------
Net cash (used in) provided
by operating
activities............... (1,961,850) 2,516,492 (505,258)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment......................... (1,698,360) (1,780,033) (1,806,178)
Proceeds from sale of property and
equipment......................... 69,565 3,100 --
Decrease (increase) in other
assets............................ (86,814) -- 48,868
----------- ----------- -----------
Net cash used in investing
activities............... (1,715,609) (1,776,933) (1,757,310)
----------- ----------- -----------
D-5
183
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of
convertible preferred stock....... 4,969,092 -- --
Proceeds from exercise of common
stock options..................... 15,625 -- 64,455
Proceeds from exercise of Series B
convertible preferred stock
warrants.......................... 2,030,380 -- --
Proceeds from notes payable.......... 500,000 500,000 1,000,000
Repayments of notes payable.......... (106,473) (152,778) (327,391)
Repayments of technology license
liability......................... -- -- (57,883)
----------- ----------- -----------
Net cash provided by
financing activities..... 7,408,624 347,222 679,181
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.......................... 3,731,165 1,086,781 (1,583,387)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR................................. 1,475,825 5,206,990 6,293,771
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR................................. $ 5,206,990 $ 6,293,771 $ 4,710,384
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Technology license arrangement....... $ -- $ -- $ 1,981,881
=========== =========== ===========
Exercise of common stock option with
a note receivable................. $ -- $ -- $ 525,000
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............... $ 9,712 $ 49,658 $ 119,919
=========== =========== ===========
Cash paid for income taxes........... $ -- $ -- $ 9,350
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
D-6
184
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Priority Call Management, Inc. (the Company) designs, develops and markets
network-based platforms enabling telecommunication service providers and Fortune
1000 companies to create and offer unique one number, prepaid calling and
enhanced messaging solutions. The Company was incorporated in Massachusetts in
March 1991.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Use of Accounting Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates included in these
financial statements relate to accounts receivable allowances, inventory
valuation and deferred tax asset valuation. Actual results could differ from
those estimates.
(c) Revenue Recognition
Revenues from system sales are recognized upon shipment, provided that no
significant obligations of the Company remain and collection of the related
receivable is probable. The Company's warranty period on system sales is
generally one year. Reserves for estimated future warranty costs are provided at
the time of sale. The Company accounts for revenues related to software
licensing fees in accordance with Statement of Position (SOP) 97-2, Software
Revenue Recognition. Revenue from system maintenance and support is deferred and
recognized ratably over the terms of the maintenance agreements, which is
generally 12 months. Allowances for estimated uncollectible amounts, returns and
credits are recorded in the same period as the related revenues.
(d) Research and Development
Research and development costs are expensed as incurred. Costs of
internally developed software that qualify for capitalization have been
immaterial.
D-7
185
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Cash Equivalents
The Company considers highly liquid investments with an original maturity
of three months or less to be cash equivalents. Cash equivalents, which consist
of treasury bills, are stated at cost plus accrued interest, which approximates
fair value.
(f) Inventory
Inventory is stated at the lower of cost or market value using the
first-in, first-out costing method.
(g) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets as
set forth below:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- -----------
Engineering and technical equipment................. 1 - 5 years
Office furniture and equipment...................... 5 years
Leasehold improvements.............................. Shorter of lease
term or asset life
Upon retirement or other disposition of property and equipment, the asset
cost and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in income. Maintenance and repairs are
charged to expense as incurred; improvements are capitalized.
(h) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist of cash, cash equivalents and accounts receivable. The Company's cash
and cash equivalents are held in highly rated qualified financial institutions.
Accounts receivable subject the Company to potential credit risk with customers
in the telecommunications industry. The Company performs ongoing credit
evaluations of its customers' financial condition but does not require
collateral. Historically, the Company has not experienced significant losses
related to its accounts receivable. Approximately 40% and 53% of the Company's
accounts receivable at December 31, 1997 and 1998 were represented by three
customers, respectively. During 1996, 1997 and 1998 the Company purchased a
significant amount of inventory from a single supplier.
D-8
186
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes, pursuant to which deferred income taxes are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. A valuation reserve against deferred tax
assets is recorded if, based on weighted available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized (see
Note 8).
(j) Financial Instruments
The fair value of the Company's financial instruments, which include cash
equivalents, accounts receivable, accounts payable and notes payable
approximates their carrying value.
(k) Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) 130, Reporting Comprehensive
Income. The Company adopted SFAS 130 during the year ended December 31, 1998.
There was no impact to the Company as a result of adopting SFAS 130, as there
were no differences between net income (loss) and comprehensive income (loss)
for all periods presented.
(l) Net Income (Loss) Per Share
Basic and diluted net loss per share for 1996 and 1997 was determined by
dividing net loss by the weighted average common shares outstanding during each
period. For 1996 and 1997, basic and diluted net loss per share are the same
since the Company recorded a net loss in each period and outstanding common
stock options and convertible preferred stock are considered antidilutive. For
1998, basic net income per share was determined by dividing net income by the
weighted average common shares outstanding during 1998. Diluted net income per
share for 1998 was determined by dividing net income by diluted weighted average
common shares outstanding assuming that all classes of preferred stock had been
converted to common stock as of January 1, 1998 and assuming the dilutive effect
of common stock options based on the treasury stock method. The calculation of
diluted weighted average shares outstanding excludes 370,890, 456,997 and 42,400
common stock options in 1996, 1997 and 1998, respectively, as their effect would
be antidilutive. The calculation of diluted weighted average shares outstanding
for 1996 and 1997 also excludes 561,450 shares representing all classes of
convertible preferred stock, as their effect would be antidilutive.
D-9
187
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma basic net income per share was determined by dividing net income
by weighted average common shares outstanding assuming that all classes of
preferred stock had been converted to common stock as of January 1, 1998.
Proforma diluted net income per share was determined by dividing net income by
diluted weighted average common shares outstanding assuming that all classes of
preferred stock had been converted to common stock as of January 1, 1998 and
assuming the dilutive effect of common stock options.
2. INVENTORY
Inventory consists of the following:
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
Purchased parts and components................ $2,396,670 $2,235,221
Work-in-process............................... 1,099,218 1,320,906
Finished goods................................ 265,668 451,195
---------- ----------
$3,761,556 $4,007,322
========== ==========
Finished goods include $155,065 and $48,983 at December 31, 1997, and 1998
respectively, of systems held by potential customers for evaluation purposes. In
general, these evaluation units are sold to the customer holding the inventory.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
Engineering and technical equipment........... $3,079,706 $5,037,269
Office furniture and equipment................ 1,119,758 1,144,375
Leasehold improvements........................ 228,519 233,721
---------- ----------
4,427,983 6,415,365
Less -- Accumulated depreciation and
amortization............................... 1,610,618 2,871,350
---------- ----------
$2,817,365 $3,544,015
========== ==========
4. NOTES PAYABLE AND LINE OF CREDIT
In April 1998, the Company increased its prior $2,750,000 loan and security
agreement to $3,000,000. Under the provisions of the new agreement, the Company
may borrow up to the lesser of (i) $2,000,000, or (ii) 80% of eligible accounts
receivable (working capital line) and up to $1,000,000 for equipment purchases
(equipment line).
D-10
188
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings under the working capital line accrue interest at the bank's prime
rate (7.75% at December 31, 1998) and borrowings under the equipment line accrue
interest at the bank's prime rate plus 1/2%. At December 31, 1998, the Company
had a $1,000,000 advance against the equipment line and no borrowings against
the working capital line. Advances against the equipment line converted to a
term note payable as of December 31, 1998. The term note is repayable in 36
monthly installments of principal and accrued interest. In addition, the Company
had $519,832 outstanding under prior agreements with the bank that is being
repaid in monthly installments through January 2001. The Company is subject to
certain financial covenants, including, but not limited to, maximum debt-to-net
worth, minimum tangible net worth and minimum profitability requirements. As of
December 31, 1998, the Company was in compliance with these covenants. The
working capital line is collateralized by the Company's accounts receivable and
inventory, and the equipment line is collateralized by the equipment purchased
with equipment advances. Maturities of long-term debt are as follows as of
December 31, 1998:
1999..................................................... $ 666,672
2000..................................................... 513,862
2001..................................................... 339,298
----------
$1,519,832
==========
5. LEASE COMMITMENTS
The Company leases approximately 35,000 square feet of office/light
manufacturing space in a building located in Wilmington, Massachusetts, under a
lease through October 2001.
Minimum annual rental commitments as of December 31, 1998 are as follows:
1999....................................................... $284,000
2000....................................................... 284,000
2001....................................................... 237,000
--------
$805,000
========
Rent expense was approximately $255,000 and $314,000 in 1997 and 1998,
respectively. The Company is obligated to pay for utilities, taxes, insurance
and maintenance.
6. TECHNOLOGY LICENSE LIABILITY
During 1998 the Company entered into a patent license agreement with a
third party whereby the third party has agreed to license certain products to
the Company and each party has agreed to cross license certain patent rights to
each other. In
D-11
189
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consideration of this license agreement, the Company has agreed to pay the sum
of $3,000,000 plus certain royalty payments. The $3,000,000 payment is payable
as follows: $400,000 was payable upon the signing of the agreement with the
balance to be paid at a rate of $200,000 per quarter commencing December 1998.
So long as the Company has not had a closing of an initial public offering of
its common stock or undergone a change of control as defined in the agreement,
the Company is entitled to defer payment of $100,000 per quarter and pay
$100,000 per quarter. Within 10 days following the closing of an initial public
offering or a change in control of the Company, the Company shall make a lump
sum payment equal to the total of payments deferred through the date of such
event.
The Company has recorded the net discounted present value of the payments
as a liability and related asset for approximately $1,982,000. The technology
license asset is being amortized over a five-year period, the estimated useful
life of the technology. The balance of the capitalized technological license at
December 31, 1998 is approximately $1,883,000, net of accumulated amortization
of approximately $99,000.
Future minimum payments under the technology license liability are as
follows as of December 31, 1998:
1999..................................................... $ 400,000
2000..................................................... 400,000
2001..................................................... 400,000
2002..................................................... 400,000
2003 and thereafter...................................... 900,000
----------
Total minimum payments................................... 2,500,000
Less -- amount representing interest.................. 576,003
----------
Present value of minimum payments........................ 1,923,997
Less -- Current portion of payments................... 244,105
----------
$1,679,892
==========
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
On July 16, 1996, the Company completed a private equity placement
consisting of 209,583 shares of Series C-0 convertible preferred stock at a
price per share of $24.00. The Company received net proceeds of $4,969,092. As
part of this equity placement, the Board of Directors authorized six new series
of convertible preferred stock: Series A-0, Series A-1, Series B-0, Series B-1,
Series C-0 and Series C-1. All outstanding shares of Series A and Series B
convertible preferred stock were canceled and exchanged for Series A-0 and
Series B-0 convertible preferred stock, respectively.
D-12
190
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares of Series A-0 convertible preferred stock, Series B-0 convertible
preferred stock and Series C-0 convertible preferred stock (Series A-0, Series
B-0 and Series C-0 preferred stock) are convertible into common stock at a rate
of one-for-one, subject to adjustment for certain dilutive issuances, at the
option of the holder, but convert automatically at the closing of a public
offering of the Company's common stock with minimum proceeds, as defined.
Dividends on Series A-0, Series B-0 and Series C-0 preferred stock are
noncumulative and become payable when and if declared by the Board of Directors
at 7% per annum of the amount paid for the preferred stock or, if greater, an
amount equal to that paid on any outstanding shares of common stock. Holders of
Series A-0, Series B-0 and Series C-0 preferred stock are entitled to one vote
for each share of common stock into which the preferred stock is convertible and
have preference in the distribution of the assets of the Company in the event of
the liquidation, dissolution or winding up of the Company. The liquidation
preference is equal to the original issuance price per share of each series of
preferred stock, plus an amount equal to any dividends declared but unpaid on
the Series A-0, Series B-0 and Series C-0 preferred stock. In addition, Series
A-0, Series B-0 and Series C-0 preferred stockholders have the right of first
refusal, on a pro rata basis, on all equity securities offered for sale by the
Company to third parties.
In addition, the holders of Series A-0, Series B-0 and Series C-0 preferred
stock have the following rights: (i) the right of first refusal on shares
offered for sale by certain management stockholders of the Company; (ii) the
right to participate, on a pro rata basis with certain management stockholders,
in the offer for sale of any shares of the Company's stock to third parties;
(iii) the right, any time after March 15, 1998 or one year after the closing of
a firm commitment underwritten initial public offering with minimum proceeds, as
defined, to require the Company to register any registrable securities, if so
elected by a majority of such holders; and (iv) the right, in certain
circumstances and subsequent to the Company's initial public offering, to
require the Company to include such holders' unregistered stock in any other
registration of the Company's common stock. As of December 31, 1998 no dividends
have been declared or distributed.
COMMON STOCK
On June 11, 1996, the Company's stockholders approved an amendment to the
Company's Articles of Organization that increased the total number of authorized
common shares from 3,500,000 to 4,000,000 shares.
STOCK OPTION PLAN
The Company's Amended and Restated 1993 Stock Option Plan (the Plan)
provides for the grant of incentive and nonqualified stock options to employees
and consultants of the Company for the purchase of a maximum of 340,000 shares
of
D-13
191
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock, which shares have been reserved for issuance under the Plan. The
maximum shares issuable under the Plan increased to 490,000 in 1996, and
increased to 640,000 in 1998.
Incentive stock options may not be granted at an exercise price less than
100% (110% in certain cases) of the fair market value of common stock at the
grant date. As of December 31, 1998, all options were issued at (or above, in
certain cases) fair market value at date of grant, as determined by the Board of
Directors. Options granted under the Plan generally vest and become exercisable
at periodic intervals over a four-year period. The term of each option granted
under the Plan is generally 10 years from the date of grant. The sale or
transfer of shares acquired upon the exercise of these options may be
restricted, upon the written request of the Company, for a period of 180 days
commencing on the effective date of an underwritten public offering of the
Company's stock.
The following schedule summarizes the activity in the Plan:
WEIGHTED
AVERAGE
OPTIONS OPTION PRICE OPTION PRICE
------- --------------- ------------
Outstanding, December 31, 1995........ 270,690 $10.00 - $15.00 $11.53
Granted............................ 135,050 12.50 - 13.75 12.86
Canceled........................... (33,600) 12.50 (12.50)
Exercised.......................... (1,250) 12.50 (12.50)
------- --------------- ------
Outstanding, December 31, 1996........ 370,890 10.00 - 15.00 11.92
Granted............................ 101,850 13.75 - 16.75 13.90
Canceled........................... (15,743) 12.50 - 16.75 (13.19)
------- --------------- ------
Outstanding, December 31, 1997........ 456,997 10.00 - 16.75 12.35
Granted............................ 137,550 16.75 - 40.00 23.13
Canceled........................... (12,269) 12.50 - 35.00 (15.47)
Exercised.......................... (39,875) 12.50 - 15.00 (14.78)
------- --------------- ------
Outstanding, December 31, 1998........ 542,403 $10.00 - $40.00 $14.82
======= =============== ======
Exercisable, December 31, 1996........ 215,176 $10.00 - $15.00 $11.50
======= =============== ======
Exercisable, December 31, 1997........ 282,221 $10.00 - $15.00 $12.06
======= =============== ======
Exercisable, December 31, 1998........ 307,609 $10.00 - $16.75 $11.62
======= =============== ======
D-14
192
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING EXERCISE
AVERAGE CONTRACTUAL PRICE OF
OPTIONS EXERCISE LIFE OPTIONS EXERCISABLE
RANGE OF OPTIONS PRICES OUTSTANDING PRICE (YEARS) EXERCISABLE OPTIONS
- ----------------------- ----------- -------- ----------- ----------- -----------
$10.00 - $16.75....... 492,503 $12.82 6.87 307,609 $11.62
21.00 - 26.00....... 7,500 24.00 9.29 -- --
31.00 - 40.00....... 42,400 35.51 9.67 -- --
------- ------- ------
542,403 $14.82 7.13 307,609 $11.62
======= =======
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options or warrants to be included in the statement of operations or disclosed
in the notes to financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
elect the disclosure-only alternative under SFAS No. 123.
Had compensation cost for the Company's options been determined based on
the fair value at the grant dates, as prescribed by SFAS No. 123, the Company's
net income (loss) would have been as follows:
1996 1997 1998
----------- ----------- ----------
Net income (loss) --
As reported....................... $(1,404,574) $ (756,554) $1,337,498
Pro forma......................... (1,632,352) (1,174,943) 816,264
Net income (loss) per share --
Basic, as reported................ $ (1.23) $ (.66) $ 1.16
Basic, pro forma.................. $ (1.43) $ (1.03) $ .70
Diluted, as reported.............. $ (1.23) $ (.66) $ .67
Diluted, pro forma................ $ (1.43) $ (1.03) $ .41
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during, 1996, 1997 and 1998: dividend yield of 0%; risk-free interest
rates ranging from 4.46% to 6.95%; volatility of 0%; and an average expected
option term of 7.5 years. The weighted average fair value of each option granted
during 1996, 1997 and 1998 was approximately $4.23, $4.98, and $4.73,
respectively.
During 1998 the Company granted an option to purchase 2,500 shares of
common stock at an exercise price of $31.00 per share to a non-employee. The
Company will
D-15
193
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognize the estimated value of the grant of $96,000 as expense over the
vesting term of two years. Any increases in value will be recorded as additional
expense during the year in which vesting occurs.
8. INCOME TAXES
The Company did not record a tax provision during 1998, as they were able
to offset taxable income with net operating loss and credit carry forwards.
Deferred taxes consists of the following:
DECEMBER 31,
------------------------
1997 1998
---------- -----------
Net operating loss carryforwards................. $1,590,000 $ 119,000
Nondeductible reserves........................... 383,000 602,000
Nondeductible accruals........................... 392,000 1,083,000
Credit carryforwards............................. 469,000 702,000
Depreciation..................................... (71,000) (83,000)
---------- -----------
Gross deferred tax asset...................... 2,763,000 2,423,000
Valuation allowance.............................. (2,763,000) (2,423,000)
---------- -----------
Net deferred tax asset........................ $ -- $ --
========== ===========
Due to the uncertainty surrounding the realization of these favorable tax
attributes, the Company has placed a valuation allowance against its net
deferred tax assets.
The Company has net operating loss credit carryforwards for federal tax
purposes of approximately $300,000, which expire at various dates through 2012.
The use of the net operating loss and credit carryforwards may be subject to
annual limitations based on ownership changes in the Company as provided in the
Internal Revenue Code.
9. NOTE RECEIVABLE
During 1998, a former employee of the Company exercised common stock
options with a note receivable. The note is a full recourse promissory note
bearing interest at the prime rate. Interest is payable upon maturity. The note
matures on the earlier of the 181st day following the closing of the Company's
initial public offering, the 60th day following the closing of any sale of the
Company to a third party, or August 2000.
D-16
194
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1998 consist of the following:
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
Accrued payroll and payroll related............... $ 912,856 $1,655,023
Accrued marketing and sales programs.............. 369,309 1,111,505
Accrued other..................................... 1,231,228 1,190,635
---------- ----------
$2,513,393 $3,957,163
========== ==========
11. SEGMENT AND ENTERPRISE -- WIDE REPORTING
The Company currently operates in a single segment as a provider of network
based platforms enabling telecommunication service providers and Fortune 1000
Companies to create and offer unique enhanced messaging solutions.
The Company derives substantially all of its revenue from the sale and
support of one group of similar products and services. Substantially all of the
Company's assets are located within the United States. During 1996, 1997, and
1998, each of the geographic regions identified accounted for greater than 10
percent of total revenues, as follows:
DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
United States....................... $ 8,109,000 $10,583,000 $13,397,000
United Kingdom...................... * * 5,155,000
China............................... * 1,925,000 3,243,000
All Other........................... 2,926,000 7,603,000 9,141,000
----------- ----------- -----------
Total................... $11,035,000 $20,111,000 $30,936,000
=========== =========== ===========
- ---------------
* Revenue derived from this geographic region was less than 10% of the Company's
total revenue during the period.
Sales to significant customers as a percentage of the Company's total
revenue is as follows:
DECEMBER 31,
------------------
1996 1997 1998
---- ---- ----
Customer A.............................................. 22% 18% 16%
Customer B.............................................. -- 12 12
Customer C.............................................. -- -- 14
Customer D.............................................. -- -- 10
D-17
195
PRIORITY CALL MANAGEMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth the activity in the Company's accounts
receivable reserve account:
BALANCE AT BALANCE AT
BEGINNING OF CHARGED TO END OF
PERIOD EXPENSE WRITE-OFFS PERIOD
------------ ---------- ---------- ----------
Year ended December 31, 1996.... $ 90,000 $ 70,000 $ -- $160,000
Year ended December 31, 1997.... 160,000 132,000 (12,000) 280,000
Year ended December 31, 1998.... 280,000 120,000 -- 400,000
D-18
196
APPENDIX E
PRIORITY CALL MANAGEMENT, INC.
TERMS, RIGHTS, PREFERENCES AND PRIVILEGES OF
SERIES A-0 CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE,
SERIES A-1 CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE,
SERIES B-0 CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE,
SERIES B-1 CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE,
SERIES C-0 CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE,
AND
SERIES C-I CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE
1. Definitions. As used herein, the following terms shall have the
following meanings:
(a) The term "Affiliate" shall mean, with regard to any Investor, a
person or entity that directly or indirectly controls, or is controlled by,
or is under common control with, such Investor; provided, however, that the
term "Affiliate", when used with regard to any Investor, shall not include
persons or entities that have no relationship with such Investor except by
reason of being a limited partner of such Investor.
(b) The term "A Preferred" shall mean, collectively, the Series A-0
Preferred Stock and the Series A-1 Preferred Stock.
(c) The term "Articles of Organization" shall mean the Corporation's
Articles of Organization, as amended from time to time.
(d) The term "B Preferred" shall mean, collectively, the Series B-0
Preferred Stock and the Series B-1 Preferred Stock.
(e) The term "Certificate of Designation" shall mean the Certificate of
Vote of Directors Establishing a Series of Preferred Stock setting forth
the terms, rights, preferences and privileges of Series A-0 Convertible
Preferred Stock, $0.01 Par Value, Series B-0 Convertible Preferred Stock,
$0.01 Par Value, Series C-0 Convertible Preferred Stock, $0.01 Par Value
and Series C-1 Convertible Preferred Stock, $0.01 Par Value, and amending
and restating the terms, rights, preferences and privileges of Series A-1
Convertible Preferred Stock, $0.01 par value, and Series B-1 Convertible
Preferred Stock, $0.01 par value, filed with the Secretary of The
Commonwealth of Massachusetts on or about July 12, 1996.
(f) The term "Common Stock" shall mean the common stock, $.01 par value
per share, of the Corporation.
(g) The term "C Preferred" shall mean, collectively, the Series C-0
Preferred Stock and the Series C-I Preferred Stock.
E-1
197
(h) The term "Excluded Stock" shall mean:
(i) 234,232 shares of Series A Preferred Stock issued by the
Corporation to Menlo Ventures VI, L.P. and Menlo Entrepreneurs Fund VI,
L.P. pursuant to the Series A Stock Purchase Agreement (the "Series A
Preferred Shares");
(ii) up to 234,232 shares of Series A-0 Preferred Stock to be
exchanged for all of the Series A Preferred Shares upon the closing of
the transactions under the Series C Stock Purchase Agreement;
(iii) up to 209,583 shares of Series C-0 Preferred Stock to be
issued by the Corporation to the Investors pursuant to the Series C
Stock Purchase Agreement;
(iv) Common Stock issued or issuable to officers, employees or
directors of, or consultants to, the Corporation, pursuant to any
agreement, plan or arrangement approved by the Board of Directors of
the Corporation, or options or warrants to purchase or rights to
subscribe for such Common Stock, or securities by their terms
convertible into or exchangeable for such Common Stock, or options or
warrants to purchase or rights to subscribe for such convertible or
exchangeable securities; provided, however, that the maximum number of
shares of Common Stock issued or issuable pursuant to all such
agreements, plans or arrangements shall not exceed the greater of (I)
490,000 shares (net of repurchases and subject to appropriate and
equitable adjustment upon a stock split or other subdivision of the
Common Stock, a stock dividend payable in shares of Common Stock, a
reverse stock split or other combination of the Common Stock, or a
reclassification of the Common Stock) or (II) such number of shares as
may be approved pursuant to Section 1(h)(xi) below;
(v) Common Stock issued as a stock dividend or upon any stock
split or other subdivision or combination of shares of Common Stock;
(vi) Common Stock issued or issuable upon conversion of the
Preferred Stock or any other class or series of preferred stock of the
Corporation;
(vii) Series A-1 Preferred Stock issued or issuable upon
mandatory conversion of Series A-0 Preferred Stock pursuant to Section
7 hereof, Series B-1 Preferred Stock issued or issuable upon mandatory
conversion of Series B-0 Preferred Stock pursuant to Section 7 hereof
and Series C-1 Preferred Stock issued or issuable upon mandatory
conversion of Series C-0 Preferred Stock pursuant to Section 7 hereof;
(viii) 117,635 shares of Series B Preferred Stock issued upon
exercise of the Preferred Warrants (the "Series B Preferred Shares");
(ix) up to 117,635 shares of Series B-0 Preferred Stock to be
exchanged for all of the Series B Preferred Shares upon the closing of
the transactions under the Series C Stock Purchase Agreement;
E-2
198
(x) any equity securities (including options and warrants) issued
in connection with (I) a financing by a bank or other lending
institution, (II) a joint venture in which the Corporation is a
participant, or (III) a license, marketing or distribution agreement to
which the Corporation is a party, provided that such issuances, in the
aggregate, do not exceed five percent (5%) of the total issued and
outstanding capital stock of the Corporation on a fully-diluted basis;
and
(xi) any class or series of capital stock of the Corporation that
is approved to be Excluded Stock by the holders of not less than a
majority of the shares of Preferred Stock at the time outstanding,
voting together as a single class, in the manner provided in Section
4(c) hereof.
(i) The term "Investors" shall mean, collectively, Canaan Capital
Limited Partnership, Canaan Capital Offshore Limited Partnership C.V.,
Canaan S.B.I.C., L.P., Menlo Ventures VI, L.P., and Menlo Entrepreneurs
Fund VI, L.P.
(j) The term "Junior Stock" shall mean the Common Stock and any class
or series of capital stock of the Corporation ranking, on liquidation or as
to payment of dividends, junior to the Preferred Stock.
(k) The term "Original Issuance Date" shall mean (i) in the case of the
Series A-0 Preferred Stock and the Series A-1 Preferred Stock, the date as
of which the first share of Series A-0 Preferred Stock has been issued,
(ii) in the case of the Series B-0 Preferred Stock and the Series B-1
Preferred Stock, the date as of which the first share of Series B-0
Preferred Stock has been issued and (iii) in the case of the Series C-0
Preferred Stock and the Series C-1 Preferred Stock, the date as of which
the first share of Series C-0 Preferred Stock has been issued.
(l) The term "Original Issuance Price" shall mean (i) in the case of
the Series A-0 Preferred Stork and the Series A-1 Preferred Stock, $13.00
per share, (ii) in the case of the Series B-0 Preferred Stock and the
Series B-1 Preferred Stock, $17.26 per share and (iii) in the case of the
Series C-0 Preferred Stock and the Series C-1 Preferred Stock, $24.00 per
share.
(m) The term "Preferred Stock" shall mean, collectively, the Series A-0
Preferred Stock, the Series A-1 Preferred Stock, the Series B-0 Preferred
Stock, the Series B-1 Preferred Stock, the Series C-0 Preferred Stock and
the Series C-1 Preferred Stock.
(n) The term "Preferred Warrants" shall mean those certain warrants,
dated as of March 15, 1995, made by the Corporation in favor of the
Investors and initially exercisable for an aggregate of 117,635 shares of
Series B Preferred Stock.
(o) The term "Qualified Public Offering" shall mean a public offering
of the Corporation's common stock pursuant to a registration statement
filed with the Securities and Exchange Commission and in which the
aggregate gross proceeds to the Corporation are at least $10,000,000 and,
with regard to the Series C-0
E-3
199
Preferred Stock and Series C-1 Preferred Stock only, in which the offering
price of Common Stock is greater than $50.00 per share.
(p) The term "Series A Preferred Stock" shall mean the Series A
Convertible Preferred Stock, $0.01 par value per share, of the Corporation.
(q) The term "Series A-0 Preferred Stock" shall mean the Series A-0
Convertible Preferred Stock, $0.01 par value per share, of the Corporation.
(r) The term "'Series A-1 Preferred Stock" shall mean the Series A-1
Convertible Preferred Stock, $0.01 par value per share, of the Corporation.
(s) The term "Series A Stock Purchase Agreement" shall mean the Series
A Convertible Preferred Stock and Warrant Purchase Agreement, dated as of
March 15, 1995, among the Corporation, Menlo Ventures VI, L.P. and Menlo
Entrepreneurs Fund VI, L.P.
(t) The term "Series B Preferred Stock" shall mean the Series B
Convertible Preferred Stock, $0.01 par value per share, of the Corporation.
(u) The term "Series B-0 Preferred Stock" shall mean the Series B-0
Convertible Preferred Stock, $0.01 par value per share, of the Corporation.
(v) The term "Series B-1 Preferred Stock" shall mean the Series B-1
Convertible Preferred Stock, $0.01 par value per share, of the Corporation.
(w) The term "Series C-0 Preferred Stock" shall mean the Series C-0
Convertible Preferred Stock, $0.01 par value per share, of the Corporation.
(x) The term "Series C-1 Preferred Stock" shall mean the Series C-1
Convertible Preferred Stock, $0.01 par value per share, of the Corporation.
(y) The term "Series C Stock Purchase Agreement" shall mean the Series
C Convertible Preferred Stock Purchase Agreement, dated on or about July
15, 1996, among the Corporation and the Investors.
(z) The term "Special Adjustment" shall mean (i) in the case of the
Series A-0 Preferred Stock, an appropriate and equitable adjustment upon a
stock split or other subdivision of the Series A-0 Preferred Stock, a stock
dividend payable in shares of Series A-0 Preferred Stock, a reverse stock
split or other combination of Series A-0 Preferred Stock, or a
reclassification of Series A-0 Preferred Stock, (ii) in the case of the
Series A-1 Preferred Stock and prior to the Original Issuance Date thereof,
an appropriate and equitable adjustment upon a stock split or other
subdivision of the Series A-0 Preferred Stock, a stock dividend payable in
shares of Series A-0 Preferred Stock, a reverse stock split or other
combination of Series A-0 Preferred Stock, or a reclassification of Series
A-0 Preferred Stock, (iii) in the case of the Series A-1 Preferred Stock
and from and after the Original Issuance Date thereof, an appropriate and
equitable adjustment upon a stock split or other subdivision of the Series
A-1 Preferred Stock, a stock dividend payable in shares of
E-4
200
Series A-1 Preferred Stock, a reverse stock split or other combination of
Series A-1 Preferred Stock, or a reclassification of Series A-1 Preferred
Stock, (iv) in the case of the Series B-0 Preferred Stock, an appropriate
and equitable adjustment upon a stock split or other subdivision of the
Series B-0 preferred Stock, a stock dividend payable in shares of Series
B-0 Preferred Stock, a reverse stock split or other combination of Series
B-0 Preferred Stock, or a reclassification of Series B-0 Preferred Stock,
(v) in the case of the Series B-1 Preferred Stock and prior to the Original
Issuance Date thereof, an appropriate and equitable adjustment upon a stock
split or other subdivision of the Series B-0 Preferred Stock, a stock
dividend payable in shares of Series B-0 Preferred Stock, a reverse stock
split or other combination of Series B-0 Preferred Stock, or a
reclassification of Series B-0 Preferred Stock, (vi) in the case of the
Series B-1 Preferred Stock and from and after the Original Issuance Date
thereof, an appropriate and equitable adjustment upon a stock split or
other subdivision of the Series B-1 Preferred Stock, a stock dividend
payable in shares of Series B-1 Preferred Stock, a reverse stock split or
other combination of Series B-1 Preferred Stock, or a reclassification of
Series B-1 Preferred Stock, (vii) in the case of the Series C-0 Preferred
Stock, an appropriate and equitable adjustment upon a stock split or other
subdivision of the Series C-0 Preferred Stock, a stock dividend payable in
shares of Series C-0 Preferred Stock, a reverse stock split or other
combination of Series C-0 Preferred Stock, or a reclassification of Series
C-0 Preferred Stock, (viii) in the case of the Series C-1 Preferred Stock
and prior to the Original Issuance Date thereof, an appropriate and
equitable adjustment upon a stock split or other subdivision of the Series
C-0 Preferred Stock, a stock dividend payable in shares of Series C-0
Preferred Stock, a reverse stock split or other combination of Series C-0
Preferred Stock, or a reclassification of Series C-0 Preferred Stock, and
(ix) in the case of Series C-1 Preferred Stock and from and after the
Original Issuance Date thereof, an appropriate and equitable adjustment
upon a stock split or other subdivision of the Series C-1 Preferred Stock,
a stock dividend payable in shares of Series C-I Preferred Stock, a reverse
stock split or other combination of Series C-1 Preferred Stock, or a
reclassification of Series C-1 Preferred Stock.
2. Dividends The holders of outstanding shares of each series of
Preferred Stock shall be entitled to receive, if, when and as declared by the
Board of Directors, out of assets of the Corporation legally available for
payment of dividends, an annual noncumulative dividend in a per share amount
equal to the product of seven percent (7%) and the Original Issuance Price of
such series of Preferred Stock (subject to Special Adjustment) or, if greater
(as determined on a per annum basis and on an as-converted to Common Stock basis
for the Preferred Stock), an amount equal to that paid on any outstanding shares
of Common Stock of the Corporation. Dividends, if declared, shall be payable in
cash annually in respect of the immediately preceding fiscal year (including any
partial fiscal year) of the Corporation (each, a "Dividend Period"). The
declaration of dividends shall be within the sole discretion of the Board of
Directors of the Corporation. Dividends in respect of each series of Preferred
Stock shall, however, be non-cumulative so that, if not declared in respect of
any Dividend Period, the holders
E-5
201
of such series of Preferred Stock shall not thereafter have any right to receive
dividends on account of such Dividend Period. No dividend shall be declared or
paid on any series of Preferred Stock in respect of any Dividend Period unless
the Corporation shall declare and pay a dividend in respect of such Dividend
Period to each of the other series of Preferred Stock, and no dividend shall be
declared on the Junior Stock unless the full amount of dividends with respect to
each of the series of Preferred Stock for the immediately preceding Dividend
Period shall have been declared and paid in full.
3. Rights on Liquidation, Dissolution or Winding-Up.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation (each, a "Liquidation"), the
assets of the Corporation legally available for distribution to its
stockholders, whether from capital, surplus or earnings, shall be
distributed in the following order of priority:
(i) The holders of Preferred Stock shall be entitled to receive,
prior and in preference to any distribution to the holders of any
Junior Stock, an amount per share equal to the respective Original
Issuance Prices of each series of the Preferred Stock (subject to
Special Adjustment) plus, in addition, an amount equal to any dividends
declared but unpaid an such series of Preferred Stock. If the assets of
the Corporation available for distribution to the holders of Preferred
Stock shall be insufficient to permit the payment to the holders of
Preferred Stock of their full preferential amount as set forth in this
Section 3(a)(i), then the holders of shares of Preferred Stock shall
share ratably in any distribution of the assets of the Corporation in
proportion to the respective amounts that would be payable to the
holders of Preferred Stock in respect of the shares of Preferred Stock
held by them upon such distribution if all amounts payable on or with
respect to such shares of Preferred Stock were paid in full.
(ii) After distribution to the holders of Preferred Stock of the
full preferential amount set forth in Section 3(a)(i) hereof, the
holders of the A Preferred, B Preferred, C Preferred and the holders of
the Common Stock shall be entitled to receive, on a pro rata basis
(assuming for this purpose that each holder of shares of A Preferred is
a holder of the number of shares of Common Stock into which such shares
of A Preferred are then convertible, that each holder of shares of B
Preferred is a holder of the number of shares of Common Stock into
which such shares of B Preferred are then convertible and that each
holder of shares of C Preferred is a holder of the number of shares of
Common Stock into which such shares of C Preferred are then
convertible), that portion of the remaining assets of the Corporation
legally available for distribution, if any, until the holders of the A
Preferred shall have received pursuant to this Section 3(a)(ii) an
amount per share equal to (A) the product of (i) the Original Issuance
Price of the A Preferred (subject to Special Adjustment) multiplied by
(ii) two, minus (B) the amounts already paid per each such share
pursuant to Section 3(a)(i) above.
E-6
202
(iii) After distribution to the holders of the A Preferred, B
Preferred, C Preferred and the Common Stock of the full preferential
amount set forth in Section 3(a)(ii) hereof, the holders of the B
Preferred, C Preferred and the holders of the Common Stock shall be
entitled to receive, prior and in preference to any other distribution
to the holders of the A Preferred, on a pro rata basis (assuming for
this purpose that each holder of shares of B Preferred is a holder of
the number of shares of Common Stock into which such shares of B
Preferred are then convertible and that each holder of shares of C
Preferred is a holder of the number of shares of Common Stock into
which such shares of C Preferred are then convertible), that portion of
the remaining assets of the Corporation legally available for
distribution, if any, until the holders of the B Preferred shall have
received pursuant to this Section 3(a)(iii) an amount per share equal
to (A) the product of (i) the Original Issuance Price of the B
Preferred (subject to Special Adjustment) multiplied by (ii) two, minus
(B) the amounts already paid per each such share pursuant to Section
3(a)(i) and Section 3(a)(ii) above.
(iv) After distribution to the holders of the B Preferred, C
Preferred and the Common Stock of the full preferential amount set
forth in Section 3(a)(iii) hereof, the holders of the C Preferred and
the holders of the Common Stock shall be entitled to receive, prior and
in preference to any other distribution to the holders of the B
Preferred, on a pro rata basis (assuming for this purpose that each
holder of shares of C Preferred is a holder of the number of shares of
Common Stock into which such shares of C Preferred are then
convertible), that portion of the remaining assets of the Corporation
legally available for distribution, if any, until the holders of the C
Preferred shall have received pursuant to this Section 3(a)(iv) an
amount per share equal to (A) the product of (i) the Original Issuance
Price of the C Preferred (subject to Special Adjustment) multiplied by
(ii) two, minus (B) the amounts already paid per each such share
pursuant to Section 3(a)(i), Section 3(a)(ii) and Section 3(a)(iii)
above.
(v) After distribution to the holders of the C Preferred and the
Common Stock of the full preferential amount set forth in Section
3(a)(iv) hereof, the holders of the Common Stock shall be entitled to
receive, prior and in preference to any other distribution to the
holders of the Preferred Stock, on a pro rata basis, that portion of
the remaining assets of the Corporation legally available for
distribution, if any, until the holders of the Common Stock shall have
received pursuant to this Section 3(a)(v) an amount per share equal to
(A) the product of (i) the Original Issuance Price of the C Preferred
(subject to Special Adjustment) multiplied by (ii) two, minus (B) the
amounts already paid per each such share pursuant to Sections 3(a)(ii),
3(a)(iii) and 3(a)(iv) above.
(vi) After distribution to the holders of the Common Stock of the
full preferential amount set forth in Section 3(a)(v) hereof, the
holders of the
E-7
203
A Preferred shall be entitled to receive, prior to and in preference to
any other distribution to the holders of the B Preferred, C Preferred
and the Common Stock, on a pro rata basis (assuming for this purpose
that each holder of shares of A Preferred is a holder of the number of
shares of Common Stock into which such shares of A Preferred are then
convertible), that portion of the remaining assets of the Corporation
legally available for distribution, if any, until the holders of the A
Preferred shall have received pursuant to this Section 3(a)(vi) an
amount per share equal to (A) the product of (i) the Original Issuance
Price of the B Preferred (subject to Special Adjustment) multiplied by
(ii) two, minus (B) the amounts already paid per each such share
pursuant to Sections 3(a)(i), (ii), (iii) and (iv).
(vii) After distribution to the holders of the A Preferred of the
full preferential amount set forth in Section 3(a)(vi) hereof, the
holders of the A Preferred and the holders of the B Preferred shall be
entitled to receive, prior to and in preference to any other
distribution to the holders of the C Preferred and the Common Stock, on
a pro rata basis (assuming for this purpose that each holder of shares
of A Preferred is a holder of the number of shares of Common Stock into
which such shares of A Preferred are then convertible and that each
holder of B Preferred is a holder of the number of shares of Common
Stock into which such shares of B Preferred are then convertible), that
portion of the remaining assets of the Corporation legally available
for distribution, if any, until the holders of the A Preferred and the
holders of the B Preferred shall have received pursuant to this Section
3(a)(vii) an amount per share equal to (A) the product of (i) the
Original Issuance Price of the C Preferred (subject to Special
Adjustment) multiplied by (ii) two, minus (B) the amounts already paid
per each such share pursuant to (in the case of A Preferred) Sections
3(a)(i), (ii), (iii), (iv) and (vi) above and (in the case of B
Preferred) Sections 3(a)(i), (ii), (iii) and (iv) above.
(viii) After distribution to the holders of the A Preferred and B
Preferred of the full preferential amount set forth in Section
3(a)(vii) hereof, the remaining assets of the Corporation legally
available for distribution, if any, to the stockholders of the
Corporation shall be distributed to the holders of shares of Common
Stock and Preferred Stock pro rata based on the respective number of
shares of Common Stock held by the holders of Common Stock and the
holders of Preferred Stock (assuming for this purpose that each holder
of shares of Preferred Stock is a holder of the number of shares of
Common Stock into which such shares of Preferred Stock are then
convertible).
(b) For purposes of this Section 3, a consolidation or merger of the
Corporation with or into any other corporation or entity, or the sale of
all or substantially all of the assets of the Corporation to any other
corporation or entity, shall be deemed to be a Liquidation, unless the
Corporation's shareholders of
E-8
204
record, as constituted immediately prior to such merger, consolidation or
sale, hold at least 50% of the voting power of the surviving or acquiring
corporation or entity.
(c) In the event of any merger, consolidation or sale of assets
contemplated under Section 3(b) above, if the consideration received by the
Corporation is other than cash, its value will be deemed its fair market
value. The value of any securities received by the Corporation pursuant to
any such merger, consolidation or sale of assets shall be determined as
follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability:
(A) If traded on a securities exchange or through the Nasdaq
National Market, the value shall be deemed to be the average of
the closing prices of the securities on such exchange or the
Nasdaq National Market, as the case may be, over the thirty-day
period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending three
(3) days prior to the closing; and
(C) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined by the
Corporation and the holders of at least a majority of the voting
power of all then outstanding shares of Preferred Stock. If the
Corporation and such holders are not able to mutually agree on the
value, the value shall be determined by an accounting firm of
national reputation, and the determination of such accounting firm
shall be final and binding on the Corporation and the holders of
Preferred Stock.
(ii) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an
affiliate or former affiliate) shall be to make an appropriate discount
from the market value determined as provided above in Section
3(c)(i)(A), (B) or (C) to reflect the approximately fair market value
thereof, as mutually determined by the Corporation and the holders of
at least a majority of the voting power of all then outstanding shares
of such Preferred Stock. If the Corporation and such holders are not
able to mutually agree on the value, the value shall be determined by
an accounting firm of national reputation, and the determination of
such accounting firm shall be final and binding on the Corporation and
the holders of Preferred Stock.
4. Voting.
(a) Except to the extent otherwise provided in this Section 4,
elsewhere in the Articles of Organization or by law, each share of
Preferred Stock shall entitle the holder thereof to vote, together with the
holders of Common Stock, as a single
E-9
205
class, on all matters as to which holders of Common Stock shall be entitled
to vote including, without limitation, on any merger or consolidation of
the Corporation or any sale, conveyance, exchange or other disposition of
all or substantially all of the assets of the Corporation (other than any
such merger or consolidation or any such sale, conveyance, exchange or
other disposition of assets in respect of which the holders of Preferred
Stock shall have the right to a separate class vote pursuant to Section
4(c) below). On all matters upon which each holder of Preferred Stock shall
be entitled to vote pursuant to this Section 4(a), such holder shall be
entitled to such number of votes as shall equal the number of shares of
Common Stock (rounded to the nearest whole number) into which all of such
holder's shares of Preferred Stock are then convertible as provided in
Section 5 hereof.
(b) In addition to the rights specified in Section 4(a) hereof, the
holders of a majority of the outstanding shares of A Preferred and B
Preferred, voting together (all on an as-converted to Common Stock basis)
as a separate class, shall have the exclusive right to elect one (1) member
of the Board of Directors of the Corporation (the "Series A and B Preferred
Director") and the holders of a majority of the outstanding shares of C
Preferred, voting (all on an as-converted to Common Stock basis) as a
separate class, shall have the exclusive right to elect one (1) member of
the Board of Directors of the Corporation (the "Series C Preferred
Director" and, together with the Series A and B Director, the "Preferred
Directors"); provided, however, that, notwithstanding the foregoing, those
holders of shares of Series A-I Preferred Stock, Series B-1 Preferred Stock
and/or Series C-I Preferred Stock that are not Investors or Affiliates of
Investors shall have no right to vote any of such holders' shares of Series
A-1 Preferred Stock, Series B-I Preferred Stock and/or Series C-I Preferred
Stock in connection with the election of any of the Preferred Directors.
Each Preferred Director elected pursuant to this Section 4(b) shall serve
from the date of his or her election and qualification until the next
annual meeting of stockholders of the Corporation and his or her successor
has been duly elected and qualified or until his or her earlier death,
removal or resignation. The holders of a majority of the outstanding shares
of A Preferred and B Preferred, voting together (all on an as-converted to
Common Stock basis) as a separate class, shall have the exclusive right to
remove the Series A and B Preferred Director with or without cause, and the
holders of a majority of the outstanding shares of C Preferred, voting (all
on an as-converted to Common Stock basis) as a separate class, shall have
the exclusive right to remove the Series C Preferred Director with or
without cause; provided, however, that, notwithstanding the foregoing,
those holders of shares of Series A-1 Preferred Stock, Series B-I Preferred
Stock and/or Series C- I Preferred Stock that are not Investors or
Affiliates of Investors shall have no right to vote any of such holders'
shares of Series A-I Preferred Stock, Series B-I Preferred Stock and/or
Series C-1 Preferred Stock in connection with the removal of any of the
Preferred Directors. A vacancy in the directorship to be elected by the
holders of A Preferred and B Preferred may be filled only by the holders of
a majority of the outstanding shares of A Preferred and B Preferred, voting
together (all on an as-converted to Common Stock basis)
E-10
206
as a separate class; provided, however, that, notwithstanding the
foregoing, those holders of shares of Series A-1 Preferred Stock and/or
Series B-1 Preferred Stock that are not Investors or Affiliates of
Investors shall have no right to vote any of such holders' shares of Series
A-1 Preferred Stock and/or Series B-1 Preferred Stock in connection with
the filing of any vacancy in the directorship pertaining to the Series A
and B Preferred Director. A vacancy in the directorship to be elected by
the C Preferred may be filled only by the holders of a majority of the
outstanding shares of C Preferred, voting (all on an as-converted to Common
Stock basis) as a separate class; provided, however, that, notwithstanding
the foregoing, those holders of shares of Series C-1 Preferred Stock that
are not Investors or Affiliates of Investors shall have no right to vote
any of such holders' shares of Series C-1 Preferred Stock in connection
with the filing of any vacancy in the directorship pertaining to the Series
C Preferred Director. The voting rights set forth in this Section 4(b)
shall be subject to the provisions of Section 4(e) and shall terminate upon
the closing of the Corporation's initial public offering.
(c) The Corporation shall not, without the affirmative consent or
approval of the holders of shares representing a majority of the shares of
Preferred Stock then outstanding, voting together as a single class, 'given
in the manner provided in Section 4(e) below:
(i) amend the Articles of Organization (including the Certificate
of Designation) or By-laws of the Corporation in a manner that would
alter or change adversely the preferences, rights, privileges or powers
of any series of the Preferred Stock;
(ii) increase the authorized number of shares of Preferred Stock;
(iii) authorize, designate, create or issue any class or series
of capital stock ranking, as to voting rights or payment of dividends
or in Liquidation, senior and prior to, or on a parity with, any series
of the Preferred Stock;
(iv) sell, convey, exchange or otherwise dispose of all or
substantially all of the Corporation's assets in a transaction in which
the proceeds available for distribution to holders of Preferred Stock
in respect of each share of each series of Preferred Stock owned by
such holders will be less than the product of (i) the Original Issuance
Price of such series of Preferred Stock (subject to Special Adjustment)
and (ii) five (5);
(v) liquidate, dissolve, recapitalize or merge into or
consolidate with, or otherwise effect a reorganization with, any other
corporation or other entity or person (other than a wholly owned
subsidiary of the Corporation) in a transaction in which the proceeds
available for distribution to holders of Preferred Stock in respect of
each share of each series of Preferred Stock owned by such holders will
be less than the product of (i) the Original Issuance Price of such
series of Preferred Stock (subject to Special Adjustment) and (ii) five
(5);
E-11
207
(vi) reclassify the shares of any class or series of Junior Stock
into shares of any class or series of capital stock ranking, either as
to payment of dividends or in Liquidation, senior and prior to, or on a
parity with, the Preferred Stock; or
(vii) redeem, retire, purchase or acquire any shares of any
capital stock of the Corporation, except at cost and on terms approved
by the Board of Directors of the Corporation from employees, advisors,
officers, directors and consultants of, and persons performing services
for, the Corporation upon the termination of employment or association.
(d) The Corporation shall not amend the Articles of Organization or the
Certificate of Designation in a manner that would adversely alter or change
the preferences, rights, privileges or powers of any series of Preferred
Stock without the affirmative consent or approval of the holders of a
majority of the outstanding shares of such series of Preferred Stock and
the Corporation shall not amend the By-Laws of the Corporation in a manner
that would adversely alter or change the preferences, rights, privileges or
powers of any series of Preferred Stock without the affirmative consent or
approval of the holders of a majority of the outstanding shares of such
series of Preferred Stock.
(e) The exclusive voting or approval rights and/or the approval
requirements of the holders of Preferred Stock (or of a series thereof in
the case of Section 4(d)) set forth in Sections 1(h)(xi), 4(b), 4(c) and
4(d) shall be exercised (i) at any annual meeting of the stockholders of
the Corporation, (ii) at any special meeting of stockholders of the
Corporation called for, among other things, such purpose in accordance with
the By-laws of the Corporation or in accordance with the provisions set
forth below in this Section 4(e) and for which proper notice has been duly
given to all holders of Preferred Stock, or (iii) by unanimous written
consent in lieu of a meeting of the holders of Preferred Stock (or the
series thereof in the case of Section 4(d)). Notwithstanding anything in
the Articles of Organization or the By-laws of the Corporation to the
contrary, at the written request of the holders of at least ten percent
(10%) of the outstanding shares of Preferred Stock (or the holders of at
least ten percent (10%) of the outstanding shares of the series of
Preferred Stock voting in the case of Section 4(d)), the Secretary of the
Corporation shall call a special meeting of the stockholders of the
Corporation for purposes of enabling the holders of Preferred Stock (or the
series thereof in the case of Section 4(d)) to exercise their exclusive
voting or approval rights and/or to comply with their approval requirements
pursuant to Sections 1(h)(xi), 4(b), 4(c) and 4(d). In exercising any of
the rights set forth in Sections 1(h)(xi), 4(b), 4(c) and 4(d), each holder
of Preferred Stock shall be entitled to one vote for each share of Common
Stock issuable upon conversion of the Preferred Stock.
E-12
208
5. Optional Conversion.
(a) The holder of any shares of any series of Preferred Stock shall
have the right, at such holder's option, at any time or from time to time
to convert any of such shares into such whole number of fully paid and
nonassessable shares of Common Stock as is equal to the quotient obtained
by dividing (A) the Original Issuance Price for such series of Preferred
Stock multiplied by the number of shares of such series of Preferred Stock
being converted by (B) the Preferred Conversion Price (as hereinafter
defined), as last adjusted and then in effect, for the shares of such
series of Preferred Stock being converted, by surrender of the certificates
representing the shares of Preferred Stock so to be converted in the manner
provided in Section 5(b) hereof. The conversion price per share at which
shares of Common Stock shall be issuable upon conversion of shares of
Preferred Stock shall initially be the respective Original Issuance Prices
of the Series A-0 Preferred Stock (the "Series A Preferred Conversion
Price"), the Series A-1 Preferred Stock (the "Series A-I Preferred
Conversion Price"), the Series B-0 Preferred Stock (the "Series B Preferred
Conversion Price"), the Series B-I Preferred Stock (the "Series B-1
Preferred Conversion Price"), the Series C-0 Preferred Stock (the "Series C
Preferred Conversion Price") and the Series C-1 Preferred Stock (the
"Series C-1 Preferred Conversion Price") (the Series A Preferred Conversion
Price, the Series A-1 Preferred Conversion Price, the Series B Preferred
Conversion Price, the Series B-1 Preferred Conversion Price, the Series C
Preferred Conversion Price and the Series C-1 Preferred Conversion Price
are sometimes collectively referred to herein as the "Preferred Conversion
Prices"); provided, however, that such Preferred Conversion Prices shall be
subject to adjustment as set forth in Section 5(d) hereof. The holder of
any shares of Preferred Stock exercising the aforesaid right to convert
such shares into shares of Common Stock shall be entitled to payment of any
dividends declared but unpaid with respect to such shares of Preferred
Stock.
(b) The holder of any shares of Preferred Stock may exercise the
conversion right pursuant to Section 5(a) hereof as to any part thereof by
delivering to the Corporation during regular business hours, at the office
of the Corporation or any transfer agent of the Corporation for the
Preferred Stock as may be designated by the Corporation, the certificate or
certificates for the shares to be converted, accompanied by written notice
stating that the holder elects to convert such shares and stating the name
or names (with address) in which the certificate or certificates for the
shares of Common Stock are to be issued. Conversion shall be deemed to have
been effected on the date when the aforesaid delivery is made (the
"Conversion Date"). As promptly as practicable thereafter, the Corporation
shall issue and deliver to or upon the written order. of such holder, to
the place designated by such holder, a certificate or certificates for the
number of full shares of Common Stock to which such holder is entitled and
a check or cash in respect of any fractional interest in a share of Common
Stock as provided in Section 5(c) hereof and a check or cash in payment of
all dividends declared but unpaid, if any (to the extent permissible under
law), with respect to the shares of Preferred Stock
E-13
209
so converted. The person in whose name the certificate or certificates for
Common Stock are to be issued shall be deemed to have become a Common Stock
holder of record on the applicable Conversion Date unless the transfer
books of the Corporation are closed on that date, in which event he shall
be deemed to have become a Common Stock holder of record on the next
succeeding date on which the transfer books are open, but the respective
Preferred Conversion Prices shall be those in effect on the Conversion
Date. Upon conversion of only a portion of the number of shares covered by
a certificate representing shares of Preferred Stock surrendered for
conversion, the Corporation shall issue and deliver to or upon the written
order of the holder of the certificate so surrendered for conversion, at
the expense of the Corporation, a new certificate covering the number of
shares of the series of Preferred Stock representing the unconverted
portion of the certificate so surrendered, which new certificate shall
entitle the holder thereof to dividends on the shares of Preferred Stock
represented thereby to the same extent as if the portion of the certificate
theretofore covering such unconverted shares had not been surrendered for
conversion.
(c) No fractional shares of Common Stock or scrip shall be issued upon
conversion of shares of Preferred Stock. If more than one share of a series
of Preferred Stock shall be surrendered for conversion at any one time by
the same holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number
of shares of such series of Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Preferred Stock, the Corporation shall pay a
cash adjustment in respect of such fractional interest in an amount equal
to the then Current Market Price (as hereinafter defined) of a share of
Common Stock multiplied by such fractional interest. Fractional interests
shall not be entitled to dividends, and the holders of fractional interests
shall not be entitled to any rights as stockholders of the Corporation in
respect of such fractional interest.
(d) The Preferred Conversion Price for each series of Preferred Stock
shall be subject to adjustment from time to time as follows:
(i) Subject to Section 5(d)(ii) and Section 5(d)(iii) hereof, if
the Corporation shall at any time or from time to time after the
Original Issuance Date of Series C-0 Preferred Stock issue any shares
of Common Stock (other than Excluded Stock) without consideration or
for a consideration per share less than the Preferred Conversion Price
for such series in effect immediately prior to the issuance of such
Common Stock, such higher Preferred Conversion Price in effect
immediately prior to each such issuance shall forthwith be lowered to a
price equal to the quotient obtained by dividing
(A) an amount equal to the sum of
(x) the total number of shares of Common Stock
outstanding (including any shares of Common Stock deemed to
have been issued
E-14
210
pursuant to subdivisions (A) and (B) of Section 5(e)(iv), it
being understood that the shares of Common Stock issuable upon
conversion of the Preferred Stock outstanding immediately
prior to such issuance shall be deemed to be outstanding for
all purposes of the computation required in this clause (i)),
immediately prior to such issuance multiplied by the Preferred
Conversion Price for such series in effect immediately prior
to such issuance, plus
(y) the consideration received by the Corporation upon
such issuance,
by
(B) the total number of shares of Common Stock outstanding
(including any shares of Common Stock deemed to have been issued
pursuant to subdivisions (A) and (B) of Section 5(e)(iv), it being
understood that the shares of Common Stock issuable upon
conversion of the Preferred Stock immediately prior to such
issuance shall be deemed to be outstanding for all purposes of the
computation required in this clause (i)) immediately after the
issuance of such Common Stock.
(ii) Notwithstanding anything expressed or implied in Sections
5(d)(i) or 5(e)(iv) to the contrary, in the event that the Corporation
shall issue any of the securities referred to in Section 5(e)(iv) and
such securities shall constitute Excluded Stock, there shall be no
adjustment to the Preferred Conversion Price of any series of Preferred
Stock pursuant to Section 5(d)(i) as a result of any such issuance. In
the event of any adjustment in the Preferred Conversion Price of any
series of Preferred Stock pursuant to Section 5(d)(i) hereof, any and
all of those securities referred to in Section 5(e)(iv) that are
outstanding at the time of such issuance, regardless of whether or not
such securities constitute Excluded Stock, shall be taken into account
(in the manner provided in Section 5(e)(iv) hereof) in computing such
adjustment.
(iii) Notwithstanding Section 5(d)(i) and Section 5(d)(ii)
hereof, neither the Series A-1 Preferred Conversion Price nor the
Series B-1 Preferred Conversion Price nor the Series C-1 Preferred
Conversion Price shall be adjusted pursuant to said Section 5(d)(i) as
a result of an issuance (or deemed issuance) of shares of Common Stock
which occurs concurrently and in conjunction with the issuance of the
first share of Series A-1 Preferred Stock, Series B-1 Preferred Stock
or Series C-1 Preferred Stock, as the case may be, pursuant to a
Special Mandatory Conversion (as defined in Section 7 hereof). After
such time as any share of Series A-1 Preferred Stock, Series B-1
Preferred Stock or Series C-1 Preferred Stock, as the case may be, is
issued and outstanding, neither the Series A-1 Preferred Conversion
Price nor the Series B-1 Preferred Conversion Price nor the Series C-1
Preferred Conversion
E-15
211
Price, as the case may be, shall be subject to adjustment pursuant to
Section 5(d)(i).
(e) For the purposes of any adjustment of the Preferred Conversion
Prices pursuant to Section 5(d)(i), the following provisions shall be
applicable:
(i) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor
after deducting therefrom any discounts, commissions or other expenses
allowed, paid or incurred by the Corporation for any underwriting or
otherwise in connection with the issuance and sale thereof.
(ii) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair market value thereof as
determined in good faith by the Board of Directors of the Corporation,
irrespective of any accounting treatment; provided, however, that the
aggregate fair market value of such noncash and cash consideration
shall not exceed the Current Market Price of the shares of Common Stock
being issued.
(iii) In the case of the issuance of Common Stock without
consideration, the consideration shall be deemed to be $.001 per share.
(iv) In the case of the issuance of (x) options or warrants to
purchase or rights to subscribe for Common Stock, (y) securities by
their terms convertible into or exchangeable for Common Stock or (z)
options or warrants to purchase or rights to subscribe for such
convertible or exchangeable securities:
(A) the shares of Common Stock deliverable upon exercise of
such options or warrants to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such
options, warrants or rights were issued and for a consideration
equal to the consideration (determined in the manner provided in
subdivisions (i), (ii) and (iii) above), if any. received by the
Corporation upon the issuance of such options, warrants or rights
plus the minimum purchase price provided in such options or
warrants or rights for the Common Stock covered thereby;
(B) the shares of Common Stock deliverable upon conversion
of or in exchange for any such convertible or exchangeable
securities or upon the exercise of options or warrants to purchase
or rights to subscribe for such convertible or exchangeable
securities and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities were issued
or such options, warrants or rights were issued and for a
consideration equal to the consideration received by the
Corporation for any such securities and related options, warrants
or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration,
if any, to be received by the Corporation upon the conversion or
exchange of such securities or the exercise of any
E-16
212
related options, warrants or rights (the consideration in each
case to be determined in the manner provided in subdivisions (i),
(ii) and (iii) above);
(C) on any change in the number of shares or exercise price
of Common Stock deliverable upon exercise of any such options,
warrants or rights or conversions of or exchanges for such
securities, other than a change resulting from the antidilution
provisions thereof, the Preferred Conversion Prices shall
forthwith be readjusted to such Preferred Conversion Prices as
would have obtained had the adjustment made upon the issuance of
such options, warrants, rights or securities not converted prior
to such change or options, warrants or rights related to such
securities not converted prior to such change been made upon the
basis of such change; and
(D) on the expiration of any such options, warrants or
rights, the termination of any such rights to convert or exchange
or the expiration of any options, warrants or rights related to
such convertible or exchangeable securities, the Preferred
Conversion Prices shall forthwith be readjusted to such Preferred
Conversion Prices as would have obtained had the adjustment made
upon the issuance of such options, warrants or rights, securities
or options, warrants or rights related to such securities been
made upon the basis of the issuance of only the number of shares
of Common Stock actually issued upon the exercise of such options,
warrants or rights, upon the conversion or exchange of such
securities or upon the exercise of the options, warrants or rights
related to such securities and subsequent conversion thereof.
(v) If, at any time after the Original Issuance Date of any
series of Preferred Stock the number of shares of Common Stock
outstanding is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares of Common Stock,
then, following the record date fixed for the determination of holders
of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Preferred Conversion Price for such series shall be
appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of such series of Preferred Stock
shall be increased in proportion to such increase in outstanding
shares.
(vi) If, at any time after the Original Issuance Date of any
series' of Preferred Stock the number of shares of Common Stock
outstanding is decreased by a combination of the outstanding shares of
Common Stock, then, following the record date for such combination, the
Preferred Conversion Price for such series shall be appropriately
increased so that the number of shares of Common Stock issuable on
conversion of each share of such series of Preferred Stock shall be
decreased in proportion to such decrease in outstanding shares.
E-17
213
(vii) In the event, at any time after the Original Issuance Date
of any series of Preferred Stock of any capital reorganization, or any
reclassification of the stock of the Corporation (other than a change
in par value or from par value to no par value or from no par value to
par value or as a result of a stock dividend or subdivision, split-up
or combination of shares), or the consolidation or merger of the
Corporation with or into another person (other than a consolidation or
merger in which the Corporation is the continuing corporation and which
does not result in any change in the Common Stock) or of the sale or
other disposition of all or substantially all the properties and assets
of the Corporation as an entirety to any other person, each share of
each series of Preferred Stock shall after such reorganization,
reclassification, consolidation, merger, sale or other disposition be
(unless, in the case of a consolidation, merger, sale or other
disposition, payment shall have been made to the holders of all shares
of such series of Preferred Stock of the full amount to which they
shall have been entitled pursuant to Section 3 hereof) convertible into
the kind and number of shares of stock or other securities or property
of the Corporation or of the corporation resulting from such
consolidation or surviving such merger or to which such properties and
assets shall have been sold or otherwise disposed to which the holder
of the number of shares of Common Stock deliverable (immediately prior
to the time of such reorganization, reclassification, consolidation,
merger, sale or other disposition) upon conversion of such shares would
have been entitled upon such reorganization, reclassification,
consolidation, merger, sale or other disposition. The provisions of
this Section 5(e)(vii) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales or
other dispositions.
(viii) All calculations under this paragraph (e) shall be made to
the nearest one tenth (1/10) of a cent or to the nearest one tenth
(1/10) of a share, as the case may be.
(ix) For the purpose of any computation pursuant to this Section
5(e) or Section 5(c) hereof, the Current Market Price at any date of
one share of Common Stock shall be deemed to be the average of the
daily closing prices for the 30 consecutive business days selected by
the Board of Directors of the Corporation ending no more than 15 days
before the day in question (as adjusted for any stock dividend,
split-up, combination or reclassification that took effect during such
30-business-day period). The closing price for each day shall be the
last reported sales price regular way or, in case no such reported
sales took place on such day, the average of the last reported bid and
asked prices regular way, in either case on the principal national
securities exchange on which the Common Stock is listed or admitted to
trading or as reported in the National Association of Securities
Dealers Automated Quotations National Market System ("NASDAQ-NMS") (or
if the Common Stock is not at the time listed or admitted for trading
on any such exchange or reported in NASDAQ-NMS, then such price shall
be equal to the average of the last reported bid and asked prices, as
reported by National Association of Securities
E-18
214
Dealers Automated Quotations System ("NASDAQ") on such day, or if, on
any day in question, the security shall not be quoted on NASDAQ, then
such price shall be equal to the average of the last reported bid and
asked prices on such day as reported by the National Quotation Bureau,
Inc. or any similar reputable quotation and reporting service, if such
quotation is not reported by the National Quotation Bureau, Inc.);
provided, however, that if the Common Stock is not traded in such
manner that the quotations referred to in this clause (x) are available
for the period required hereunder, the Current Market Price as of the
day in question shall be determined in good faith by the Board of
Directors of the Corporation.
(x) In any case in which the provisions of this Section 5(e)
shall require that an adjustment shall become effective immediately
after a record date for an event, the Corporation may defer until the
occurrence of such event (A) issuing to the holder of any share of
Preferred Stock converted after such record date and before the
occurrence of such event the additional shares of capital stock
issuable upon such conversion by reason of the adjustment required by
such event over and above the shares of capital stock issuable upon
such conversion before giving effect to such adjustment and (B) paying
to such holder any amount in cash in lieu of a fractional share of
capital stock pursuant to Section 5(c); provided, however, that the
Corporation shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such
additional shares, and such cash, upon the occurrence of the event
requiring such adjustment.
(f) Whenever a Preferred Conversion Price shall be adjusted as provided
in Section 5(d), the Corporation shall forthwith file, at the office of
Corporation or any transfer agent designated by the Corporation for the
Preferred Stock, a statement, signed by its Chief Financial Officer,
showing in detail the facts requiring such adjustment and the Preferred
Conversion Prices then in effect. The Corporation shall also cause a copy
of such statement to be sent by first-class certified mail, return receipt
requested, postage prepaid, to each holder of shares of. Preferred Stock at
his or its address appearing on the Corporation's records. Where
appropriate, such copy may be given in advance and may be included as part
of a notice required to be mailed under the provisions of Section 5(g).
(g) In the event the Corporation shall propose to take any action of
the types described in Section 5(d) or clause (v), (vi) or (vii) of Section
5(e), the Corporation shall give notice to each holder of shares of
Preferred Stock, in the manner set forth in Section 5(f), which notice
shall specify the record date, if any, with respect to any such action and
the date on which such action is to take place. Such notice shall also set
forth such facts with respect thereto as shall be reasonably necessary to
indicate the effect of such action (to the extent such effect may be known
at the date of such notice) on the respective Preferred Conversion Prices
and the number, kind or class of shares or other securities or property
which shall be deliverable or purchasable upon the occurrence of such
action or deliverable upon
E-19
215
conversion of shares of Preferred Stock. In the case of any action which
would require the fixing of a record date, such notice shall be given at
least 20 days prior to the date so fixed, and in case of all other action,
such notice shall be given at least 30 days prior to the taking of such
proposed action. Failure to give such notice, or any defect therein, shall
not affect the legality or validity of any such action.
(h) The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of
capital stock of the Corporation upon conversion of any shares of Preferred
Stock.
(i) The Corporation shall reserve, free from preemptive rights, out of
its authorized but unissued shares of Common Stock solely for the purpose
of effecting the conversion of the shares of Preferred Stock sufficient
shares to provide for the conversion of all outstanding shares of Preferred
Stock.
(j) All shares of Common Stock which may be issued in connection with
the conversion provisions set forth herein will, upon issuance by the
Corporation, be validly issued, fully paid and nonassessable, with no
personal liability attaching to the ownership thereof, and free from all
taxes, liens or charges with respect thereto.
(k) The Corporation will not, by amendment of its Articles of
Organization or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation, but will at all times in good faith assist in the carrying
out of all the provisions of this Section 5 and in the taking of all such
action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Preferred Stock against impairment.
6. Automatic Conversion. Upon the closing of a Qualified Public Offering,
all shares of Preferred Stock then outstanding shall, by virtue of, and
simultaneously with, such closing and without any action on the part of the
holders thereof, be deemed automatically converted into that number of fully
paid and nonassessable shares of Common Stock into which such shares would have
been convertible in the event of optional conversion at such time pursuant to
Section 5 hereof. The provisions of Section 5 shall apply to any such automatic
conversion.
7. Special Mandatory Conversion.
(a) If any holder of shares of Preemptive Right Series Preferred Stock
(as defined in Section 8 hereof) is entitled to exercise the preemptive
right set forth in Section 8 hereof (the "Preemptive Right") with respect
to an equity financing (an "Equity Financing") of the Corporation and the
Corporation (other than an issuance of Excluded Stock) has fully complied
with its obligations pursuant to Section 8 hereof in respect thereof, and
if such holder (a "Non-Participating Holder") does not by exercise of such
holder's Preemptive Right acquire at least its Proportionate Percentage (as
defined in Section 8(b)(v) hereof) of the Offered Securities (as defined in
Section 8 hereof) offered to the holders of Preemptive
E-20
216
Right Series Preferred Stock in such Equity Financing (a "Mandatory
Offering"), then each of the shares of Preemptive Right Series Preferred
Stock owned by such holder immediately before the original issuance date of
the security of the Corporation issued in such Equity Financing shall
automatically and without further action on the part of such holder be
converted, subject to and effective concurrently with the consummation of
the Mandatory Offering (the "Special Mandatory Conversion Date"), (i) in
the case of shares of Series A-0 Preferred Stock into one share of Series
A-1 Preferred Stock, (ii) in the case of shares of Series B-0 Preferred
Stock into one share of Series B-1 Preferred Stock and (iii) in the case of
shares of Series C-0 Preferred Stock into one share of Series C-1 Preferred
Stock (said conversion being referred to herein as a "Special Mandatory
Conversion"). Upon such conversion, the shares so converted shall be
canceled and not subject to reissuance.
(b) The holder of any shares of Preemptive Right Series Preferred Stock
converted pursuant to Section 8(a) hereof shall deliver to the Corporation
during regular business hours at the office of the Corporation or any
transfer agent designated by the Corporation for the Preemptive Right
Series Preferred Stock, the certificate or certificates for the shares so
converted. As promptly as practicable thereafter, the Corporation shall
issue and deliver to such holder, at the place designated by such holder, a
certificate or certificates for the number of full shares of Series A-1
Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock,
as the case may be, to which such holder is entitled. The person in whose
name the certificate for such Series A-1 Preferred Stock, Series B-1
Preferred Stock or Series C-1 Preferred Stock, as the case may be, is to be
issued shall be deemed to have become a Series A-1 Preferred Stock holder,
Series B-1 Preferred Stock holder or Series C-1 Preferred Stock holder, as
the case may be, of record on the Special Mandatory Conversion Date unless
the transfer books of the Corporation are closed on that date, in which
event such person shall be deemed to have become a Series A-1 Preferred
Stockholder, Series B-1 Stockholder or Series C-1 Stockholder, as the case
may be, of record on the next succeeding date on which the transfer books
are open.
(c) Subsequent to each Special Mandatory Conversion under this Section
7, but concurrently with any subsequent amendment to its Articles of
Organization, the Corporation shall designate a new series of Preferred
Stock (herein called a "New Series") having terms, powers, preferences and
relative, participating, optional and other special rights, and
qualifications, limitations and restrictions, which are identical to the
terms; powers, preferences and relative, participating, optional and other
special rights, and qualifications, limitations and restrictions, of the
Series A-1 Preferred Stock, the Series B-1 Preferred Stock or the Series
C-1 Preferred Stock, as the case may be, except that the initial Preferred
Conversion Price of such New Series shall be the Preferred Conversion Price
of the Series A-0 Preferred Stock, the Series B-0 Preferred Stock or the
Series C-0 Preferred Stock, as the case may be, in effect immediately prior
to the adjustment to the Series A Preferred Conversion Price, the Series B
Preferred Conversion Price or the Series C Preferred
E-21
217
Conversion Price, as the case may be, made concurrently with the issuance
of the first share of Series A-1 Preferred Stock, Series B-1 Preferred
Stock or Series C-1 Preferred Stock, as the case may be, pursuant to such
Special Mandatory Conversion. In connection therewith, the Corporation
shall also amend its Articles of Organization to provide that, upon a
subsequent Special Mandatory Conversion, shares of Series A-0 Preferred
Stock, Series B-0 Preferred Stock or Series C-0 Preferred Stock shall be
convertible pursuant to this Section 7 into shares of such New Series.
8. Preemptive Rights.
(a) General. Except as provided in Section 8(b) hereof, no holder of
any shares of Preferred Stock shall be entitled, as a preemptive right or
right of first refusal of such holder, to purchase or to subscribe for any
shares of capital stock issued by the Corporation, whether now or hereafter
authorized, or bonds, certificates of indebtedness, debentures or other
securities convertible into or carrying any right to purchase capital stock
of the Corporation of any class.
(b) Right of First Refusal.
(i) Subject to the provisions of Section 8(c) hereof, the
Corporation shall not issue, sell or exchange, agree to issue, sell or
exchange, or reserve or set aside for issuance, sale or exchange, (i)
any shares of Common Stock, (ii) any other equity security of the
Corporation, including, without limitation, shares of Preferred Stock,
(iii) any debt security of the Corporation which by its terms is
convertible into or exchangeable for any equity security of the
Corporation or has any other equity feature, (iv) any security of the
Corporation that is a combination of debt and equity or (v) any option,
warrant or other right to subscribe for, purchase or otherwise acquire
any equity security or any such debt security of the Corporation,
unless in each case the Corporation shall have first offered to sell to
each holder (the "Section 8 Offeree") of shares of Series A-0 Preferred
Stock, Series B-0 Preferred Stock or Series C-0 Preferred Stock (the
"Preemptive Right Series Preferred Stock") such Section 8 Offeree's
Proportionate Percentage (as hereinafter defined) of such securities
(the "Offered Securities"), and to sell thereto such Offered Securities
not subscribed for by the other Section 8 Offerees as hereinafter
provided, at a price and on such other terms as shall have been
specified by the Corporation in writing delivered to such Section 8
Offeree (an "Offer"), which Offer by its terms shall remain open and
irrevocable for a period of 30 days from the date it is delivered by
the Corporation to the Section 8 Offerees.
(ii) Notice of each Section 8 Offeree's intention to accept, in
whole or in part, an Offer shall be evidenced by a writing signed by
such Section 8 Offeree and delivered to the Corporation prior to the
end of the 30-day period of such Offer (the "Notice of Acceptance"),
setting forth (A) such portion of the Offered Securities as such
Section 8 Offeree elects to purchase and (B) such portion, if any, of
the Offered Securities not accepted by any of the other
E-22
218
Section 8 Offerees (the "Refused Securities") that such Section 8
Offeree elects to purchase, in which case such Refused Securities shall
be deemed to have been offered to and accepted by the Section 8
Offerees which exercised their option under this clause (B) pro rata in
accordance with their respective Proportionate Percentages; provided,
however, that if the pro rata computation based upon Proportionate
Percentages contemplated by the preceding clause (B) would result in
less than all of the Refused Securities being accepted and if making
such pro rata computation based on the respective amounts of Refused
Securities offered to be accepted by each Section 8 Offeree exercising
its option under such clause (B) would result in all or a greater
number of the Refused Securities being accepted, then such computation
shall be made on such latter basis.
(iii) In the event that Notices of Acceptance are not given by
the Section 8 Offerees in respect of all the Offered Securities, the
Corporation shall have 120 days from the expiration of the foregoing
30-day period to sell that portion of such Offered Securities that are
not subject to Notices of Acceptance to any other person or persons,
but only upon terms and conditions in all respects, including, without
limitation, unit price and interest rates, which are no more favorable,
in the aggregate, to such other person or persons or less favorable to
the Corporation than those set forth in the Offer. Upon the closing
(which shall include full payment to the Corporation) of the sale to
such other person or persons of all the remaining Offered Securities,
the Section 8 Offerees shall purchase from the Corporation, and the
Corporation shall sell to the Section 8 Offerees, the Offered
Securities in respect of which Notices of Acceptance were delivered to
the Corporation by the Section 8 Offerees, at the terms specified in
the Offer. The purchase by the Section 8 Offerees of any Offered
Securities is subject in all cases to the preparation, execution and
delivery by the Corporation and the Section 8 Offerees of a purchase
agreement relating to such Offered Securities satisfactory in form and
substance to the Section 8 Offerees and their counsel.
(iv) In each case, any Offered Securities not purchased by the
Section 8 Offerees or other person or persons within the 120-day period
set forth in Section 8(b)(iii) may not be sold or otherwise disposed of
until they are again offered to the Section 8 Offerees under the
procedures specified in Sections 8(b)(i), (ii) and (iii).
(v) For purposes of this Section 8, the term "Proportionate
Percentage" shall mean, as to a Section 8 Offeree, that percentage
figure which expresses the ratio which (x) the number of shares of
outstanding Common Stock (computed as set forth below) then owned by
such Section 8 Offeree bears to (y) the aggregate number of shares of
issued and outstanding Common Stock (computed as set forth below). For
purposes solely of the computation required under clause (x) of this
Section 8(b)(v), the holders of outstanding Preemptive Right Series
Preferred Stock shall be treated as having converted
E-23
219
all such outstanding Preemptive Right Series Preferred Stock into
shares of Common Stock at the rate at which such securities are
convertible into Common Stock in effect at the time of delivery by the
Corporation of the notice of the Offer contemplated by Section 8(b)(i)
above; and for purposes solely of the computation required under clause
(y) of this Section 8(b)(v), the holders of outstanding securities of
the Corporation that are convertible, exchangeable or exercisable for
shares of Common Stock (including, without limitation, the Preemptive
Right Series Preferred Stock) shall be treated as having converted,
exchanged or exercised all such outstanding securities into or for
shares of Common Stock on such terms as are applicable and in effect at
the time of delivery by the Corporation of the notice of the Offer
contemplated by Section 8(b)(i) above.
(c) The provisions of Section 8(b) shall not apply to the offer,
issuance, sale or exchange, or any agreement to issue, sell or exchange, or
any reservation or setting aside for issuance, sale or exchange of (i) any
Excluded Stock or (ii) shares of the Corporation's common stock in
connection with a public offering registered under the Securities Act of
1933, as amended. In addition, the provisions of Section 8(b) shall
terminate and be of no further force or effect upon the closing of a
Qualified Public Offering. For the avoidance of doubt, and notwithstanding
anything ins this Section 8 to the contrary, "Offered Securities" shall not
include any securities issued by the Corporation to any of its stockholders
on account of the exercise by such stockholders of their respective
preemptive rights or rights of first refusal.
E-24
220
APPENDIX F
SEC. 86. SECTIONS APPLICABLE TO APPRAISAL; PREREQUISITES
If a corporation proposes to take a corporate action as to which any
section of this chapter provides that a stockholder who objects to such action
shall have the right to demand payment for his shares and an appraisal thereof,
sections eighty-seven to ninety-eight, inclusive, shall apply except as
otherwise specifically provided in any section of this chapter. Except as
provided in sections eighty-two and eight-three, no stockholder shall have such
right unless (1) he files with the corporation before the taking of the vote of
the shareholders on such corporate action, written objection to the proposed
action stating that he intends to demand payment for his shares if the action is
taken and (2) his shares are not voted in favor of the proposed action.
SEC. 87. STATEMENT OF RIGHTS OF OBJECTING STOCKHOLDERS IN NOTICE OF MEETING;
FORM
The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to create
any rights in any stockholder receiving the same to demand payment for his
stock, and the directors may authorize the inclusion in any such notice of a
statement of opinion by the management as to the existence or non-existence of
the right of the stockholders to demand payment for their stock on account of
the proposed corporate action. The notice may be in such form as the directors
or officers calling the meeting deem advisable, but the following form of notice
shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting and
effected by the corporation, any stockholder (1) who files with the corporation
before the taking of the vote on the approval of such action, written objection
to the proposed action stating the he intends to demand payment for his shares
if the action is taken and (2) whose shares are not voted in favor of such
action has or may have the right to demand in writing from the corporation (or,
in the case of a consolidation or merger, the name of the resulting or surviving
corporation shall be inserted), within twenty days after the date of mailing to
him of notice in writing that the corporate action has become effective,
payments for his shares and an appraisal of the value thereof. Such corporation
and any such stockholder shall in such cases have the rights and duties and
shall follow the procedure set forth in sections 88 to 98, inclusive, of chapter
156B of the General Laws of Massachusetts."
SEC. 88. NOTICE OF EFFECTIVENESS OF ACTION OBJECTED TO
The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed a written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
F-1
221
deemed to create any rights in any stockholder receiving the same to demand
payment for his stock. The notice shall be sent by registered or certified mail,
addressed to the stockholder at his last known address as it appears in the
records of the corporation.
SEC. 89. DEMAND FOR PAYMENT; TIME FOR PAYMENT
If within twenty days after the date of mailing of a notice under
subsection (e) of section eight-two, subsection (f) of section eighty-three, or
section eighty-eight, any stockholder to whom the corporation was required to
give such notice shall demand in writing from the corporation taking such
action, or in the case of a consolidation or merger from the resulting or
surviving corporation, payment for his stock, the corporation upon which such
demand is made shall pay to him the fair value of his stock within thirty days
after the expiration of the period during which such demand may be made.
SEC. 90. DEMAND FOR DETERMINATION OF VALUE; BILL IN EQUITY; VENUE
If during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county where
the corporation in which such objecting stockholder held stock had or has its
principal office in the commonwealth.
SEC. 91. PARTIES TO SUIT TO DETERMINE VALUE; SERVICE
If the bill is filed by the corporation, it shall name as parties
respondent all stockholders who have demanded payment for their shares and with
whom the corporation has not reached agreement as to the value thereof. If the
bill is filed by a stockholder, he shall bring the bill in his own behalf and in
behalf of all other stockholders who have demanded payment for their shares and
with whom the corporation has not reached agreement as to the value thereof, and
service of the bill shall be made upon the corporation by subpoena with a copy
of the bill annexed. The corporation shall file with its answer a duly verified
list of all such other stockholders, and such stockholders shall thereupon be
deemed to have been added as parties to the bill. The corporation shall give
notice in such form and returnable on such date as the court shall order to each
stockholder party to the bill by registered or certified mail, addressed to the
last known address of such stockholder as shown in the records of the
corporation, and the court may order such additional notice by publication or
otherwise as it deems advisable. Each stockholder who makes demand as provided
in section eighty-nine shall be deemed to have consented to the provisions of
this section relating to notice, and the giving of notice by the corporation to
any such stockholder in compliance with the order of the court shall be a
sufficient service of process on him. Failure to give notice to any stockholder
making demand shall not invalidate the proceedings as to other stockholders to
whom notice was properly given, and the court may at any time before the entry
of a final decree make supplementary orders of notice.
F-2
222
SEC. 92. DECREE DETERMINING VALUE AND ORDERING PAYMENT; VALUATION DATE
After hearing the court shall enter a decree determining the fair value of
the stock of those stockholders who have become entitled to the valuation of and
payment for their shares, and shall order the corporation to make payment of
such value, together with interest, if any, as hereinafter provided, to the
stockholders entitled thereto upon the transfer by them to the corporation of
the certificates representing such stock if certificated or, if uncertificated,
upon receipt of an instruction transferring such stock to the corporation. For
this purpose, the value of the shares shall be determined as of the day
preceding the date of the vote approving the proposed corporate action and shall
be exclusive of any element of value arising from the expectation or
accomplishment of the proposed corporate action.
SEC. 93. REFERENCE TO SPECIAL MASTER
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report the
same to the court, all in accordance with the usual practice in suits in equity
in the superior court.
SEC. 94. NOTATION ON STOCK CERTIFICATES OF PENDENCY OF BILL
On motion the court may order stockholder parties to the bill to submit
their certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in its
records with respect to any uncertificated shares held by such stockholders
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
SEC. 95. COSTS; INTEREST
The costs of the bill, including the reasonable compensation and expenses
of any master appointed by the court, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided in
this chapter shall be paid by the corporation. Interest shall be paid upon any
award from the date of the vote approving the proposed corporate action, and the
court may on application of any interested party determine the amount of
interest to be paid in the case of any stockholder.
F-3
223
SEC. 96. DIVIDENDS AND VOTING RIGHTS AFTER DEMAND FOR PAYMENT
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled to
the payment of dividends or other distribution on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the date of the vote approving the proposed corporate action) unless:
(1) bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the
corporation, or in the case of a consolidation or merger, the resulting or
surviving corporation, deliver to it a written withdrawal of his objections
to and an acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
SEC. 97. STATUS OF SHARES PAID FOR
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock, or in the
case of a consolidation or merger the shares or the securities of the resulting
or surviving corporation into which the shares of such objecting stockholder
would have been converted had he not objected to such consolidation or merger
shall have the status of treasury stock or securities.
SEC. 98. EXCLUSIVE REMEDY; EXCEPTION
The enforcement by a stockholder of his right to receive payment for his
shares in the manner provided in this chapter shall be an exclusive remedy
except that this chapter shall not exclude the right of such stockholder to
bring or maintain an appropriate proceeding to obtain relief on the ground that
such corporate action will be or is illegal or fraudulent as to him.
F-4
224
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's By-Laws provide for indemnification of directors and
officers of the Registrant to the full extent permitted by Delaware law.
Section 145 of the General Corporation Law of the State of Delaware
provides generally that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at its request in
such capacity in another corporation or business association, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. In addition, pursuant to the authority of Delaware law,
the Certificate of Incorporation of the Registrant also eliminates the monetary
liability of directors to the fullest extent permitted by Delaware law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits required by Item 601 of Regulation S-K.
2.1 -- Agreement and Plan of Merger By and Between LHS Group Inc.,
Priority Call Management, Inc. and Patriot Acquisition Corp.
dated April 20, 1999 (included as Appendix A to the proxy
statement-prospectus contained in this registration
statement).
5.1 -- Opinion of Scott A. Wharton, General Counsel of the
Registrant, relating to the legality of the shares being
offered (including consent).
*8.1 -- Opinion of Alston & Bird LLP relating to certain tax matters
(including consent).
*23.1 -- Consent of Alston & Bird LLP (contained in Exhibit 8.1).
23.2 -- Consent of Ernst & Young LLP relating to the audited
financial statements of the Registrant.
23.3 -- Consent of Arthur Andersen LLP relating to the audited
financial statements of Priority Call Management, Inc.
24.1 -- Powers of Attorney (contained on signature page).
99.1 -- Form of Proxy for Priority Call Capital Stock.
- ---------------
* To be filed by amendment.
II-1
225
ITEM 22. UNDERTAKINGS
(a)
(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is part of this registration statement, by any person
or party who is deemed to be an underwriter within the meaning of Rule
145(c), the user undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect
to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Exchange Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Exchange Act
and will be governed by the final adjudication of the issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
226
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on April 30, 1999.
LHS GROUP INC.
By: /s/ HARTMUT LADEMACHER
-------------------------------------
Hartmut Lademacher
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Hartmut Lademacher and Jerry W. Braxton, and each
of them, with the power to act without the other, as his true and lawful
attorneys-in-fact and agents, with the full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, including any Registration Statement filed
pursuant to Rule 462(b) of the Securities Act, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on April 30, 1999.
SIGNATURE TITLE
--------- -----
/s/ HARTMUT LADEMACHER Chairman of the Board, Chief Executive
- ----------------------------------------------------- Officer and Director (principal
Hartmut Lademacher executive officer)
/s/ JERRY W. BRAXTON Executive Vice President, Chief
- ----------------------------------------------------- Financial Officer, Treasurer and
Jerry W. Braxton Director (principal financial and
accounting officer)
II-3
227
SIGNATURE TITLE
--------- -----
/s/ ULF BOHLA Director
- -----------------------------------------------------
Ulf Bohla
/s/ WILLIAM E. FORD Director
- -----------------------------------------------------
William E. Ford
Director
- -----------------------------------------------------
Dr. Wolf J. Gaede
/s/ WILLIAM O. GRABE Director
- -----------------------------------------------------
William O. Grabe
/s/ GEORGE F. SCHMITT Director
- -----------------------------------------------------
George F. Schmitt
II-4
228
INDEX OF EXHIBITS
The following exhibits are filed as part of this Registration Statement.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1 -- Agreement and Plan of Merger By and Between LHS Group Inc.,
Priority Call Management, Inc. and Patriot Acquisition Corp.
dated April 20, 1999 (included as Appendix A to the proxy
statement-prospectus contained in this registration
statement).
5.1 -- Opinion of Scott A. Wharton, General Counsel of the
Registrant, relating to the legality of the shares being
offered
8.1* -- Opinion of Alston & Bird LLP relating to certain tax matters
(including consent).
23.1* -- Consent of Alston & Bird LLP (contained in Exhibit 8.1).
23.2 -- Consent of Ernst & Young LLP relating to the audited
financial statements of the Registrant.
23.3 -- Consent of Arthur Anderson LLP relating to the audited
financial statements of Priority Call Management, Inc.
24.1 -- Powers of Attorney (contained on signature page).
99.1 -- Form of Proxy for Priority Call Capital Stock.
- ---------------------
* To be filed by amendment.