<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WASHINGTON, D.C. 20549
------------------------------------
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
---------------------------------------------------------------
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------------------------
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for use of the Commission only (as permitted by Rule
14a-6(e)(2))
PERIPHONICS CORPORATION
(Name of registrant as specified in its charter)
[ ] No fee required.
[ ] Fee computed below per Exchange Act Rule 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock of Periphonics Corporation, par value $0.01 per share.
(2) Aggregate number of securities to which transaction applies:
13,264,840 shares of Common Stock.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): $29.31 (the
average of high and low trading prices of Periphonics Common Stock on
Nasdaq on September 16, 1999).
Fee: $77,758 = 13,264,840 x $29.31 x .01/50
[X] Fee paid previously with preliminary materials: $77,758
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11 (a) (2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration no.:
(3) Filing Party:
(4) Date Filed:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PERIPHONICS
October 7, 1999
Dear Periphonics Stockholder,
I cordially invite you to attend our annual meeting of stockholders on
November 10, 1999 at 10:00 a.m. local time at the Wyndham Wind Watch Hotel, 1717
Motor Parkway, Hauppauge, New York 11788.
At the meeting, you will be asked to vote on a proposal to adopt the merger
agreement by which Periphonics Corporation will become a wholly-owned subsidiary
of Nortel Networks Corporation. Once the merger has been completed, you will be
entitled to receive in exchange for each share of Periphonics common stock that
you own a fraction of a Nortel Networks common share having a value of $29.23,
based on the average trading price of Nortel Networks common shares on the New
York Stock Exchange for a specified period prior to the merger, except that you
will not receive less than 0.62 or more than 0.76 Nortel Networks common shares
for each share of your Periphonics common stock.
PERIPHONICS' BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
AND THE MERGER AGREEMENT ARE IN THE BEST INTERESTS OF PERIPHONICS AND ITS
STOCKHOLDERS. ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS THAT YOU VOTE "FOR" THE MERGER PROPOSAL AT THE ANNUAL
MEETING. I refer you to page 19 of this proxy statement/prospectus, which
describes the factors considered by the Board in determining to recommend the
merger.
After carefully reading and considering these materials, please promptly
return the enclosed proxy to vote your shares, even if you plan to attend the
meeting in person. These materials contain detailed information on how to vote.
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR CAREFUL CONSIDERATION OF, AND
VOTE ON, THE MATTER BEFORE OUR STOCKHOLDERS IS IMPORTANT.
We appreciate your interest and participation as a stockholder of
Periphonics.
Very truly yours,
/s/ Peter J. Cohen
Peter J. Cohen,
Chairman of the Board, President
and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
regulator has approved the Nortel Networks common shares offered under this
proxy statement/prospectus or determined if this proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
No securities commission or similar regulatory authority in Canada has in any
way passed upon the merits of the Nortel Networks common shares offered under
this proxy statement/prospectus or the disclosure contained in this proxy
statement/prospectus. Any representation to the contrary is an offense.
This proxy statement/prospectus is dated October 7, 1999 and is first being
mailed to stockholders on or about October 8, 1999.
<PAGE> 3
PERIPHONICS CORPORATION
NOTICE OF 1999 ANNUAL
MEETING OF STOCKHOLDERS TO BE
HELD AT 10:00 A.M. ON NOVEMBER 10, 1999
Dear Stockholders:
Please accept this invitation to attend the 1999 annual meeting of
stockholders of Periphonics Corporation on November 10, 1999 at 10:00 a.m. at
The Wyndham Wind Watch Hotel, 1717 Motor Parkway, Hauppauge, New York 11788. At
the meeting you will be asked to consider and vote on the following matters
described under the corresponding numbers in the attached proxy
statement/prospectus:
1. a proposal to approve and adopt the Agreement and Plan of Merger by
and among Nortel Networks Corporation, North Subsidiary, Inc. (a
wholly-owned subsidiary of Nortel Networks Corporation), and
Periphonics Corporation dated as of August 24, 1999, and to approve
the merger and other transactions described in the merger agreement
and as described in this proxy statement/prospectus;
2. election of two Class II directors to hold office until the merger is
completed or, if the merger is not completed, until the 2002 annual
meeting of stockholders and until their respective successors have
been elected and qualified;
3. ratification of the selection of Deloitte & Touche LLP as
Periphonics' independent auditors until the merger is completed or,
if the merger is not completed, for the fiscal year ending May 31,
2000; and
4. such other matters as may properly come before the meeting.
The Board has fixed October 1, 1999 as the record date for the
determination of stockholders entitled to notice of and to vote at the meeting,
and only holders of Periphonics common stock of record at the close of business
on that day will be entitled to vote. Periphonics will not close its stock
transfer books and your ability to transfer your shares will not be affected.
A complete list of stockholders entitled to vote at the meeting will be
available at the offices of Periphonics during ordinary business hours from
October 12, 1999 until the meeting for examination by any stockholder for any
purpose germane to the meeting. This list will also be available at the meeting.
Whether or not you expect to be present at the meeting, please fill in,
date, sign and return the enclosed proxy, which is solicited by the management
of Periphonics. The shares represented by the proxy will be voted according to
your specified response. The proxy is revocable and will not affect your right
to vote in person if you attend the meeting.
By Order of the Board
/s/ Kevin J. O'Brien
Kevin J. O'Brien,
Secretary
Date: October 7, 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE
MERGER............................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS..... 1
SUMMARY................................ 2
The Companies.......................... 2
The Merger............................. 2
What Periphonics Stockholders Will
Receive in the Merger............. 2
Recommendation to Stockholders....... 3
Opinion of Financial Advisor to
Periphonics....................... 3
Agreement of Certain Directors and
Executive Officers................ 3
Material Federal Income Tax
Consequences...................... 3
No Appraisal Rights.................. 3
Treatment of Periphonics Stock
Options........................... 3
Markets and Market Prices............ 3
Interests of Periphonics' Directors
and Executive Officers in the
Merger............................ 4
Conditions to the Merger............. 4
Termination of the Merger
Agreement......................... 4
Termination Fees..................... 5
Stock Option Agreement............... 5
SELECTED HISTORICAL
FINANCIAL DATA....................... 6
Nortel Networks........................ 6
Periphonics............................ 8
RECENT DEVELOPMENTS.................... 9
COMPARATIVE HISTORICAL UNAUDITED PER
SHARE DATA........................... 10
RISK FACTORS........................... 11
Because the market value of Nortel
Networks common shares at the time of
the merger may be either higher or
lower than the average trading price
used to determine the number of
Nortel Networks common shares you
will receive in the merger, you
cannot be certain of the market value
of the Nortel Networks common shares
you will receive..................... 11
Directors and executive officers of
Periphonics may have conflicts of
interest that influence their
decision to approve the merger....... 11
The termination fee and the stock
option agreement may discourage other
companies from trying to acquire
Periphonics.......................... 12
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-looking statements may prove
inaccurate........................... 12
PERIPHONICS' ANNUAL MEETING............ 14
Where and When Periphonics' Annual
Meeting Will be Held................. 14
How to Participate in Periphonics'
Annual Meeting....................... 14
What You Will Vote On.................. 14
Only Periphonics Stockholders of Record
as of October 1, 1999 Are Entitled to
Vote................................. 14
Majority of Outstanding Shares Must be
Represented For a Vote to be Taken... 15
Vote Required.......................... 15
Voting Your Shares and Changing Your
Vote................................. 15
How Proxies Are Counted................ 15
Confidential Voting.................... 16
Cost of Solicitation................... 16
1. THE MERGER PROPOSAL................. 17
THE MERGER............................. 17
Background of the Merger............... 17
Recommendation of Periphonics' Board;
Reasons of Periphonics for the
Merger............................... 19
Opinion of Financial Advisor to
Periphonics.......................... 20
Interests of Certain Persons in the
Merger............................... 25
Accounting Treatment................... 27
Regulatory Approvals................... 28
Resale of Nortel Networks Common
Shares............................... 28
No Appraisal Rights.................... 30
U.S. Federal Income Tax Consequences of
the Merger........................... 30
U.S. and Canadian Tax Considerations
Relating to Holding Nortel Networks
Common Shares........................ 31
Stock Exchange Listings of Nortel
Networks Common Shares............... 34
THE MERGER AGREEMENT................... 35
The Merger............................. 35
Effective Time of the Merger........... 35
Conversion of Periphonics Common
Stock................................ 35
No Fractional Nortel Networks Common
Shares............................... 35
Exchange of Periphonics Common Stock
for Nortel Networks Common Shares.... 36
Treatment of Periphonics Stock
Options.............................. 36
Employee Benefits...................... 37
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Representations and Warranties......... 37
Conduct of Business of Periphonics..... 38
Conduct of Business of Nortel
Networks............................. 39
Covenants of Periphonics............... 39
Covenants of Nortel Networks........... 39
Covenants of Nortel Networks,
Periphonics and the Merger
Subsidiary........................... 39
Acquisition Proposals.................. 40
Conditions to the Merger............... 41
Indemnification........................ 42
Waiver and Amendment................... 42
Termination of the Merger Agreement.... 42
Termination Fees and Expenses.......... 43
OTHER AGREEMENTS....................... 46
Stock Option Agreement................. 46
Stockholders Agreement................. 49
MARKET PRICES AND DIVIDENDS............ 50
Nortel Networks........................ 50
Periphonics............................ 51
BUSINESS OF NORTEL NETWORKS............ 51
DESCRIPTION OF NORTEL NETWORKS SHARE
CAPITAL.............................. 52
General................................ 52
Common Shares.......................... 52
Preferred Shares....................... 53
COMPARATIVE RIGHTS OF HOLDERS OF
PERIPHONICS CORPORATION COMMON STOCK
AND NORTEL NETWORKS COMMON SHARES.... 53
Vote on Extraordinary Corporate
Transactions......................... 54
Dividends and Distributions............ 54
Amendments to Charter.................. 54
Amendment to By-laws................... 55
Interested Shareholder Transactions.... 55
Dissent and Appraisal Rights........... 56
Directors' Qualifications.............. 57
Election of Directors.................. 57
Removal of Directors................... 57
Vacancy on Boards...................... 58
Directors' and Officers'
Indemnification...................... 58
Directors' Exculpation................. 59
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Special Meeting of Shareholders........ 59
Quorum Requirements.................... 59
Rights Agreement....................... 59
Inspection of Books and Records........ 59
2. ELECTION OF CLASS II DIRECTORS...... 60
Effects of the Merger on Periphonics'
Board................................ 60
Information Regarding Directors........ 60
Information Regarding Executive
Officers............................. 61
Directors' Compensation................ 62
Executive Compensation................. 62
Options................................ 63
Employment Agreements.................. 64
Compensation Committee Interlocks and
Insider Participation................ 65
Compensation Committee Report on
Executive Compensation............... 65
Stock Performance Graph................ 66
Security Ownership of Certain
Beneficial Owners and Management..... 67
Compliance with Section 16(a) of the
Exchange Act......................... 68
3. SELECTION OF AUDITORS............... 69
4. OTHER MATTERS....................... 69
Stockholders' Proposals................ 69
LEGAL OPINIONS......................... 70
EXPERTS................................ 70
SERVICE OF PROCESS AND ENFORCEMENT OF
LIABILITIES.......................... 70
WHERE YOU CAN FIND MORE INFORMATION.... 70
ANNEX A Agreement and Plan of Merger by
and among Nortel Networks
Corporation, North Subsidiary, Inc.
and Periphonics Corporation, dated as
of August 24, 1999................... A-1
ANNEX B Stock Option Agreement, dated
as of August 24, 1999, between Nortel
Networks Corporation and Periphonics
Corporation.......................... B-1
ANNEX C Stockholders Agreement, dated
as of August 24, 1999................ C-1
ANNEX D Opinion of William Blair &
Company, L.L.C....................... D-1
</TABLE>
ii
<PAGE> 6
QUESTIONS AND ANSWERS
ABOUT THE MERGER
Q: What do I need to do now?
A: Just vote your shares as described in this document and the proxy card
included with it, so that your shares may be represented at the Periphonics
annual meeting. If you do not vote your shares in connection with the merger
proposal, your failure to vote will have the same effect as voting against
the merger proposal.
Q: Should I send in my stock certificates now?
A: No. You will receive instructions for exchanging your stock certificates
after the merger is completed.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: No. Your broker can vote your shares only if you provide instructions on how
to vote. You should instruct your broker to vote your shares, following the
directions provided by your broker. Your failure to instruct your broker on
how to vote your shares will have the same effect as voting against the
merger proposal.
Q: Can I change my vote after I have mailed my proxy card or provided
instructions to my broker?
A: Yes. You can change your vote at any time before your proxy is voted at the
annual meeting. This document contains instructions on how to change your
vote. If you have instructed your broker to vote your shares, you must
follow directions received from your broker to change those instructions.
Q: Do I need to attend the Periphonics annual meeting in person?
A: No. It is not necessary for you to attend the annual meeting to vote your
shares, although you are welcome to attend.
Q: When will the merger be completed?
A: Nortel Networks and Periphonics are working towards completing the merger as
soon as possible, and expect to complete it shortly after the Periphonics
annual meeting in November 1999, if stockholders approve the merger
proposal. However, it is possible that delays in obtaining regulatory
approvals could require that the merger be completed at a later time.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger after reading this proxy
statement/prospectus, you should contact:
Periphonics Corporation
4000 Veterans Memorial Highway
Bohemia, NY 11716
Attn: Investor Relations
Telephone: (516) 468-9444
E-mail: [email protected]
1
<PAGE> 7
SUMMARY
This summary highlights key aspects of the merger which are described in
greater detail elsewhere in this document. It does not contain all of the
information that may be important to you. To better understand the merger, and
for a more complete description of the legal terms of the merger, you should
read this entire document carefully, including the Annexes, and the additional
documents to which we refer you. You can learn how to obtain these additional
documents in "Where You Can Find More Information" on page 70.
THE COMPANIES
NORTEL NETWORKS CORPORATION
8200 Dixie Road, Suite 100
Brampton, Ontario
Canada L6T 5P6
Telephone: (905) 863-0000
Nortel Networks is a leading global supplier of data and telephony network
solutions and services with operations in Canada, the United States, Europe, the
Caribbean and Latin America region and the Asia Pacific region. These customers
include public and private enterprises and institutions; Internet service
providers; local, long-distance, personal communications services and cellular
mobile communications companies; cable television companies; and utilities.
Nortel Networks had revenues of $17.6 billion in 1998 and has approximately
72,000 employees.
North Subsidiary, Inc., a Delaware corporation and a wholly owned
subsidiary of Nortel Networks, had conducted no business prior to entering into
the merger agreement. We refer to North Subsidiary, Inc. in this document as the
"merger subsidiary."
PERIPHONICS CORPORATION
4000 Veterans Memorial Highway
Bohemia, NY 11716
Telephone: (516) 468-9000
Periphonics is a leading supplier of mid-to-large scale telecommunications
call processing systems with operations in the United States, the United
Kingdom, Canada, Germany, Hong Kong, Korea, Mexico and Singapore. Its major
customers include telecommunications companies, financial services companies,
transportation companies and government agencies. It has installed its systems
for customers in more than 50 countries. Periphonics had revenues of $142.3
million in its fiscal year ended May 31, 1999 and has approximately 900
employees.
THE MERGER
The merger agreement, which is the legal document that governs the merger,
is attached as Annex A. We encourage you to read the merger agreement carefully.
WHAT PERIPHONICS STOCKHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 35)
If the "average trading price" of Nortel Networks common shares is between
$38.46 and $47.15, for each share of your Periphonics common stock you will
receive a number of Nortel Networks common shares having a value of $29.23 based
on the average trading price. The "average trading price" is the average of the
last sales prices for a Nortel Networks common share on the New York Stock
Exchange Composite Tape for the ten consecutive trading days ending two trading
days before the merger. Within this range of average trading prices, the actual
number of Nortel Networks common shares you receive will vary because a formula
contained in the merger agreement adjusts the number of shares you receive to
maintain their value at $29.23. We refer to the number of Nortel Networks common
shares you will receive in the merger for each share of Periphonics common stock
in this document as the "exchange ratio."
If the average trading price of Nortel Networks common shares is below
$38.46, you will receive 0.76 Nortel Networks common shares for each share of
your Periphonics common stock. In that case, the value of the Nortel Networks
common shares you receive in the merger will be less than $29.23 for each share
of your Periphonics common stock, based on the average trading price.
If the average trading price of Nortel Networks common shares is above
$47.15, you will receive 0.62 Nortel Networks common shares for each share of
your Periphonics common stock. In that case, the value of the Nortel Networks
common shares you receive in the merger will be more than $29.23 for each share
of your Periphonics common stock, based on the average trading price.
2
<PAGE> 8
This information is summarized in the table below:
<TABLE>
<CAPTION>
VALUE OF NORTEL NETWORKS
NUMBER OF NORTEL NETWORKS COMMON SHARES YOU COMMON SHARES YOU RECEIVE FOR
AVERAGE TRADING PRICE OF NORTEL RECEIVE FOR EACH SHARE OF PERIPHONICS COMMON EACH SHARE OF PERIPHONICS
NETWORKS COMMON SHARES STOCK ("EXCHANGE RATIO") COMMON STOCK
- ------------------------------- -------------------------------------------- -----------------------------
<S> <C> <C>
less than $38.46 0.76 less than $29.23
between $38.46 and $47.15 $29.23 divided by the average trading price $29.23
more than $47.15 0.62 more than $29.23
</TABLE>
Nortel Networks will not issue fractional shares in the merger. As a
result, the total number of Nortel Networks common shares that you receive in
the merger will be rounded down to the nearest whole number. You will receive a
cash payment, based on the average trading price, for the value of the remaining
fraction of a Nortel Networks common share that you would otherwise receive.
RECOMMENDATION TO STOCKHOLDERS (SEE PAGE 19)
Periphonics' Board has unanimously approved the merger agreement and
recommends that you vote "FOR" the merger proposal.
OPINION OF FINANCIAL ADVISOR TO PERIPHONICS (SEE PAGE 20)
On August 23, 1999, Periphonics' Board received an oral opinion (later
confirmed in writing) from its financial advisor, William Blair & Company,
L.L.C., that, as of August 23, 1999, the exchange ratio in the merger agreement
was fair to Periphonics stockholders from a financial point of view. The full
text of the opinion is attached as Annex D. We urge you to read the entire
opinion carefully for the assumptions made, procedures followed, matters
considered and limits of the scope of William Blair's review in rendering its
opinion. William Blair's opinion was addressed to Periphonics' Board for the
purpose of the Board's evaluation of the merger and does not constitute a
recommendation to any Periphonics stockholder as to how to vote with respect to
the merger proposal.
AGREEMENT OF CERTAIN DIRECTORS AND EXECUTIVE OFFICERS (SEE PAGE 49)
A number of directors and executive officers of Periphonics have entered
into a stockholders agreement with Nortel Networks. These directors and
officers, with their affiliates, own and are entitled to vote approximately
13.4% of the outstanding shares of Periphonics common stock. In the stockholders
agreement they have agreed to vote all of their Periphonics shares in favor of
the merger agreement and against any competing transaction. The stockholders
agreement is attached as Annex C.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 30)
The receipt of Nortel Networks common shares in the merger generally will
be tax free to Periphonics stockholders for United States income tax purposes,
except for tax on cash received for fractional shares. Tax matters are very
complicated, and the tax consequences of the merger to you will depend on the
facts of your particular situation. We urge you to consult your tax advisor for
a full understanding of the tax consequences of the merger to you.
NO APPRAISAL RIGHTS
You will have no appraisal rights in connection with the merger.
TREATMENT OF PERIPHONICS STOCK OPTIONS (SEE PAGE 36)
Nortel Networks will assume all Periphonics stock options outstanding at
the time of the merger. After the merger, Nortel Networks will treat these stock
options as options to acquire a number of Nortel Networks common shares equal to
what the holder would have received in the merger if the options had been
exercised immediately before the merger. The exercise prices of the options will
be adjusted accordingly.
MARKETS AND MARKET PRICES (SEE PAGE 50)
Nortel Networks common shares are traded under the symbol "NT" on the New
York, Toronto and Montreal stock exchanges. Periphonics common
3
<PAGE> 9
stock is traded on The Nasdaq Stock Market under the symbol "PERI." On August
23, 1999, the last trading day before the public announcement of the proposed
merger, the last sale price per Nortel Networks common share on the New York
Stock Exchange was $43.63 and the closing price per share of Periphonics common
stock was $25.25. On October 4, 1999, the most recent date for which prices were
practicably available before the printing of this document, the last sale price
per Nortel Networks common share was $53.69 and the closing price per share of
Periphonics common stock was $32.75. You will find additional historical share
price information for both Nortel Networks and Periphonics on page 50.
INTERESTS OF PERIPHONICS' DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER (SEE
PAGE 25)
You should be aware of potential conflicts of interest of, and the benefits
available to, directors and executive officers of Periphonics when considering
Periphonics' Board's recommendation that you vote in favor of the merger
proposal. The directors and executive officers of Periphonics have interests in
the merger that are in addition to, or different from, their interests as
Periphonics stockholders. These differing interests relate to, among other
things:
-- existing agreements between Periphonics and some of its directors and
executive officers which have afforded them significant cash payments and
other benefits, including the vesting of a significant number of options,
as a result of the execution of the merger agreement;
-- new agreements between Periphonics or Nortel Networks and some
Periphonics directors and executive officers entered into in connection
with the merger agreement which afford them significant benefits; and
-- directors' and officers' insurance coverage and indemnification rights
provided for in the merger agreement.
CONDITIONS TO THE MERGER (SEE PAGE 41)
Nortel Networks and Periphonics will not complete the merger unless a
number of conditions are satisfied or waived, including:
-- approval of the merger agreement by Periphonics stockholders;
-- receipt of regulatory approvals and the absence of legal restraints;
-- continued accuracy of the representations and warranties of the other
party;
-- performance of the agreements and covenants to be performed by the other
party;
-- the absence of events which have had or would reasonably be expected to
have a material adverse effect on the other party;
-- issuance of opinions by attorneys for Nortel Networks and Periphonics as
to the tax-free nature of the merger, except with respect to cash
payments for fractional shares; and
-- receipt of approval for listing the Nortel Networks common shares to be
issued in the merger on the New York, Toronto and Montreal stock
exchanges.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 42)
Nortel Networks and Periphonics can jointly agree to terminate the merger
agreement at any time before completing the merger. In addition, either company
can terminate the merger agreement if:
-- the merger has not been completed by March 31, 2000, if all governmental
approvals required for the completion of the merger have then been
obtained;
-- the merger has not been completed by June 30, 2000;
-- Periphonics' stockholders fail to approve the merger agreement;
-- any governmental approval required for the completion of the merger is
finally denied;
-- the other party breaches any of its representations and warranties and
those breaches
4
<PAGE> 10
(1) would reasonably be expected to have a material adverse effect and (2)
are not or cannot be cured within 10 days after notice is given; or
- -- the other party materially breaches any of its agreements and those
breaches are not or cannot be cured within 10 days after notice is given.
Nortel Networks can also terminate the merger agreement if:
- -- any governmental agency imposes final conditions for completing the merger
that would reasonably be expected to have a material adverse effect on
Nortel Networks or on the surviving corporation in the merger or require
Nortel Networks to dispose of any assets; or
- -- Periphonics' Board withdraws its recommendation of the merger to
Periphonics stockholders.
Periphonics can also terminate the merger agreement if:
- -- any governmental agency imposes final conditions for completing the merger
that would reasonably be expected to have a material adverse effect on
Nortel Networks or would require Nortel Networks to dispose of any assets,
except that Periphonics cannot terminate the merger agreement under these
circumstances if Nortel Networks waives its analogous right to do so; or
- -- Periphonics' Board, at any time prior to the Periphonics annual meeting,
elects to terminate the merger agreement in order to approve or recommend a
merger or similar transaction that is a "superior proposal."
A "superior proposal" is any bona fide acquisition proposal made by a third
party that was not solicited or encouraged in violation of the merger agreement
and which Periphonics' Board determines in its good faith judgment, based on the
written opinion of a financial advisor of nationally recognized reputation, to
be materially more favorable to Periphonics' stockholders than the transactions
contemplated by the merger agreement.
TERMINATION FEES (SEE PAGE 43)
Periphonics could be required to pay Nortel Networks a termination fee of
up to $15,000,000 if the merger agreement is terminated under specified
circumstances.
Nortel Networks could be required to pay Periphonics a termination fee of
$4,000,000 if Periphonics terminates the merger agreement following a willful
breach by Nortel Networks of its representations, warranties or agreements.
STOCK OPTION AGREEMENT (SEE PAGE 46)
Periphonics has granted Nortel Networks an option to purchase a number of
shares of Periphonics common stock equal to 19.9% of those outstanding at a
price of $29.23 per share, exercisable under specified circumstances. Nortel
Networks' potential profit on the option is capped at $16,500,000. The option is
no longer exercisable after completion of the merger or if Nortel Networks
receives $15,000,000 in respect of the termination fee, and the termination fee
is no longer payable after any exercise of the option.
5
<PAGE> 11
SELECTED HISTORICAL FINANCIAL DATA
NORTEL NETWORKS
The following selected consolidated financial data as at and for the six
months ended June 30, 1999 and 1998 has been derived from Nortel Networks'
unaudited interim financial statements and contain all normal, recurring entries
necessary for fair presentation, but are not indicative of the results for the
entire year. The selected consolidated financial data as at and for each of the
five fiscal years in the period ended December 31, 1998 has been derived from
the consolidated financial statements of Nortel Networks. The report of Deloitte
& Touche LLP, as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, is included in Nortel Networks' Annual
Report on Form 10-K for the year ended December 31, 1998, incorporated in this
proxy statement/prospectus by reference. You should read the selected
consolidated financial data in conjunction with the financial statements and the
notes to the financial statements for Nortel Networks included in its Annual
Report on Form 10-K for the year ended December 31, 1998 and its Quarterly
Report on Form 10-Q for the period ended June 30, 1999. See "Where You Can Find
More Information" on page 70 to learn how you can obtain these reports. We have
adjusted per share amounts to reflect Nortel Networks' two-for-one stock split
on January 7, 1998 and the stock dividend of one common share on each issued and
outstanding Nortel Networks common share as of August 17, 1999.
<TABLE>
<CAPTION>
AS AT AND FOR THE
SIX MONTHS
AS AT AND FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(MILLIONS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE FIGURES
AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS AND RELATED DATA
Revenues................................. $ 8,874 $10,672 $12,847 $15,449 $17,575 $ 7,666 $ 9,831
Research and development expense......... 1,156 1,579 1,813 2,147 2,453 1,185 1,367
Amortization of plant and equipment...... 390 430 439 439 471 213 300
Income tax provision..................... 161 233 321 438 601 202 296
Net earnings (loss)
Canadian GAAP.......................... 408 473 623 829 (537) (24) (601)
U.S. GAAP.............................. 362 399 564 712 (1,250) (228) (469)
Net earnings (loss) applicable to common
shares
Canadian GAAP.......................... 404 469 619 812 (569) (39) (615)
U.S. GAAP.............................. 358 395 560 695 (1,282) (243) (483)
Earnings (loss) per revenue dollar, in
cents(9)
Canadian GAAP.......................... 5 4 5 5 (3) (1) (6)
U.S. GAAP.............................. 4 4 4 4 (7) (3) (5)
Earnings (loss) per common share, in
dollars
Canadian GAAP.......................... 0.40 0.46 0.60 0.78 (0.50) (0.04) (0.46)
U.S. GAAP.............................. 0.36 0.39 0.54 0.67 (1.12) (0.23) (0.36)
U.S. GAAP, fully diluted............... 0.36 0.39 0.54 0.65 (1.12) (0.23) (0.36)
Dividends per common share, in dollars... 0.09 0.105 0.125 0.145 0.15 0.075 0.075
FINANCIAL POSITION
Working capital.......................... 2,160 2,051(6) 3,099 3,664 4,424 3,379(6) 4,408
Plant and equipment (at cost)............ 3,910 4,533 4,680 4,706 5,249 4,772 5,260
Accumulated amortization................. 2,205 2,610 2,645 2,666 2,986 2,703 3,002
Total assets
Canadian GAAP.......................... 8,797 9,480 10,903 12,554 19,732 12,452(6) 19,677
U.S. GAAP.............................. 9,218(6) 9,301(6) 10,820(6) 12,398(6) 21,813(6) 12,132 21,972
Long-term debt........................... 1,495 1,221 1,663 1,565 1,648 1,561 1,513
Redeemable preferred shares.............. 73 73 367 609 609 609 609
Common shareholders' equity
Canadian GAAP.......................... 3,355 3,798 4,509 4,801 10,956 5,013(6) 10,823
U.S. GAAP.............................. 3,283 3,652 4,304 4,517 12,180 4,498 12,264
CAPITAL EXPENDITURES(9).................. 389 577 601 575 642 282 351
EMPLOYEES AT END OF PERIOD(9)............ 57,054 59,904(8) 62,284(7) 68,341(7) 71,296(7) 68,715(7) 72,461(7)
</TABLE>
6
<PAGE> 12
<TABLE>
<CAPTION>
AS AT AND FOR THE
SIX MONTHS
AS AT AND FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(MILLIONS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE FIGURES AND EMPLOYEE
DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
Supplementary measure of net earnings
applicable to common shares(10)
Canadian GAAP.......................... 303(5) 469 619 804(4) 1,065(3) 352(2) 590(1)
U.S. GAAP.............................. 257(5) 395 560 687(4) 980(3) 308(2) 474(1)
Supplementary measure of net earnings per
common share(10)
Canadian GAAP.......................... 0.30(5) 0.46 0.60 0.77(4) 0.93(3) 0.33(2) 0.44(1)
U.S. GAAP.............................. 0.26(5) 0.39 0.54 0.66(4) 0.86(3) 0.29(2) 0.35(1)
U.S. GAAP, fully diluted............... 0.26(5) 0.39 0.53 0.64(4) 0.83(3) 0.29(2) 0.34(1)
</TABLE>
- ---------------
(1) Excludes (a) the impact of acquisition related costs (the amortization of
intangible assets from the acquisition of Bay Networks, Inc., and all
subsequent acquisitions, and the amortization of any purchased in-process
research and development ("R&D") from prior acquisitions) ($1,201 under
Canadian GAAP; $953 under U.S. GAAP), and (b) one-time gains and charges of
$4, net of tax.
(2) Excludes (a) the impact of the amortization of Broadband Networks Inc. and
Aptis Communications, Inc. in-process R&D ($392 under Canadian GAAP; $552
under U.S. GAAP) and (b) one-time gains and charges of ($1), net of tax.
(3) Excludes (a) the impact of acquisition related costs ($1,630 under Canadian
GAAP; $2,258 under U.S. GAAP), (b) one-time gains of $441 on the sales of
shares of Lagaradere SCA, Netspeed Inc. and Matra Ericsson
Telecommunications, the disposition of the Advanced Power System business
and the Creedmoor, North Carolina manufacturing facility, and gains related
to Entrust Technologies Inc., net of a loss on the sale of the Research and
Development Centre of the GSM terminals business, and (c) one-time charges
of $447 related primarily to a charge taken by Nortel Networks plc to
downsize a portion of its Fixed Wireless Access manufacturing operation and
a write-down of certain assets and investments, and (d) net tax impact on
one-time gains and charges of ($2).
(4) Excludes a one-time gain of $102 on the sale of its TTS Meridian Systems
Inc. and Nortel Communications Systems Inc. distribution businesses,
one-time charges of $95 related to the write-down of certain investments
and for the rationalization and/or relation of certain manufacturing
facilities, and a net tax impact of ($1).
(5) Excludes one-time gains of $101 on the sale of its optical fiber and fiber
cable manufacturing facility and on the sale of its connection, protection
and optical fiber management systems businesses.
(6) Comparative amounts have been restated to conform with current period's
presentation.
(7) In addition, Nortel Networks' proportionate share of the employees of all
joint ventures was 3,756 in June 1999, 3,565 in June 1998, 3,756 in
December 1998, 4,555 in December 1997 and 5,300 in December 1996.
(8) In addition, Nortel Networks' proportionate share of the employees of the
Matra Nortel Communications S.A.S. joint venture was 3,811.
(9) Unaudited.
(10) Supplementary measure of net earnings represents after tax earnings
excluding the impact of Acquisition Related Costs, and one-time gains and
charges. Supplementary measure of net earnings should not be considered as
an alternative to net earnings (loss) from operations, net earnings (loss),
or cash flows from operating activities (all as determined in accordance
with generally accepted accounting principles). Supplementary measure of
net earnings is presented as an indicator to assess Nortel Networks'
financial performance.
7
<PAGE> 13
PERIPHONICS
The following selected consolidated financial data as at and for each of
the five fiscal years in the period ended May 31, 1999 has been derived from the
audited consolidated financial statements of Periphonics. The report of Deloitte
& Touche LLP, independent auditors, as at May 31, 1998 and 1999 and for each of
the three years in the period ended May 31, 1999 is included in Periphonics'
Annual Report on Form 10-K for the year ended May 31, 1999, which is
incorporated in this proxy statement/prospectus by reference. You should read
the selected consolidated financial data in conjunction with the consolidated
financial statements and the notes to the consolidated financial statements for
Periphonics included in its Annual Report on Form 10-K for the year ended May
31, 1999. See "Where You Can Find More Information" on page 70 to learn how to
obtain this report.
<TABLE>
<CAPTION>
AS AT AND FOR THE FISCAL YEAR ENDED MAY 31,
----------------------------------------------------
1995(1) 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
EARNINGS AND RELATED DATA
System revenues........................ $ 51,747 $ 71,800 $ 86,144 $ 87,618 $107,364
Maintenance revenues................... 13,030 17,003 25,100 29,681 34,893
-------- -------- -------- -------- --------
Total revenues....................... 64,777 88,803 111,244 117,299 142,257
-------- -------- -------- -------- --------
Cost of system revenues................ 23,686 32,798 38,858 43,437 51,646
Cost of maintenance revenues........... 8,387 10,956 14,924 16,988 18,212
-------- -------- -------- -------- --------
Total cost of revenues............... 32,073 43,754 53,782 60,425 69,858
-------- -------- -------- -------- --------
Gross profit........................... 32,704 45,049 57,462 56,874 72,399
-------- -------- -------- -------- --------
Selling, general and administrative.... 18,749 22,587 27,737 36,111 41,650
Research and development............... 5,831 7,933 10,698 15,068 18,303
Non-recurring, noncash compensation
charge(1)............................ 1,250 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses............. 25,830 30,520 38,435 51,179 59,953
-------- -------- -------- -------- --------
Earnings from operations............... 6,874 14,529 19,027 5,695 12,446
-------- -------- -------- -------- --------
Interest expense....................... (992) -- -- -- --
Interest and other income.............. 170 885 1,242 1,272 1,182
Foreign exchange gain (loss)........... 88 (345) (49) (547) (332)
-------- -------- -------- -------- --------
Total other expenses................. (734) 540 1,193 725 850
-------- -------- -------- -------- --------
Earnings before provision for income
taxes................................ 6,140 15,069 20,220 6,420 13,296
Provision for income taxes............. 2,956 5,854 7,583 1,990 4,388
-------- -------- -------- -------- --------
Net earnings......................... $ 3,184 $ 9,215 $ 12,637 $ 4,430 $ 8,908
======== ======== ======== ======== ========
Per share data:(2)
Basic earnings....................... $ 0.39 $ 0.71 $ 0.93 $ 0.32 $ 0.66
======== ======== ======== ======== ========
Diluted earnings..................... $ 0.33 $ 0.70 $ 0.90 $ 0.32 $ 0.65
======== ======== ======== ======== ========
Weighted average shares:
Basic................................ 8,270 12,890 13,641 13,765 13,443
======== ======== ======== ======== ========
Diluted.............................. 9,778 13,258 14,020 13,947 13,690
======== ======== ======== ======== ========
FINANCIAL POSITION
Working capital........................ $ 27,550 $ 48,476 $ 55.200 $ 58,083 $ 60,781
Total assets........................... 47,722 75,103 93,583 100,607 113,047
Redeemable cumulative convertible
preferred stock issued by
subsidiary........................... 1,215 -- -- -- --
Common stockholders' equity............ 33,576 58,781 72,208 77,860 81,210
</TABLE>
- ---------------
(1) On February 1, 1995, Periphonics accelerated the vesting of all outstanding
stock options under its 1986 incentive stock option plan, and all such
options were fully vested at such date. Periphonics also relinquished its
right to repurchase shares obtained by employees under the 1986 incentive
stock option
8
<PAGE> 14
plan. As a result, Periphonics recorded a non-recurring, non-cash
compensation charge of approximately $1.25 million, or $0.13 per share.
(2) In the third quarter of fiscal 1998, Periphonics adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share." Under this
standard, basic income per share is determined using the weighted average
number of shares of common stock outstanding during each period, while
diluted income per share further assumes the issuance of common shares for
all dilutive securities including stock options.
RECENT DEVELOPMENTS
On September 23, 1999, Periphonics reported record results for its fiscal
year 2000 first quarter, which ended on August 31, 1999. Total revenues for the
quarter increased 41.9 percent to $43.1 million compared with $30.4 million in
the first quarter of fiscal 1999. Net income for the quarter increased 304.3
percent to $4.5 million, or $0.31 per diluted share (before expenses associated
with the merger), compared with $1.1 million, or $0.08 per diluted share, in the
prior year period. Net income for the quarter including expenses associated with
the merger was $3.9 million, or $0.28 per diluted share.
You can find further information regarding these results in Periphonics'
Current Report on Form 8-K dated October 4, 1999. To learn how to obtain this
report, see "Where You Can Find More Information" on page 70.
9
<PAGE> 15
COMPARATIVE HISTORICAL UNAUDITED PER SHARE DATA
The following table sets forth historical per share financial information
as at and for the six months ended June 30, 1999, and as at and for the year
ended December 31, 1998 relating to the outstanding Nortel Networks common
shares and outstanding shares of Periphonics common stock. You should read the
information presented in the table in conjunction with the financial statements
and the notes to the financial statements for Nortel Networks included in its
Annual Report on Form 10-K for the year ended December 31, 1998 and its
Quarterly Report on Form 10-Q for the period ended June 30, 1999, and the
financial statements and the notes to the financial statements for Periphonics
included in its Annual Report on Form 10-K for the year ended May 31, 1999. See
"Where You Can Find More Information" on page 70 to learn how to obtain these
reports. We have adjusted per share amounts to reflect Nortel Networks' two-for-
one stock split on January 7, 1998 and the stock dividend of one common share on
each issued and outstanding Nortel Networks common share as of August 17, 1999.
<TABLE>
<CAPTION>
AS AT AND FOR THE AS AT AND FOR THE
SIX MONTHS YEAR ENDED
ENDED JUNE 30, 1999 DECEMBER 31, 1998
------------------- -----------------
<S> <C> <C>
NORTEL NETWORKS COMMON SHARES
Net loss per common share:
Canadian GAAP, basic................................. $(0.46) $(0.50)
U.S. GAAP, basic..................................... (0.36) (1.12)
U.S. GAAP, diluted................................... (0.36) (1.12)
Cash dividends per common share:
Canadian and U.S. GAAP............................... 0.075 0.15
Book value per common share at period end:
Canadian GAAP........................................ 7.98 8.26
U.S. GAAP............................................ 9.04 9.18
PERIPHONICS COMMON STOCK (U.S. GAAP)
Net earnings per share, basic........................... 0.63 0.48
Net earnings, diluted................................... 0.62 0.47
Cash dividends per share................................ -- --
Book value per share at period end...................... 6.25 5.68
</TABLE>
10
<PAGE> 16
RISK FACTORS
You should consider the following matters in conjunction with the other
information included or incorporated by reference in this document in deciding
whether to vote in favor of the merger proposal.
BECAUSE THE MARKET VALUE OF NORTEL NETWORKS COMMON SHARES AT THE TIME OF
THE MERGER MAY BE EITHER HIGHER OR LOWER THAN THE AVERAGE TRADING PRICE USED TO
DETERMINE THE NUMBER OF NORTEL NETWORKS COMMON SHARES YOU WILL RECEIVE IN THE
MERGER, YOU CANNOT BE CERTAIN OF THE MARKET VALUE OF THE NORTEL NETWORKS COMMON
SHARES YOU WILL RECEIVE.
If the "average trading price" of Nortel Networks common shares is between
$38.46 and $47.15, for each share of your Periphonics common stock you will
receive a number of Nortel Networks common shares having a value of $29.23,
based on the average trading price. The "average trading price" is the average
of the last sales prices for a Nortel Networks common share on the New York
Stock Exchange Composite Tape for the ten consecutive trading days ending two
trading days before the merger. However, because the actual trading price of
Nortel Networks common shares at the time of the merger may be either lower or
higher than the average trading price, the market value of the Nortel Networks
common shares you receive in the merger may be either lower or higher than
$29.23 for each share of your Periphonics common stock.
If the average trading price of Nortel Networks common shares is below
$38.46, you will receive 0.76 Nortel Networks common shares for each share of
your Periphonics common stock. In this case the value of the Nortel Networks
common shares you receive in the merger will be less than $29.23 for each share
of your Periphonics common stock, based on the average trading price. If the
average trading price of Nortel Networks common shares is above $47.15, you will
receive 0.62 Nortel Networks common shares for each share of your Periphonics
common stock. In this case the value of the Nortel Networks common shares you
receive in the merger will be more than $29.23 for each share of your
Periphonics common stock, based on the average trading price. Furthermore, in
either case, because the actual trading price of Nortel Networks common shares
at the time of the merger may be either lower or higher than the average trading
price, the market value of the Nortel Networks common shares you receive in the
merger may be either lower or higher than the value of those shares based on the
average trading price.
In addition, the exchange of certificates representing your shares of
Periphonics common stock for certificates representing Nortel Networks common
shares will not take place immediately upon completion of the merger. You will
thus be unable to sell or otherwise transfer these Nortel Networks common shares
for a period following completion of the merger. The market value of the Nortel
Networks common shares you receive in the merger may be either lower or higher
at the time you receive your certificates representing Nortel Networks common
shares, and so become able to sell those shares, than at the time of the merger.
DIRECTORS AND EXECUTIVE OFFICERS OF PERIPHONICS MAY HAVE CONFLICTS OF INTEREST
THAT INFLUENCE THEIR DECISION TO APPROVE THE MERGER.
You should be aware of potential conflicts of interest of, and the benefits
available to, directors and executive officers of Periphonics when considering
Periphonics' Board's recommendation of the merger. As discussed below under
"Interests of Certain Persons in the Merger" on page 25, the directors and
executive officers of Periphonics have interests in the merger that are in
addition to, or different from, their interests as Periphonics stockholders.
These interests include:
-- Options. Directors and executive officers of Periphonics hold a
significant number of options to purchase Periphonics common stock
that, under the terms of employment and change in control agreements
with Periphonics and as a result of the execution of the merger
agreement, became vested and immediately exercisable. To the extent
they are not exercised before the merger is completed, these options
will be converted into options to purchase Nortel Networks common
shares.
-- Current Employment and Change in Control Agreements. All of the
executive officers of Periphonics, four of whom also serve as
directors of Periphonics, have employment or change in control
agreements containing provisions that, as a result of the execution
of the merger agreement, will afford them significant cash payments
and other benefits if their employment is terminated by
11
<PAGE> 17
Periphonics without cause, or if they terminate their own employment for
good reason, within three years. Nortel Networks' and Periphonics have
entered into agreements with three of these executive officers, each of
whom is also a director, under which they will continue in their
employment with Periphonics for a period following the merger, and will
receive the payments and benefits referred to above.
-- New Employment Agreements. Periphonics has entered into new
employment agreements with all other executive officers who currently
have employment or change in control agreements with Periphonics,
including one who is a director. The new agreements will supersede the
current agreements upon the completion of the merger and will afford
these individuals significant benefits.
-- Agreement with Blum & Co., Inc. Mr. Blum is a non-executive director
of Periphonics who is also the President and Chief Executive Officer of
Blum & Co., Inc., a financial advisory firm which has received a fee for
advising and assisting Periphonics in negotiating the terms of the
merger.
-- Directors' and Officers' Insurance; Indemnification of Periphonics'
Directors and Officers. Under the merger agreement, present and former
directors and officers of Periphonics have significant rights to
directors' and officers' insurance coverage and to indemnification with
respect to acts and omissions in their capacities as directors and
officers of Periphonics.
THE TERMINATION FEE AND THE STOCK OPTION AGREEMENT MAY DISCOURAGE OTHER
COMPANIES FROM TRYING TO ACQUIRE PERIPHONICS.
In the merger agreement, Periphonics agreed to pay a termination fee to
Nortel Networks in specified circumstances, including where a third party
acquires or seeks to acquire Periphonics. In the stock option agreement,
Periphonics granted Nortel Networks an option to purchase a number of shares of
Periphonics common stock equal to 19.9% of the Periphonics common stock
outstanding at the time of exercise, exercisable under similar circumstances.
These agreements could discourage other companies from trying to acquire
Periphonics even though those other companies might be willing to offer greater
value to Periphonics stockholders than Nortel Networks has offered in the merger
agreement. In addition, payment of the termination fee could have an adverse
effect on Periphonics' financial condition.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.
This document and the documents that are incorporated by reference contain
forward-looking statements about Periphonics, Nortel Networks and the combined
company after the merger which Periphonics and Nortel Networks believe are
covered by the Private Securities Litigation Reform Act of 1995. Statements in
this document that are not historical facts are "forward-looking statements" for
the purpose of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended. Forward-looking statements include:
-- financial projections and estimates;
-- statements regarding plans, objectives and expectations of
Periphonics or its Board, with respect to future operations, products
and services;
-- statements regarding future economic performance;
-- statements relating to the assumptions underlying projections,
estimates, plans, objectives, expectations and performance; and
-- statements relating to the estimated size and growth of relevant
markets.
When used in this document, the words "anticipates," "believes," "expects,"
"intends," and similar expressions as they relate to Periphonics, Nortel
Networks or the combined company after the merger or the management of any of
these companies are intended to identify these forward-looking statements.
12
<PAGE> 18
In making any of these statements, the expectations are believed to be
based on reasonable assumptions. However, there are numerous risks,
uncertainties and important factors that could cause actual results to differ
materially from those in forward-looking statements. These include:
-- those discussed or identified from time to time in Periphonics' or
Nortel Networks' public filings with the Securities and Exchange
Commission, which is referred to throughout this document as the
"Commission";
-- specific risks or uncertainties associated with Periphonics' or
Nortel Networks' expectations with respect to:
-- timing, completion or tax status of the merger;
-- the value of the merger consideration;
-- growth prospects;
-- market positions;
-- distribution channels;
-- premiums;
-- earnings per share;
-- cost savings;
-- revenue enhancements; and
-- profitability resulting from the merger; and
-- general economic conditions such as:
-- changes in interest rates and the performance of the markets;
-- changes in domestic and foreign laws, regulations and taxes;
-- changes in competition and pricing environments;
-- regional or general changes in asset valuations;
-- the occurrence of significant natural disasters;
-- the development of major year 2000 liabilities;
-- general market conditions;
-- competition; and
-- pricing.
The actual results, performance or achievement by Periphonics or Nortel
Networks could differ materially from those expressed in, or implied by, these
forward-looking statements. Accordingly, we cannot assure you that any of the
events anticipated by the forward-looking statements will occur, or if they do,
what impact they will have on the results of operations and financial condition
of Periphonics or Nortel Networks.
13
<PAGE> 19
PERIPHONICS' ANNUAL MEETING
This document is being furnished to you in connection with the solicitation
of your proxy as a Periphonics stockholder by Periphonics' Board relating to the
following matters to be voted on at Periphonics' annual meeting and at any
adjournment or postponement of the annual meeting:
1. the merger proposal;
2. the election of directors;
3. the ratification of the selection of independent auditors; and
4. other matters that may come before the meeting.
This document is also a prospectus for the Nortel Networks common shares to be
issued in the merger. You should read this document carefully before voting your
shares.
WHERE AND WHEN PERIPHONICS' ANNUAL MEETING WILL BE HELD
Periphonics' annual meeting will be held at The Wyndham Wind Watch Hotel,
1717 Motor Parkway, Hauppauge, New York 11788, on November 10, 1999 at 10:00
a.m.
HOW TO PARTICIPATE IN PERIPHONICS' ANNUAL MEETING
If your stock is registered in your name and not in the name of a bank,
broker or other third party, you may attend the annual meeting. If your stock is
not registered in your name, you must tell the firm that is the holder of record
of your stock that you wish to attend the annual meeting. That firm must give
you documentation showing that you own shares of Periphonics common stock as of
October 1, 1999, which is the record date for the meeting. You must bring that
documentation to the meeting in order to attend.
Periphonics will establish reasonable rules and procedures for the conduct
of the annual meeting to ensure that there is sufficient time to address all of
the items on the agenda and to facilitate an orderly meeting. The agenda for the
annual meeting and limitations on the time allotted for questions or comments by
stockholders will be distributed at the meeting.
WHAT YOU WILL VOTE ON
At the annual meeting, you will be asked to consider and vote on the
following proposals:
1. a proposal to approve and adopt the Agreement and Plan of Merger by
and among Nortel Networks Corporation, North Subsidiary, Inc., a
wholly-owned subsidiary of Nortel Networks Corporation, and
Periphonics Corporation dated as of August 24, 1999, and to approve
the merger and the other transactions described in this document;
2. election of two Class II directors to hold office until the merger is
completed or, if the merger is not completed, until the 2002 annual
meeting of stockholders and until their respective successors have
been elected and qualified;
3. ratification of the selection of Deloitte & Touche LLP as
Periphonics' independent auditors until the merger is completed or,
if the merger is not completed, for the fiscal year ending May 31,
2000; and
4. any other matters that may properly come before the meeting.
ONLY PERIPHONICS STOCKHOLDERS OF RECORD AS OF OCTOBER 1, 1999 ARE ENTITLED TO
VOTE
Periphonics stockholders who hold their shares of record as of the close of
business on October 1, 1999, are entitled to receive notice of and vote at
Periphonics' annual meeting. On the record date, approximately 13,364,662 shares
of Periphonics common stock were outstanding and entitled to vote at the annual
meeting. Each share is entitled to one vote.
14
<PAGE> 20
MAJORITY OF OUTSTANDING SHARES MUST BE REPRESENTED FOR A VOTE TO BE TAKEN
In order to have a quorum, a majority of the shares of Periphonics common
stock that are outstanding and entitled to vote at the annual meeting must be
represented in person or by proxy. If a quorum is not present, a majority of
shares that are represented may adjourn or postpone the meeting.
VOTE REQUIRED
The merger proposal must be approved by the affirmative vote of a majority
of the shares of Periphonics common stock that are outstanding and entitled to
vote at the annual meeting. This means that if you do not vote your shares in
connection with the merger proposal, your failure to vote will have the same
effect as voting against the merger proposal.
A nominee for director must receive a plurality of the votes cast to be
elected. The proposal to ratify the appointment of auditors, and any stockholder
proposal presented at the meeting, must receive an affirmative vote of a
majority of votes cast. In each case, each share is entitled to one vote.
VOTING YOUR SHARES AND CHANGING YOUR VOTE
Periphonics' Board is soliciting your proxy. This will give you the
opportunity to vote at Periphonics' annual meeting if you do not attend in
person.
If you are a record holder of Periphonics common stock, you may vote your
shares by any of the following means:
-- in person by completing a ballot at the meeting; or
-- by proxy by completing, signing and dating the enclosed proxy and
returning it in the enclosed envelope.
If your broker holds your shares for you in street name, you should
instruct your broker to vote your shares, following the directions your broker
provides. Most brokers have procedures for telephone and Internet voting. Check
the material your broker sends you, or call your account representative for more
information.
When you deliver a valid proxy or instruct your broker to vote your shares,
your shares will be voted according to your instructions. If you do not vote in
one of these ways or attend the annual meeting and vote in person, your failure
to vote will have the same effect as voting against the merger.
If you are a record holder of Periphonics common stock, you may revoke your
proxy at any time before the vote at the meeting by:
-- filing a later proxy with, or delivering other communications to, the
Secretary of Periphonics; or
-- attending the annual meeting and voting in person.
If your broker holds your shares for you in street name, to change your
vote you will need to give appropriate instructions to your broker, following
the directions your broker provides.
HOW PROXIES ARE COUNTED
If you return a signed and dated proxy card but do not indicate how you
want your shares to be voted, those shares represented by your proxy will be
voted as recommended by Periphonics' Board. A valid proxy also gives the
individuals named as proxies authority to vote in their discretion when voting
the shares on any other matters that are properly presented for action at the
annual meeting, including any proposal to adjourn the meeting. However, if
Periphonics proposes to adjourn the meeting in order to have more time to
solicit proxies on the merger proposal, any shares represented by a proxy that
is voted against the merger proposal will be voted against the adjournment
proposal.
15
<PAGE> 21
Shares represented by a properly executed proxy card marked "abstain" will
not be voted, but may be counted to determine whether a quorum is present. As a
result, because the affirmative vote of a majority of the shares outstanding and
entitled to vote at Periphonics' annual meeting is required to approve the
merger proposal, a proxy marked "abstain" on the merger proposal will have the
same effect as voting against the merger proposal. Abstentions are not counted
in determining the number of shares voted for or against any nominee for
director, the ratification of auditors or any stockholder proposal presented at
the meeting.
CONFIDENTIAL VOTING
It is Periphonics' policy that all proxies, ballots and tabulations that
identify the vote of individual stockholders are kept confidential. These items
are not seen by nor reported to Periphonics, except as necessary to meet legal
requirements, in a contested proxy solicitation or where stockholders submit
comments with their proxy.
COST OF SOLICITATION
Nortel Networks and Periphonics will share equally the cost of printing and
mailing this proxy statement/prospectus. The remaining cost of soliciting
proxies will be borne by Periphonics. Periphonics believes that the cost of
solicitation represents an amount normally expended for a solicitation relating
to an uncontested election of directors. The cost of solicitation will include
the cost of supplying necessary additional copies of the solicitation materials
and Periphonics' 1999 Annual Report to Stockholders to beneficial owners of
shares held of record by brokers, dealers, banks, trustees and their nominees,
including the reasonable expenses of these recordholders for mailing the
solicitation materials and annual report to the beneficial owners.
16
<PAGE> 22
1. THE MERGER PROPOSAL
At the meeting, you will be asked to vote to adopt the merger agreement and
approve the merger and other transactions contemplated in the merger agreement
as described in this document. The merger agreement provides for the merger of
the merger subsidiary with and into Periphonics or, if Nortel Networks so
elects, the merger of Periphonics with and into the merger subsidiary. In either
case, the surviving corporation will exist as a wholly-owned subsidiary of
Nortel Networks. In the merger, you will receive Nortel Networks common shares.
See "The Merger Agreement" beginning on page 35 for a description of the terms
of the merger. PERIPHONICS' BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE MERGER PROPOSAL.
THE MERGER
BACKGROUND OF THE MERGER
Periphonics is a leading supplier of mid-to-large scale call processing
systems. Periphonics' products constitute a specialized segment of the call
center and telecommunications call and transaction processing market.
Periphonics' management believes that several factors have contributed to the
increased use of these call processing systems, including:
-- industry-wide improvements in product features;
-- public acceptance of automated systems to obtain information or
execute transactions; and
-- competitive pressures on organizations to offer improved customer
service at lower cost.
Following the announcement on April 1, 1998 that Voicetek, a competitor of
Periphonics and supplier of interactive voice response systems to Nortel
Networks, had been acquired by Aspect Telecommunications, senior executives of
Periphonics decided to contact Nortel Networks to discuss replacing Voicetek's
systems with Periphonics' systems. In July 1998, a sales manager of Periphonics,
in a telephone conversation with a Nortel Networks representative, suggested
that the companies explore an arrangement in which Periphonics would replace
Voicetek as a supplier to Nortel Networks. As a result of this conversation and
subsequent calls, representatives of the two companies met on July 28, 1998 and
October 8, 1998 at Periphonics' headquarters in Bohemia, New York. At these
meetings, Periphonics executives provided Nortel Networks representatives with a
comprehensive technical presentation detailing the broad scale capability of
Periphonics' systems and the potential benefits to Nortel Networks of
incorporating Periphonics' systems in Nortel Networks' systems.
On October 27, 1998, at Nortel Networks' request, Mr. Peter Cohen, Chairman
of the Board, President and Chief Executive Officer of Periphonics, and other
Periphonics executives met with Nortel Networks executives, including Mr. James
Long, President of Nortel Networks Enterprise Solutions, and Mr. Aziz Khadbai,
Vice President of Strategy and Alliances of Nortel Networks Enterprise
Solutions, at Nortel Networks' facility in Dallas, Texas. To facilitate the
discussions, Nortel Networks and Periphonics executed a mutual confidentiality
agreement. At this meeting, Mr. Long suggested that Nortel Networks and
Periphonics enter into a strategic business alliance and asked if Periphonics'
was interested in discussing the possibility of being acquired by Nortel
Networks. Mr. Cohen responded that Periphonics would be willing to discuss that
possibility if it was in the best interests of Periphonics' stockholders,
customers and employees. Representatives of Periphonics and Nortel Networks
subsequently held confidential technical meetings on November 12 and 13, 1998 at
Periphonics' headquarters to discuss Periphonics' ongoing and future product
plans and to determine if the product lines of Nortel Networks and Periphonics
could be effectively integrated.
On January 29, 1999, Mr. Khadbai advised Mr. Cohen that Nortel Networks had
reorganized the Enterprise Solutions business. Mr. Khadbai also stated that, in
any case, Nortel Networks still needed to evaluate its overall strategy and
whether it would be interested in acquiring Periphonics, and that any possible
acquisition discussions with Periphonics would need to be deferred. On February
5, 1999, Mr. Cohen sent
17
<PAGE> 23
Mr. Khadbai a letter requesting that Nortel Networks return Periphonics'
confidential information, since further acquisition discussions were not being
scheduled.
On June 9, 1999, Mr. Cohen received a phone call from Mr. David Robertson,
Vice President, Technology Development of Nortel Networks Enterprise Solutions,
indicating that Nortel Networks was interested in resuming discussions and in
creating a closer relationship with Periphonics. After Mr. Cohen discussed this
call with other members of Periphonics' Board, he agreed to meet with Nortel
Networks representatives the following week.
Various executives of the two companies held a number of meetings from June
14 to June 16, 1999. These meetings involved a series of technical discussions
and demonstrations. In addition, Mr. Cohen and Mr. Wayne Fothergill, President
of Nortel Networks Enterprise Applications Solutions, discussed, among other
things, sales, marketing, customer service, Internet and interactive voice
response issues, and the possibility of an acquisition of Periphonics by Nortel
Networks. However, the possible financial terms of an acquisition transaction
were not discussed.
Following several telephone conversations, a meeting was held at Nortel
Networks' counsel's office in New York City on June 24, 1999. Among those
present for Periphonics were Mr. Cohen and other senior officers, Mr. Blum, a
non-executive director of Periphonics who is also President of Blum & Co., which
had been retained to act as a financial advisor to Periphonics, and
representatives of Ruskin, Moscou, Evans & Faltischek P.C. and of Fried, Frank,
Harris, Shriver & Jacobson, legal counsel to Periphonics. Among those present
for Nortel Networks were various representatives of its Enterprise Applications
Solutions business, its Mergers and Acquisitions group and its Law department,
and representatives of Credit Suisse First Boston, its financial advisor, and
Cleary, Gottlieb, Steen & Hamilton, its U.S. legal counsel. At the beginning of
that meeting, Periphonics requested, and Nortel Networks agreed, to amend the
confidentiality agreement to provide that Nortel Networks would not seek to
acquire Periphonics for two years, except at Periphonics' request. At this
meeting, Periphonics made a presentation and answered detailed questions
regarding its operations, financial condition and prospects. At the meeting's
conclusion, Nortel Networks representatives indicated that they had enough
information to submit a preliminary indication of interest.
On June 28, 1999, Periphonics engaged William Blair & Company, L.L.C., to
act as its financial advisor in connection with the possible acquisition of
Periphonics by Nortel Networks. Between June 29, 1999 and August 9, 1999, Nortel
Networks and Periphonics each performed further diligence and there were
intermittent discussions between the parties and their respective financial
advisors regarding the possible economic terms of a potential transaction. In
the course of those discussions, each party indicated price levels at which it
might be interested in proceeding with a transaction. At one point, when there
was a lack of progress in the discussions, a William Blair representative
indicated to a Credit Suisse First Boston representative that Periphonics might
be interested in purchasing certain businesses from Nortel Networks. The Credit
Suisse First Boston representative advised William Blair that Nortel Networks
was not interested in selling those businesses to Periphonics.
On August 10, 1999, Credit Suisse First Boston advised William Blair that
Nortel Networks had increased the price level at which it was prepared to
proceed. Credit Suisse First Boston informed William Blair that, subject to the
satisfactory completion of diligence and negotiation of mutually satisfactory
merger, option and stockholders agreements, Nortel Networks would be prepared to
acquire Periphonics in a stock-for-stock merger in which each outstanding share
of Periphonics common stock would be exchanged for 0.68 Nortel Networks common
shares, after giving effect to Nortel Networks' one-for-one stock dividend in
August 1999. Credit Suisse First Boston indicated that Nortel Networks would
require Periphonics to negotiate exclusively with it in connection with its
proposal. Based on Nortel Networks' common share trading price at that time,
that proposed exchange ratio represented a per share price of approximately $28.
On August 11, 1999, Periphonics' Board conducted a telephone meeting in which
William Blair and counsel participated. At the direction of Periphonics' Board,
William Blair informed Credit Suisse First Boston that Periphonics would be
interested in pursuing a possible transaction in which Periphonics' stockholders
would receive 0.76 common shares of Nortel Networks, after giving effect to
Nortel Networks' one-for-one stock dividend, for each share of Periphonics
common stock.
18
<PAGE> 24
On August 12, 1999, Credit Suisse First Boston advised William Blair that,
subject to satisfactory completion of diligence and negotiation of mutually
satisfactory merger, option and stockholder agreements, Nortel Networks would be
prepared to offer Periphonics' stockholders the exchange ratio subsequently set
forth in the merger agreement as described in this document. Under this exchange
ratio, each Periphonics share would be exchanged for a number of Nortel Networks
common shares with a trading value of $29.23, but not more than 0.76 or less
than 0.62 Nortel Networks common shares per Periphonics share. On August 13,
1999, Periphonics' Board, after consultation with William Blair and counsel,
authorized William Blair to inform Nortel Networks that Periphonics' Board,
subject to satisfactory completion of its diligence and negotiation of
satisfactory definitive documentation, would be prepared to endorse such a
proposal. William Blair also said that Periphonics would be prepared to enter
into exclusive negotiations with Nortel Networks until August 31, 1999, as
Nortel Networks had again requested. Periphonics and Nortel Networks
subsequently executed an exclusivity agreement dated August 18, 1999.
From August 16 to August 23, 1999, representatives of the two companies
completed their diligence and negotiated the terms of the merger agreement,
option agreement and related agreements. Simultaneously, Nortel Networks
representatives met with Periphonics senior executives and their representatives
to negotiate revised employment agreements to become effective when the merger
is completed.
Periphonics' Board met on August 23, 1999. Counsel to Periphonics advised
Periphonics' Board of its fiduciary duties with respect to Nortel Networks'
proposed acquisition of Periphonics. Periphonics' Board discussed and considered
Periphonics' strategies and goals and the risks and benefits of pursuing a
strategic combination with Nortel Networks. Periphonics' Board, together with
its financial advisors and legal counsel, reviewed the terms of the merger
agreement, the stock option agreement and related agreements. William Blair
discussed its financial and valuation analyses of the Nortel Networks proposal
with Periphonics' Board and delivered its oral opinion, later confirmed in
writing, that as of August 23, 1999 the exchange ratio was fair, from a
financial point of view, to Periphonics' stockholders.
After further discussion, Periphonics' Board unanimously approved the
merger agreement, the option agreement and the transactions contemplated by
these agreements, and authorized the execution and delivery of such agreements
on behalf of Periphonics.
Nortel Networks and Periphonics issued a joint press release on August 24,
1999, prior to the opening of financial markets in New York, Toronto and
Montreal.
RECOMMENDATION OF PERIPHONICS' BOARD; REASONS OF PERIPHONICS FOR THE MERGER
Periphonics' Board has determined that the terms of the merger agreement
are fair to and in the best interests of Periphonics and its stockholders.
Periphonics' Board unanimously approved the merger agreement and directed that
the merger agreement be submitted to Periphonics' stockholders for adoption.
PERIPHONICS' BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE MERGER
PROPOSAL.
In reaching its determination to approve the transaction, and to recommend
that Periphonics' stockholders vote to adopt the merger proposal, Periphonics'
Board considered a number of factors, including:
-- The exchange ratio negotiated with Nortel Networks and the implied
premium over recent and historical market prices of Periphonics
common stock, as well as how this premium compared to price premiums
in several recent transactions involving telecommunications
companies.
-- The opinion of William Blair that, based on and subject to matters
stated in the opinion, as of August 23, 1999, the exchange ratio was
fair, from a financial point of view, to Periphonics' stockholders. A
copy of William Blair's written opinion is attached as Annex D.
-- The merger will generally be tax-free to Periphonics' U.S.
stockholders, other than to the extent they receive cash for any
fractional shares.
-- Nortel Networks is more diversified, and has a much larger market
capitalization, than Periphonics. As a result, Periphonics'
stockholders who exchange their Periphonics common stock for Nortel
19
<PAGE> 25
Networks common shares in the merger would be expected to obtain a less
volatile, more liquid investment.
-- Information and presentations by management of Periphonics and
Periphonics' legal and financial advisors concerning the terms of the
merger agreement, the option agreement and the stockholders
agreement, and the business, technology, products, operations,
financial condition, organizational structure and industry position
of Periphonics and Nortel Networks, on both a historical and
prospective basis.
-- The potential benefits of the merger to customers, suppliers and
employees.
-- Periphonics' management's belief that:
-- Periphonics and Nortel Networks share similar visions of the
evolution of the call center business and the role of interactive
voice solutions in that business;
-- The products and technologies of Periphonics are highly
complementary to a number of Nortel Networks' products and
technologies. As part of Nortel Networks, Periphonics will be able
to provide complete solutions to businesses that want to use the
Internet as well as voice medium to deliver more sophisticated
customer service;
-- The integrated products and services portfolio of the combined
company will create and enhance cross-selling opportunities to the
existing customer bases of each of Periphonics and Nortel Networks,
resulting in new opportunities to generate revenue;
-- As part of Nortel Networks, Periphonics will benefit from greater
sales and marketing resources, additional research and development
capabilities and expanded patent and cross-licensing opportunities;
and
-- The market for Periphonics' products and professional services in
the United States and internationally is highly competitive. Some
of Periphonics' competitors have substantially greater financial,
technical, marketing and sales resources than Periphonics. As part
of Nortel Networks, Periphonics will be better able to compete in
this environment.
Periphonics' Board also considered opportunities that might exist to pursue
other potential business combinations, but did not solicit or receive any offers
other than from Nortel Networks.
Periphonics' Board did not quantify or otherwise assign relative weights to
the factors described above or determine that any factor was of particular
importance. Rather, Periphonics' Board made its determination based on the
totality of the information it considered. The members of the Board were aware
that, as described below under "-- Interests of Certain Persons in the Merger,"
directors and officers of Periphonics have interests in the merger in addition
to, or different from, their interests as stockholders in Periphonics, and the
Board considered this in determining to recommend the transaction.
Periphonics and Nortel Networks cannot assure you that any of the expected
results, efficiencies, opportunities or other benefits described in this section
will be achieved as a result of the merger.
OPINION OF FINANCIAL ADVISOR TO PERIPHONICS
Periphonics retained William Blair & Company, L.L.C., to act as its
financial advisor in connection with a possible business combination with Nortel
Networks. Periphonics asked William Blair to render an opinion as to whether the
exchange ratio set forth in the merger agreement is fair to Periphonics
stockholders, from a financial point of view. On August 23, 1999, William Blair
delivered an oral opinion, later confirmed in writing as of that date, to
Periphonics' Board that, as of that date and based upon and subject to the
assumptions and qualifications stated in its opinion, the exchange ratio was
fair to Periphonics stockholders from a financial point of view.
THE FULL TEXT OF WILLIAM BLAIR'S WRITTEN OPINION, DATED AUGUST 23, 1999, IS
ATTACHED AS ANNEX D. YOU SHOULD READ THE ENTIRE OPINION CAREFULLY TO LEARN ABOUT
THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED,
20
<PAGE> 26
MATTERS CONSIDERED AND LIMITS OF THE SCOPE OF WILLIAM BLAIR'S REVIEW IN
RENDERING ITS OPINION. THE FOLLOWING SUMMARY OF WILLIAM BLAIR'S OPINION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. WILLIAM
BLAIR'S OPINION WAS ADDRESSED TO PERIPHONICS' BOARD FOR THE PURPOSE OF ITS
EVALUATION OF THE MERGER AND IS NOT A RECOMMENDATION TO ANY PERIPHONICS
STOCKHOLDER AS TO HOW TO VOTE ON THE MERGER PROPOSAL.
In connection with its opinion, William Blair reviewed, among other things:
-- a draft of the merger agreement dated August 23, 1999;
-- publicly available financial, operating and business information
about Periphonics and Nortel Networks;
-- research analyst reports about Periphonics and Nortel Networks;
-- financial and other information about Periphonics' prospects prepared
by Periphonics' senior management;
-- current and historical market prices and trading volumes of
Periphonics common stock and Nortel Networks common shares;
-- historical revenues, operating earnings, operating cash flows, net
income and capitalization of Periphonics, Nortel Networks and
publicly held companies in businesses William Blair believed were
comparable to Periphonics and Nortel Networks, respectively;
-- information regarding publicly available financial terms of selected
actual business combinations which William Blair believed were
relevant;
-- the pro forma impact of the merger on the earnings per share of
Nortel Networks based on pro forma financial information prepared by
Periphonics' senior management and securities analysts' reports
regarding Nortel Networks; and
-- other publicly available information about Periphonics and Nortel
Networks.
William Blair also discussed the matters listed above with members of the
senior management of Periphonics and Nortel Networks, considered other matters
which it deemed relevant to its inquiry and took into account the accepted
financial and investment procedures and considerations it deemed relevant.
In rendering its opinion, William Blair assumed and relied upon the
accuracy and completeness of all the information it examined or otherwise
reviewed or discussed for purposes of its opinion. William Blair did not attempt
to verify independently any of this information, nor did it make or obtain an
independent valuation or appraisal of the assets, liabilities or solvency of
Periphonics or Nortel Networks. Periphonics' management advised William Blair
that the forecasts concerning Periphonics' prospects that William Blair examined
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of Periphonics' management. William Blair expressed no
opinion with respect to these forecasts or the estimates and judgments on which
they were based.
William Blair based its opinion on economic, market, financial and other
conditions existing on August 23, 1999 and other information disclosed to
William Blair as of that date. Under its engagement with Periphonics, William
Blair does not have any obligation to update, revise or reaffirm its opinion. As
a result, circumstances may develop before the merger occurs that, if known at
the time William Blair rendered its opinion, would have altered William Blair's
opinion. William Blair assumed that the merger would be accounted for as a
purchase under generally accepted accounting principles ("GAAP"), would be
treated as a tax-free reorganization under the Internal Revenue Code and that
the shares received by Periphonics stockholders would be freely tradable.
William Blair relied on the advice of counsel to Periphonics regarding legal
matters and assumed that the merger would be completed on the terms described in
the merger agreement, without any waiver of any material terms or conditions by
Periphonics.
The following discussion summarizes the material financial analyses William
Blair performed in arriving at its opinion. William Blair discussed these
analyses with Periphonics' Board on August 23, 1999.
21
<PAGE> 27
Stock Price Analysis. William Blair examined the history of the trading
prices and volume for Periphonics common stock and Nortel Networks common shares
and the relationships between movements of these common stocks and movements in
common stocks of publicly held companies in businesses William Blair believed
were comparable to Periphonics and Nortel Networks.
Analysis of Certain Publicly Traded Companies for Periphonics. William
Blair reviewed and compared Periphonics' financial information to corresponding
financial information, ratios and public market multiples for publicly traded
companies in the voice processing industry. These publicly traded companies
included Cognitronics, Edify, Intervoice, Syntellect, Talx, Active Voice, Aspect
Telecommunications, Applied Voice Technology, Brooktrout Technology, Davox,
Genesys, Centigram Communications, and Natural Microsystems. William Blair
selected these companies because William Blair believed they are the publicly
traded companies whose operations and financial condition are most comparable to
Periphonics. Although William Blair compared the trading multiples of these
companies at the date of William Blair's opinion to the implied purchase
multiples of Periphonics, none of the selected companies is identical to
Periphonics.
Among the information William Blair considered were revenue; operating
income, commonly known as EBIT; earnings before interest, taxes, depreciation
and amortization, commonly known as EBITDA; net income; earnings per share;
gross profit margins, EBIT margins and net income margins; growth in revenues
and net income;, return on assets; and equity and capital structure. The
multiples and ratios for Periphonics and the comparable companies were based on
the most recent publicly available financial information, earnings per share
estimates for 1999 and 2000 from First Call Corporation and these companies'
closing share prices on August 18, 1999.
William Blair observed that the multiples of price to earnings per share,
as well as multiples of enterprise value, which is market equity value plus book
value of total debt less cash and equivalents, to revenues, EBIT and EBITDA
implied by the terms of the merger compared favorably, from Periphonics'
perspective, to the median of the corresponding multiples of the comparable
companies.
Information regarding the multiples implied by the terms of the merger
compared to the multiples from William Blair's analysis of selected voice
processing companies is set forth in the following table. LTM refers to the
latest twelve months.
<TABLE>
<CAPTION>
SELECTED VOICE
THE PROPOSED PROCESSING COMPANIES
PERIPHONICS -----------------------
MULTIPLE MERGER RANGE MEDIAN
- -------- ------------ -------------- ------
<S> <C> <C> <C>
Enterprise Value to LTM Revenues........................ 2.8x 0.1x to 5.1x 1.4x
Enterprise Value to LTM EBIT............................ 31.6x 10.9x to 26.4x 18.9x
Enterprise Value to LTM EBITDA.......................... 21.4x 6.5x to 18.3x 11.2x
Price to LTM Earnings Per Share......................... 47.3x 13.7x to 41.8x 29.7x
Price to estimated 1999 Earnings Per Share.............. 29.3x 11.3x to 33.5x 23.5x
Price to estimated 2000 Earnings Per Share.............. 22.3x 9.7x to 28.8x 15.9x
</TABLE>
Comparable Acquisitions Analysis. William Blair analyzed recent merger or
acquisition transactions in the voice processing industry that William Blair
believed were generally comparable, in whole or in part, to the proposed
transaction. William Blair examined eleven transactions announced between
October 23, 1995 and June 15, 1999. The selected transactions were not intended
to be representative of the entire range of possible transactions in the voice
processing industry. Although William Blair compared the transaction multiples
of these companies to the implied purchase multiples of Periphonics, none of the
selected companies is identical to Periphonics.
William Blair reviewed the consideration paid in these transactions in
terms of the enterprise value of these transactions as a multiple of revenues,
EBIT and EBITDA for the latest twelve months prior to the announcement of these
transactions. William Blair also reviewed the consideration paid in these
transactions in terms of the price paid for the common stock, also referred to
as the equity purchase price, as a multiple of net income for the twelve months
prior to the announcement of the transactions.
22
<PAGE> 28
Information regarding the multiples implied by the terms of the merger
compared to the acquisition multiples from William Blair's analysis of selected
voice processing companies is set forth in the following table.
<TABLE>
<CAPTION>
ELEVEN TRANSACTIONS IN THE
THE PROPOSED VOICE PROCESSING INDUSTRY
PERIPHONICS ---------------------------
MULTIPLE MERGER RANGE MEDIAN
- -------- ------------ ---------------- --------
<S> <C> <C> <C>
Enterprise Value to LTM Revenues........................ 2.8x 0.9x to 12.2x 2.4x
Enterprise Value to LTM EBIT............................ 31.6x 18.8x to 40.4x 28.2x
Enterprise Value to LTM EBITDA.......................... 21.4x 11.3x to 18.8x 14.6x
Equity Purchase Price to LTM Net Income................. 47.3x 33.0x to 57.4x 36.5x
</TABLE>
Premium Analysis. In addition to evaluating multiples paid in transactions
in the voice processing industry, William Blair analyzed the premiums paid over
a company's stock price prior to the announcement of a transaction in thirty
transactions in industries similar to that of Periphonics, which were announced
between October 10, 1994 and June 15, 1999. In these transactions, the
companies' enterprise values ranged from $14 million to $1.7 billion. The
premium analysis for Periphonics was based on an assumed August 19, 1999
announcement date. The premium analysis conducted by William Blair indicated the
following:
<TABLE>
<CAPTION>
THIRTY TRANSACTIONS IN
THE PROPOSED RELATED INDUSTRIES
PERIPHONICS ------------------------
PREMIUM MERGER RANGE MEDIAN
- ------- ------------ --------------- ------
<S> <C> <C> <C>
One day before announcement........................... 36.7% -14.3% to 87.5% 21.4%
One week before announcement.......................... 39.2% 3.0% to 92.0% 33.7%
Four weeks before announcement........................ 34.4% -6.8% to 118.0% 43.4%
</TABLE>
Discounted Cash Flow Analysis. Using a discounted cash flow analysis,
William Blair estimated the net present value of the free cash flows that
Periphonics could produce on a stand-alone basis over a five year period from
2000 to 2004. Free cash flows means EBIT after taxes plus depreciation and
amortization less capital expenditures and working capital. In estimating these
cash flows, William Blair used the forecasts provided by Periphonics management
for the years 2000 through 2002 and projected results for 2003 and 2004 using
similar growth rates and margins. William Blair also calculated an enterprise
value for Periphonics at the conclusion of the five-year period ending in 2004,
commonly referred to as the terminal value. In calculating the terminal value,
William Blair assumed multiples of enterprise value to EBITDA ranging from 12.0x
to 14.0x, which William Blair believed to be appropriate for this analysis. The
annual and terminal free cash flows were discounted at rates between 19% and 21%
to determine a net present value of the enterprise value of Periphonics. The
discounted cash flow analysis conducted by William Blair indicated the
following:
<TABLE>
<S> <C>
Valuation of the Equity of Periphonics.................. $398 million to $490 million
Per Share Price Range................................... $27.63 to $34.02
</TABLE>
Analysis of Certain Publicly Traded Companies for Nortel Networks. William
Blair reviewed and compared Nortel Networks financial information to
corresponding financial information, ratios and public market multiples for
publicly traded companies in the networking equipment industries. These publicly
traded companies included ADC Telecommunications, 3Com, Cabletron Systems,
Ciena, Cisco Systems, Lucent Technologies, Motorola, Newbridge Networks and
Tellabs. William Blair selected these companies because William Blair believed
they are the publicly traded companies whose operations and financial condition
are most comparable to Nortel Networks'. Although William Blair compared the
trading multiples of the selected companies at the date of William Blair's
opinion to the trading multiples of Nortel Networks, none of the selected
companies is identical to Nortel Networks.
The information William Blair considered included revenue, EBIT, EBITDA,
net income, earnings per share, gross profit margins, EBIT margins and net
income margins, growth in revenues and net income, return on assets and equity
and capital structure. The multiples and ratios for Nortel Networks and the
comparable
23
<PAGE> 29
companies were based on the most recent publicly available financial
information, earnings per share estimates for 1999 and 2000 from First Call
Corporation and these companies' closing share prices on August 18, 1999.
William Blair observed that the multiples of price to earnings per share,
as well as multiples of enterprise value to revenues, EBIT and EBITDA implied by
the current value of Nortel Networks common shares compared favorably, from
Periphonics' perspective, to the median of the corresponding multiples of the
comparable companies.
Information about the multiples implied by Nortel Networks' price per
common share compared to the multiples from William Blair's analysis of selected
networking equipment companies is set forth in the following table.
<TABLE>
<CAPTION>
SELECTED NETWORKING
EQUIPMENT COMPANIES
NORTEL ------------------------
MULTIPLE NETWORKS RANGE MEDIAN
- -------- -------- -------------- ------
<S> <C> <C> <C>
Enterprise Value to LTM Revenues........................ 3.0x 1.2x to 18.5x 3.8x
Enterprise Value to LTM EBIT............................ 33.4x 13.2x to 62.9x 33.1x
Enterprise Value to LTM EBITDA.......................... 20.2x 8.6x to 55.5x 21.7x
Price to LTM Earnings Per Share......................... 47.0x 22.4x to 98.9x 51.1x
Price to estimated 1999 Earnings Per Share.............. 37.9x 22.1x to 74.9x 46.2x
Price to estimated 2000 Earnings Per Share.............. 32.0x 17.8x to 59.7x 29.2x
</TABLE>
Discounted Cash Flow Analysis for Nortel Networks. Using a discounted cash
flow analysis, William Blair estimated the net present value of the free cash
flows that Nortel Networks could produce on a stand-alone basis over a five year
period from 1999 to 2003. In estimating these cash flows William Blair used
research analyst estimates for the years 1999 and 2000 and projected results for
2001 through 2003 using similar growth rates and margins. In calculating the
terminal value, William Blair assumed multiples of enterprise value to EBITDA
ranging from 22.0x to 24.0x, which William Blair believed to be appropriate for
this analysis. The annual and terminal free cash flows were discounted at rates
between 15.5% and 16.5% to determine a net present value of the enterprise value
of Nortel Networks. The discounted cash flow analysis conducted by William Blair
indicated the following:
<TABLE>
<S> <C>
Valuation of the Equity of Nortel Networks................ $68.0 billion to $76.4 billion
Per Share Price Range..................................... $47.80 to $53.72
</TABLE>
Pro Forma Merger Analysis. William Blair also performed pro forma analyses
of the financial impact of the merger. Using the earnings forecast for
Periphonics provided by management and analyst estimates of Nortel Networks'
earnings, William Blair compared the earnings per share of the Nortel Networks
common shares on a stand-alone basis to the earnings per share of the common
stock of the surviving corporation on a pro forma basis before taking into
account any potential cost savings or operating synergies. William Blair assumed
the merger would be accounted for using purchase accounting. Based on an
analysis of the merger using the consensus estimates, and excluding nonrecurring
charges and goodwill amortization attributable to the merger, the proposed
transaction would result in accretion of approximately 0.2% per share for fiscal
1999 earnings and accretion of approximately 0.3% per share for fiscal 2000
earnings. If the goodwill recognized by Nortel Networks as a result of the
merger is included in this pro forma analysis, the proposed transaction would
result in dilution of approximately 4.1% per share for fiscal 1999 earnings and
dilution of approximately 3.3% per share for fiscal 2000 earnings.
General. This summary is not a complete description of the analysis
performed by William Blair. The preparation of a fairness opinion involves
determinations about the most appropriate and relevant methods of financial
analysis and the application of these methods in particular circumstances. As a
result, a fairness opinion is not easily summarized. The preparation of a
fairness opinion does not involve a mathematical
24
<PAGE> 30
evaluation or weighing of the results of the individual analyses performed, but
requires William Blair to exercise its professional judgment, based on its
experience and expertise, in considering a wide variety of analyses taken as a
whole. Each of the analyses conducted by William Blair was carried out in order
to provide a different perspective on the merger and add to the total mix of
information available. William Blair did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion about the fairness of the exchange ratio. Rather, in reaching its
conclusion, William Blair considered the results of the analyses in light of
each other and ultimately reached its opinion based on the results of all
analyses taken as a whole. William Blair did not place particular reliance or
weight on any particular analysis, but instead concluded that its analyses,
taken as a whole, supported its determination. William Blair believes that its
analyses must be considered as a whole. Selecting portions of William Blair's
analyses and the factors considered by it, without considering all analyses and
factors, may create an incomplete view of the evaluation process underlying its
opinion. No company or transaction used in the above analyses as a comparison is
directly comparable to Nortel Networks or Periphonics or the merger. In
performing its analyses, William Blair made numerous assumptions with respect to
industry performance, business and economic conditions and other matters. The
analyses performed by William Blair are not necessarily indicative of future
actual values and future results, which may be significantly more or less
favorable than suggested by these analyses.
William Blair is a nationally recognized firm. As part of its investment
banking activities, William Blair regularly engages in the valuation of
businesses and their securities in connection with merger transactions and other
types of strategic combinations and acquisitions. William Blair acted as the
lead manager for Periphonics' public offerings and received underwriting fees
for those services. In the ordinary course of its business, William Blair and
its affiliates actively trade shares of Periphonics common stock and Nortel
Networks common shares for their own accounts and for the accounts of their
customers and may hold a long or short position in these securities.
Periphonics agreed to pay William Blair a fee for its services equal to
seven-tenths of one percent of the total consideration received by Periphonics
and its stockholders. This fee is contingent upon the completion of the merger.
Periphonics will also reimburse William Blair for all out-of-pocket expenses,
including fees and expenses of its counsel and any other independent experts
retained by William Blair, reasonably incurred by it in connection with its
engagement. In addition, Periphonics has agreed to indemnify William Blair and
its affiliates against specified liabilities, including liabilities arising
under applicable securities laws.
Periphonics did not retain William Blair as an advisor or agent to
Periphonics' stockholders or any other person. Periphonics retained William
Blair solely as an advisor to Periphonics' Board. William Blair's opinion is not
an opinion about the price at which Nortel Networks common shares would trade at
any time. Periphonics and Nortel Networks determined the exchange ratio in
arms-length negotiations in which William Blair advised Periphonics' Board.
Periphonics did not impose any restrictions or limitations on William Blair with
respect to the investigations made or the procedures that William Blair followed
in rendering its opinion.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Some directors and officers of Periphonics have interests in the merger
that are in addition to, or different from, their interests as stockholders in
Periphonics. The members of the Board knew about these interests, and considered
them, when they approved the merger agreement and the merger. These interests
are summarized below.
Options. Under the terms of applicable employment and change in control
agreements, as a result of the execution of the merger agreement a total of
391,500 outstanding non-vested options to purchase Periphonics common stock held
by Periphonics directors and executive officers vested and became immediately
exercisable. Nortel Networks will assume all of these stock options to the
extent they are not exercised before the merger and will treat them as options
to purchase Nortel Networks common shares, as described under "The Merger
Agreement -- Treatment of Periphonics Stock Options."
25
<PAGE> 31
Current Employment Agreements. Periphonics has employment agreements with
Peter Cohen, Richard Daniels and Kevin O'Brien, each of whom is an executive
officer and a director of Periphonics. Under these agreements, as amended on
April 15, 1999, if a potential change in control occurs, Messrs. Cohen, Daniels
and O'Brien will receive cash payments equal to $67,373, $52,384 and $38,743,
respectively, to cover legal and other expenses of implementing and enforcing
their employment agreements. The execution of the merger agreement was a
potential change in control for purposes of these agreements, and the executives
have received these amounts.
In addition, under these employment agreements, if the executive's
employment with Periphonics is terminated by the executive for good reason, as
defined in the agreements, or by Periphonics without cause, as defined in the
agreements, within three years after a change in control, such as the merger, or
a potential change in control, such as the execution of the merger agreement,
the executive is entitled to receive severance compensation and benefits
consisting, generally, of:
-- a lump sum payment equal to three years' salary and bonus;
-- a prorated bonus for the year of termination;
-- continued health insurance and other welfare benefit coverage for
three years or, in the case of Mr. Cohen, for life;
-- reimbursement for outplacement services, or a cash payment equal to
20% of the executive's base salary in lieu of reimbursement; and
-- full vesting of all employee benefits.
In addition, if any amount payable to any of these executives is an "excess
parachute payment" within the meaning of the Internal Revenue Code and is
subject to the excise tax imposed upon excess parachute payments, Periphonics
will make an additional payment to the executive. This additional payment will
be equal to the amount of the excise tax payable by the executive plus any
income and excise taxes payable by the executive with respect to this additional
payment.
Nortel Networks and Periphonics have entered into agreements with each of
Messrs. Cohen, Daniels and O'Brien under which they will continue in their
employment with Periphonics for a period following the merger. Under these
agreements, each executive will continue to receive his regular compensation and
benefits while employed by Periphonics after the merger in accordance with his
current employment agreement. Each executive will also be entitled to receive
the compensation and benefits provided under his current employment agreement,
including lump sum cash payments of $2,380,509, $1,777,560 and $1,124,851
payable to Messrs. Cohen, Daniels and O'Brien, respectively, as if there had
been a severance.
New Employment Agreements. At Nortel Networks' request, Periphonics
entered into new employment agreements as of August 24, 1999 with Martin
Bartholomew, Lewis Chipp, George Cole, Gary Conlin, Louis Marianacci, Jayandra
Patel and Gary Strzinek, all of whom are currently executives of Periphonics.
Mr. Patel is also a director of Periphonics. The new employment agreements will
supersede the current employment and change in control agreements of these
executives with Periphonics upon completion of the merger. The new agreements
terminate on the later of December 31, 2001 or twenty-five months after the
completion of the merger, or when the executive's employment terminates, if
sooner.
The new employment agreements specify each executive's annual base salary
and provide that each executive will be entitled to a minimum annual bonus. The
agreements further provide that each executive will be eligible to receive an
additional target annual bonus based on the executive's base salary if
Periphonics and the executive meet specified performance objectives. Under some
of the agreements the executives will receive bonuses related to Periphonics'
revenues. In addition, the agreements provide that each executive will receive a
commencement incentive bonus on the completion of the merger, with Mr. Patel to
receive $744,000. The new employment agreements also provide that each executive
will be reimbursed for reasonable legal and financial advisory expenses incurred
in connection with entering into the new employment agreements up to a specified
maximum amount.
26
<PAGE> 32
The new employment agreements provide that each officer will receive a
grant of options to purchase a specified number of Nortel Networks common
shares, including options to purchase 36,000 Nortel Networks common shares for
Mr. Patel, as soon as practicable after the merger is completed. The exercise
price per share of these option grants will be equal to the fair market value of
Nortel Networks common shares on the date of grant, determined in accordance
with the Nortel Networks Corporation 1986 Stock Option Plan as Amended and
Restated. These options will vest in full over the two or three year period
following the date they are granted.
The agreements further provide that if an executive's employment is
terminated by Periphonics without cause, as defined in the agreements, or the
executive terminates his employment for good reason, as defined in the
agreements, the executive will be entitled to receive;
-- a lump sum payment equal to his annual base salary and minimum bonus
through the later of December 31, 2001 and twenty-five months after
the completion of the merger;
-- continued coverage under the employer's benefit plans for this
period; and
-- reimbursement for the cost of any outplacement counseling obtained by
the executive, up to a maximum amount equal to 20% of the executive's
base salary.
In addition, if Periphonics achieves at least the minimum performance
objectives for the year, the executive will be entitled to receive a pro-rata
portion of the executive's target bonus for the year in which the executive's
employment terminates. The agreements also contain customary non-compete,
non-solicitation and confidentiality provisions.
Agreement with Blum & Co., Inc. Mr. Blum is a non-executive director of
Periphonics and is also the President and Chief Executive Officer of Blum & Co.,
Inc., a financial advisory firm, which has received a fee of $150,000 plus
reimbursement for all of its reasonable expenses for advising and assisting
Periphonics in negotiating the terms of the merger.
Directors' and Officers' Insurance; Indemnification of Periphonics
Directors and Officers. The merger agreement provides that, for six years after
the merger, Nortel Networks will maintain directors' and officers' liability
insurance to cover the present and former directors and officers of Periphonics
and its subsidiaries with respect to claims against these directors and officers
arising from facts or events which occurred at or before the merger. Subject to
specified limitations, this insurance will have at least the same maximum
coverage and amounts as, and terms and conditions no less advantageous than, the
coverage currently provided by Periphonics.
The merger agreement requires the surviving corporation in the merger to
indemnify each present and former director and officer of Periphonics and its
subsidiaries following the merger and until the expiration of any applicable
statutory limitations period against all expenses or liabilities incurred in
connection with any claim or investigation arising out of actions or omissions
occurring at or before the merger to the fullest extent permitted under the laws
of the State of Delaware and Periphonics' certificate and by-laws. In addition,
the surviving corporation in the merger will assume the existing indemnity
agreements between Periphonics and each of its directors and executive officers,
which provide for similar indemnification.
ACCOUNTING TREATMENT
Nortel Networks' financial statements are currently prepared in accordance
with Canadian GAAP and then reconciled to U.S. GAAP. Nortel Networks has
announced, however, that for periods beginning after January 1, 2000, it will
provide financial reporting in accordance with U.S. GAAP as well as in
accordance with Canadian GAAP.
Under both Canadian GAAP and U.S. GAAP, the merger will be accounted for
under the purchase method of accounting. The consideration to be paid in the
merger will be allocated based on the estimated fair values of the assets
acquired and the liabilities assumed, determined as of the date of the
completion of the merger under Canadian GAAP and as of the date of the
announcement of the merger under U.S. GAAP.
27
<PAGE> 33
REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals required to
complete the merger. While Nortel Networks and Periphonics believe that they
will receive the requisite regulatory approvals for the merger which they have
not already obtained, Nortel Networks and Periphonics cannot assure you that
they will obtain these approvals on satisfactory terms or otherwise.
United States. The merger is subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations under the act, which provide that particular transactions may
not be completed until required information and materials are furnished to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and the requisite waiting period has expired or is terminated. Nortel Networks
and Periphonics filed the required information and materials with the Antitrust
Division and the FTC on September 14, 1999 and received early termination of the
waiting period on October 4, 1999.
Germany. The merger is subject to the German Act against Restraints on
Competition (Gesetz gegen Wettbewerbsbeschrankungen). This act requires the
filing of a notification with, and the submission of specified information to,
the German Federal Cartel Office (Bundeskartellamt) and provides that the merger
may not be completed prior to clearance by the Federal Cartel Office or the
expiration of the requisite review period. The initial review period is one
month, subject to extension for up to an additional three months if the Federal
Cartel Office requests additional information or determines that the merger may
be anticompetitive. The required notification and information are expected to be
filed with the Federal Cartel Office on or about October 8, 1999.
Canadian Securities Laws. The distribution by Nortel Networks of its
common shares in the merger, the assumption by Nortel Networks of the
Periphonics stock options outstanding at the time of the merger and the issuance
of Nortel Networks common shares upon exercise of those options will be carried
out in reliance upon available statutory or discretionary exemptions from the
registration and prospectus requirements of applicable Canadian provincial
securities laws. A prospectus in respect of this distribution, assumption and
issuance has not been filed with any securities commission or similar regulatory
authority in any province or territory of Canada.
General. Periphonics and Nortel Networks are not aware of any governmental
approvals or actions that may be required for completion of the merger other
than as described above. Should any other approval or action be required,
Periphonics and Nortel Networks currently contemplate that the approval would be
sought or action taken.
The merger agreement provides that each of Nortel Networks and Periphonics
is obligated to complete the merger only if:
-- all requisite regulatory approvals are received;
-- all statutory or regulatory waiting periods have terminated or
expired; and
-- in the case of Nortel Networks' obligation to complete the merger, no
approvals are received that contain conditions or restrictions which
(1) would, after the merger, reasonably be expected to have a
material adverse effect, as defined in the merger agreement, on
Nortel Networks and its subsidiaries taken as a whole or on the
surviving corporation or (2) would require Nortel Networks or any of
its subsidiaries to sell or otherwise dispose of, or permit the sale
or other disposition of, any assets of Nortel Networks, Periphonics
or their respective subsidiaries.
RESALE OF NORTEL NETWORKS COMMON SHARES
United States. Nortel Networks common shares issuable to Periphonics
stockholders upon completion of the merger, and upon exercise of the Periphonics
stock options to be assumed by Nortel Networks by reason of the merger, have
been registered under the Securities Act. These securities may be traded freely
in the United States without restriction by those shareholders who are not
deemed to be "affiliates" of Nortel Networks or Periphonics as that term is
defined in rules promulgated under the Securities Act.
28
<PAGE> 34
If you are an affiliate of Periphonics or Nortel Networks as that term is
used in the Securities Act, you may not use this proxy statement/prospectus in
connection with any resale by you of Nortel Networks common shares that you
receive as a result of the merger or that you receive when you exercise a stock
option that is converted into an option to buy Nortel Networks common shares as
a result of the merger.
Periphonics has agreed in the merger agreement to use its reasonable best
efforts to cause each person who may be deemed to be an affiliate of Periphonics
to execute and deliver to Nortel Networks an agreement in which each person
agrees, among other things, not to offer to sell, transfer, or otherwise dispose
of any of the Nortel Networks common shares received in connection with the
merger, including upon exercise of the Periphonics stock options to be assumed
by Nortel Networks by reason of the merger, except:
-- in compliance with Rule 145 under the Securities Act;
-- in a transaction that, in the opinion of counsel reasonably
satisfactory to Nortel Networks, is otherwise exempt from the
registration requirements of the Securities Act; or
-- in an offering which is registered under the Securities Act.
However, subject to compliance with Rule 145, each affiliate of Periphonics
will be able to resell freely all of the Nortel Networks common shares received
in the merger at any time after the completion of the merger.
Canada. If you may wish to sell your Nortel Networks common shares in
Canada, you should consider the information below.
By virtue of available statutory prospectus exemptions under applicable
Canadian provincial securities laws or, where these prospectus exemptions are
not available, discretionary exemptions from the prospectus requirements of
these securities laws to be obtained by Nortel Networks, the Nortel Networks
common shares issuable to holders of Periphonics common stock upon completion of
the merger and upon the exercise of the Periphonics stock options assumed by
Nortel Networks by reason of the merger will be freely resalable in or into
Canada through an appropriately registered dealer only if a number of conditions
are met at the time of resale, including the following:
-- the selling shareholder does not hold, alone or in combination with
others, more than 20% of the outstanding voting securities of Nortel
Networks and does not otherwise hold a sufficient number of any
securities of Nortel Networks to affect materially the control of
Nortel Networks;
-- if the selling shareholder is in a "special relationship" with Nortel
Networks, the selling shareholder has reasonable grounds to believe
that Nortel Networks is not in default of any requirement under
applicable Canadian securities laws;
-- required disclosures, which Nortel Networks will either make promptly
following the completion of the merger or at the other times as such
disclosures are required to be made, are made to the applicable
Canadian securities regulatory authorities;
-- no unusual effort is made to prepare the market or to create a demand
for the shares; and
-- no extraordinary commission or consideration is paid in respect of
the trade in the shares.
A selling shareholder is in a "special relationship" with Nortel Networks if,
among other things, the selling shareholder is:
-- a director, officer or employee of Nortel Networks;
-- a director or senior officer of a subsidiary of Nortel Networks,
including the surviving corporation in the merger; and
-- a person or company, or a director or senior officer of a company,
that beneficially owns, directly or indirectly, or exercises control
or direction over, voting securities with more than 10% of the voting
rights attached to all voting securities of Nortel Networks.
29
<PAGE> 35
NO APPRAISAL RIGHTS
Under the Delaware General Corporation Law, you will have no appraisal
rights in connection with the merger. You will find additional information under
"Comparative Rights of Holders of Periphonics Common Stock and Nortel Networks
Common Shares -- Dissent and Appraisal Rights."
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Periphonics and Nortel Networks expect that:
-- the merger will be a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986; and
-- for U.S. federal income tax purposes you will not recognize any gain
or loss upon receipt of Nortel Networks common shares for your shares
of Periphonics common stock in the merger, except with respect to
cash you receive for any fractional share.
The Internal Revenue Service, which we refer to in this document as the
"Service," will not be asked to rule on the tax consequences of the merger.
Instead, Periphonics will rely on the opinion of Fried, Frank, Harris, Shriver &
Jacobson, its counsel, and Nortel Networks will rely on the opinion of Cleary,
Gottlieb, Steen & Hamilton, its counsel, regarding U.S. federal income tax
consequences of the merger. These opinions will be based on customary
assumptions and on representations made by Periphonics and Nortel Networks. The
opinions will be based on the Internal Revenue Code, U.S. Treasury regulations,
current administrative rulings and practice and judicial authority, all of which
are subject to change, possibly with retroactive effect. Neither opinion will
apply to Periphonics stockholders who will own 5% or more of Nortel Networks'
common shares, measured by vote or value (either directly or indirectly through
attribution rules) immediately after the merger. An opinion of counsel is not
binding on the Service and the Service could take a position different from what
is reflected in the opinions. We cannot assure you that the opinions will be
upheld by the courts if challenged by the Service. We urge you to consult your
own tax and financial advisors regarding the U.S. federal income tax
consequences of the merger for you based on your own particular facts and
circumstances as well as any state, local, foreign or other tax consequences of
the merger.
Periphonics, Nortel Networks and the merger subsidiary will not be
obligated to complete the merger unless Periphonics receives the opinion of
Fried Frank and Nortel Networks receives the opinion of Cleary Gottlieb that:
-- the merger will qualify as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code;
-- Nortel Networks will be treated as a corporation under Section 367
(a)(1) of the Internal Revenue Code with respect to each transfer of
property thereto pursuant to the merger; and
-- accordingly, the following material U.S. federal income tax
consequences will result from the merger:
(1) no gain or loss will be recognized by Periphonics, the merger
subsidiary or Nortel Networks as a result of the merger; and
(2) no gain or loss will be recognized by Periphonics stockholders who
receive Nortel Networks common shares in the merger, except for
cash received for any fractional share; and
(3) the tax basis of the Nortel Networks common shares received by
Periphonics stockholders in the merger will be the same as the tax
basis of the Periphonics common stock surrendered in exchange for
those shares reduced by the tax basis allocable to fractional
shares for which cash is received.
If you receive cash for any fractional share interest in a Nortel Networks
common share in the merger, you will be treated as though Nortel Networks
distributed an actual fractional share interest to you and then redeemed the
fractional share interest for cash. The difference between the cash amount you
will receive for
30
<PAGE> 36
the fractional share interest and the amount of your tax basis in the
Periphonics common stock allocable to that fractional share interest will
generally be capital gain or loss if you hold your Periphonics common stock as a
capital asset at the time of the merger. Long-term capital gains recognized by
an individual holder on capital assets held for more than one year generally are
subject to a maximum rate of 20%. The holding period for Nortel Networks common
shares that you receive in the merger will include the holding period of your
shares of Periphonics common stock if you held those shares as capital assets at
the time of the merger.
Periphonics stockholders will be required to retain records and file a
statement setting forth facts relating to the merger with their U.S. federal
income tax returns.
The discussion above is only a summary description of some of the
anticipated U.S. federal income tax consequences of the merger, and may not
address the particular facts and circumstances of your situation. It does not
discuss all of the consequences that may be relevant to you if:
-- you are entitled to special treatment under the Internal Revenue Code
(as are insurance companies, dealers in securities or currencies,
traders in securities electing to mark to market, exempt
organizations or foreign persons);
-- you acquired your Periphonics common stock pursuant to the exercise
of Periphonics stock options or otherwise as compensation; or
-- you will own 5% or more of Nortel Networks' common shares measured by
vote or value (either directly or indirectly through the application
of attribution rules) immediately after the merger.
The summary set forth above is not a complete analysis of all potential tax
effects of the transactions contemplated by the merger agreement or the merger
itself. No information is provided in this document regarding the tax
consequences, if any, of the merger or the exchange of shares in the merger
under state, local, foreign or other tax laws or under proposed changes in
applicable tax laws.
U.S. AND CANADIAN TAX CONSIDERATIONS RELATING TO HOLDING NORTEL NETWORKS COMMON
SHARES
U.S. Federal Income Tax Considerations. The following summary describes
the principal U.S. federal income tax consequences of the ownership and
disposition of Nortel Networks common shares by a U.S. holder. A "U.S. holder"
is a person or entity that:
-- is a citizen or resident of the United States;
-- is a U.S. domestic corporation; or
-- will otherwise be subject to U.S. federal income tax on a net income
basis in respect of Nortel Networks common shares.
Even if you are a U.S. holder, this summary is not a complete description
of all the tax considerations that may be relevant to your decision to hold or
dispose of Nortel Networks common shares. In particular, this summary does not
address the tax treatment of beneficial owners that:
-- will not hold Nortel Networks common shares as a capital asset;
-- own 10% or more of the voting stock of Nortel Networks; or
-- may be subject to special tax rules, such as:
-- banks;
-- dealers in securities or currencies;
-- traders in securities electing to mark to market;
-- tax-exempt entities;
-- insurance companies;
31
<PAGE> 37
-- persons that will hold Nortel Networks common shares as a position
in a "straddle" or a "conversion transaction"; and
-- persons that have a "functional currency" other than the U.S.
dollar.
This summary is based upon tax laws and practice of the United States as in
effect on the date of this document, which are subject to change. You should
consult your own tax advisor about the U.S. tax consequences of your beneficial
ownership and disposition of Nortel Networks common shares and the effect of any
foreign, state or local tax laws.
The gross amount of any cash dividends paid by Nortel Networks with respect
to Nortel Networks common shares, including the amount of any Canadian taxes
withheld from these dividends, generally will be includible in the gross income
of a U.S. holder to the extent paid out of Nortel Networks' current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles. This income will be foreign source dividend income and will not be
eligible for the dividends-received deduction allowed to U.S. corporations with
respect to stock of other U.S. corporations. Canadian withholding tax at the
legally applicable rate will be treated as foreign income tax which U.S. holders
may elect to deduct in computing their taxable income or, subject to the
limitations on foreign tax credits generally, credit against their U.S. federal
income tax liability. Dividends on Nortel Networks common shares generally will
constitute "passive income" or, in some cases, "financial services income" for
U.S. foreign tax credit purposes. Foreign tax credits will not be allowed for
withholding taxes imposed in respect of certain short-term or hedged positions
in Nortel Networks common shares or in respect of arrangements in which a U.S.
holder's expected economic profit, after non-U.S. taxes, is insubstantial. You
should consult your own advisers concerning the implications of these rules in
light of your particular circumstances.
Distributions of Nortel Networks common shares to U.S. holders that are
made by Nortel Networks as part of a pro rata distribution to all holders of
Nortel Networks common shares generally will not be subject to U.S. federal
income tax.
Gain or loss realized by a U.S. holder on the sale or other disposition of
Nortel Networks common shares will be subject to U.S. federal income taxation as
capital gain or loss in an amount equal to the difference between the U.S.
holder's tax basis in the Nortel Networks common shares and the amount realized
on the disposition. This gain or loss will be capital gain or loss, and will be
long-term capital gain or loss if the Nortel Networks common shares were held
for more than one year. Dividends paid on, and proceeds from the sale or other
disposition of Nortel Networks common shares, including gain attributable to
cash received for any fractional Nortel Networks common shares may be subject to
the information reporting requirements of the Internal Revenue Code and may be
subject to backup withholding at the rate of 31% unless the holder:
-- establishes that it is a corporation or other exempt holder; or
-- provides an accurate taxpayer identification number on a properly
completed Internal Revenue Service Form W-9 and certifies that no
loss of exemption from backup withholding has occurred.
The amount of any backup withholding from a payment to a holder will be
allowed as a credit against the U.S. Holder's U.S. federal income tax liability
and may entitle the holder to a refund, provided that certain required
information is furnished to the Service.
Canadian Federal Income Tax Considerations. Osler, Hoskin & Harcourt,
Canadian tax counsel to Nortel Networks, has advised that the following is a
general summary of the principal Canadian federal income tax considerations
generally applicable to holders of Nortel Networks common shares who acquire
Nortel Networks common shares in the merger in exchange for Periphonics common
stock and who, for purposes of the Income Tax Act (Canada), at all relevant
times:
-- deal at arm's length with Nortel Networks;
32
<PAGE> 38
-- alone or together with others not at arm's length with them, did not
own 25% or more of any class or series of Nortel Networks shares,
including interests in or rights to shares, within the five-year
period before disposing of those shares;
-- hold their Periphonics common stock and Nortel Networks common shares
for their own account as capital property and do not use or hold
their Periphonics common stock or Nortel Networks common shares in,
or in the course of, carrying on business in Canada;
-- are not financial institutions as defined in the Income Tax Act
(Canada) for purposes of certain special provisions of the Income Tax
Act (Canada) (the mark-to-market rules) relating to securities held
by financial institutions; and
-- whose Periphonics common stock and Nortel Networks common shares are
not designated insurance property as defined in the Income Tax Act
(Canada) and are not effectively connected with an insurance business
carried on in Canada.
This summary is based on the current provisions of the Income Tax Act
(Canada) and the regulations under the Income Tax Act (Canada), all specific
proposals to amend the Income Tax Act (Canada) and those regulations publicly
announced by or on behalf of the Minister of Finance (Canada) prior to the date
of this document and counsel's understanding of the current administrative
practices of Revenue Canada. This summary does not take into account or
anticipate any other changes in law or practice, whether by judicial,
governmental or legislative decision or action, nor does it take into account
the tax legislation or considerations of any province or territory, or any
jurisdiction other than Canada. This summary is of a general nature only, is not
intended nor should it be construed to be legal or tax advice to any particular
holder of Nortel Networks common shares and in particular does not take into
account or anticipate the specific circumstances of any particular holder or
address tax considerations peculiar to any holder subject to special provisions
of the Income Tax Act (Canada). Accordingly, you should consult your own tax
advisor with respect to your particular circumstances.
If you are not resident in Canada for purposes of the Income Tax Act
(Canada):
-- you will not be subject to Canadian tax on the exchange of your
shares of Periphonics common stock for Nortel Networks common shares
in the merger;
-- dividends on Nortel Networks common shares you receive in the merger
will generally be subject to Canadian withholding tax. If you are a
resident of the United States, the rate of this withholding tax will
generally be 15% of the gross amount of the dividends, under the
terms of the Canada-United States Income Tax Convention (1980). If
you are resident elsewhere, the rate of withholding will generally be
25%, or a lesser rate provided under any applicable tax treaty; and
-- gains realized on the disposition of Nortel Networks common shares
you receive in the merger will not generally be subject to Canadian
tax if they are listed on a stock exchange prescribed by the Income
Tax Act (Canada), which includes the New York Stock Exchange. If you
are a resident of the United States, your gains generally will not in
any event be subject to Canadian tax as long as the value of your
Nortel Networks common shares is not derived principally from
Canadian real estate, as contemplated in the Canada-United States
Income Tax Convention (1980).
If you are resident in Canada for purposes of the Income Tax Act (Canada)
and Periphonics is not your foreign affiliate, as defined in the Income Tax Act
(Canada):
-- you will realize a capital gain (or sustain a capital loss) on the
exchange of your shares of Periphonics common stock for Nortel
Networks common shares in the merger. The amount of this gain will be
the amount by which (1) the fair market value of the Nortel Networks
common shares you receive plus the amount of cash you receive for any
fractional share, net of any reasonable costs you incur, exceed (or
are exceeded by) (2) your adjusted cost base in the shares of
Periphonics common stock you exchange; and
33
<PAGE> 39
-- the adjusted cost base of your Nortel Networks common shares after
the merger will be the average of (1) the fair market value of the
Periphonics common stock you exchanged less the amount of cash you
received for any fractional Nortel Networks common share and (2) the
adjusted cost base of any other Nortel Networks common shares you
then own as capital property.
STOCK EXCHANGE LISTINGS OF NORTEL NETWORKS COMMON SHARES
Nortel Networks will apply to list the Nortel Networks common shares to be
issued in the merger, or upon exercise of the stock options assumed by Nortel
Networks by reason of the merger, on the New York, Toronto and Montreal stock
exchanges.
34
<PAGE> 40
THE MERGER AGREEMENT
The following is a summary of the principal provisions of the merger
agreement. A copy of the merger agreement is attached as Annex A. We encourage
you to read it in its entirety.
THE MERGER
When the merger occurs, at Nortel Networks' option either:
-- the merger subsidiary will merge with and into Periphonics and the
separate corporate existence of the merger subsidiary will cease and
Periphonics will survive and continue to exist as a Delaware
corporation and as a wholly-owned subsidiary of Nortel Networks; or
-- Periphonics will merge with and into the merger subsidiary and the
separate corporate existence of Periphonics will cease and the merger
subsidiary will survive and continue to exist as a Delaware
corporation and a wholly-owned subsidiary of Nortel Networks.
In this document, the company that survives the merger is sometimes
referred to as the "surviving corporation."
The merger agreement is conditioned on:
-- approval of the merger agreement by Periphonics' stockholders; and
-- satisfaction or waiver of the other conditions to the merger.
EFFECTIVE TIME OF THE MERGER
The merger will become effective at the time of filing of a certificate of
merger, or at a later time specified in the certificate of merger, in accordance
with Delaware law. The merger will become effective on the third business day
after the last of the conditions to the merger has been satisfied or waived, or
another date if so agreed by Nortel Networks and Periphonics.
CONVERSION OF PERIPHONICS COMMON STOCK
Each share of Periphonics common stock outstanding immediately prior to the
merger, other than treasury shares, will be converted in the merger into the
right to receive a fraction of a common share of Nortel Networks equal to the
"exchange ratio."
"Exchange ratio" means the fraction obtained by dividing $29.23 by the
average of the last sales prices of Nortel Networks common shares on the New
York Stock Exchange Composite Tape for the 10 consecutive trading days ending on
the trading day which is two trading days prior to completion of the merger and
rounding the result to the nearest hundredth, except that if this fraction is
less than 0.62 then the exchange ratio will be 0.62, and if this fraction is
more than 0.76 then the exchange ratio will be 0.76.
Each share of Periphonics common stock held in Periphonics' treasury or
held by Nortel Networks or its subsidiaries at the time of the merger will be
canceled and retired without any payment.
NO FRACTIONAL NORTEL NETWORKS COMMON SHARES
Nortel Networks will not issue fractional shares in the merger. If, upon
conversion of your Periphonics common stock, you are entitled to receive a
number of Nortel Networks common shares that includes a fraction of a Nortel
Networks common share, you will instead be entitled to receive cash for that
fractional share. The amount of cash payable will equal the fraction multiplied
by the average of the last sales prices of Nortel Networks common shares on the
New York Stock Exchange Composite Tape for the 10 consecutive trading days
ending on the trading day which is two trading days prior to completion of the
merger.
35
<PAGE> 41
EXCHANGE OF PERIPHONICS COMMON STOCK FOR NORTEL NETWORKS COMMON SHARES
At or prior to the completion of the merger, Nortel Networks will deposit
with an exchange agent certificates representing the number of Nortel Networks
common shares, and an estimated amount of cash for fractional shares, to be
issued or paid in exchange for outstanding shares of Periphonics common stock.
The cash and certificates representing Nortel Networks common shares deposited
with the exchange agent are referred to in this document as the "exchange fund."
Promptly after the merger is completed, Nortel Networks will mail to each
record holder of Periphonics common stock a letter of transmittal and
instructions for use in effecting the surrender of Periphonics common stock for
exchange for Nortel Networks common shares.
Upon surrender to the exchange agent of Periphonics common stock for
cancellation together with a properly executed and completed letter of
transmittal, you will be entitled to receive the full number of Nortel Networks
common shares into which your Periphonics common stock is converted as
determined by the exchange ratio, and cash for any fractional Nortel Networks
common share.
Nortel Networks will not pay you any dividends or other distributions
declared after the merger is completed until you have surrendered your
Periphonics common stock. Once you have done so, Nortel Networks will pay you
the amount of any dividends or other distributions that were declared after the
merger is completed and before you surrendered your Periphonics common stock,
without interest.
Upon completion of the merger, Periphonics will close its stock transfer
books and no longer transfer Periphonics common stock. After the merger is
completed, you will cease to have any rights with respect to Periphonics common
stock, except for the right to convert your common stock into Nortel Networks
common shares as described above.
Any portion of the exchange fund that remains unclaimed by Periphonics
stockholders for one year after the merger is completed will be paid or
delivered to Nortel Networks. Any Periphonics stockholders who have not
previously surrendered their Periphonics common stock as described above must
look only to Nortel Networks for payment of Nortel Networks common shares, cash
instead of any fractional shares and unpaid dividends and distributions on the
Nortel Networks common shares deliverable in respect of the Periphonics common
stock. No interest will be paid on any of these amounts.
TREATMENT OF PERIPHONICS STOCK OPTIONS
Nortel Networks will assume all Periphonics stock options outstanding at
the time of the merger. After the merger, Nortel Networks will treat these
assumed stock options as options to acquire Nortel Networks common shares on the
terms and conditions of the Periphonics stock option plan under which they were
granted.
The number of Nortel Networks common shares that may be purchased upon
exercise of an assumed stock option after the merger will be equal to the number
of shares of Periphonics common stock that were subject to the option prior to
the merger multiplied by the exchange ratio under the merger agreement. The
exercise price for each Nortel Networks common share covered by an assumed stock
option will be equal to the aggregate exercise price for the shares of
Periphonics common stock covered by the option prior to the merger divided by
the number of Nortel Networks common shares that may be purchased under the
assumed stock option after the merger.
Nortel Networks' board of directors or an appropriate committee of the
board of directors will succeed to the authorities and responsibilities of
Periphonics' Board or any Board committee under each Periphonics stock option
plan, and those plans will continue to be administered in accordance with their
current terms. The conversion of Periphonics stock options that are incentive
stock options as defined in Section 422 of the Internal Revenue Code will be
effected in a manner consistent with Section 424(a) of the Internal Revenue
Code.
36
<PAGE> 42
EMPLOYEE BENEFITS
During the one year period following the completion of the merger, Nortel
Networks has agreed to maintain for Periphonics employees who continue in their
employment:
-- the same salaries and severance benefits that were in effect prior to
the merger; and
-- employee benefits, other than equity based benefits, that are
substantially similar in the aggregate to those in effect prior to
the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains material representations and warranties of
Periphonics with respect to the following:
-- its corporate organization and existence;
-- its capitalization;
-- disclosure of its subsidiaries and their corporate organization and
existence;
-- its corporate power and authority to execute, deliver and perform its
obligations under the merger agreement and the option agreement;
-- the merger agreement and the option agreement and related
transactions not violating its certificate and by-laws, applicable
law and specified agreements;
-- its financial statements and filings with the Commission;
-- the absence of undisclosed litigation, claims or other proceedings;
-- its compliance with applicable law;
-- the absence of undisclosed material contracts and the absence of
defaults under its material contracts, subject to the applicable
materiality standards;
-- brokers' and finders' fees with respect to the merger;
-- its employee benefit plans and related matters;
-- the inapplicability of state anti-takeover statutes and anti-takeover
provisions of its certificate and by-laws to the transactions
contemplated by the merger agreement and the option agreement and the
adoption of an amendment to its rights agreement;
-- environmental liabilities;
-- intellectual property;
-- the filing and accuracy of its tax returns;
-- its belief that no conditions exist that would adversely affect the
status of the merger as a reorganization for U.S. federal income tax
purposes;
-- required governmental and regulatory approvals;
-- the receipt of an opinion of William Blair as to the fairness of the
exchange ratio, from a financial point of view, to Periphonics'
stockholders;
-- year 2000 readiness; and
-- the absence of materially adverse changes in its business since May
31, 1999.
The merger agreement contains material representations and warranties of
each of Nortel Networks and the merger subsidiary with respect to the following:
-- its corporate organization and existence;
37
<PAGE> 43
-- its capitalization;
-- its corporate power and authority to execute, deliver and perform its
obligations under the merger agreement and the option agreement;
-- the merger agreement and the option agreement and related
transactions not violating its charter and by-laws, applicable law
and material agreements;
-- its financial statements and filings with the commission;
-- the absence of undisclosed litigation, claims or other proceedings
that would have a material adverse effect;
-- brokers' and finders' fees relating to the merger;
-- required governmental and regulatory approvals;
-- the absence of materially adverse changes in its business since
December 31, 1998; and
-- its not acting in a manner that would adversely affect the status of
the merger as a reorganization for U.S. federal income tax purposes.
CONDUCT OF BUSINESS OF PERIPHONICS
The merger agreement provides that Periphonics and its subsidiaries will
conduct their businesses in the ordinary and usual course in all material
respects and will use their reasonable best efforts to keep their business
organizations and assets intact and to preserve their current business
relationships. Subject to specified exceptions, the merger agreement also
contains limitations, prohibitions and other provisions relating to Periphonics'
conduct of business from the date of the merger agreement to the completion of
the merger with respect to:
-- changes in respect of its capital stock;
-- actions with respect to dividends and other distributions;
-- employment arrangements;
-- changes with respect to employee benefit plans;
-- acquisitions and disposals of assets, businesses or properties;
-- amendments to its certificate or by-laws;
-- changes in its accounting principles or practices;
-- entry into or termination of (1) contracts specified in the merger
agreement with customers and suppliers or (2) leases, or changes to
existing material contracts;
-- settlement of claims;
-- actions that would be reasonably likely to adversely affect the
status of the merger as a reorganization for U.S. federal income tax
purposes;
-- actions that would be reasonably likely to result in a breach of any
of its representations and warranties or cause any condition to the
merger not to be satisfied;
-- incurrence of indebtedness;
-- making of capital expenditures;
-- changes with respect to material tax elections;
-- waivers of confidentiality or "standstill" provisions with other
companies; and
-- agreements or commitments to do any of the foregoing.
38
<PAGE> 44
CONDUCT OF BUSINESS OF NORTEL NETWORKS
Subject to specified exceptions, the merger agreement contains limitations,
prohibitions and other provisions relating to Nortel Networks' actions during
the period from the date of the merger agreement to the completion of the merger
with respect to:
-- declaration or payment of any extraordinary cash dividend on or in
respect of the Nortel Networks common shares;
-- actions that would be reasonably likely to adversely affect the
status of the merger as a reorganization for U.S. federal income tax
purposes;
-- actions that would be reasonably likely to result in a breach of any
of its representations and warranties or cause any condition to the
merger not to be satisfied; and
-- agreements or commitments to do any of the foregoing.
COVENANTS OF PERIPHONICS
The merger agreement contains covenants requiring Periphonics to:
-- take all action necessary to convene an appropriate meeting of its
stockholders to consider and vote on the adoption of the merger
agreement and for Periphonics' Board to recommend adoption, except as
provided in "-- Acquisition Proposals";
-- use its reasonable best efforts to cause persons who may be deemed
"affiliates" of Periphonics under the Securities Act to execute and
deliver an agreement limiting such person's ability to sell, transfer
or dispose of his or her Nortel Networks common shares;
-- provide Nortel Networks with reasonable access to information under
the condition that non-public information be subject to the terms of
the confidentiality agreement between Nortel Networks and
Periphonics; and
-- take all further action necessary in order to render its stockholder
protection rights inapplicable to the merger.
COVENANTS OF NORTEL NETWORKS
In the merger agreement, Nortel Networks has agreed to use its reasonable
best efforts to list the Nortel Networks common shares to be issued in the
merger and upon exercise of the Periphonics stock options assumed by Nortel
Networks by reason of the merger on the New York, Toronto and Montreal stock
exchanges prior to the merger. Nortel Networks has also agreed to use its
reasonable best efforts to obtain all necessary approvals of Canadian securities
regulatory authorities to permit the distribution of Nortel Networks common
shares in the merger.
COVENANTS OF NORTEL NETWORKS, PERIPHONICS AND THE MERGER SUBSIDIARY
The merger agreement also contains various covenants requiring each of
Nortel Networks, the merger subsidiary and Periphonics:
-- to use their reasonable best efforts in good faith to take all
necessary actions to effect the merger;
-- to cooperate in the preparation of this proxy statement/prospectus
and a joint communications plan with respect to the transactions
contemplated by the merger agreement;
-- to take all steps within their control to exempt the transactions
contemplated by the merger agreement and the option agreement from
any state anti-takeover law that purports to apply to those
transactions;
-- to cooperate and use their respective reasonable best efforts to:
39
<PAGE> 45
-- prepare all documentation, effect all filings and obtain all
permits, consents, approvals and authorizations of all third
parties and regulatory authorities necessary to complete the
transactions contemplated by the merger agreement, subject to
specified limitations described under "The Merger -- Regulatory
Approvals -- General;" and
-- cause the merger to be completed as expeditiously as reasonably
practicable; and
-- to use their reasonable best efforts to cause their respective
independent public accountants to deliver to the other party
customary accountant's comfort letters.
ACQUISITION PROPOSALS
Periphonics has agreed in the merger agreement that it will not, and will
cause its subsidiaries and its officers, directors, agents and advisors and
those of its subsidiaries not to, initiate, solicit or encourage inquiries or
proposals with respect to, or engage in any negotiations concerning, or provide
any confidential information to, or have any discussions with, any person other
than Nortel Networks relating to, any of the following "acquisition proposals":
-- a merger or consolidation, or any similar transaction, involving
Periphonics;
-- a purchase or other acquisition of greater than 20% of the
consolidated assets of Periphonics and its subsidiaries, other than
transactions involving the sale of inventory in the ordinary course
of business, consistent with past practice;
-- a purchase or other acquisition of beneficial ownership of securities
representing more than 20% of the voting power of Periphonics;
-- any substantially similar transaction; or
-- any inquiry or indication of interest with respect to any of the
foregoing.
Notwithstanding the foregoing, the merger agreement permits Periphonics to
engage in any discussions or negotiations with, or provide any information to,
any person in response to a bona fide written acquisition proposal by that
person, but only if and to the extent that:
-- the proposal was not solicited or encouraged in violation of the
merger agreement;
-- the meeting of Periphonics' stockholders has not occurred;
-- Periphonics' Board determines in good faith that the acquisition
proposal would, if completed, constitute a "superior proposal" and is
reasonably likely to be completed;
-- Periphonics' Board determines, in good faith after consultation with
outside counsel, that such action is legally required as a matter of
the fiduciary duties of the directors under applicable law; and
-- before providing any information or data to any person or entering
into discussions or negotiations with any person, Periphonics
receives from that person an executed confidentiality agreement
containing terms no less restrictive with respect to that person than
the terms of the confidentiality agreement which Nortel Networks has
entered into with Periphonics.
A "superior proposal" is any bona fide acquisition proposal made by a third
party that was not solicited or encouraged in violation of the merger agreement
and which Periphonics' Board determines in its good faith judgment, based on a
written opinion to that effect by a financial advisor of nationally recognized
reputation, to be materially more favorable to the stockholders of Periphonics
than the transactions contemplated by the merger agreement.
Periphonics has agreed to notify Nortel Networks within 24 hours of its
receipt of any inquiries, proposals or offers described above and to advise
Nortel Networks promptly of any material developments. As of the date of this
document, Periphonics has not received any inquiries, proposals or offers of
this kind.
40
<PAGE> 46
Periphonics has also agreed to cease any activities, discussions or
negotiations with any parties other than Nortel Networks with respect to any
acquisition proposal.
CONDITIONS TO THE MERGER
The obligation of each of the parties to complete the merger is conditioned
upon the satisfaction or waiver of each of the following conditions:
-- the merger agreement has been adopted and approved by the requisite
vote of the holders of Periphonics common stock;
-- all regulatory approvals required to complete the merger have been
obtained and are in full force and effect and all statutory waiting
periods have expired and, in the case of Nortel Networks, do not
contain any conditions, restrictions or requirements which would
reasonably be expected to:
-- have a material adverse effect on Nortel Networks and its
subsidiaries taken as a whole, or on the surviving corporation,
after the effective time; or
-- require Nortel Networks or any of its subsidiaries to sell or
otherwise dispose of, or to hold separately, or permit the sale or
other disposition of, any assets of Nortel Networks, Periphonics or
their respective subsidiaries, or require Nortel Networks to
refrain from exercising full authority over Periphonics and its
subsidiaries after the effective time;
-- no governmental authority has enacted, issued, promulgated, enforced
or entered any statute, rule, regulation, judgment, decree,
injunction or other order which is in effect and enjoins or prohibits
completion of the merger;
-- the representations and warranties of the other party contained in
the merger agreement are true and correct as of the date of the
merger agreement and as of completion of the merger, except for any
representations and warranties that by their terms speak as of the
date of the merger agreement or some other date, which will be true
and correct as of such date, in each case subject to the applicable
materiality standard set forth in the merger agreement;
-- each of the agreements and covenants to be performed by the other
party in accordance with the merger agreement at or prior to the time
of the merger has been duly performed in all material respects;
-- no events have occurred which have had or would reasonably be
expected to have a material adverse effect on the other party;
-- this proxy statement/prospectus has been declared effective and no
stop order suspending its effectiveness has been issued, and no
proceedings for that purpose have been initiated or threatened by the
Commission and not concluded or withdrawn;
-- Nortel Networks has received an opinion of Cleary, Gottlieb, Steen &
Hamilton as to tax matters;
-- Periphonics has received an opinion of Fried, Frank, Harris, Shriver
& Jacobson as to tax matters; and
-- the Nortel Networks common shares issuable pursuant to the merger
agreement have received approval for listing on the New York, Toronto
and Montreal stock exchanges, subject to official notice of issuance.
In addition, it is a condition to Nortel Networks' obligation to complete
the merger that no governmental authority has brought an action that is
reasonably likely to succeed and that seeks to enjoin or prohibit completion of
the merger, require the unwinding of the merger or impose substantial penalties
as a result of the merger.
41
<PAGE> 47
INDEMNIFICATION
The surviving corporation will indemnify the present and former officers
and directors of Periphonics and its subsidiaries to the fullest extent
permitted by Delaware law and the Periphonics certificate and by-laws with
respect to any claim, action, suit, proceeding or investigation arising out of
actions or omissions occurring at or prior to completion of the merger. For six
years following completion of the merger, Nortel Networks will provide an
insurance policy with respect to that portion of directors' and officers'
liability insurance that serves to cover the present and former directors and
officers of Periphonics or its subsidiaries with respect to claims arising from
facts or events which occurred at or before the time the merger is completed.
Subject to specified limitations, this insurance policy will contain at least
the same maximum coverage and amounts as Periphonics currently provides to its
directors and officers.
WAIVER AND AMENDMENT
Nortel Networks and Periphonics may amend any provision of the merger
agreement by an agreement in writing approved by their respective Boards.
However, after adoption of the merger agreement by Periphonics' stockholders,
the merger agreement may not be amended without stockholder approval if by law
the amendment would require the approval of Periphonics' stockholders. Prior to
the time the merger is completed, Nortel Networks or Periphonics may, with the
approval of their respective Boards:
-- extend the time for the performance of any of the obligations or
other acts of the other parties;
-- waive any inaccuracies in the representations and warranties
contained in the merger agreement; and
-- waive compliance with any of the agreements or conditions contained
in the merger agreement.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated, and the merger may be abandoned:
-- by the mutual consent of Nortel Networks and Periphonics;
-- by either party:
-- if the other party breaches any of its representations or warranties
contained in the merger agreement, except if such breach would not
have or reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the breaching party, which
breach is not capable of being cured or has not been cured within 10
calendar days after the giving of written notice to the breaching
party of the breach;
-- if the other party materially breaches any of its covenants or
agreements contained in the merger agreement, which breach is not
capable of being cured or has not been cured within 10 calendar days
after the giving of written notice to the breaching party of the
breach;
-- if the merger is not completed by March 31, 2000, or, if an approval
of any governmental authority required to be obtained for the
completion of the merger has not been obtained, by June 30, 2000,
except to the extent that the failure of the merger to be completed
is due to the knowing action of the party seeking to terminate the
merger agreement;
-- if the approval of any governmental authority required to complete
the merger has been denied by final nonappealable action; or
-- if the required stockholder approval is not obtained at the
stockholders' meeting;
-- by Nortel Networks:
-- if Periphonics breaches its covenant to take all actions necessary to
convene the stockholders' meeting to consider and vote upon the
approval and adoption of the merger;
-- if Periphonics breaches its obligations described under
"-- Acquisition Proposals";
42
<PAGE> 48
-- if any required approval of a governmental authority contains any
final, nonappealable conditions, restrictions or requirements which
would reasonably be expected to (1) have a material adverse effect,
following the merger, on Nortel Networks and its subsidiaries taken
as a whole or on the surviving corporation or (2) require Nortel
Networks to sell or otherwise dispose of, or to hold separately, or
permit the sale or other disposition of, any assets of Nortel
Networks, Periphonics or their respective subsidiaries, or require
Nortel Networks to refrain from exercising full authority over
Periphonics and its subsidiaries following the merger; or
-- if Periphonics' Board at any time prior to the Periphonics
stockholders' meeting withdraws or modifies in any manner adverse to
Nortel Networks its recommendation of the merger, or resolves to do
so;
-- by Periphonics:
-- if any required approval of a governmental authority contains any
final, nonappealable conditions, restrictions or requirements which
would reasonably be expected to (1) have a material adverse effect,
following the merger, on Nortel Networks and its subsidiaries taken
as a whole or (2) require Nortel Networks to sell or otherwise
dispose of, or to hold separately, or permit the sale or other
disposition of, any assets of Nortel Networks, Periphonics or their
respective subsidiaries, or require Nortel Networks to refrain from
exercising full authority over Periphonics and its subsidiaries
following the merger, unless within 30 days following receipt by
Nortel Networks of written notice of Periphonics' intent to terminate
the merger agreement under these circumstances, Nortel Networks
notifies Periphonics that it waives its analogous right to terminate
the merger agreement; or
-- if its Board at any time prior to the Periphonics stockholders'
meeting, elects to terminate the merger agreement in order to approve
or recommend a superior proposal, so long as (1) Periphonics has
notified Nortel Networks in writing that it intends to recommend or
approve a superior proposal, (2) after taking into account any
modifications to the transactions contemplated by the merger
agreement that Nortel Networks has then proposed in writing and not
withdrawn, the Periphonics' Board has determined that the proposal is
and continues to be a superior proposal and (3) Periphonics pays
Nortel Networks the applicable termination fee as provided in
"-- Termination Fees and Expenses."
TERMINATION FEES AND EXPENSES
Periphonics. Periphonics may be required to pay Nortel Networks the sum of
$15,000,000 in each of the following four circumstances:
1. Failure to complete the merger
-- Periphonics terminates the merger agreement because the merger is not
completed by March 31, 2000, or, if an approval of any governmental
authority required to be obtained for the completion of the merger
has not been obtained, by June 30, 2000, unless the failure of the
merger to be completed results primarily from Nortel Networks'
knowing action or inaction or from Nortel Networks' or the merger
subsidiary's inability to obtain consent or approval of, or make any
filing or registration with, any governmental authority; and
-- at any time after the date of the merger agreement and at or before
the time of the event giving rise to such termination there exists an
acquisition proposal; and
-- within 12 months of the termination of the merger agreement,
Periphonics enters into a definitive agreement with any third party
with respect to an acquisition proposal or an acquisition proposal is
completed.
43
<PAGE> 49
2. Failure of Periphonics' stockholders to approve the merger
-- Periphonics or Nortel Networks terminates the merger agreement due to
the failure of Periphonics' stockholders to approve the merger
agreement; and
-- at any time after the date of the merger agreement and at or before
the time of the event giving rise to termination of the merger
agreement there is an acquisition proposal, which has been publicly
announced or the existence of which is a matter of public knowledge;
and
-- within 12 months of the termination of the merger agreement,
Periphonics enters into a definitive agreement with any third party
with respect to an acquisition proposal or an acquisition proposal is
completed.
3. Withdrawal of recommendation by Periphonics' Board
-- Nortel Networks terminates the merger agreement after Periphonics'
Board withdraws or modifies in any manner adverse to Nortel Networks
its recommendation of the merger or resolves to do so.
4. Termination by Periphonics' Board in response to superior proposal
-- Periphonics' Board elects to terminate the merger agreement, in order
to approve or recommend a superior proposal.
Periphonics may be required to pay Nortel Networks the sum of $4,000,000 if
Nortel Networks terminates the merger agreement due to:
-- a willful breach by Periphonics of any of its representations or
warranties that is not capable of being cured or has not been cured
within 10 calendar days after Nortel Networks gives written notice of
the breach, except if the breach would not have, or reasonably be
expected to have, a material adverse effect on Periphonics; or
-- a willful material breach by Periphonics of any of its covenants or
agreements that is not capable of being cured or has not been cured
within 10 calendar days after Nortel Networks gives written notice to
Periphonics of the breach; or
-- a willful breach by Periphonics of its covenant to take all actions
necessary to convene an appropriate meeting of its stockholders to
consider and vote upon the approval and adoption of the merger
agreement and any other matters required to be approved by its
stockholders for completion of the merger; or
-- a willful breach by Periphonics of its obligations described under
"-- Acquisition Proposals."
If Periphonics is required to pay Nortel Networks the sum of $4,000,000
following any termination for willful breach as described above, Nortel Networks
may require Periphonics to pay the additional sum of $11,000,000 if:
-- at any time after the date of the merger agreement and at or before
the time of the event giving rise to the termination for willful
breach there is an acquisition proposal; and
-- within 12 months of the termination of the merger agreement,
Periphonics enters into a definitive agreement with any third party
with respect to an acquisition proposal or an acquisition proposal is
completed.
The merger agreement provides that no more than $15,000,000 is payable by
Periphonics in respect of the termination fees described above, and that
termination fees will no longer be payable by Periphonics after any exercise by
Nortel Networks of the option described below under "Other Agreements -- Stock
Option Agreement."
Nortel Networks. Nortel Networks may be required to pay Periphonics a
termination fee of $4,000,000 if Periphonics terminates the merger agreement in
the event of either:
44
<PAGE> 50
-- a willful breach by Nortel Networks of any of its representations or
warranties that is not capable of being cured or has not been cured
within 10 calendar days after Periphonics gives written notice to
Nortel Networks of the breach, except if the breach would not have,
or reasonably be expected to have, a material adverse effect on
Nortel Networks; or
-- a willful material breach by Nortel Networks of any of its covenants
or agreements that is not capable of being cured or has not been
cured within 10 calendar days after Periphonics gives written notice
to Nortel Networks of the breach.
Expenses. Each party to the merger agreement will bear all expenses
incurred by it in connection with the merger, except that printing and mailing
expenses and Commission registration and filing fees will be shared equally
between the parties.
45
<PAGE> 51
OTHER AGREEMENTS
The following is a summary of the principal provisions of the stock option
agreement and the stockholders agreement. A copy of the stock option agreement
is attached as Annex B and a copy of the stockholders agreement is attached as
Annex C. We encourage you to read each agreement in its entirety.
STOCK OPTION AGREEMENT
As a condition to Nortel Networks' execution of the merger agreement,
Periphonics entered into the stock option agreement. In this agreement,
Periphonics granted Nortel Networks an option that under specified circumstances
would permit Nortel Networks to purchase a number of shares of Periphonics
common stock. The maximum number of shares that Nortel Networks could purchase
under the option is 19.9% of the number of shares of Periphonics common stock
outstanding at the time Nortel Networks exercises the option. The exercise price
of the option is $29.23 per share, subject to adjustment under specified
circumstances. If Nortel Networks were to exercise the option in full, it would
hold approximately 16.6% of the outstanding shares of Periphonics common stock.
When Nortel Networks May Exercise the Option. Nortel Networks may exercise
the option in whole or in part if both an initial triggering event and a
subsequent triggering event occur before an exercise termination event, as these
terms are defined below in this section.
"Initial triggering event" means any of the following:
-- Periphonics or any of its subsidiaries, without Nortel Networks'
prior written consent, enters into an agreement to engage in an
acquisition transaction, as defined below, with any person other than
Nortel Networks;
-- Periphonics' Board recommends that Periphonics' stockholders approve
or accept any acquisition transaction other than the merger;
-- Periphonics or any of its subsidiaries, without Nortel Networks'
prior written consent, authorizes, recommends or proposes, or
publicly announces its intention to authorize, recommend or propose,
an acquisition transaction with any person other than Nortel Networks
or its subsidiaries;
-- Periphonics or any of its subsidiaries, without Nortel Networks'
prior written consent, authorizes or engages in, or announces its
intention to authorize or engage in, any negotiations regarding an
acquisition transaction with any person other than Nortel Networks or
its subsidiaries;
-- Periphonics' Board fails to recommend that Periphonics' stockholders
approve the merger;
-- Periphonics' Board publicly withdraws or modifies, or publicly
announces its intention to withdraw or modify, in any manner adverse
to Nortel Networks, its recommendation that Periphonics' stockholders
approve the merger;
-- any person other than Nortel Networks or its subsidiaries makes a
proposal to Periphonics or its stockholders to engage in an
acquisition transaction and, subsequently:
-- Periphonics' stockholders vote and fail to approve the merger at
the meeting or any adjournment or postponement of the meeting; or
-- the meeting is not held or is canceled;
-- any person other than Nortel Networks, its subsidiaries or a party to
the stockholders agreement acquires beneficial ownership or the right
to acquire beneficial ownership of 20% or more of the outstanding
shares of Periphonics common stock;
-- any group, as defined in the Securities Exchange Act of 1934, other
than a group of which Nortel Networks or any of its subsidiaries is a
member, is formed that beneficially owns 20% or more of the
outstanding shares of Periphonics common stock;
46
<PAGE> 52
-- any person other than Nortel Networks or its subsidiaries makes a
bona fide proposal to Periphonics or its stockholders to engage in an
acquisition transaction and the proposal becomes publicly known;
-- Periphonics breaches any covenant or obligation contained in the
merger agreement in anticipation of engaging in an acquisition
transaction and the breach;
-- would entitle Nortel Networks to terminate the merger agreement;
and
-- is not cured before Nortel Networks provides Periphonics with
written notice of the breach; or
-- any person other than Nortel Networks or its subsidiaries files with
a regulatory or governmental authority an application for approval
of, or notice of intention to engage in, an acquisition transaction,
except in connection with a transaction to which Nortel Networks has
given its prior written consent.
"Acquisition transaction" means:
-- a merger or consolidation, or any similar transaction, involving
Periphonics;
-- a purchase, lease or other acquisition or assumption of all or more
than 20% of the consolidated assets of Periphonics;
-- a purchase or other acquisition of beneficial ownership of securities
representing 20% or more of the voting power of Periphonics; or
-- any substantially similar transaction.
"Subsequent triggering event" means:
-- any person other than Nortel Networks, its subsidiaries or a party to
the stockholders agreement acquires beneficial ownership of 25% or
more of the outstanding Periphonics common stock;
-- Periphonics or any of its subsidiaries, without Nortel Networks'
prior written consent, enters into an agreement to engage in a
transaction with any person other than Nortel Networks or its
subsidiaries that would be an acquisition transaction if the
references to 20% in the definition of acquisition transaction were
changed to 25%; or
-- Periphonics' Board recommends that the stockholders of Periphonics
approve or accept any transaction, other than the merger, that would
be an acquisition transaction if the references to 20% in the
definition of acquisition transaction were changed to 25%.
"Exercise termination event" means any of:
-- the time the merger is completed;
-- termination of the merger agreement in accordance with its provisions
if termination occurs before the occurrence of an initial triggering
event, except for a termination by Nortel Networks due to a breach of
a covenant or representation by Periphonics;
-- the passage of 12 months after termination of the merger agreement if
termination:
-- follows or is concurrent with the occurrence of an initial
triggering event; or
-- is a termination by Nortel Networks as a result of a breach of a
covenant or representation by Periphonics; or
-- the receipt by Nortel Networks, at its request, of the sum of
$15,000,000 in respect of the termination fee in the merger
agreement.
The period within which Nortel Networks may exercise the option and other
specified rights under the stock option agreement will be extended as necessary
to obtain required regulatory approvals, comply with applicable regulatory
waiting periods and avoid liability under Section 16(b) of the Exchange Act. The
option
47
<PAGE> 53
price and the number of shares issuable under the option are subject to
adjustment in the event of specified changes in the capital stock of
Periphonics.
Registration Rights. If any subsequent triggering event occurs before an
exercise termination event, Nortel Networks will have the right for 12 months to
require Periphonics to register under the Securities Act the Periphonics common
stock issued and issuable pursuant to the option. This right is subject to
specified conditions and limitations.
Repurchase. At any time within 12 months after the occurrence of a
repurchase event, as defined in this section, Periphonics will repurchase, at
Nortel Network's request, the option and all or any part of the shares of
Periphonics common stock issued upon the full or partial exercise of the option.
Periphonics will repurchase the option at a price equal to (1) the amount by
which the market/offer price, as defined in this section, exceeds the option
price, multiplied by (2) the number of shares for which the option may then be
exercised. Periphonics will repurchase shares issued upon exercise of the option
at a price equal to (1) the market/offer price multiplied by (2) the number of
option shares to be repurchased.
"Repurchase event" means either of the following events, provided that a
subsequent triggering event occurs before an exercise termination event:
-- the completion of any merger or consolidation involving Periphonics
or any purchase, lease or other acquisition of all or a majority of
the assets of Periphonics, except any transaction involving only
Periphonics and its subsidiaries; or
-- the acquisition by any person of beneficial ownership of 50% or more
of the outstanding shares of Periphonics common stock.
"Market/offer price" means the highest of:
-- the price per share of Periphonics common stock at which a tender or
exchange offer has been made and completed or remains outstanding;
-- the price per share of Periphonics common stock to be paid by any
third party pursuant to an agreement with Periphonics;
-- the highest average closing price for Periphonics common stock for
any 20 trading day period within the three-month period immediately
before Nortel Networks, or any other option holder or owner of
Periphonics shares issued upon exercise of the option, gives notice
of the required repurchase; or
-- in the event of a sale of all or a majority of the consolidated
assets of Periphonics, the sum of the net price paid in the sale for
the assets and the current market value of the remaining net assets
of Periphonics, divided by the number of shares of Periphonics common
stock outstanding at the time of sale.
Limitation on Total Profit. The option agreement caps Nortel Networks'
potential profit on the option at $16,500,000. This limit will be reduced by an
amount equal to any amounts received by Nortel Networks in respect of the
termination fee under the merger agreement.
For purposes of this limitation on profit, the amount realized by Nortel
Networks is the aggregate, before taxes, of:
-- any amount received from Periphonics for repurchase of the option, or
any portion of the option;
-- any amount received from Periphonics for repurchase of shares of
Periphonics common stock issued upon exercise of the option, less the
purchase price;
-- any net cash received from the sale to any third party of shares of
Periphonics common stock issued upon exercise of the option, less the
purchase price; and
-- any amounts received on transfer of the option or any portion of the
option to a third party.
48
<PAGE> 54
Substitute Option. If, prior to an exercise termination event, Periphonics
enters into specified transactions in which it is not the surviving corporation,
permits specified fundamental changes in its capital stock or sells all or
substantially all of its assets, the option will be converted into a substitute
option to purchase capital stock of the entity that is the effective successor
to Periphonics. The substitute option will have terms similar to those of the
option.
Assignment. Neither party may assign its rights or obligations under the
stock option agreement without the express written consent of the other party,
except that if a subsequent triggering event occurs prior to an exercise
termination event, Nortel Networks may, subject to specified limitations, assign
its rights and obligations in whole or in part within 12 months following the
subsequent triggering event.
STOCKHOLDERS AGREEMENT
Peter J. Cohen, George W. Cole, Richard A. Daniels, Kevin J. O'Brien and
Jayandra Patel, all of whom are stockholders and executives of Periphonics,
entered into the stockholders agreement as an inducement and condition to Nortel
Networks' entering into the merger agreement. The stockholders agreement covers
approximately 13.4% of the shares of Periphonics common stock outstanding as of
October 1, 1999.
Voting of Shares; Proxy. Each of the five stockholders who entered into
the stockholders agreement has agreed to vote his Periphonics common stock at
the Periphonics stockholders' meeting:
-- in favor of the merger agreement; and
-- against any alternative transaction.
An "alternative transaction" is:
-- any tender offer, exchange offer or proposal for a merger,
consolidation or other business combination involving Periphonics or
any of its subsidiaries and any person other than Nortel Networks or
its subsidiaries; or
-- any proposal or offer by any person other than Nortel Networks or its
subsidiaries to acquire a substantial equity interest in, or a
substantial portion of the assets of, Periphonics or any of its
subsidiaries.
The obligations of the five stockholders under the stockholders agreement
will terminate at the earliest of:
-- completion of the merger;
-- termination of the merger agreement as a result of a breach by Nortel
Networks (subject to specified limitations); and
-- 30 days following any other termination of the merger agreement.
Covenants of the Stockholders. Each of the five stockholders has agreed in
the stockholders agreement that he will not:
-- dispose of or encumber the Periphonics common stock he owns or
controls, except to a family member or as a result of his death, and
only if the transferee agrees to honor the terms of the stockholders
agreement; or
-- solicit, initiate or encourage or otherwise facilitate any
alternative transaction.
49
<PAGE> 55
MARKET PRICES AND DIVIDENDS
NORTEL NETWORKS
The Nortel Networks common shares are traded on the New York, Toronto and
Montreal stock exchanges under the symbol "NT." They are also traded on the
London Stock Exchange. The following table sets forth the range of high and low
sales prices as reported on the New York Stock Exchange Composite Tape, together
with the dividends per common share declared by Nortel Networks, during the
periods indicated. We have adjusted the information in the table to reflect
Nortel Networks' two-for-one stock split on January 7, 1998 and the stock
dividend of one common share on each issued and outstanding Nortel Networks
common share as of August 17, 1999.
<TABLE>
<CAPTION>
PRICE RANGE
----------------- PER SHARE
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
FISCAL 1997
Quarter ended March 31, 1997...................... $19.250 $15.125 $0.0325
Quarter ended June 30, 1997....................... 22.750 15.532 0.0375
Quarter ended September 30, 1997.................. 26.938 22.563 0.0375
Quarter ended December 31, 1997................... 28.469 20.267 0.0375
FISCAL 1998 HIGH LOW
------- -------
Quarter ended March 31, 1998...................... $32.719 $19.844 $0.0375
Quarter ended June 30, 1998....................... 34.625 25.688 0.0375
Quarter ended September 30, 1998.................. 31.844 15.219 0.0375
Quarter ended December 31, 1998................... 25.844 13.406 0.0375
FISCAL 1999 HIGH LOW
------- -------
Quarter ended March 31, 1999...................... $31.875 25.063 $0.0375
Quarter ended June 30, 1999....................... 44.000 30.719 0.0375
Quarter ended September 30, 1999.................. 51.875 39.813 0.0375
October 1, 1999 through October 4, 1999........... 54.000 49.688 --
</TABLE>
On August 23, 1999, the last trading day before Periphonics and Nortel
Networks announced the merger, the closing price per Nortel Networks common
share on the New York Stock Exchange Composite Tape was $43.625. On October 4,
1999, the most recent date for which prices were practicably available before
the printing of this document, this price was $53.688. Past price performance is
not necessarily indicative of future price performance. You should obtain
current market quotations for Nortel Networks common shares.
Holders of Nortel Networks common shares are entitled to receive dividends
from legally available funds when, as and if declared by Nortel Networks' board
of directors. Although Nortel Networks currently intends to continue paying
quarterly cash dividends on Nortel Networks common shares, Nortel Networks
cannot assure you that its dividend policy will remain unchanged after
completion of the merger. The declaration and payment of dividends after the
merger will depend upon business conditions, operating results, capital and
reserve requirements and other factors considered relevant by Nortel Networks'
board of directors.
50
<PAGE> 56
PERIPHONICS
Periphonics common stock is listed on Nasdaq under the symbol "PERI." The
following table presents the high and low closing prices of Periphonics common
stock as reported by Nasdaq. The prices shown for the period that Periphonics
common stock was traded on Nasdaq represent quotations among dealers without
adjustments for retail markups, markdowns, or commissions and may not represent
actual transactions. Periphonics has not declared any dividends on its common
stock for the periods indicated below.
<TABLE>
<CAPTION>
PRICE RANGE
-----------------
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1997
Quarter ended August 31, 1996............................... $20.125 $14.000
Quarter ended November 30, 1996............................. 20.875 17.125
Quarter ended February 28, 1997............................. 33.750 12.000
Quarter ended May 31, 1997.................................. 19.000 11.250
HIGH LOW
------- -------
FISCAL 1998
Quarter ended August 31, 1997............................... $22.000 $12.875
Quarter ended November 30, 1997............................. 14.188 9.313
Quarter ended February 28, 1998............................. 12.750 8.000
Quarter ended May 31, 1998.................................. 13.813 10.125
HIGH LOW
------- -------
FISCAL 1999
Quarter ended August 31, 1998............................... $12.563 $ 5.125
Quarter ended November 30, 1998............................. 11.500 4.875
Quarter ended February 28, 1999............................. 14.438 10.125
Quarter ended May 31, 1999.................................. 11.438 6.313
HIGH LOW
------- -------
FISCAL 2000
Quarter ended August 31, 1999............................... $28.313 $10.500
September 1, 1999 through October 4, 1999................... 32.750 26.875
</TABLE>
On August 23, 1999, the last trading day before Periphonics and Nortel
Networks publicly announced the merger, the closing price per share of
Periphonics common stock as reported by Nasdaq was $25.250. On October 4, 1999,
the most recent date for which prices were practicably available before the
printing of this document, this price was $32.750. Past price performance is not
necessarily indicative of future price performance. You should obtain current
market quotations for shares of Periphonics common stock.
BUSINESS OF NORTEL NETWORKS
The following is a brief description of the business of Nortel Networks.
Additional information regarding Nortel Networks is contained in its filings
with the Commission.
Nortel Networks is a leading global supplier of data and telephony network
solutions and services. Its business consists of the design, development,
manufacture, marketing, sale, financing, installation, servicing and support of
data and telephony networks for carrier and enterprise customers. Customers
include public and private institutions; local, long-distance, personal
communications services and cellular mobile communications companies; cable
television companies; Internet service providers; and utilities. Nortel
51
<PAGE> 57
Networks has operations in Canada, the United States, Europe, the Caribbean and
the Latin America region and the Asia Pacific region. Nortel Networks employs
approximately 72,000 people.
At August 31, 1999, BCE Inc. owned 39.7% of the outstanding Nortel Networks
common shares; the remaining 60.3% of the outstanding Nortel Networks common
shares were widely held by other stockholders. After giving effect to the
merger, but not to the exercise of the converted Periphonics stock options, BCE
will own approximately 39.4% of the outstanding Nortel Networks common shares.
BCE is a diversified Canadian telecommunications company whose subsidiaries
include Bell Canada and Bell Canada International Inc. as well as other
telecommunication companies. There are currently 13 directors on Nortel
Networks' board of directors, one of whom is a senior executive and director of
BCE and three others are non-employee directors of BCE. Nortel Networks has
entered into business relationships with affiliates of BCE. Information on these
relationships and the directors of Nortel Networks is included in Nortel
Networks' Proxy Circular and Proxy Statement dated February 26, 1999 attached as
Exhibit 99 to Nortel Networks' Annual Report on Form 10-K for the year ended
December 31, 1998. See "Where You Can Find More Information" on page 70 to learn
how to obtain these documents.
Nortel Networks is a corporation organized under the Canada Business
Corporations Act. The principal executive offices of Nortel Networks are located
at 8200 Dixie Road, Suite 100, Brampton, Ontario, Canada, L6T 5P6, and Nortel
Networks' telephone number is (905) 863-0000.
DESCRIPTION OF NORTEL NETWORKS SHARE CAPITAL
GENERAL
The authorized capital of Nortel Networks includes an unlimited number of
Nortel Networks common shares and an unlimited number of Class A Preferred
Shares and Class B Preferred Shares, without nominal or par value, issuable in
series.
COMMON SHARES
The Nortel Networks common shares are listed on the New York, Toronto,
Montreal and London stock exchanges. Nortel Networks will apply to list the
Nortel Networks common shares issued in the merger and upon exercise of the
Periphonics stock options to be assumed by Nortel Networks by reason of the
merger on the New York, Toronto and Montreal stock exchanges.
There were 1,359,394,322 Nortel Networks common shares issued and
outstanding as at August 31, 1999.
Holders of Nortel Networks common shares are entitled to one vote per share
on all matters voted on at all meetings of shareholders, except meetings at
which only holders of other classes or series of shares of Nortel Networks are
entitled to vote.
Subject to the rights, privileges, restrictions, and conditions attaching
to any other class or series of shares of Nortel Networks, holders of Nortel
Networks common shares have the right to receive any dividends declared and
payable by Nortel Networks on Nortel Networks common shares and the right to
receive the remaining assets of Nortel Networks upon liquidation, dissolution or
winding-up, if any, after payment of all debts and liabilities.
Holders of Nortel Networks common shares have no pre-emptive, redemption or
conversion rights. Outstanding Nortel Networks common shares are, and shares to
be issued in the merger will be, validly issued, fully paid and non-assessable.
Repurchases of Nortel Networks Common Shares. The following table sets
forth information with respect to programs under which Nortel Networks' board of
directors has authorized the repurchase for cancellation of Nortel Networks
common shares through open market purchases. We have adjusted this information
to reflect Nortel Networks' two-for-one stock split on January 7, 1998 and the
stock dividend of one common share on each issued and outstanding Nortel
Networks common share as of August 17, 1999.
52
<PAGE> 58
<TABLE>
<CAPTION>
NUMBER OF NORTEL NETWORKS
COMMON SHARES AUTHORIZED NUMBER OF NORTEL NETWORKS
PROGRAM PERIOD FOR REPURCHASE COMMON SHARES REPURCHASED
-------------- ------------------------- -------------------------
<S> <C> <C> <C>
1997 stock repurchase
program............ January 30, 1997 through 32,000,000 20,364,800
January 29, 1998
1998 stock repurchase
program............ February 4, 1998 through 12,800,000 8,694,800
February 3, 1999
1999 stock repurchase
program............ February 26, 1999 through 20,000,000 none, as of the date of
February 25, 2000 this document
</TABLE>
PREFERRED SHARES
Nortel Networks' board of directors may from time to time issue Class A
Preferred Shares and Class B Preferred Shares in one or more series and
determine for any such series, by resolution passed before issuance, its
designation, number of shares and respective rights, privileges, restrictions
and conditions. Nortel Networks has issued a number of series of preferred
shares. A detailed description of these shares may be found in Nortel Networks'
registration statement on Form 8-A, as amended, which you may obtain as
described under "Where You Can Find More Information" on page 70.
The holders of preferred shares do not have the right to receive notice of,
attend, or vote at, any meeting of shareholders except to the extent otherwise
determined by Nortel Networks' board of directors and set forth in the articles
of amendment designating any series of preferred shares or as provided in the
Canada Business Corporations Act. Holders of preferred shares have no
pre-emptive rights.
The provisions attaching to the preferred shares may be repealed, altered,
modified or amended with approvals as may be required by the Canada Business
Corporations Act.
As of the date of this document, there are 200 cumulative redeemable Class
A Preferred Shares series 4, 16,000,000 cumulative redeemable Class A Preferred
Shares series 5 and 14,000,000 non-cumulative redeemable Class A Preferred
Shares series 7 issued and outstanding. The series 5 preferred shares are
convertible, in specific circumstances, into an equal number of cumulative
redeemable Class A Preferred Shares series 6, none of which are currently
outstanding. Once issued, the series 6 preferred shares are convertible, in
specific circumstances, into series 5 preferred shares. The series 7 preferred
shares are convertible, in specific circumstances, into an equal number of
non-cumulative redeemable Class A Preferred Shares series 8, none of which are
currently outstanding. Once issued, the series 8 preferred shares are
convertible, in specific circumstances, into series 7 preferred shares. At the
date of this document, there are no other preferred shares outstanding.
COMPARATIVE RIGHTS OF HOLDERS OF PERIPHONICS CORPORATION COMMON STOCK
AND NORTEL NETWORKS COMMON SHARES
The internal affairs of Periphonics are currently governed by the laws of
Delaware, particularly the Delaware General Corporation Law and Periphonics'
certificate and by-laws. When the merger is completed, Periphonics stockholders
will become shareholders of Nortel Networks, a Canadian corporation governed by
the Canada Business Corporations Act. At that time, your rights will be governed
by the Canada Business Corporations Act, other applicable Canadian law and
Nortel Networks' articles and by-laws.
The following is a summary comparison of some of the differences between
the rights of holders of Nortel Networks common shares under the Canada Business
Corporations Act and Nortel Networks' articles and by-laws and the rights of
Periphonics stockholders under the Delaware General Corporation Law and
Periphonics' certificate and by-laws. This summary is not a complete discussion
of, and is qualified in its entirety by reference to, the Delaware General
Corporation Law, the Canada Business Corporations Act, the
53
<PAGE> 59
respective common laws of Delaware and Canada and the full texts of the
governing corporate instruments of Periphonics and Nortel Networks.
VOTE ON EXTRAORDINARY CORPORATE TRANSACTIONS
Periphonics. Under the Delaware General Corporation Law, mergers or
consolidations, or sales or exchanges of all or substantially all of a
corporation's assets, require the affirmative vote of the Board, except in
limited circumstances. In addition, these transactions require, with specified
exceptions, the affirmative vote of a majority of the outstanding shares of the
corporation entitled to vote on the transaction. Stockholder consent is not
required:
-- from the shareholders of a corporation that survives the merger if
the merger does not require the issuance of common shares in excess
of 20% of the corporation's shares outstanding immediately prior to
the merger, the merger agreement does not amend in any respect the
surviving company's certificate and stockholder approval is not
specifically mandated in the surviving company's certificate; and
-- from either corporation where one corporation owns 90% of each class
of outstanding shares of the other corporation.
Nortel Networks. Under the Canada Business Corporations Act, extraordinary
corporate actions must be approved by a resolution passed by at least two-thirds
of the votes cast by the shareholders voting on the resolution in person or by
proxy at the annual or special meeting called for this purpose, and in some
cases whether or not the shares are designated as voting shares in the
corporation's articles of incorporation. In some cases, extraordinary corporate
actions must also be approved by separate resolutions of each affected class or
series of shares, including classes or series that do not otherwise carry the
right to vote. Extraordinary corporate actions include some types of
amalgamations, continuances, a sale, lease or exchange of all or substantially
all the property of a corporation other than in the ordinary course of business,
liquidations and dissolutions and arrangements, if ordered by a court.
DIVIDENDS AND DISTRIBUTIONS
Periphonics. Subject to restrictions contained in a corporation's
certificate, the Delaware General Corporation Law generally provides that a
corporation may declare and pay dividends out of the excess, if any, of net
assets over capital, as that term is defined in the Delaware General Corporation
Law, or, when no surplus exists, out of net profits for the fiscal year in which
the dividend is declared and net profits for the preceding fiscal year.
Dividends may not be paid out of net profits if the capital of the corporation
is less than the amount of capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of assets.
Periphonics does not have additional restrictions on the declaration or payment
of dividends.
Nortel Networks. Under the Canada Business Corporations Act, a corporation
may not declare or pay a dividend if there are reasonable grounds to believe
that:
-- the corporation is, or would be after payment of the dividend, unable
to pay its liabilities as they become due; or
-- the realizable value of the corporation's assets after payment of the
dividend would be less than the aggregate of its liabilities and its
stated capital of all classes. Other than the preferential rights of
the holders of Nortel Networks preferred shares with respect to
dividends and liquidations, the Nortel Networks articles contain no
additional restrictions on the declaration or payment of dividends.
AMENDMENTS TO CHARTER
Periphonics. The Delaware General Corporation Law requires stockholder
approval for any amendment to a corporation's certificate. In addition, if the
amendment to the certificate adversely affects the rights of a particular class
of stock, that class is entitled to vote separately on the amendment, whether or
not it is
54
<PAGE> 60
designated as voting stock. Under the Periphonics certificate, the affirmative
vote of the holders of not less than 75% of the outstanding Periphonics shares
entitled to vote is required in order to amend, repeal or adopt any provision of
the Periphonics certificate relating to:
-- the removal and election of directors;
-- classification of directors;
-- action by written consent;
-- the calling of special meetings of stockholders; and
-- the percentage vote required for business combinations with
interested shareholders.
Nortel Networks. Under the Canada Business Corporations Act, amendments to
the articles of incorporation of a corporation generally require approval by a
resolution passed by at least two-thirds of the votes cast by shareholders
voting on the resolution. If the amendment affects a particular class or series
of shares in a manner requiring a separate class or series vote, that class or
series is entitled to vote on the amendment whether or not it otherwise carries
the right to vote. Approval of a proposed amendment in these circumstances
requires an affirmative two-thirds vote of the holders of the shares of each
class or series entitled to vote separately.
AMENDMENT TO BY-LAWS
Periphonics. The Delaware General Corporation Law states that stockholders
entitled to vote have the power to adopt, amend, or repeal the by-laws of a
corporation. The corporation in its certificate may also confer this power on
the board of directors in addition to the stockholders. Periphonics' certificate
expressly authorizes the board of directors to adopt, amend or repeal the
Periphonics by-laws. Periphonics' by-laws authorize the stockholders to alter,
amend or repeal the Periphonics by-laws by the affirmative vote of the holders
of a majority of the shares of the capital stock of Periphonics.
Nortel Networks. The Canada Business Corporations Act provides that,
unless the articles of incorporation or by-laws of a corporation provide
otherwise, the directors may, by resolution, make, amend or repeal any by-laws
that regulate the business or affairs of a corporation. Where the directors
make, amend or repeal a by-law, they are required to submit the by-law or
amendment or repeal of a by-law to the shareholders for confirmation at the next
annual or special meeting of shareholders. The shareholders entitled to vote at
shareholder meetings may confirm, reject or amend any by-law or amendment or
repeal of a by-law by a resolution passed by a majority of the votes cast by
shareholders entitled to vote at the annual or special meeting of shareholders
represented in person or by proxy.
INTERESTED SHAREHOLDER TRANSACTIONS
Periphonics. The Delaware General Corporation Law prohibits a business
combination between a corporation and an interested stockholder. An interested
stockholder is a person that beneficially owns or has the right to acquire 15%
or more of the outstanding voting stock of the corporation, or a person that is
an affiliate or associate of the corporation, as those terms are defined in the
Delaware General Corporation Law, and that beneficially owned or had the right
to acquire 15% or more of the outstanding voting stock of the corporation at any
time during the three-year period before the determination is made whether the
stockholder is an interested stockholder. This provision does not apply where:
-- a business combination is approved by a majority of the board of
directors and the affirmative vote of two-thirds of the votes
entitled to be cast by disinterested stockholders at an annual or
special meeting;
-- a business combination is approved by the corporation's board of
directors prior to the date the interested stockholder acquired its
shares;
-- the corporation's board of directors approved the transaction which
resulted in the stockholder becoming an interested stockholder prior
to the date the interested stockholder acquired its shares; or
55
<PAGE> 61
-- the interested stockholder acquired at least 85% of the voting stock
of the corporation in the transaction in which the stockholder become
an interested stockholder.
In addition, the Periphonics certificate requires the affirmative vote of
the holders of not less than 75% of the outstanding shares of capital stock in
connection with a business combination, as defined in the Periphonics
certificate, involving an interested stockholder, as defined in the Periphonics
certificate. The 75% stockholder vote is not required:
-- in the event that the business combination is approved by
disinterested directors, as the merger was approved; or
-- if the business combination meets specified fair price and fair
procedure criteria.
Nortel Networks. The Canada Business Corporations Act does not contain a
comparable provision with respect to business combinations. However, policies of
some Canadian securities regulatory authorities, including Policy Statement 9.1
of the Ontario Securities Commission, contain requirements in connection with
related party transactions. A related party transaction means, generally, any
transaction by which an issuer, directly or indirectly, acquires or transfers an
asset or acquires or issues treasury securities or assumes or transfers a
liability from or to, as the case may be, a related party by any means in any
one or any combination of transactions. A "related party" includes control
parties of the issuer, parties under common control with the issuer, parties
controlled by the issuer, holders of more than 10% of the voting securities of
the issuer, and directors and senior officers and affiliates of any of the
foregoing.
Policy 9.1 requires more detailed disclosure in any proxy material required
to be sent to security holders in connection with a related party transaction.
Subject to specified exceptions, Policy 9.1 also requires the preparation of a
formal valuation of the subject matter of the related party transaction and any
non-cash consideration offered in the transaction and the inclusion of a summary
of the valuation in the proxy material. In some circumstances, Policy 9.1 also
requires that the minority shareholders of the issuer separately approve the
transaction, by a simple majority or two-thirds of the votes cast, depending on
the circumstances.
DISSENT AND APPRAISAL RIGHTS
Periphonics. Stockholders of a Delaware corporation who dissent from a
merger or consolidation of the corporation for which a stockholder's vote is
required are, in specific instances, entitled to appraisal rights, and the
surviving corporation is required to purchase the dissenting shares at fair
value. There are, however, no statutory rights of appraisal with respect to
stockholders of a Delaware corporation whose shares of stock, at the record date
for the determination of stockholders entitled to notice of and to vote at the
meeting of stockholders to act upon the merger or consolidation, are either:
-- listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc.; or
-- held of record by more than 2,000 stockholders unless the agreement
of merger or consolidation converts such shares into anything other
than (1) stock of the surviving corporation, (2) stock of another
corporation which is either listed on a national securities exchange
or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers,
Inc., or held of record by more than 2,000 stockholders, (3) cash for
fractional shares, or (4) some combination of the above.
Holders of Periphonics common stock are not entitled to appraisal rights in
connection with the merger.
Nortel Networks. Shareholders of a Canada Business Corporations Act
corporation are entitled to exercise dissent rights and to be paid the fair
value of their shares in connection with:
-- an amendment to a corporation's articles of incorporation to add,
change or remove any provisions restricting or constraining the
issue, transfer or ownership of shares of the class held by those
holders;
56
<PAGE> 62
-- an amendment to a corporation's articles of incorporation to add,
change or remove any restriction on the business or businesses of the
corporation;
-- other amendments to a corporation's articles of incorporation that
require a separate class or series vote;
-- an amalgamation, other than an amalgamation between a parent
corporation and one or more of its wholly owned subsidiaries or
between two or more wholly owned subsidiaries;
-- a continuance under the laws of another jurisdiction;
-- a sale, lease or exchange of all or substantially all the property of
the corporation other than in the ordinary course of business; or
-- a court order permitting a shareholder to dissent in connection with
an application to the court for an order approving an arrangement
proposed by the corporation, although a shareholder is not entitled
to dissent if an amendment to the articles of incorporation is
effected by a court order approving a reorganization or rectifying a
matter that is oppressive or unfairly prejudicial to or that unfairly
disregards the interests of any security holder, creditor, director
or officer.
DIRECTORS' QUALIFICATIONS
Periphonics. The Delaware General Corporation Law does not have any
residency or other director qualification requirements.
Nortel Networks. Generally, a majority of the directors of a Canada
Business Corporations Act corporation must be Canadian citizens who ordinarily
reside in Canada. The Canada Business Corporations Act also requires that a
corporation whose securities are publicly traded have not fewer than three
directors, at least two of whom are not officers or employees of the corporation
or any of its affiliates.
ELECTION OF DIRECTORS
Periphonics. Under the Delaware General Corporation Law, directors are
elected at each annual stockholder meeting unless their terms are staggered.
Vacancies on the board of directors may be filled by the stockholders or
directors, unless the certificate or by-laws provide otherwise. The certificate
may authorize the election of particular directors by one or more classes or
series of shares, and the certificate, an initial by-law or a by-law adopted by
a vote of the stockholders may provide for staggered terms for the directors.
Periphonics' by-laws provide for classification of the board of directors into
three classes of directors elected for three-year terms with each class as
nearly equal in number as possible and only one class standing for election each
year. There is no cumulative voting. The affirmative vote of the holders of at
least 75% of the outstanding voting stock of Periphonics is required to amend or
repeal this provision of the Periphonics by-laws.
Nortel Networks. The Nortel Networks articles and by-laws do not provide
for a classified board of directors or for cumulative voting in the election of
directors.
REMOVAL OF DIRECTORS
Periphonics. Periphonics' certificate provides that a director may be
removed, with or without cause, by the holders of at least 75% of the shares
then entitled to vote in an election of directors.
Nortel Networks. The shareholders of a Canada Business Corporations Act
corporation may, by resolution passed by a majority of the votes cast on the
resolution at a meeting of shareholders called for that purpose, remove any
director before the expiration of his term of office and may elect any qualified
person to serve for the remainder of the director's term.
57
<PAGE> 63
VACANCY ON BOARDS
Periphonics. Under the Delaware General Corporation Law and Periphonics'
by-laws, unless and until filled by the stockholders, any vacancy in the board
of directors, however occurring, may be filled by vote of a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director.
Nortel Networks. Generally under the Canada Business Corporations Act, if
there is a vacancy on the board of directors, the remaining directors, if they
constitute a quorum, may appoint a qualified person to fill the vacancy for the
remainder of the vacating director's term. In the absence of a quorum, the
remaining directors must call a meeting of shareholders to fill the vacancy. In
addition, if the articles of a corporation so provide, the directors may
increase the number of directors within the range provided in the articles and
may fill the vacancies created for a term expiring not later than the next
annual meeting of shareholders if the total number of directors so appointed
does not exceed one-third of the number of directors elected at the previous
annual meeting of shareholders. Nortel Networks' articles provide for the
filling of vacancies caused by an increase in the number of directors as
described.
DIRECTORS' AND OFFICERS' INDEMNIFICATION
Periphonics. The Delaware General Corporation Law authorizes a corporation
to indemnify its present and former directors and officers against all
reasonable expenses, including attorneys' fees, and, except in actions initiated
by or in the right of the corporation, against all judgments, fines and amounts
paid in settlement, in actions brought against them, if the individual is
determined to have acted in good faith, for a purpose which he reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
in the case of a criminal proceeding, had no reason to believe his conduct was
unlawful. Periphonics' certificate requires indemnification to the full extent
authorized by the Delaware General Corporation Law.
The Delaware General Corporation Law provides a right of mandatory
indemnification to the extent that an indemnitee is successful on the merits or
otherwise in the defense of any claim, issue or matter associated with an
action. The Delaware General Corporation Law also allows the advance payment of
an indemnitee's expenses prior to the final disposition of an action, if the
indemnitee undertakes to repay any amount advanced if it is later determined
that the indemnitee is not entitled to indemnification for the action for which
the expenses were advanced. Periphonics' certificate provides for advance
payments, as permitted by the Delaware General Corporation Law.
Nortel Networks. The Canada Business Corporations Act also generally
provides that a corporation may indemnify its present and former directors or
officers or a person who acts or acted at the corporation's request as a
director or officer of a corporation of which the corporation is or was a
shareholder or creditor, and his or her heirs and legal representatives against
all costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment reasonably incurred by him or her in respect of any civil,
criminal or administrative action or proceeding to which he or she is made a
party by reason of being or having been a director or officer of the
corporation. However, this indemnity is limited to circumstances in which the
director or officer acted honestly and in good faith with a view to the best
interests of the corporation. In the case of a criminal or administrative action
or proceeding that is enforced by a monetary penalty, the director or officer
must have had reasonable grounds for believing that his or her conduct was
lawful. Subject to the above mentioned limitations, a corporation may, with the
approval of a court, also indemnify in respect of an action by or on behalf of
the corporation to which the person is made a party by reason of being or having
been a director or an officer of the corporation. The Nortel Networks by-laws
require indemnification to the full extent authorized by the Canada Business
Corporations Act. Where an officer or director is substantially successful on
the merits in his or her defense of an action or proceeding, the officer or
director is entitled to indemnification from the corporation for reasonable
costs, charges and expenses, subject to the limitations discussed above.
The Canada Business Corporations Act does not expressly contemplate the
advance payment of an indemnitee's expenses prior to the final disposition of an
action.
58
<PAGE> 64
DIRECTORS' EXCULPATION
Periphonics. Under the Delaware General Corporation Law, a corporation is
permitted to include a provision in its certificate which limits or eliminates
the liability of directors to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, as long as this liability
does not arise from proscribed conduct, including intentional misconduct and
breach of the duty of loyalty. Periphonics' certificate contains a provision
limiting the liability of its directors as described.
Nortel Networks. The Canada Business Corporations Act has no comparable
provision.
SPECIAL MEETING OF SHAREHOLDERS
Periphonics. Under the Delaware General Corporation Law, a special meeting
of stockholders can be called by the board of directors or any person so
authorized in the certificate or in the by-laws. Periphonics' permit only the
Chairman of the Board or the President to call a special meeting.
Nortel Networks. Under the Canada Business Corporations Act, the directors
of a corporation may call a special meeting of shareholders. Under the Nortel
Networks by-laws, in addition to Nortel Networks' Board, the Chairman of the
Board of Nortel Networks or the Chief Executive Officer of Nortel Networks has
the power to call a special meeting of shareholders.
QUORUM REQUIREMENTS
Periphonics. Under the Delaware General Corporation Law, holders of a
majority of the outstanding shares of a corporation constitute a quorum of
stockholders, unless otherwise specified in the corporation's certificate or
by-laws. In no event, however, can holders of less than one-third of the
outstanding shares constitute a quorum. Periphonics' by-laws state that a quorum
shall be the holders, present in person or by proxy, of a majority of the shares
of the capital stock of the corporation issued and outstanding and entitled to
vote at the meeting of stockholders.
Nortel Networks. Under the Canada Business Corporations Act, holders of a
majority of the outstanding shares entitled to vote at a meeting of shareholders
constitute a quorum, unless otherwise specified in a corporation's by-laws.
Nortel Networks' by-laws generally state that a quorum shall be three persons
present in person and representing in their own right, or by proxy, or as the
duly authorized representative of any shareholder that is a body corporate or
association, not less than 25% of the outstanding shares of the corporation
carrying voting rights at the meeting of shareholders.
RIGHTS AGREEMENT
Periphonics. In 1995, Periphonics' Board adopted a preferred stock
purchase rights agreement which may have the effect of discouraging some types
of transactions that involve an actual or threatened change in control of
Periphonics. Under the rights agreement, stockholders of Periphonics hold rights
to purchase stock in Periphonics, or in an acquirer of Periphonics, at a
discounted price, under specified circumstances and in the event of particular
hostile efforts to acquire control of Periphonics. Periphonics' Board may redeem
the rights in accordance with the rights agreement. Periphonics' Board has taken
action to exempt the merger and the related transactions from triggering
Periphonics' stockholders' rights under the rights agreement.
Nortel Networks. Nortel Networks has not adopted any agreement or plan
similar to the rights agreement.
INSPECTION OF BOOKS AND RECORDS
Periphonics. Under the Delaware General Corporation Law, any stockholder
has the right to examine the books and records of the corporation for any proper
purpose.
Nortel Networks. The Canada Business Corporations Act provides that
shareholders, creditors, their agents and legal representatives may examine
specified records of a corporation during usual business hours and take extracts
of the records free of charge.
59
<PAGE> 65
2. ELECTION OF CLASS II DIRECTORS
Periphonics' certificate provides that Periphonics' Board shall be divided
into three classes, with each class consisting, as nearly as possible, of
one-third of the total number of directors constituting the entire Board.
Periphonics' Board currently consists of six members with two members in each of
Classes I, II and III. Each class is elected for a term of three years. The
terms of office of the current Class I, II and III directors are scheduled to
expire at the 2001, 1999 and 2000 annual meeting, respectively. At each annual
meeting, directors are elected to succeed those in the class whose term expires
at that annual meeting, the newly elected directors to hold office until the
third succeeding annual meeting and the election and qualification of their
respective successors.
Two directors are to be elected as Class II directors by a plurality of the
votes cast at the meeting. Each director elected as a Class II director will
hold office until the merger is completed or, if the merger is not completed,
until the 2002 annual meeting and until the election and qualification of his
successor. Unless otherwise directed, the persons named in the accompanying
proxy have advised management that they intend to vote for the election of
Edward H. Blum and Richard A. Daniels as Class II directors.
Each of the nominees for election as a Class II director has advised
Periphonics he is willing to serve as a director, and management believes that
each nominee will be able to serve. If any nominee becomes unavailable, proxies
may be voted for the election of such person or persons who may be designated by
Periphonics' Board.
PERIPHONICS' BOARD RECOMMENDS VOTING "FOR" THE ELECTION OF EDWARD H. BLUM
AND RICHARD A. DANIELS AS CLASS II DIRECTORS.
EFFECTS OF THE MERGER ON PERIPHONICS' BOARD
Upon completion of the merger, the entire Board will cease to serve as
directors. The directors of the merger subsidiary will serve as directors of the
surviving corporation following the merger.
INFORMATION REGARDING DIRECTORS
The following table sets forth information with respect to:
-- the nominees for the election as Class II directors, including the
year in which their terms would expire, if elected; and
-- each of the Class I and Class III directors whose terms will continue
after the meeting:
<TABLE>
<CAPTION>
YEAR TERM EXPIRES, IF
NAME AGE POSITION ELECTED, AND CLASS
- ---- --- -------- ---------------------
<S> <C> <C> <C>
Edward H. Blum*....... 59 Director 2002 -- Class II
Peter Breitstone...... 45 Director 2001 -- Class I
Peter J. Cohen........ 61 Chairman of the Board, President and Chief
Executive Officer 2000 -- Class III
Richard A. Daniels*... 55 Senior Vice President -- Strategic Planning and
Business Development, Treasurer and Director 2002 -- Class II
Kevin J. O'Brien...... 45 Chief Financial Officer, Vice President-Finance
and Administration, Secretary and Director 2001 -- Class I
Jayandra Patel........ 47 Senior Vice President-Product Development, Chief
Technical Officer, Assistant Treasurer and
Director 2000 -- Class III
</TABLE>
- ---------------
* nominee for Class II director
Mr. Blum was elected a director in June 1995. Since 1988, Mr. Blum has been
the President and Chief Executive Officer of Blum & Co. Inc., a financial
advisory firm. Since 1990, he has been the Chief Executive Officer of Blum,
Clark & Co., also a financial advisory firm. Mr. Blum received a BS in Chemical
60
<PAGE> 66
Engineering from Carnegie Mellon University in 1961 and a Ph.D. in Chemical
Engineering from Princeton University in 1965.
Mr. Breitstone was elected a director in June 1995. Since 1984, Mr.
Breitstone has been engaged in the private practice of law. Mr. Breitstone has
also been the President of Breitstone & Co., Ltd., a general insurance agency
since 1989 and the President of Shinnecock Insurance Ltd., an offshore Bermuda
captive reinsurance company since 1991. Mr. Breitstone received a BBA from
Adelphi University in 1976 and a JD from Temple University School of Law in
1979. He is also a director of American Medical Alert Corp.
Mr. Cohen joined Periphonics as President in January 1984 and currently
serves as its Chairman of the Board, President and Chief Executive Officer. He
has been a Director and Chairman of the Board since May 1986. Mr. Cohen received
a BSEE and MSEE from City College of New York.
Mr. Daniels joined Periphonics in September 1984 and currently serves as
Senior Vice President-Strategic Planning and Business Development and Treasurer.
Mr. Daniels has been a Director since May 1986. Mr. Daniels received a BSEE from
City College of New York and a MS in Management Science from Massachusetts
Institute of Technology.
Mr. O'Brien joined Periphonics in September 1981 and currently serves as
Chief Financial Officer, Vice President-Finance and Administration and
Secretary. He has been a Director since May 1986. Mr. O'Brien is a certified
public accountant and received a BBA in accounting from Hofstra University.
Mr. Patel joined Periphonics in February 1983 and currently serves as
Senior Vice President-Product Development, Chief Technical Officer, Assistant
Treasurer and Director. Mr. Patel received a BSEE from Birla Institute of
Technology and Science in India and a MSEE from the Florida Institute of
Technology.
INFORMATION REGARDING EXECUTIVE OFFICERS
The following information concerns the executive officers of Periphonics
other than those who also serve as directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Lewis E. Chipp....................... 50 Vice President -- Customer Support
George W. Cole....................... 55 Vice President -- Telecom Business Development Group
and Assistant Secretary
Gary Conlin.......................... 49 Vice President -- Sales -- U.S. and Canada
Louis Marianacci..................... 45 Senior Vice President -- Sales and Marketing
W. Gary Strzinek..................... 54 Vice President -- International Operations
</TABLE>
Mr. Chipp joined Periphonics in August 1995 and currently serves as its
Vice President -- Customer Support. Prior to joining Periphonics, from 1991 to
1993, Mr. Chipp was Director of Corporate Customer Support with Grass Valley
Group. Mr. Chipp has an ASEE from Rochester Institute of Technology.
Mr. Cole joined Periphonics in February 1975 and currently serves as its
Vice President -- Telecom Business Development Group and Assistant Secretary.
Mr. Cole received an A.B. in Physics and a Ph.D. in Nuclear Physics from Yale
University.
Mr. Conlin joined Periphonics in January 1983 and currently serves as its
Vice President-Sales -- U.S. and Canada. Mr. Conlin received a B.S. in marketing
from C.W. Post College.
Mr. Marianacci joined Periphonics in November 1998 and currently serves as
its Senior Vice President -- Sales and Marketing. Mr. Marianacci received a B.A.
in marketing and finance from McGill University.
Mr. Strzinek re-joined Periphonics in July 1995 and currently serves as its
Vice President-International Operations. From 1993 to 1995, Mr. Strzinek was
employed as Vice President at Intervoice, a competitor of Periphonics. Mr.
Strzinek received a BBA in Economics from the University of Texas.
61
<PAGE> 67
Executive officers of Periphonics are elected annually by the Board and
serve until their successors are duly elected and qualified.
There are no family relationships between any of the directors, executive
officers or persons nominated or chosen by Periphonics to become directors or
executive officers.
Periphonics carries insurance providing indemnification, under specified
circumstances, to all of its directors and officers for claims against them by
reason of, among other things, any act or failure to act in their capacities as
directors or officers. No sums have been paid to any past or present director or
officer of Periphonics under this or any prior indemnification insurance policy.
Periphonics has also entered into indemnity agreements with all of its
directors and executive officers, which provide for indemnification of
Periphonics' directors and executive officers to the fullest extent permitted by
the provisions of the Delaware General Corporation Law.
The indemnity agreements provide that Periphonics will pay any costs which
an indemnitee actually and reasonably incurs because of claims made against him
by reason of services rendered as a director or officer of Periphonics, except
that Periphonics is not obligated to make any payment prohibited by law, or
where a final determination is made:
-- that a claim was based upon the indemnitee's obtaining a personal
profit or advantage to which he was not legally entitled;
-- on a claim for an accounting of profits made in connection with a
violation of Section 16(b) of the Securities Exchange Act of 1934, or
similar state or common law provisions;
-- that the indemnitee was deliberately dishonest; or
-- that indemnification is not lawful.
Periphonics' Board does not have a nominating committee. In June 1995,
Periphonics formed an audit committee comprised of Messrs. Cohen, Blum and
Breitstone and a compensation committee comprised of the entire Board. The audit
committee recommends annually to the Board the appointment of Periphonics'
independent public accountants and reviews the results and scope of the audit
and other services provided by Periphonics' independent auditors. The audit
committee met twice in fiscal year 1999. The compensation committee approves
salaries and incentive compensation for management and key employees of
Periphonics. The compensation committee met four times in fiscal year 1999.
Periphonics also has a stock option committee, comprised of the entire Board,
which awards stock options. The Board met on seven occasions during the last
fiscal year.
DIRECTORS' COMPENSATION
Outside directors participate in Periphonics' non-employee director stock
option plan. Under this plan, non-employee directors receive automatic option
grants to purchase 10,000 shares of Periphonics common stock on the date of each
annual meeting of stockholders. Periphonics has no other arrangements for
compensating its directors for their duties as directors. Periphonics reimburses
its directors for expenses they incur in attending meetings.
EXECUTIVE COMPENSATION
The table below sets forth information concerning compensation awarded to,
earned by or paid to Periphonics' Chief Executive Officer and Periphonics' four
other most highly compensated executive officers whose aggregate cash
compensation exceeded $100,000, and are collectively referred to as the "named
executives," for services rendered in all capacities during the three fiscal
years ended May 31, 1999, 1998 and 1997:
62
<PAGE> 68
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS
- --------------------------- ---- --------- --------
<S> <C> <C> <C>
Peter J. Cohen.............................................. 1999 $448,916 $112,178
Chairman of the Board, President and Chief Executive Officer 1998 $447,656 $ -0-
1997 $403,745 $240,897
Richard A. Daniels.......................................... 1999 $350,481 $ 80,078
Senior Vice President-Strategic Planning and 1998 $350,481 $ -0-
Business Development and Treasurer 1997 $343,347 $181,261
George W. Cole.............................................. 1999 $321,744 $ 60,949
Vice President-Telecom Business Development Group and 1998 $321,744 $ -0-
Assistant Secretary 1997 $289,386 $129,057
Jayandra Patel.............................................. 1999 $303,073 $ 69,716
Senior Vice President-Product Development, Chief Technical 1998 $302,761 $ -0-
Officer, Assistant Treasurer and Director 1997 $272,692 $122,298
Kevin O'Brien............................................... 1999 $257,309 $ 36,992
Chief Financial Officer, Vice President-Finance 1998 $256,149 $ -0-
and Administration and Secretary 1997 $231,714 $73,883
</TABLE>
- ---------------
(1) Includes (a) amounts deferred at the named executive's election pursuant to
Periphonics' 401(k) deferred compensation plan and (b) amounts includible
in compensation for company-provided group term life insurance and
supplemental disability insurance.
For fiscal year 2000, each of these executives received a cost of living
increase over his fiscal year 1999 base salary. Each of these executives was
contractually entitled to, but waived, a cost of living increase for fiscal year
1999 over his fiscal year 1998 base salary.
OPTIONS
The table below sets forth information regarding stock options granted to
the named executives in fiscal year 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------- VALUE AT ASSUMED
NUMBER % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(2)
OPTIONS EMPLOYEES IN PER EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR SHARE DATE 5% 10%
- ---- ---------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Cohen................. 75,000 6.5% 7.625 4/15/04 457,125 726,375
Richard A. Daniels............. 23,000 2.0% 7.625 4/15/04 140,185 222,755
George W. Cole................. 15,000 1.3% 7.625 4/15/04 91,425 145,275
Jayandra Patel................. 49,000 4.2% 7.625 4/15/04 298,655 474,565
Kevin O'Brien.................. 26,000 2.2% 7.625 4/15/04 158,470 251,810
</TABLE>
- ---------------
(1) Options were granted to these individuals under the Periphonics 1995 Stock
Option Plan. The exercise price of the options is based on the market price
of the common stock on the date of grant. Options granted under this plan
vest in four equal installments beginning on the first anniversary of the
date of grant. In addition, the employment agreements between Periphonics
and these individuals provide that their options vest immediately on a
change in control or potential change in control of Periphonics. The
signing of the merger agreement was a potential change in control under the
employment agreements and resulted in the vesting of the options.
63
<PAGE> 69
(2) The assumed 5% and 10% rates of stock price appreciation are specified by
the proxy rules and do not reflect expected appreciation. The amounts shown
represent the assumed value of the stock options, less exercise price, at
the end of the five-year period beginning on the date of grant and ending
on the option expiration date. For a five-year period beginning May 28,
1999, based on the closing price on the Nasdaq National Market of the
Periphonics common stock of $10.75 on such date, a share of Periphonics
common stock would have a value on May 28, 2004 of approximately $13.72 at
an assumed appreciation rate of 5% and approximately $17.31 at an assumed
appreciation rate of 10%.
The table below sets forth information regarding stock options held by the
named executives and the year-end values of unexercised options held by the
named executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Peter J. Cohen............................... 0 75,000 0 234,375
Richard A. Daniels........................... 0 23,000 0 71,875
George W. Cole............................... 0 15,000 0 46,875
Jayandra Patel............................... 0 49,000 0 153,125
Kevin O'Brien................................ 0 26,000 0 81,250
</TABLE>
- ---------------
(1) Values stated are based on the closing price ($10.75) of Periphonics common
stock as reported on the Nasdaq National Market on May 28, 1999 and the
exercise price of the options.
EMPLOYMENT AGREEMENTS
In March 1995 Periphonics entered into employment agreements with each of
the named executives. These employment agreements became effective in April 1995
and were amended on April 15, 1999. These employment agreements automatically
renew for consecutive two year terms unless, at least one year prior to
expiration of the existing term, either party gives notice of cancellation. The
agreements provide for an annual base salary as of June 1, 1999 of $449,153,
$349,226, $320,836, $304,034 and $258,289, including annual cost of living
increases, for Messrs. Cohen, Daniels, Cole, Patel and O'Brien, respectively,
subject to annual review following the end of each fiscal year by Periphonics'
Board or its compensation committee. Each employment agreement provides for
reimbursement of business expenses, health and disability insurance and related
benefits and an annual bonus to be determined in accordance with Periphonics'
performance incentive employee benefit plan. Each employment agreement requires
that all of the employee's business time be devoted to Periphonics. Each
employment agreement may be terminated if the employee becomes permanently
disabled. The agreements also provide that if the employee is terminated without
cause he will be paid his base salary and bonus through the remainder of the
term of his agreement. Each employment agreement further provides that the
employee will not compete with Periphonics during the term of the agreement and
for a period of two years from termination of employment.
Each of the employment agreements was amended on April 15, 1999 to provide
for additional payments to be made to the employees in the event of a change in
control or potential change in control, as defined in the agreements. Under
these employment agreements, if the executive's employment with Periphonics is
terminated by the executive for good reason, as defined in the agreements, or by
Periphonics without cause, as defined in the agreements, within three years
after a change in control, such as the merger, or a potential change in control,
such as the execution of the merger agreement, the executive is entitled to
receive additional compensation and benefits. In addition Nortel Networks and
Periphonics have entered into agreements with Messrs. Cohen, Daniels and O'Brien
under which they will continue in their employment with Periphonics for a period
following the merger and will receive the compensation and benefits provided
64
<PAGE> 70
under their current employment agreements. You should see "The
Merger -- Interests of Certain Persons in the Merger -- Current Employment
Agreements" for a description of the amended agreements.
In connection with the merger, Periphonics entered into new employment
agreements with Mr. Cole and Mr. Patel, effective on the completion of the
merger. You should see "The Merger -- Interests of Certain Persons in the
Merger -- New Employment Agreements" for a description of the new agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee assumes responsibility for all fiscal
compensation decisions relating to Periphonics executives. The Committee is
composed of two independent outside directors and four inside directors of
Periphonics. The two independent outside directors, alone, make decisions
affecting the compensation of the four inside directors.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation committee met four times during fiscal 1999 to carry out
its responsibilities including the development and administration of policies
governing annual compensation for senior executives of Periphonics.
In developing and administering these policies, the compensation committee
has focused on compensating Periphonics executives:
-- on a competitive basis with other comparably sized and managed
companies;
-- in a manner consistent with and supportive of overall Periphonics
objectives; and
-- in a manner that balances Periphonics' long-term and short-term
strategic initiatives.
The compensation committee intends to:
-- reward executives for strategic management and enhancement of
stockholder value;
-- facilitate both the short-term and long-term planning process; and
-- attract and retain key executives believed to be critical to
Periphonics' long-term success.
Periphonics' executive compensation program generally consists of a fixed
base salary, participation in the performance incentive benefit plan and
long-term incentive compensation in the form of stock options. In addition,
Periphonics executives are able to participate in various benefit plans
generally available to other full-time Periphonics employees.
Base Salary. Base salary is intended to provide competitive remuneration
for services provided to Periphonics over a one year period. Base salary levels
for the named executives were established by employment agreements on December
15, 1993. These agreements were restated, effective on the closing of
Periphonics' initial public offering, to reflect the transition from a private
to public corporation. Base salaries were set at levels designed to attract and
retain the most appropriately qualified individuals for each of the key
management level positions within Periphonics. The employment agreements
stipulated that future increases in base salary would be determined by
Periphonics' Board or its compensation committee. In determining these
increases, the Board considers compensation information for comparable
companies, industry patterns and level of responsibility for each executive. The
key factor in determining the appropriate adjustment to base salary has been
Periphonics' performance.
Performance Incentive Plan. Payouts under Periphonics' performance
incentive plan are paid primarily to recognize specific operating performance
achieved within the last fiscal year. Because these incentive payments are
related to performance, they may vary considerably from one year to the next.
The performance incentive plan correlates executive compensation with return on
total capital employed and net margin growth. Through this program, in fiscal
1999, each named executive's short-term incentive payment was derived from
specific measures of Periphonics' performance. Depending on management level,
executives can receive performance incentive plan payouts of up to a maximum of
60% of base salary.
65
<PAGE> 71
Long-Term Incentives. To align long-term compensation with long-term
stockholder value, the Board has instituted an employee stock purchase program
and adopted stock option plans.
Chief Executive Officer. Since December 15, 1993, Peter J. Cohen, Chief
Executive Officer, has been compensated under an employment agreement between
himself and Periphonics. This agreement will be effective until May 31, 2002.
Mr. Cohen's employment agreement provides for an annual increase in base
salary as deemed appropriate by the non-executive members of the Board. In
addition, Mr. Cohen is eligible to participate in the performance incentive
benefit plan. As noted above, for the 1999 fiscal year, Mr. Cohen and certain
other executives were contractually entitled to, but waived, the cost of living
increase over their fiscal year 1998 base salary. You should see "-- Employment
Agreements" above for a further description of Mr. Cohen's employment agreement.
<TABLE>
<CAPTION>
Board of Directors
------------------
<S> <C>
Peter J. Cohen
Edward H. Blum
Peter Breitstone
Richard A. Daniels
Kevin O'Brien
Jayandra Patel
</TABLE>
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
stockholder return for the period beginning on March 31, 1995 and ending on May
31, 1999, based on the market price of Periphonics' common stock, with the
cumulative total return of the NASDAQ U.S. Public Companies Index and a defined
peer group based on similar market capitalization. The graph assumes a $100
investment on March 31, 1995 in each of the indices and the reinvestment of any
and all dividends. Additionally, the peer group calculation in the graph
reflects the following events:
-- Digital Sound Corporation changed its name to Pulsepoint
Communications in April 1998; and
-- Comverse Technology, Inc. merged with Boston Technology, Inc. on
January 14, 1998.
66
<PAGE> 72
COMPARISON OF CUMULATIVE TOTAL RETURN
COMPARISON OF CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
NASDAQ U.S.
PUBLIC COMPANIES
PERIOD ENDING PERIPHONICS CORPORATION INDEX PEER GROUP
- ------------- ----------------------- ---------------- ----------
<S> <C> <C> <C>
3/31/95 $100 $100 $100
5/31/95 $ 92 $106 $102
5/31/96 $206 $154 $216
5/31/97 $229 $173 $185
5/31/98 $125 $220 $193
5/31/99 $132 $309 $242
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Periphonics' common stock as of the date of this document by:
-- each person known to Periphonics to beneficially own more than 5% of
the outstanding shares of common stock;
-- each of Periphonics' named executives; and
-- all executive officers and directors of Periphonics as a group.
67
<PAGE> 73
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OF
DIRECTORS, NAMED EXECUTIVES NATURE OF BENEFICIAL BENEFICIAL
AND 5% STOCKHOLDERS OWNERSHIP(1) OWNERSHIP
- --------------------------- -------------------- -------------
<S> <C> <C>
Peter J. Cohen(2) (3)....................................... 469,986 3.5%
George W. Cole(2)........................................... 360,528 2.7%
Richard A. Daniels(2) (4)................................... 422,498 3.2%
Kevin J. O'Brien(2)......................................... 256,352 1.9%
Jayandra Patel(2)........................................... 467,944 3.5%
Becker Capital Management(5)................................ 1,031,000 7.7%
VGH Partners, L.L.C(6)...................................... 1,309,900 9.8%
All executive officers and directors as a group (eleven
persons)(7)............................................... 2,296,651 16.6%
</TABLE>
- ---------------
(1) A person is deemed to be the beneficial owner of securities that he can
acquire within sixty days from the date of this document. Each beneficial
owner's percentage ownership is determined by assuming that options that
are held by that person, but not those held by any other person,
exercisable within sixty days from the date of this document have been
exercised. Unless otherwise noted, Periphonics believes that all persons
named in the table have sole voting and investment power with respect to
all shares of common stock they beneficially own.
(2) Addresses are c/o Periphonics Corporation, 4000 Veterans Memorial Highway,
Bohemia, New York 11716.
(3) Of these shares, 130,160 are held of record by Mr. Cohen and Allean Cohen,
as joint tenants.
(4) Of these shares, 332,998 and 66,500 are held of record in grantor retained
annuity trusts for the benefit of Mr. Daniels' children and brother,
respectively. Mr. Daniels is the sole trustee of these trusts.
(5) Becker Capital Management's address is 1211 Southwest 5th Avenue, Suite
2185, Portland, Oregon 97204.
(6) Based solely on the Schedule 13G filed by VGH Partners, L.L.C. on July 12,
1999, percentage adjusted to reflect subsequently issued shares. VGH
Partners, L.L.C's address is 260 Franklin Street, Boston, MA 02110.
(7) Includes 473,250 shares subject to options exercisable within sixty days of
the date of this proxy statement/prospectus.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires Periphonics'
officers and directors and persons who own more than ten percent of a registered
class of Periphonics' equity securities to file reports of ownership and changes
in ownership with the Commission and to furnish Periphonics with copies of these
reports. Based solely on Periphonics' review of the copies of these forms
received by it during its fiscal year ended May 31, 1999, Periphonics believes
that the persons required to file these reports have complied with all
applicable filing requirements.
68
<PAGE> 74
3. SELECTION OF AUDITORS
Periphonics' Board recommends that the stockholders ratify the selection of
Deloitte & Touche LLP, independent auditors, as Periphonics' independent
auditors until the merger is completed or, if the merger, is not completed, for
the fiscal year ending May 31, 2000. A representative of Deloitte & Touche LLP
is expected to be present at the meeting and will be given the opportunity to
make a statement and to answer any questions you may have with respect to the
consolidated financial statements of Periphonics for the year ended May 31,
1999.
PERIPHONICS' BOARD RECOMMENDS VOTING "FOR" THE SELECTION OF DELOITTE &
TOUCHE LLP AS PERIPHONICS' INDEPENDENT AUDITORS UNTIL THE MERGER IS COMPLETED
OR, IF THE MERGER, IS NOT COMPLETED, FOR THE FISCAL YEAR ENDING MAY 31, 2000.
Following the merger, the surviving corporation will be a wholly owned
subsidiary of Nortel Networks and accordingly is not expected to continue to
retain its own independent auditors.
4. OTHER MATTERS
Periphonics' Board does not know of any other matters which may come before
the meeting and does not intend to present any other matters at the meeting.
However, if any other matters shall properly come before the meeting or any
adjournment of the meeting, the persons named as proxies will have discretionary
authority to vote the shares of common stock represented by the accompanying
proxy in accordance with their best judgment.
STOCKHOLDERS' PROPOSALS
Any stockholder of Periphonics who wishes to present a proposal to be
considered at the next annual meeting of Periphonics' stockholders, which will
be held only if the merger is not completed, and who wishes to have his or her
proposal presented in Periphonics' proxy statement with respect to that meeting
must deliver the proposal in writing to Periphonics at 4000 Veterans Memorial
Highway, Bohemia, New York 11716, on or before May 31, 2000. In order to avoid
controversy as to the date on which the proposal was received by Periphonics,
proponents should submit their proposals by certified mail, return receipt
requested.
69
<PAGE> 75
LEGAL OPINIONS
The validity of the Nortel Networks common shares offered by this proxy
statement/prospectus will be passed upon for Nortel Networks by Nicholas J.
DeRoma, Esq., Senior Vice-President and General Counsel of Nortel Networks.
EXPERTS
The consolidated financial statements and the related financial statement
schedules incorporated in this proxy statement/prospectus by reference from
Nortel Networks Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of the firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements and the related financial statement
schedules incorporated in this proxy statement/prospectus by reference from
Periphonics Corporation's Annual Report on Form 10-K for the year ended May 31,
1999 have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of the firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of Bay Networks, Inc. appearing in
the Bay Networks, Inc. Annual Report on Form 10-K for the year ended June 30,
1997 have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Such consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
Nortel Networks is a Canadian corporation. A substantial portion of Nortel
Networks' assets is located in Canada and a majority of its directors and
officers, and the experts named in this proxy statement/prospectus, are
residents of Canada. As a result, it may be difficult for investors to effect
service within the United States upon Nortel Networks or upon Nortel Networks'
directors, officers and experts. Execution by United States courts of any
judgment obtained against Nortel Networks or any of its directors, officers and
experts in United States courts would be limited to the assets of Nortel
Networks or that person in the United States. Nicholas J. DeRoma, Esq., Senior
Vice-President and General Counsel of Nortel Networks, has advised Nortel
Networks that there is doubt as to the enforceability in Canada of United States
judgments or liabilities in original actions in Canadian courts predicated
solely upon the civil liability provisions of the federal securities laws of the
United States. The agent for service of process in the United States for Nortel
Networks is Harris Trust Company of New York, 88 Pine Street, 19th Floor, New
York, New York 10005.
WHERE YOU CAN FIND MORE INFORMATION
Periphonics and Nortel Networks file annual, quarterly and special reports,
proxy statements and other information with the Commission. You may read and
copy any of the information on file with the Commission at the Commission's
following locations:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms. Periphonics' and Nortel Networks' Commission filings are
also available to the public from commercial document retrieval services. Some
of Periphonics' Commission filings are available at the Commission's
70
<PAGE> 76
World Wide Web site located at http://www.sec.gov. and some of Nortel Networks'
filings are available at http://www.nortelnetworks.com.
Nortel Networks common shares are listed on the New York, Toronto, Montreal
and London stock exchanges. Reports and other information concerning Nortel
Networks may be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
Nortel Networks filed a registration statement on Form S-4 to register with
the Commission the Nortel Networks common shares offered by this proxy
statement/prospectus. This document is a part of that registration statement and
constitutes a prospectus of Nortel Networks in addition to being a proxy
statement of Periphonics for the Periphonics annual meeting. As permitted by
Commission rules, this document does not contain all the information you can
find in the registration statement or exhibits to the registration statement.
The Commission allows Periphonics and Nortel Networks to "incorporate by
reference" information into this document, which means that Nortel Networks and
Periphonics can disclose important information to you by referring you to
another document filed separately with the Commission. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in this document. This document
incorporates by reference the documents set forth below that Periphonics and
Nortel Networks have previously filed with the Commission. These documents
contain important information about Periphonics and Nortel Networks and their
financial performance.
<TABLE>
<CAPTION>
PERIPHONICS COMMISSION FILINGS PERIOD
------------------------------ ------
<S> <C>
Annual Report on Form 10-K...................... Year ended May 31, 1999
Current Reports on Form 8-K..................... Dated August 24, 1999 and October 4, 1999
Description of Periphonics' capital stock from
its Form 8-A.................................... Filed on February 21, 1996
Description of Periphonics' Preferred Stock
Purchase Rights attached to each share of
Periphonics common stock from its Form 8-A...... Filed on February 21, 1996, as amended by
Amendment No. 1 on Form 8-A/A filed on June
29, 1998
</TABLE>
Periphonics is also incorporating by reference any additional documents
that it files with the Commission between the date of this document and the date
of the annual meeting.
<TABLE>
<CAPTION>
NORTEL NETWORKS COMMISSION FILINGS PERIOD
---------------------------------- ------
<S> <C>
Annual Report on Form 10-K...................... Year ended December 31, 1998
Quarterly Reports on Form 10-Q.................. Quarters ended March 31, 1999 and June 30,
1999
Current Reports on Form 8-K..................... Dated July 23, 1998, January 27, 1999, April
14, 1999, April 28, 1999, April 29, 1999,
July 29, 1999, August 24, 1999 and September
13, 1999
Current Report on Form 8-K/A.................... Dated April 30, 1999
Description of the Nortel Networks common shares
and preferred shares contained in Nortel
Networks' Form 8-A.............................. Dated October 8, 1975, as amended by filings
on Form 8 dated February 24, 1983, June 12,
1984, September 13, 1984, June 25, 1985, and
July 15, 1987, and as amended by Form 8-A/A,
dated May 8, 1998
Proxy Circular and Proxy Statement.............. Dated February 26, 1999 filed as Exhibit 99
to Nortel Networks' Annual Report on Form
10-K for the year ended December 31, 1998
</TABLE>
Nortel Networks is also incorporating by reference any additional documents
that it files with the Commission between the date of this document and the date
of the Periphonics annual meeting.
71
<PAGE> 77
Nortel Networks has supplied all information contained or incorporated by
reference in this document relating to Nortel Networks and Periphonics has
supplied all information contained or incorporated by reference in this document
relating to Periphonics.
You may already have been sent some of the documents incorporated by
reference, but you can obtain any of them from Periphonics or Nortel Networks,
as appropriate, or the Commission. Documents incorporated by reference are
available from Periphonics or Nortel Networks, as the case may be, without
charge, excluding all exhibits unless an exhibit has been specifically
incorporated by reference in this document. Stockholders may obtain documents
incorporated by reference in this document by Periphonics by requesting them in
writing or by telephone at the following address:
Periphonics Corporation
4000 Veterans Memorial Highway
Bohemia, NY 11716
Attn: Investor Relations
Telephone: (516) 468-9444
E-mail: [email protected]
Stockholders may obtain documents incorporated by reference in this
document by Nortel Networks by requesting them in writing or by telephone at the
following address:
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario
Canada, L6T 5P6
Attn: Corporate Secretary
Telephone: (905) 863-0000
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM PERIPHONICS OR NORTEL NETWORKS,
PLEASE DO SO BY OCTOBER 25, 1999 TO RECEIVE THEM BEFORE THE MEETING. PERIPHONICS
OR NORTEL NETWORKS WILL SEND REQUESTED DOCUMENTS BY FIRST-CLASS MAIL WITHIN ONE
BUSINESS DAY OF RECEIVING THE REQUEST.
You should rely only on the information contained or incorporated by
reference in this document to vote on the merger agreement proposal. No one has
been authorized to provide you with information that is different from what is
contained in this document. This document is dated October 7, 1999. You should
not assume the information contained in this document is accurate as of any date
other than this date, and neither the mailing of this document to stockholders
nor the issuance of Nortel Networks common shares in the merger shall imply
information is accurate as of any other date.
72
<PAGE> 78
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NORTEL NETWORKS CORPORATION,
NORTH SUBSIDIARY, INC.
AND
PERIPHONICS CORPORATION
DATED AS OF AUGUST 24, 1999
A-1
<PAGE> 79
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
ARTICLE I CERTAIN DEFINITIONS............................... A-4
1.01. Certain Definitions.................................. A-4
ARTICLE II THE MERGER; EFFECTS OF THE MERGER................ A-9
2.01. The Merger........................................... A-9
2.02. Effective Date and Effective Time.................... A-9
2.03. Tax Consequences..................................... A-9
ARTICLE III CONVERSION OF SHARES; EXCHANGE PROCEDURES....... A-10
3.01. Conversion of Shares................................. A-10
3.02. Issuance of Shares of the Surviving Corporation...... A-10
3.03. Rights as Stockholders; Stock Transfers.............. A-10
3.04. Fractional Shares.................................... A-10
3.05. Exchange Procedures.................................. A-10
3.06. Anti-Dilution Provisions............................. A-11
3.07. Stock Options and Other Stock Plans.................. A-12
ARTICLE IV ACTIONS PENDING MERGER........................... A-13
4.01. Forbearances of the Company.......................... A-13
4.02. Forbearances of Parent............................... A-15
ARTICLE V REPRESENTATIONS AND WARRANTIES.................... A-15
5.01. Representations and Warranties of the Company........ A-15
5.02. Representations and Warranties of Parent and Sub..... A-24
ARTICLE VI COVENANTS........................................ A-27
6.01. Reasonable Best Efforts.............................. A-27
6.02. Stockholder Approvals................................ A-28
6.03. Registration Statement............................... A-28
6.04. Press Releases....................................... A-29
6.05. Access; Information.................................. A-29
6.06. Acquisition Proposals................................ A-29
6.07. Affiliate Agreements................................. A-30
6.08. Takeover Laws........................................ A-30
6.09. The Company Rights Agreement......................... A-31
6.10. Shares Listed........................................ A-31
6.11. Regulatory Applications.............................. A-31
6.12. Indemnification...................................... A-32
6.13. Certain Employee Benefit Matters..................... A-32
6.14. Accountants' Letters................................. A-33
6.15. Notification of Certain Matters...................... A-33
6.16. Certain Tax Matters.................................. A-33
6.17. Agreements with Respect to Assumption of Company
Stock Options....................................... A-34
</TABLE>
A-2
<PAGE> 80
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER........ A-34
7.01. Conditions to Each Party's Obligation to Effect the
Merger.............................................. A-34
7.02. Conditions to Obligation of the Company.............. A-35
7.03. Conditions to Obligation of Parent and Sub........... A-35
ARTICLE VIII TERMINATION.................................... A-36
8.01. Termination.......................................... A-36
8.02. Effect of Termination and Abandonment................ A-38
ARTICLE IX MISCELLANEOUS.................................... A-39
9.01. Survival............................................. A-39
9.02. Amendment; Extension; Waiver......................... A-39
9.03. Counterparts......................................... A-39
9.04. Governing Law........................................ A-39
9.05. Expenses............................................. A-39
9.06. Notices.............................................. A-39
9.07. Entire Understanding................................. A-40
9.08. Assignment; No Third Party Beneficiaries............. A-40
9.09. Interpretation....................................... A-41
9.10. Severability......................................... A-41
9.11. Pre-Termination Equitable Remedies................... A-41
</TABLE>
Exhibit A Form of Affiliate Letter
A-3
<PAGE> 81
AGREEMENT AND PLAN OF MERGER, dated as of August 24, 1999 (this
"Agreement"), by and among NORTEL NETWORKS CORPORATION, a corporation organized
under the laws of Canada ("Nortel"), NORTH SUBSIDIARY, INC., a corporation
organized under the laws of Delaware ("Sub"), and PERIPHONICS CORPORATION, a
corporation organized under the laws of Delaware (the "Company").
WITNESSETH:
WHEREAS, the Boards of Directors of each of Nortel, Sub and the Company
have determined that it is advisable and in the best interests of their
respective companies and their stockholders to consummate the strategic business
combination transaction provided for herein in which, subject to the terms and
conditions set forth herein, (x) Sub will merge (the "Reverse Merger") with and
into the Company, so that the Company is the surviving corporation in the Merger
or (y) if Nortel so elects, the Company will merge (the "Forward Merger") with
and into Sub, so that Sub is the surviving corporation in the Merger;
WHEREAS, the parties intend that for U.S. federal income tax purposes, the
Reverse Merger or the Forward Merger (either, the "Merger") qualify as a
"reorganization";
WHEREAS, as a condition and an inducement to Nortel's willingness to enter
into this Agreement, Nortel and the Company are simultaneously entering into a
Stock Option Agreement (the "Option Agreement"), pursuant to which the Company
is granting Nortel an option exercisable upon the occurrence of certain events;
WHEREAS, as a condition and as an inducement to Nortel's willingness to
enter into this Agreement, Nortel is entering into an agreement (the
"Stockholders' Agreement") with certain substantial Company stockholders (the
"Specified Stockholders"); and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.01. Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:
"Acquisition Proposal" shall mean (a) a merger or consolidation, or any
similar transaction, involving the Company (other than mergers, consolidations
or similar transactions involving solely the Company and/or one or more
wholly-owned Subsidiaries of the Company), (b) a purchase or other acquisition
(including by way of merger, consolidation, share exchange, tender or exchange
offer involving any Subsidiary of the Company or securities issued by any
Subsidiary of the Company, as the case may be) of greater than 20% of the
consolidated assets of the Company and its Subsidiaries (other than transactions
involving the sale of inventory in the ordinary course of business, consistent
with past practice), (c) a purchase or other acquisition (including by way of
merger, consolidation, share exchange, tender or exchange offer or otherwise) of
beneficial ownership of securities representing more than 20% of the voting
power of the Company, (d) any substantially similar transaction, or (e) any
inquiry or indication of interest with respect to any of the foregoing; in each
case other than the transactions contemplated by this Agreement and the Option
Agreement.
"Agreement" shall have the meaning set forth in the first paragraph of
this Agreement.
"Average Nortel Trading Price" shall mean the average of the last sales
prices per share of Nortel Common Shares on the NYSE Composite Tape for the 10
consecutive trading days ending on the trading day which is two trading days
prior to the Effective Date.
A-4
<PAGE> 82
"Business Day" shall mean each day on which banking institutions in both of
Toronto, Canada and New York, New York are not authorized or required to close.
"Canadian GAAP" shall mean Canadian generally accepted accounting
principles.
"Canadian Stock Exchanges" shall mean the Toronto and Montreal stock
exchanges.
"Capitalization Date" shall have the meaning set forth in Section
5.01(b)(i).
"Code" shall mean the U.S. Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning set forth in the first paragraph of this
Agreement.
"Company Affiliate" shall have the meaning set forth in Section 6.07(a).
"Company Board" shall mean the Board of Directors of the Company.
"Company Certificate" shall mean the Restated Certificate of Incorporation
of the Company, as amended.
"Company Common Stock" shall have the meaning set forth in Section 3.01(b).
"Company Disclosure Schedule" shall have the meaning set forth in the
opening paragraph of Section 5.01.
"Company Employee" shall have the meaning set forth in Section 6.13(a).
"Company Equity Interests" shall have the meaning set forth in Section
5.01(b).
"Company Filed SEC Documents" shall have the meaning set forth in Section
5.01(g).
"Company Financial Advisor" shall have the meaning set forth in Section
5.01(k).
"Company Intellectual Property Rights" shall have the meaning set forth in
Section 5.01(p).
"Company Meeting" shall have the meaning set forth in Section 6.02.
"Company Plan" shall mean any Plan entered into or currently maintained,
sponsored, or contributed to by the Company or any of its Subsidiaries or to
which the Company or any such Subsidiary has any obligation to contribute or
with respect to which the Company or any of its Subsidiaries may have any
material liability.
"Company Preferred Stock" shall have the meaning set forth in Section
5.01(b).
"Company Proxy Statement" shall have the meaning set forth in Section
6.03(a).
"Company Rights Agreement" shall have the meaning set forth in Section
5.01(b).
"Company SEC Documents" shall have the meaning set forth in Section
5.01(g).
"Company Series A Preferred Stock" shall have the meaning set forth in
Section 5.01(g).
"Company Stock Option Plans" shall have the meaning set forth in Section
3.07(a).
"Company Stock Options" shall have the meaning set forth in Section
3.07(a).
"Company Stock Purchase Plan" shall have the meaning set forth in Section
3.07(d).
"Company Stockholder Protection Rights" shall have the meaning set forth in
Section 5.01(b).
"Confidentiality Agreement" shall mean that certain confidentiality
agreement, dated October 27, 1998, by and between the Company and an affiliate
of Nortel, as amended by a letter agreement dated June 24, 1999.
"Copyrights" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Costs" shall have the meaning set forth in Section 6.12(a).
A-5
<PAGE> 83
"DGCL" shall mean the General Corporation Law of the State of Delaware.
"Draft 1999 10-K" shall have the meaning set forth in Section 5.01(g)(iv).
"Effective Date" shall have the meaning set forth in Section 2.02.
"Effective Time" shall have the meaning set forth in Section 2.02.
"Environmental Laws" shall have the meaning set forth in Section 5.01(o).
"ERISA" shall mean the U.S. Employee Retirement Income Security Act of
1974, as amended, and the regulations promulgated thereunder and published
interpretations of any Governmental Authority with respect thereto.
"Exchange Act" shall mean the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Agent" shall have the meaning set forth in Section 3.05(a).
"Exchange Fund" shall have the meaning set forth in Section 3.05(a).
"Exchange Ratio" shall mean the fraction obtained by dividing $29.23 by the
Average Nortel Trading Price and rounding the result to the nearest hundredth;
provided, however, that if such fraction is less than 0.62 then the Exchange
Ratio shall be 0.62, and if such fraction is more than 0.76 then the Exchange
Ratio shall be 0.76; and provided, further, that the Exchange Ratio shall in any
case be subject to adjustment as set forth in Section 3.06.
"Exon-Florio" shall have the meaning set forth in Section 5.01(r).
"Forward Merger" shall have the meaning set forth in the recitals to this
Agreement.
"Governmental Authority" means any court, administrative agency or
commission or other foreign or domestic federal, state, provincial or local
governmental authority or instrumentality.
"HSR Act" shall have the meaning set forth in Section 5.01(r).
"Indemnified Party" shall have the meaning set forth in Section 6.12(a).
"Insurance Amount" shall have the meaning set forth in Section 6.12(b).
"Intellectual Property Rights" shall mean all proprietary, license and
other rights in and to: (A) trademarks, service marks, brand names, trade dress,
trade names, words, symbols, color schemes and other indications of origin
("Trademarks"); (B) patents, patent applications (together, "Patents"),
inventors' certificates and invention disclosures; (C) trade secrets and other
confidential or non-public business information, including ideas, formulas,
compositions, discoveries and improvements, know-how, manufacturing and
production processes and techniques, and research and development information;
drawings, specifications, plans, proposals and technical data; analytical
models, investment and lending strategies and records, financial and other
products; financial, marketing and business data, pricing and cost information;
business and marketing plans and customer and supplier lists and information; in
each case whether patentable, copyrightable or not ("Trade Secrets"); (D)
computer programs and databases, in each case whether patentable, copyrightable
or not (collectively, "Software"), and all documentation therefor; (E) writings
and other works of authorship, including marketing materials, brochures,
training materials, including all copyrights and moral rights related to each of
the foregoing ("Copyrights"); (F) mask works; (G) rights to limit the use or
disclosure of confidential information by any Person; (H) registrations of, and
applications to register, any of the foregoing with any Governmental Authority
and any renewals or extensions thereof; (I) the goodwill associated with each of
the foregoing; and (J) any claims or causes of action arising out of or related
to any infringement or misappropriation of any of the foregoing; in each case in
any jurisdiction.
"Knowledge" with respect to a party shall mean to the knowledge of its
senior executive officers after reasonable inquiry.
A-6
<PAGE> 84
"Liens" shall mean any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
"Material Adverse Effect" shall mean with respect to any party, any change,
circumstance or effect that (i) is or is reasonably likely to be materially
adverse to the business, condition (financial or otherwise) or results of
operations of such party and its Subsidiaries taken as a whole, other than any
change, circumstance or effect that results from or arises out of (a) changes in
the economy in general or (b) changes or circumstances affecting the industries
in which such party operates, which change, circumstance or effect (in the case
of clause (b) does not affect the Company or Nortel, as the case may be,
disproportionately relative to other entities operating in such industry;
provided, that any change, circumstance or effect that arises directly out of or
results directly from the announcement of this Agreement shall not by itself be
deemed to constitute a Material Adverse Effect; or (ii) would materially impair
the ability of either Nortel or the Company, respectively, to perform its
obligations under this Agreement.
"Material Suppliers" shall have the meaning set forth in Section
5.01(t)(ii).
"Material Systems" shall mean, with respect to any person, all internal
computer systems, communications systems, embedded manufacturing systems and
facilities infrastructure systems that are material to the business, finances
and operations of such person.
"Merger" shall have the meaning set forth in the recitals to this
Agreement.
"Merger Consideration" shall have the meaning set forth in Section 2.01(a).
"NASD" shall mean the National Association of Securities Dealers, Inc. or,
if the context so requires, the Nasdaq Stock Market, Inc.
"New Certificates" shall have the meaning set forth in Section 3.05(a).
"Nortel" shall have the meaning set forth in the first paragraph of this
Agreement.
"Nortel Board" shall mean the Board of Directors of Nortel.
"Nortel Certificate" shall mean the Certificate and Articles of
Amalgamation of Nortel dated January 4, 1982, as amended from time to time by
the Certificates and Articles of Amendment of Nortel.
"Nortel Common Shares" shall have the meaning set forth in Section 3.01(a).
"Nortel Disclosure Schedule" shall have the meaning set forth in the
opening paragraph of Section 5.02.
"Nortel SEC Documents" shall have the meaning set forth in Section 5.02(f).
"NYSE" shall mean the New York Stock Exchange, Inc.
"Old Certificates" shall have the meaning set forth in Section 3.05(a).
"Option Agreement" shall have the meaning set forth in the recitals hereof.
"Patents" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Person" or "person" shall mean any individual, bank, corporation, limited
liability company, partnership, association, joint-stock company, business trust
or unincorporated organization.
"Plan" shall mean any "employee benefit plan", within the meaning of
Section 3(3) of ERISA, whether or not subject to ERISA, and any employment,
consulting, termination, severance, retention, change in control, deferred or
incentive compensation, stock option or other equity based, vacation or other
fringe benefit plan, program, policy, arrangement, agreement or commitment.
"Previously Disclosed" by a party shall mean information disclosed in its
SEC Documents filed prior to the date of this Agreement or set forth in the
related section of its Disclosure Schedule or (with respect to the Company) set
forth in the Draft 1999 10-K.
"Registration Statement" shall have the meaning set forth in Section
6.03(a).
A-7
<PAGE> 85
"Regulatory Law" shall mean the Sherman Act, as amended, the Clayton Act,
as amended, the HSR Act, the Federal Trade Commission Act, as amended, and all
other federal, state and foreign, if any, statutes, rules, regulations, orders,
decrees, administrative and judicial doctrines and other laws that are designed
or intended to prohibit, restrict or regulate actions having the purpose or
effect of monopolization or restraint of trade or lessening of competition
through merger or acquisition.
"Rights" shall mean, with respect to any person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any person any
right to subscribe for or acquire, or any options, calls or commitments relating
to, or any stock appreciation right or other instrument the value of which is
determined in whole or in part by reference to the market price or value of,
shares of capital stock of such person.
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Severance Plan" shall have the meaning set forth in Section 6.13(a).
"Software" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Specified Stockholders" shall have the meaning set forth in the recitals
to this Agreement.
"Stockholders' Agreement" shall have the meaning set forth in the recitals
to this Agreement.
"Sub" shall have the meaning set forth in the first paragraph of this
Agreement.
"Sub Common Stock" shall have the meaning set forth in Section 3.01(a).
"Subsidiary" and "Significant Subsidiary" shall have the meanings ascribed
to them in Rule 1-02 of Regulation S-X of the SEC.
"Superior Proposal" shall have the meaning set forth in Section 6.06(a).
"Surviving Corporation" shall mean (i) in the case of the Reverse Merger,
the Company as the surviving corporation, or (ii) in the case of the Forward
Merger, Sub as the surviving corporation.
"Takeover Laws" shall have the meaning set forth in Section 5.01(m).
"Tax Returns" shall have the meaning set forth in Section 5.01(q).
"Taxes" shall mean all taxes, charges, fees, levies or other assessments,
however denominated, including, without limitation, all net income, gross
income, gross receipts, sales, use, ad valorem, goods and services, capital,
transfer, franchise, profits, license, withholding, payroll, employment,
employer health, excise, estimated, severance, stamp, occupation, property or
other taxes, custom duties, fees, assessments or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority whether arising before, on or after the
Effective Date.
"Termination Fee" shall have the meaning set forth in Section 8.02(b).
"Trade Secrets" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Trademarks" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Treasury Shares" shall mean shares of the Company Common Stock held by the
Company or any of its Subsidiaries.
"U.S. GAAP" shall mean United States generally accepted accounting
principles.
"Year 2000 Compliant" shall have the meaning set forth in Section 5.01(t).
"$" shall mean United States Dollar.
A-8
<PAGE> 86
ARTICLE II
THE MERGER; EFFECTS OF THE MERGER
2.01. The Merger. (a) The Reverse Merger. Upon the terms and subject to
the conditions set forth in this Agreement, and in accordance with the DGCL, at
the Effective Time Sub will merge with and into the Company pursuant to the
Reverse Merger. Following the Effective Time of the Reverse Merger, the separate
corporate existence of Sub shall cease and the Company shall survive and
continue to exist as a Delaware corporation.
(b) The Forward Merger. Notwithstanding paragraph (a) of this Section, if
Nortel so elects pursuant to notice to the Company at least three business days
prior to the Effective Time, upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the DGCL, at the Effective Time
the Company will merge with and into Sub pursuant to the Forward Merger;
provided, however, that Nortel may not so elect if such election would be
reasonably likely to cause non-satisfaction of any material condition to the
Merger that would have been reasonably likely to be satisfied in the absence of
such election. Following the Effective Time of the Forward Merger, the separate
corporate existence of the Company shall cease and Sub shall survive and
continue to exist as a Delaware corporation.
(c) Effectiveness and Effects of the Merger. Subject to the satisfaction
or waiver of the conditions set forth in Article VII in accordance with this
Agreement, the Merger shall become effective upon the occurrence of the filing
in the office of the Secretary of State of the State of Delaware of a
certificate of merger in accordance with Section 251 of the DGCL, or such later
date and time as may be set forth in such certificate. The Merger shall have the
effects prescribed in the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchises of the Company and Sub shall be vested in the
Surviving Corporation, and all debt, liabilities and duties of the Company and
Sub shall become the debt, liabilities and duties of the Surviving Corporation.
(d) Certificate of Incorporation and By-Laws. The certificate of
incorporation and by-laws of Sub, as in effect immediately prior to the
Effective Time, but with Article 1 of the certificate of incorporation amended
to read: "The name of the Corporation is Periphonics Corporation," shall be
those of the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law.
(e) Name. The name of the Surviving Corporation shall remain (in the case
of the Reverse Merger) or be changed to (in the case of the Forward Merger)
"Periphonics Corporation."
(f) Officers and Directors of Surviving Corporation. The officers of the
Company as of the Effective Time shall be the officers of the Surviving
Corporation, until the earlier of their resignation or removal or otherwise
ceasing to be an officer or until their respective successors are duly elected
and qualified, as the case may be. The directors of Sub as of the Effective Time
shall be the directors of the Surviving Corporation until the earlier of their
resignation or removal or otherwise ceasing to be a director or until their
respective successors are duly elected and qualified, as the case may be.
2.02. Effective Date and Effective Time. Subject to the satisfaction or
waiver (subject to applicable law) of the conditions as set forth in Article VII
in accordance with this Agreement, the parties shall cause the effective date of
the Merger (the "Effective Date") to occur on (i) the third Business Day to
occur after the last of the conditions set forth in Section 7.01 shall have been
satisfied or waived in accordance with the terms of this Agreement or (ii) such
other date to which the parties may agree in writing. The time on the Effective
Date when the Merger shall become effective is referred to as the "Effective
Time."
2.03. Tax Consequences. It is intended that the Merger shall qualify as a
reorganization under Section 368(a) of the Code.
A-9
<PAGE> 87
ARTICLE III
CONVERSION OF SHARES; EXCHANGE PROCEDURES
3.01. Conversion of Shares. Subject to the provisions of this Agreement,
at the Effective Time, automatically by virtue of the Merger and without any
action on the part of any party or stockholder:
(a) Conversion of Sub Common Stock. Each share of common stock of
Sub, par value $0.01 per share (the "Sub Common Stock"), issued and
outstanding immediately prior to the Effective Time, shall be converted
into one newly issued, fully-paid and non-assessable share of preferred
stock, $0.01 par value, of the Surviving Corporation, pursuant to a
Certificate of Designations proposed by Nortel and approved by the Company,
such approval not to be unreasonably withheld or delayed.
(b) Conversion of Company Common Stock. Subject to Section 3.04,
each share of common stock, par value $0.01 per share, of the Company (the
"Company Common Stock") issued and outstanding immediately prior to the
Effective Time (other than shares of Company Common Stock to be canceled
pursuant to Section 3.01(c)) shall become and be converted into the right
to receive a fraction of a common share, without par value, of Nortel
("Nortel Common Shares"), equal to the Exchange Ratio. All of the shares of
Company Common Stock converted into the right to receive Nortel Common
Shares (or cash pursuant to Section 3.04) pursuant to this Article III
shall no longer be outstanding and shall automatically be canceled and
shall cease to exist as of the Effective Time.
(c) Treasury Shares. Each share of Company Common Stock held by the
Company or any wholly owned Subsidiary of the Company as Treasury Shares
immediately prior to the Effective Time or owned by Nortel or any
Subsidiary thereof shall no longer be outstanding and shall automatically
be canceled and retired at the Effective Time and no consideration shall be
issued in exchange therefor.
3.02. Issuance of Shares of the Surviving Corporation. At the Effective
Time, in consideration of the issuance by Nortel of Nortel Common Shares to the
holders of Company Common Stock in accordance with Section 3.01(b), the
Surviving Corporation shall issue to Nortel a number of shares of newly issued,
fully-paid and non-assessable common stock, $0.01 par value, of the Surviving
Corporation, which number shall be equal to the number of shares of Company
Common Stock outstanding as of immediately prior to the Effective Time.
3.03. Rights as Stockholders; Stock Transfers. At the Effective Time,
holders of Company Common Stock shall cease to be, and shall have no rights as,
stockholders of the Company, other than the right to receive any dividend or
other distribution with respect to such Company Common Stock with a record date
occurring prior to the Effective Time and the consideration provided under this
Article III. After the Effective Time, there shall be no transfers on the stock
transfer books of the Company or the Surviving Corporation of shares of Company
Common Stock.
3.04. Fractional Shares. Notwithstanding any other provision hereof, no
fractional Nortel Common Shares and no certificates or scrip therefor, or other
evidence of ownership thereof, will be issued in the Merger; instead, Nortel
shall pay to each holder of Company Common Stock who would otherwise be entitled
to a fractional share of Nortel Common Shares (after taking into account all Old
Certificates delivered by such holder) an amount (in U.S. dollars) in cash
(without interest) determined by multiplying such fraction by the Average Nortel
Trading Price. As promptly as practicable after the determination of the amount
of cash, if any, to be paid to holders of fractional interests, Nortel shall so
notify the Exchange Agent, and Nortel shall cause the Surviving Corporation to
deposit such amount with the Exchange Agent and shall cause the Exchange Agent
to forward payments to such holders of fractional interests subject to and in
accordance with the terms hereof.
3.05. Exchange Procedures. (a) At or prior to the Effective Time, Nortel
shall deposit, or shall cause to be deposited, with a bank or trust company
having (or whose parent has) net capital of not less than $10,000,000 (the
"Exchange Agent"), for the benefit of the holders of certificates formerly
representing shares of Company Common Stock ("Old Certificates"), for exchange
in accordance with this Article III, certificates representing the Nortel Common
Shares ("New Certificates") and an estimated amount of cash
A-10
<PAGE> 88
pursuant to Section 3.04 (such cash and New Certificates (without any interest
on any such cash), being hereinafter referred to as the "Exchange Fund") to be
paid pursuant to this Article III in exchange for outstanding shares of Company
Common Stock.
(b) As promptly as practicable after the Effective Date, Nortel shall send
or cause the Exchange Agent to send or cause to be sent to each former holder of
record of shares (other than Treasury Shares) of Company Common Stock
immediately prior to the Effective Time transmittal materials for use in
exchanging such stockholder's Old Certificates for the consideration set forth
in this Article III. Nortel shall cause the New Certificates representing Nortel
Common Shares into which shares of a stockholder's Company Common Stock are
converted at the Effective Time and/or any check in respect of any fractional
share interests or dividends or distributions which such person shall be
entitled to receive pursuant to this Article III to be delivered to such
stockholder upon delivery to the Exchange Agent of Old Certificates representing
such shares of Company Common Stock (or, pursuant to Section 3.05(f), a surety
bond reasonably satisfactory to Nortel and the Exchange Agent, if any of such
certificates are lost, stolen or destroyed) owned by such stockholder. No
interest will be paid on any such cash to be paid in lieu of fractional share
interests or in respect of dividends or distributions which any such person
shall be entitled to receive pursuant to this Article III upon such delivery.
(c) Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to any former holder of Company Common Stock for
any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(d) No dividends or other distributions with respect to Nortel Common
Shares with a record date occurring after the Effective Time shall be paid to
the holder of any unsurrendered Old Certificate representing shares of Company
Common Stock converted in the Merger into the right to receive shares of such
Nortel Common Shares and cash in lieu of fractional Nortel Common Shares
pursuant to Section 3.04, until the holder thereof shall be entitled to receive
New Certificates and such amount of cash in exchange therefor in accordance with
this Article III. After becoming so entitled in accordance with this Article
III, the record holder thereof also shall be entitled to receive any such
dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to Nortel Common Shares such holder
had the right to receive upon surrender of the Old Certificate, and payment
thereof shall be made promptly following the later of (i) the date on which such
holder shall become entitled to receive New Certificates and (ii) the payment
date with respect to such dividend or other distribution.
(e) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of the Company for one year after the Effective Time shall, upon
demand by Nortel, be paid or delivered to Nortel. Any stockholders of the
Company who have not theretofore complied with this Article III shall thereafter
look only to Nortel for payment of the Nortel Common Shares, cash in lieu of any
fractional shares and unpaid dividends and distributions on the Nortel Common
Shares deliverable in respect of each share of Company Common Stock such
stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon.
(f) If any Old Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Old
Certificate to be lost, stolen or destroyed and the posting by such person of a
bond in such reasonable amount as Nortel may direct as indemnity against any
claim that may be made against it or the Surviving Corporation with respect to
such Old Certificate, Nortel shall, in exchange for such lost, stolen or
destroyed Old Certificate, deliver or cause the Exchange Agent to deliver a New
Certificate in respect thereof pursuant to this Article III.
3.06. Anti-Dilution Provisions. In the event Nortel changes (or
establishes a record date for changing) the number of Nortel Common Shares
issued and outstanding prior to the Effective Time as a result of a stock split,
stock dividend, recapitalization, subdivision, reclassification, combination,
exchange of shares or similar transaction with respect to the outstanding Nortel
Common Shares then (a) if the record and payment dates therefor shall be prior
to the Effective Time, the Exchange Ratio shall be proportionately adjusted to
reflect such stock split, stock dividend, recapitalization, subdivision,
reclassification, combination, exchange of shares or similar transaction; and
(b) if the record date therefor shall be prior to the Effective Time but the
A-11
<PAGE> 89
payment date therefor shall be subsequent to the Effective Time, Nortel shall
take such action as shall be required so that on such payment date any former
holder of Old Certificates who shall have received or become entitled to receive
New Certificates pursuant to this Article III shall be entitled to receive such
additional Nortel Common Shares as such holder would have received as a result
of such event if the record date therefor had been immediately after the
Effective Time.
3.07. Stock Options and Other Stock Plans. (a) Subject to Section 6.17:
Effective at the Effective Time, each option to purchase shares of Company
Common Stock (collectively, the "Company Stock Options") granted to employees or
directors of, or consultants or advisors to, the Company or any Subsidiary
thereof pursuant to the terms of the Periphonics Corporation 1995 Stock Option
Plan, the Periphonics Corporation 1995 Non-Employee Director Stock Option Plan
or the Periphonics Corporation 1986 Incentive Stock Option Plan (collectively,
the "Company Stock Option Plans") that is outstanding immediately prior to the
Effective Time shall be assumed by Nortel and deemed to constitute an option to
acquire, on the same terms and conditions (including adjustments for any stock
dividend, subdivision, reclassification, recapitalization, split, combination,
exchange of shares or similar transaction following such and the terms and
conditions approved by resolution of the Company Board adopted on April 15,
1999) as were applicable under such Company Stock Option immediately prior to
the Effective Time, the number of Nortel Common Shares (rounded down to the
greatest number of whole Nortel Common Shares) that is equal to the product of
(i) the number of shares of Company Common Stock covered by such Company Stock
Option immediately prior to the Effective Time multiplied by (ii) the Exchange
Ratio, at an option exercise price per share of Nortel Common Shares equal to
the quotient of (iii) the option exercise price per share of Company Common
Stock covered by such Company Stock Option immediately prior to the Effective
Time divided by (iv) the Exchange Ratio. The date of grant of each such Company
Stock Option shall be the date on which such Company Stock Option was originally
granted. Any Company Stock Option, the terms and conditions of which were
amended pursuant to the resolutions adopted by the Company Board on April 15,
1999 to provide for the acceleration of the vesting of such stock option as a
result of the Merger, shall become vested in accordance with such terms and
conditions as so amended. Within three Business Days following the Effective
Date, Nortel shall cause to be delivered to each holder of a Company Stock
Option that has been assumed by Nortel pursuant to this Section 3.07 a notice
stating that (x) such Company Stock Option has been converted into an option to
purchase Nortel Common Shares, (y) such Company Stock Option has been assumed by
Nortel and shall continue in effect subject to all of the terms and conditions
applicable thereto immediately prior to the Effective Time and (z) setting forth
the number of Nortel Common Shares covered by such Company Stock Option and the
per share option exercise price for such Nortel Common Shares. From and after
the Effective Time, Nortel and the Surviving Corporation shall comply with the
terms of each Company Stock Option Plan pursuant to which the Company Stock
Options were granted; provided, that the board of directors of Nortel or an
authorized committee thereof shall succeed to the authorities and
responsibilities of the Company Board or any committee thereof under the Company
Stock Option Plans. The adjustments provided herein with respect to any Company
Stock Options that are "incentive stock options" (as defined in Section 422 of
the Code) shall be effected in a manner consistent with Section 424(a) of the
Code.
(b) Prior to the Effective Date, the Company shall take all necessary or
appropriate action (including amending any of the Company Stock Option Plans or
making adjustments as permitted thereby) to (i) use its reasonable best efforts
to obtain as promptly as possible following the mailing of the Company Proxy
Statement, the written consent of each holder of a Company Stock Option (in a
form reasonably satisfactory to counsel to Nortel) to the assumption and
conversion of such individual's Company Stock Options as contemplated in Section
3.07(a), (ii) effectuate the assumption and conversion of the Company Stock
Options by Nortel and the assignment to Nortel of the authorities and
responsibilities of the Company Board or any committee thereof under the Company
Stock Option Plans and (iii) other than as expressly permitted pursuant to
Section 4.01(b), preclude the grant of any additional Company Stock Options
under any of the Company Stock Option Plans or otherwise.
(c) Nortel shall cause to be taken all corporate action necessary to
reserve for issuance a sufficient number of Nortel Common Shares for delivery
upon exercise of Company Stock Options in accordance with
A-12
<PAGE> 90
this Section 3.07. Within five business days after the Effective Date, Nortel
shall use its reasonable best efforts to cause the Nortel Common Shares subject
to Company Stock Options to be registered under the Securities Act pursuant to a
registration statement on Form S-8 (or any successor or other appropriate forms)
and shall use its reasonable best efforts to cause the effectiveness of such
registration statement (and current status of the prospectus or prospectuses
contained therein) to be maintained for so long as Company Stock Options remain
outstanding.
(d) The Company shall take such action as is necessary to cause a "new
exercise date," within the meaning of the Periphonics Corporation 1995 Employee
Stock Purchase Plan (the "Company Stock Purchase Plan"), to be established that
will cause the offering period under such Company Stock Purchase Plan in effect
immediately prior to the Effective Date to terminate as of a date that is no
later than three Business Days prior to the Effective Date; provided that such
change in the offering period shall be conditioned upon the consummation of the
Merger. On such new exercise date, the Company shall apply the funds credited as
of such date under the Company Stock Purchase Plan within each participant's
payroll withholding account to the purchase of whole shares of Company Common
Stock in accordance with the terms of the Company Stock Purchase Plan.
Immediately prior to and effective as of the Effective Time and subject to the
consummation of the Merger, the Company shall terminate the Company Stock
Purchase Plan.
ARTICLE IV
ACTIONS PENDING MERGER
4.01. Forbearances of the Company. From the date hereof until the
Effective Time, except as expressly contemplated by this Agreement, as required
by a Governmental Authority of competent jurisdiction or as set forth in Section
4.01 of the Company's Disclosure Schedule, without the prior written consent of
Nortel, the Company will not, and will cause each of its Subsidiaries not to:
(a) Ordinary Course. Conduct its business and the business of its
Subsidiaries other than in the ordinary and usual course in all material
respects and in material compliance with applicable laws and regulations
or, to the extent consistent therewith, fail to use reasonable best efforts
to preserve intact their business organizations and assets and maintain
their rights, franchises and existing relations with customers, suppliers,
employees and business associates, or take any action that would adversely
affect its ability to perform any of its material obligations under this
Agreement in any material respect; provided, however, that no action by the
Company or its Subsidiaries with respect to matters specifically addressed
by any other provision of this Section 4.01 shall be deemed a breach of
this Section 4.01(a) unless such action would constitute a breach of one or
more of such other provisions.
(b) Capital Stock. (i) Issue, sell, pledge, dispose of or encumber,
or authorize or propose the issuance, sale, pledge, disposition or
encumbrance of, any shares of its capital stock or any Rights, (ii) enter
into any agreement with respect to the foregoing or (iii) permit any
additional shares of capital stock to become subject to new grants of
employee or director stock options, other Rights or similar stock-based
employee rights, other than (v) automatic grants, if any, of stock options
to purchase Company Common Stock in accordance with the terms of the
Company 1995 Non-Employee Director Stock Option Plan as in effect on the
date hereof, (w) grants of stock options to purchase up to an aggregate of
50,000 shares of the Company Common Stock in accordance with the terms of
the Company 1995 Stock Option Plan, as amended and in effect on the date
hereof, to new employees hired after the date hereof and/or to current
employees (other than current officers or other executives) in connection
with the promotion or retention of any such current employee, in any such
case, in the ordinary course of business, (x) the issuance of the Company
Common Stock upon the exercise of stock options outstanding as of the date
hereof issued in the ordinary course of business in accordance with the
terms of any Company Stock Option Plan as in effect on the date of this
Agreement or granted as permitted under clause (v) above, (y) issuances by
a wholly owned Subsidiary of the Company of capital stock to such
Subsidiary's parent and (z) issuances to comply with the Company's
obligations under the Company Stock Purchase Plan.
A-13
<PAGE> 91
(c) Dividends, Etc. (i) Make, declare, pay or set aside for payment
any dividend (other than dividends from the Company's Subsidiaries to the
Company or another Subsidiary of the Company) on or in respect of, or
declare or make any distribution on any shares of its capital stock or (ii)
except for any such transaction by a wholly owned Subsidiary of the Company
which remains a wholly owned Subsidiary after consummation of such
transaction, directly or indirectly adjust, split, combine, redeem,
reclassify, purchase, repurchase or otherwise acquire, any shares of the
capital stock of the Company or any of its Subsidiaries.
(d) Compensation; Employment Agreements; Etc. Enter into or amend
any employment, consulting, severance, retention, change in control or
similar agreements or arrangements with any of its or its Subsidiaries'
directors, officers, employees or consultants or former directors,
officers, employees or consultants, or grant any salary, wage or other
compensation increase, make any award or grant under any Plan or increase
or modify any employee benefit (including any incentive or bonus payments),
except (i) for increases in annual salary or hourly wage rates granted to
current employees (other than officers) in the ordinary course of business,
consistent with past practice, (ii) for changes required to be implemented
in accordance with the current terms of any Company Plan set forth in
Section 4.01(d) of the Company's Disclosure Schedule and (iii) grants of
stock options permitted under Section 4.01(b).
(e) Benefit Plans. Enter into, adopt, implement or amend in any
material respect (except to the extent required to comply with applicable
law) any Plan.
(f) Acquisitions and Dispositions. Except in the ordinary course of
business, consistent with past practice, acquire all or any portion of the
assets, business or properties of any other entity or sell, transfer,
mortgage, encumber or otherwise dispose of or discontinue any portion of
its assets, business or properties.
(g) Amendments. Amend the Company Certificate or the Company's
by-laws.
(h) Accounting Methods. Implement or adopt any change in its
accounting principles, practices or methods, other than as may be required
by U.S. GAAP or SEC regulation.
(i) Contracts. Except in the ordinary course of business, (i) enter
into or terminate (x) any customer contract or agreement in excess of
$3,000,000, (y) any contract or agreement with a supplier that does not
conform in size and scope to similar contracts entered into by the Company
or its Subsidiaries prior to the date hereof or (z) any material lease or
other agreement or (ii) amend or modify in a material respect any of its
existing material contracts, agreements or leases (including any material
licensing agreement).
(j) Claims. Except in the ordinary course of business, settle any
claim, action or proceeding involving money damages in excess of $100,000
in the aggregate or involving any restrictions or limitations on the
Company or the Company's business.
(k) Adverse Actions. (i) Take any action with the Knowledge that
such action would, or is reasonably likely to, prevent or impede the Merger
from qualifying as a reorganization within the meaning of Section 368(a) of
the Code; or (ii) knowingly take any action that is intended or is
reasonably likely to result in (A) any of its representations and
warranties set forth in this Agreement being or becoming untrue at any time
at or prior to the Effective Time, (B) except as otherwise permitted by
Section 6.06, any of the conditions to the Merger set forth in Article VII
not being satisfied or satisfaction of any such condition being materially
delayed or (C) a violation of any provision of this Agreement except, in
each case, as may be required by applicable law.
(l) Incurrence of Indebtedness. Other than (i) short-term
indebtedness incurred in the ordinary course of business consistent with
past practice but in no event to exceed an aggregate of $1,000,000 of
short-term debt and (ii) indebtedness of the Company or any of its
Subsidiaries to the Company or any of its Subsidiaries, incur any
indebtedness for borrowed money, assume, guarantee, endorse or otherwise as
an accommodation become responsible for the obligations of any other
individual, corporation or other entity, or make any loan or advance.
A-14
<PAGE> 92
(m) Capital Expenditures. Make any capital expenditures in excess of
$2,000,000 in the aggregate in any quarter of the year.
(n) Tax Elections. Make any new or different material Tax election,
or revoke any material Tax election.
(o) Confidentiality Agreements. Waive any confidentiality or
"standstill" provisions entered into with any third party in connection
with its consideration of an Acquisition Proposal.
(p) Agreements. Agree or commit to do anything prohibited by the
above paragraphs (a) through (o).
4.02. Forbearances of Nortel. From the date hereof until the Effective
Time, except as expressly contemplated by this Agreement or as set forth in
Section 4.02 of Nortel's Disclosure Schedule, without the prior written consent
of the Company, Nortel will not, and will cause each of its Subsidiaries not to:
(a) Dividends, Etc. (i) Make, declare, pay or set aside for payment
any extraordinary cash dividend on or in respect of the Nortel Common
Shares.
(b) Adverse Actions. (i) Take any action with the Knowledge that
such action would, or is reasonably likely to, prevent or impede the Merger
from qualifying as a reorganization within the meaning of Section 368(a) of
the Code; or (ii) knowingly take any action that is intended or is
reasonably likely to result in (A) any of its representations and
warranties set forth in this Agreement being or becoming untrue at any time
at or prior to the Effective Time, (B) subject to Section 6.11(d), any of
the conditions to the Merger set forth in Article VII not being satisfied
or satisfaction of any such condition being materially delayed or (C) a
violation of any provision of this Agreement except, in each case, as may
be required by applicable law.
(c) Agreements. Agree or commit to do anything prohibited by the
above paragraphs (a) and (b).
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01. Representations and Warranties of the Company. Except as set forth
in the disclosure schedule delivered by the Company to Nortel prior to the
execution of this Agreement (the "Company Disclosure Schedule") (each section of
which qualifies the correspondingly numbered representation and warranty or
covenant to the extent specified therein), the Company hereby represents and
warrants to each of Nortel and Sub as follows:
(a) Organization, Standing and Authority. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization. It is duly qualified to do
business and is in good standing in the states of the United States and
foreign jurisdictions where its ownership or leasing of property or assets
or the conduct of its business requires it to be so qualified and it has in
effect all federal, state, local and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on
its business as it is now conducted, except where the failure to be so duly
qualified and in good standing or to have in effect all federal, state,
local, and foreign governmental authorizations does not have, and would not
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on the Company. The Company has made available to
Nortel a complete and correct copy of its certificate of incorporation and
by-laws, each as amended and in full force and effect as of the date of
this Agreement, and the Company is not in violation of any provision
thereof.
A-15
<PAGE> 93
(b) Shares.
(i) The authorized capital stock of the Company consists of (A)
30,000,000 shares of Company Common Stock, par value $0.01 of which
13,236,840 shares were outstanding as of August 20, 1999 (the
"Capitalization Date") and (B) 1,000,000 shares of preferred stock, par
value $0.01 per share ("Company Preferred Stock"), of which no shares
were issued or outstanding as of the Capitalization Date and 750,000
shares of which have been designated Series A Junior Participating
Preferred Stock ("Company Series A Preferred Stock") and reserved for
issuance upon exercise of the rights (the "Company Stockholder
Protection Rights") distributed to the holders of Company Common Stock
pursuant to a Rights Agreement dated as of July 31, 1996, between the
Company and the American Stock Transfer & Trust Company, as Rights
Agent, as amended (the "Company Rights Agreement"). Since the
Capitalization Date, there have been no issuances of shares of the
capital stock of the Company or any other securities of the Company
other than issuances of shares pursuant to Company Stock Options
outstanding on the Capitalization Date as set forth in clause (iii)
below.
(ii) All issued and outstanding shares of Company Common Stock have
been duly authorized and validly issued, and are fully paid and
nonassessable, and no class of capital stock of the Company is entitled
to preemptive rights.
(iii) There were outstanding at the Capitalization Date no Rights
to acquire capital stock from the Company other than (A) the Company
Stockholder Protection Rights, (B) Company Stock Options and (C) rights
under the Company Stock Purchase Plan, the Rights referred to in clauses
(B) and (C) representing in the aggregate the right to purchase
1,729,200 shares of Company Common Stock. Section 5.01(b)(iii) of the
Company's Disclosure Schedule sets forth for all Company Stock Options
outstanding at the Capitalization Date a true and complete list of the
following: their holders, their date of grant, the number of shares of
Company Common Stock for which they are exercisable, their exercise
price as currently in effect, their date of vesting and the conditions,
if any, under which such vesting may accelerate. Other than in
connection with the Option Agreement and other than the associated
Company Stockholder Protection Rights issued with the shares of Company
Common Stock issued as described in clause (i) above, no Rights to
acquire capital stock from the Company have been issued or granted since
the Capitalization Date.
(c) Subsidiaries.
(i) Section 5.01(c)(i) of the Company Disclosure Schedule sets
forth a list as of the date hereof of all of the Company's Subsidiaries,
together with their jurisdiction of organization. Unless otherwise
described therein, the Company owns, directly or indirectly,
beneficially and of record 100% of the issued and outstanding voting
securities of each such Subsidiary (other than directors' qualifying
shares, if any). No equity securities of any of the Company's
Subsidiaries are or may become required to be issued (other than to the
Company or its wholly owned Subsidiaries) by reason of any Rights and
there are no contracts, commitments, understandings or arrangements by
which any of such Subsidiaries is bound to sell or otherwise transfer
any shares of capital stock of any such Subsidiaries (other than to the
Company or its wholly owned Subsidiaries). In addition, Section
5.01(c)(i) of the Company Disclosure Schedule lists as of the date of
this Agreement each corporation, partnership, limited liability company
or similar entity with respect to which, as of the date of this
Agreement, the Company or any Subsidiary of the Company owns more than
5% but less than a majority of the voting equity or similar voting
interest or any interest convertible into, or exchangeable or
exercisable for, more than 5% but less than a majority of the voting
equity or similar voting interest and which interest is carried on the
Company's most recent financial statements (or if not held as of the
date thereof, would be carried on the Company's financial statements if
prepared as of the date hereof) at a value in excess of $500,000
(collectively, the "Company Equity Interests"). All of the shares of
capital stock of each of the Significant Subsidiaries of the Company and
all the Company Equity Interests held by the Company and each Subsidiary
of the Company are fully paid and nonassessable and are owned by the
Company or
A-16
<PAGE> 94
such Subsidiary free and clear of any Liens. There are no material
outstanding contractual obligations of the Company or any of its
Subsidiaries to provide funds to, or make any investment (in the form of
a loan, capital contribution or otherwise) in any entity in which the
Company or any Subsidiary of the Company owns a Company Equity Interest.
(ii) Each of the Company's Subsidiaries has been duly organized and
is validly existing in good standing under the laws of the jurisdiction
of its organization. Each of such Subsidiaries is duly qualified to do
business and in good standing in the jurisdictions where its ownership
or leasing of property or the conduct of its business requires it to be
so qualified and each has in effect all federal, state, local and
foreign governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its business as it is now
conducted, except where the failure to be so duly qualified and in good
standing or to have in effect all federal, state, local, and foreign
governmental authorizations does not have, and would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on the Company.
(d) Corporate Power. The Company and each of its Subsidiaries has
the corporate power and authority to carry on its business as it is now
being conducted and to own all its properties and assets; and it has the
corporate power and authority to execute, deliver and perform its
obligations under this Agreement and the Option Agreement and to consummate
the transactions contemplated hereby and thereby.
(e) Corporate Authority.
(i) Subject, in the case of the consummation of the Merger, to
receipt of the requisite approval and adoption of the "agreement of
merger" (as such term is used in Section 251 of the DGCL) contained in
this Agreement and the Merger by the holders of a majority of the
outstanding shares of Company Common Stock entitled to vote thereon, the
Company Board having unanimously adopted a resolution approving such
"agreement of merger" and declaring its advisability, this Agreement,
the Option Agreement and the transactions contemplated hereby and
thereby have been authorized by all necessary corporate action of the
Company and the Company Board (assuming that neither Nortel or Sub is an
"interested stockholder" of the Company under Section 203 of the DGCL
immediately before the execution and delivery of this Agreement, the
Option Agreement, and the Stockholders' Agreement).
(ii) This Agreement and the Option Agreement are legal, valid and
binding agreements of the Company, enforceable in accordance with their
terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer
and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles, whether considered at
law or in equity).
(f) No Defaults. Subject to receipt of the regulatory approvals, and
expiration of the waiting periods, referred to in Section 5.01(r) and
required filings under federal and state securities or other laws, the
execution, delivery and performance of this Agreement and the Option
Agreement and the consummation of the transactions contemplated hereby and
thereby by the Company do not and will not (i) constitute a breach or
violation of, or a default under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license, or agreement,
indenture or instrument of the Company or of any of its Subsidiaries or to
which the Company or any of its Subsidiaries or any of their respective
properties or assets are subject or bound, (ii) constitute a breach or
violation of, or a default under, the articles or certificate of
incorporation or by-laws of the Company or any of its Subsidiaries or (iii)
require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license, agreement,
indenture or instrument, except in the case of (i) and (iii), where such
breach, violation or default or the failure to obtain such consents or
approvals would not in the aggregate have a Material Adverse Effect on the
Company, the Surviving Corporation or Nortel and would not prevent or
materially impair the Company's ability to consummate the transactions
contemplated by this Agreement. Section 5.01(f) of the Company Disclosure
Schedule contains a list of
A-17
<PAGE> 95
all consents of third parties required under any material agreement to be
obtained by it or its subsidiaries prior to, or as a result of, the
consummation of the Merger.
(g) Financial Reports and SEC Documents.
(i) With respect to the periods since May 31, 1996, the Company and
its Subsidiaries have filed all reports and statements, together with
any amendments required to be made thereto, that were required to be
filed with the SEC.
(ii) The Company's Annual Reports on Form 10-K for the fiscal years
ended May 31, 1996, 1997, and 1998, its Quarterly Reports on Form 10-Q
for the periods ended August 31, 1998, November 30, 1998 and February
28, 1999, and all other reports, registration statements, definitive
proxy statements or information statements filed or to be filed by it or
any of its Subsidiaries subsequent to May 31, 1996 under the Securities
Act, or under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, in
the form filed, or to be filed (collectively, the "Company SEC
Documents"), with the SEC, as of the date filed (or, with respect to a
document filed prior to the date of this Agreement and amended or
superseded by a subsequent filing prior to the date of this Agreement,
then on the date of such filing as so amended or superseded) (A)
complied or will comply in all material respects as to form with the
applicable requirements under the Securities Act or the Exchange Act, as
the case may be; and (B) did not 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 to make the statements therein, in
light of the circumstances under which they were made, not misleading;
and each of the balance sheets contained in or incorporated by reference
into any such Company SEC Document (including the related notes and
schedules thereto) fairly presents and will fairly present the financial
position of the entity or entities to which it relates as of its date,
and each of the statements of income and changes in stockholders' equity
and cash flows or equivalent statements in such Company SEC Documents
(including any related notes and schedules thereto) fairly presents and
will fairly present the results of operations, changes in stockholders'
equity and changes in cash flows, as the case may be, of the entity or
entities to which it relates for the periods to which they relate, in
each case in accordance with U.S. GAAP 4 consistently applied during the
periods involved and Regulation S-X of the SEC, except in each case as
may be noted therein, subject to normal year-end audit adjustments in
the case of unaudited statements.
(iii) Since February 28, 1999, the Company has not incurred any
liabilities (whether absolute, accrued, contingent or otherwise) that
are of a nature that would be required to be disclosed on a balance
sheet of the Company or the footnotes related thereto prepared in
conformity with U.S. GAAP, except (x) liabilities as set forth in the
Company SEC Documents filed prior to the date of this Agreement (the
"Company Filed SEC Documents") and (y) other liabilities incurred in the
ordinary course of business consistent with past practice, which do not
have, and would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on the Company.
(iv) The Company has furnished to Nortel a draft (dated August 17,
1999) of its Annual Report on Form 10-K for the fiscal year ended May
31, 1999 (including a draft of the consolidated financial statements to
be included therein, with accompanying footnote disclosure) (the "Draft
1999 10-K"). The Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 1999 shall be filed with the SEC on or before August
30, 1999 and shall not differ in any material respect from the Draft
1999 10-K, except for the inclusion of disclosure relating to this
Agreement and the transactions contemplated hereby. The consolidated
balance sheet contained in the Draft 1999 10-K fairly presents the
financial position of the Company as of May 31, 1999, and the statement
of income and changes in stockholders' equity and cash flows for the
fiscal year ended May 31, 1999 contained in the Draft 1999 10-K fairly
present the Company's consolidated results of operations, changes in
stockholders' equity and changes in cash flows for such periods, in each
case in accordance with U.S. GAAP applied consistently with past periods
and Regulation S-X of the SEC.
A-18
<PAGE> 96
(h) Litigation. Except as disclosed on Section 5.01(h) of the
Company Disclosure Schedule, in the Company Filed SEC Documents or the
Draft 1999 10-K, (i) no litigation, claim or other proceeding before any
court or governmental agency that is pending or, to the Company's
Knowledge, threatened against the Company or any of its Subsidiaries would
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on the Company and (ii) no litigation, claim or
other proceeding before any court or governmental agency is pending or, to
the Company's Knowledge, threatened against the Company or any of its
Subsidiaries which, if determined adversely to the Company or any such
Subsidiary, would reasonably be expected to result in a loss of more than
$100,000 or the imposition of any material restrictions on the business of
the Company or any such Subsidiary.
(i) Compliance with Laws. The Company and each of its Subsidiaries:
(i) is in compliance with all applicable federal, state, local
and foreign statutes, laws, regulations, ordinances, rules, judgments,
orders or decrees applicable thereto or to the employees conducting
such businesses, except where failure to so comply does not have, and
would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company;
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations
with, all Governmental Authorities that are required in order to
permit them to conduct their businesses substantially as presently
conducted, and all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect and, to its
Knowledge, no suspension or cancellation of any of them is threatened,
except for (x) failures to hold such permits, licenses,
authorizations, orders and approvals and (y) failures to make such
filings, applications, and registrations, which do not have, and would
not reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect on the Company; and
(iii) has received since May 31, 1998 no written notification or
communication from any Governmental Authority (A) asserting that the
Company or any of its Subsidiaries is not in compliance with any of
the statutes, regulations or ordinances which such Governmental
Authority enforces or (B) threatening to revoke any license,
franchise, permit or governmental authorization.
(j) Material Contracts; Defaults. Except for this Agreement, the
Option Agreement, and those agreements and other documents filed as
exhibits to the Company Filed SEC Documents, as of the date of this
Agreement, neither the Company nor any of its Subsidiaries is a party to or
bound by (i) any "material contract" within the meaning of Item 601(b)(10)
of the SEC's Regulation S-K or (ii) any non-competition agreement or other
agreement or arrangement that materially restricts it or any of its
Subsidiaries from competing in any line of business. Neither it nor any of
its Subsidiaries is in default under any material contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to
which it is a party, by which its respective assets, business, or
operations may be bound or affected, and there has not occurred any event
that, with the lapse of time or the giving of notice or both, would
constitute such a default, except for such defaults that, individually or
in the aggregate, would not reasonably be expected to have a Material
Adverse Effect on the Company.
(k) No Brokers. No action has been taken by the Company, its
officers, directors or employees that would give rise to any valid claim
against any party hereto for a brokerage commission, finder's fee or other
like payment with respect to the transactions contemplated by this
Agreement, excluding fees to be paid to William Blair & Company (the
"Company Financial Advisor") and to Blum & Co., Inc. pursuant to the
Company's written agreements with such firms, true and complete copies of
which agreements have been furnished to Nortel prior to the date of this
Agreement.
(l) Employee Benefits; Employee Relations.
(i) Section 5.01(l) of the Company Disclosure Schedule contains a
complete and correct list of each Company Plan. With respect to each
Company Plan, true and complete copies have been provided to Nortel
of: (i) the plan document or agreement or, with respect to any Company
Plan A-19
<PAGE> 97
that is not in writing, a written description of the terms thereof;
(ii) the trust agreement, insurance contract or other documentation of
any related funding arrangement; (iii) the summary plan description;
(iv) the most recent required Internal Revenue Service Form 5500,
including all schedules thereto; (v) any material communication to or
from any Governmental Authority, including a written description of
any oral communication; and (vi) all amendments or modifications to
any such document.
(ii) Neither the Company nor any Subsidiary thereof has
disseminated in writing or otherwise broadly or generally notified
employees of any intent or commitment (whether or not legally binding)
to create or implement any additional Plan or to amend, modify or
terminate any Company Plan, except for immaterial amendments to any
Company Plan that will not result in an increase in the annual costs
in respect of such plan incurred or to be incurred by the Company or
any of its Subsidiaries.
(iii) Except for any failures that would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on the Company, each Company Plan has been operated and
administered, and is, in compliance with its terms and all applicable
laws, rules and regulations (including ERISA and the Code and any
regulations thereunder). There are no actions, suits, claims or
governmental audits (other than routine claims for benefits in the
ordinary course) pending or, to the Knowledge of the Company,
threatened with respect to any Company Plan that would reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on the Company.
(iv) No Company Plan is, and neither the Company nor any
Subsidiary thereof contributes to or has any material liability or
obligation with respect to any Plan that is, (A) a multiemployer plan
within the meaning of Section 4001(a)(3) of ERISA, (B) any single
employer plan or other pension plan subject to Title IV or Section 302
of ERISA or Section 412 of the Code or (C) a multiple employer plan
within the meaning of Section 4063 or 4064 of ERISA. Neither the
Company nor any Subsidiary thereof is a party to any collective
bargaining or other collective labor agreement or understanding.
(v) There is no pending or, to the Knowledge of the Company,
threatened labor dispute, strike, work stoppage or other concerted
labor activity against the Company or any Subsidiary thereof or
involving any of their respective employees. To the Knowledge of the
Company, neither the Company nor any Subsidiary thereof, nor their
respective businesses, has committed any unfair labor practices or
violated in any material respect any applicable employment laws in
connection with the operation of the respective businesses of the
Company or any Subsidiary thereof, and there is no pending or, to the
Knowledge of the Company, threatened charge or complaint against the
Company or any of its Subsidiaries by the National Labor Relations
Board or any comparable state agency, or by any employee or class of
employees or governmental agency relating to a purported violation of
any applicable employment laws.
(vi) Each Company Plan that is intended to qualify under Section
401(a) and/or 401(k) of the Code so qualifies and its trust is exempt
from taxation under Section 501(a) of the Code. The Company and its
Subsidiaries have timely paid all contributions, premiums and expenses
payable to or in respect of each Company Plan under the terms thereof
and in accordance with applicable law, including ERISA and the Code,
and, to the extent any such contributions, premiums or expenses are
not yet due, the liability therefor has been properly and adequately
accrued on the Company's financial statements included in its
Quarterly Report on Form 10-Q for the period ended February 28, 1999.
(vii) Neither the Company nor any of its Subsidiaries has
incurred or will incur, either directly or indirectly (including as a
result of an indemnification obligation), any material liability under
or pursuant to any provision of Title I or IV of ERISA or the penalty,
excise tax or joint and several liability provisions of the Code
relating to employee benefit plans, and to the Knowledge of the
Company, no event, transaction or condition has occurred, exists or is
expected to occur which A-20
<PAGE> 98
could reasonably be expected to result in any such material liability to
the Company, any of its Subsidiaries or, after the Effective Time ,
Nortel or any of its Affiliates.
(viii) Except as set forth in Section 5.01(l)(viii) of the
Disclosure Schedule, neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby,
either alone or in combination with another event (whether contingent or
otherwise) will (A) entitle any current or former employee, consultant
or director of the Company or any of its Subsidiaries to any increased
or modified benefit or payment; (B) increase the amount of compensation
due to any such employee, consultant or director; (C) accelerate the
vesting, payment or funding of any compensation, stock-based benefit,
incentive or other benefit; (D) result in any "parachute payment" under
Section 280G of the Code (whether or not such payment is considered to
be reasonable compensation for services rendered); or (E) cause any
compensation to fail to be deductible under Section 162(m), or any other
provision of the Code or any similar foreign Law.
(m) Takeover Laws. The Company Board (i) has validly approved this
Agreement, the Option Agreement and the Stockholders' Agreement and the
transactions contemplated hereby and thereby (including the Merger) for
purposes of Section 203 of the DGCL and (ii) has taken all steps necessary
to render Article Ninth of the Company Certificate inapplicable to the
transactions contemplated by this Agreement. Except for Section 203 of the
DGCL (which has been rendered inapplicable), to the Company's Knowledge, no
"moratorium", "control share", "fair price" or other antitakeover laws and
regulations of any state (collectively, "Takeover Laws") are applicable to
the Merger or the other transactions contemplated by this Agreement, the
Option Agreement and the Stockholders' Agreement.
(n) Rights Agreement. The Company Board, by a duly enacted
resolution, has determined in good faith that each of Nortel and Sub shall
be an "Excluded Person" for all purposes of the Company Rights Agreement
(as contemplated by Section 1(h) of such Agreement) and, in connection
therewith, has approved an amendment (in the form provided to Nortel prior
to the date hereof) to the Company Rights Agreement to the effect that none
of Nortel, Sub or any of their respective affiliates shall become an
"Acquiring Person" and that no "Shares Acquisition Date" or "Distribution
Date" (as such terms are defined in the Company Rights Agreement) will
occur as a result of the approval, execution or delivery of this Agreement,
the Option Agreement, or the Stockholders' Agreement or the consummation of
the transactions contemplated hereby or thereby. The Company Rights
Agreement shall terminate and be of no further effect upon the Effective
Time, without any consideration being payable with respect to outstanding
Company Stockholder Protection Rights thereunder.
(o) Environmental Matters.
(i) As used in this Agreement, "Environmental Laws" means all
applicable local, state, provincial and federal environmental, health
and safety laws (including common law) and regulations in effect on the
date of this Agreement, relating to the protection of human health and
safety as affected by exposure to pollutants, contaminants, or hazardous
or toxic wastes, substances or materials and to the protection of the
environment including, without limitation, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation,
and Liability Act, the Clean Water Act, the Federal Clean Air Act, and
the Occupational Safety and Health Act, each as amended, regulations
promulgated thereunder, and state counterparts.
(ii) (x) Neither the conduct or operations of the Company or its
Subsidiaries nor any condition of any property presently or previously
owned, leased or operated by any of them violates or, within the
applicable statute or limitations period, violated Environmental Laws,
except for violations that are not material and (y) no condition has
existed or event has occurred with respect to any of them or any such
property that is reasonably likely to result in a Material Adverse
Effect on the Company. Neither the Company nor any of its Subsidiaries
has received any written notice from any Governmental Authority that it
or its Subsidiaries or the operation or condition of any property ever
owned, leased, operated, held as collateral or held as a fiduciary by
any of them are or were in material violation of or otherwise are
alleged to have material liability under any Environmental Law,
including, but not limited to, responsibility (or potential
responsibility) for the
A-21
<PAGE> 99
cleanup or other remediation of any pollutants, contaminants, or
hazardous or toxic wastes, substances or materials at, on, beneath, or
originating from any such property.
(iii) To the Company's Knowledge, none of the property currently
owned, leased or operated by the Company or by its Subsidiaries is
subject to, or as a result of this transaction would be subject to, (i)
the New Jersey Site Recovery Act or any other state or local
Environmental Laws which would impose restrictions, such as notice,
disclosure or obtaining advance approval prior to this transaction, or
(ii) any liens under any Environmental Laws.
(p) Intellectual Property.
(i) Except as set forth in Section 5.01(p)(i) of the Company
Disclosure Schedule, the Company and its Subsidiaries own or are
licensed to use all Intellectual Property Rights currently used in the
business of the Company or its Subsidiaries or necessary to conduct the
business of the Company and its Subsidiaries as currently conducted or
currently anticipated to be conducted (the "Company Intellectual
Property Rights").
(ii) Section 5.01(p)(ii) of the Company Disclosure Schedule
contains an accurate and complete list as of the date of this Agreement
of the following categories of Company Intellectual Property Rights: (A)
Trademarks that are registered or for which an application for
registration is pending; (B) Patents; (C) Software; (D) Copyrights that
are registered or for which an application for registration is pending;
and (E) mask works. Where listed Intellectual Property Rights are
registered with a governmental authority or an application for
registration is pending, the jurisdiction, registration or application
number, date of registration or application, named owner and/or
assignee, and international classes of registration are indicated, as
applicable.
(iii) Section 5.01(p)(iii) of the Company Disclosure Schedule
contains an accurate and complete list as of the date of this Agreement
of (A) all licenses and agreements under which the Company and its
Subsidiaries are licensed to use third party Intellectual Property
Rights and (B) all licenses and sublicenses under which the Company and
its Subsidiaries have granted rights to third parties to use the Company
Intellectual Property Rights. Except as set forth in Section
5.01(p)(iii) of the Company Disclosure Schedule, the Company and its
Subsidiaries are not required to pay any royalties, fees or other
amounts to any Person in connection with the use of the Company
Intellectual Property Rights.
(iv) The Company and its Subsidiaries have good and valid title to
all Company Intellectual Property Rights owned by any of them and valid
and enforceable license rights to all Company Intellectual Property
Rights used under license, free and clear, to the Company's Knowledge,
of all Liens, and other than as set forth in Section 5.01(p)(iv) of the
Company Disclosure Schedule, to the Company's Knowledge, all Company
Intellectual Property Rights are in full force and effect and will
remain in full force and effect immediately following the Effective
Time.
(v) The Company and its Subsidiaries have a practice to secure, and
have secured, from all consultants and contractors who contribute or
have contributed to the creation or development of Company Intellectual
Property Rights valid written assignments by such persons to the Company
and its Subsidiaries of the rights to such contributions the Company and
its Subsidiaries do not already own by operation of law. The Company and
its Subsidiaries have taken reasonable and appropriate steps to protect
and preserve the confidentiality of all of their Trade Secrets, and to
the Company's Knowledge there are no unauthorized uses, disclosures or
infringements of any Company Intellectual Property Rights, and all use
by, and disclosure to, any Person of Trade Secrets that comprise any
part of the Company Intellectual Property Rights has been pursuant to
the terms of a written agreement with such Person, and all use by the
Company and its Subsidiaries of Trade Secrets owned by another Person
has been pursuant to the terms of a written agreement with such Person
or is otherwise lawful. Neither the Company Intellectual Property Rights
nor the use or other exploitation thereof by the Company and its
Subsidiaries (or any consultant, contractor or employee of the Company
and its Subsidiaries who contributes to or has contributed to or
A-22
<PAGE> 100
participated in the creation or development of Company Intellectual
Property Rights) in the conduct of their business, nor any product or
service provided by the Company and its Subsidiaries, infringes on,
misappropriates, breaches or violates any third party Intellectual
Property Rights.
(vi) Neither the Company nor any of its Subsidiaries: (A) has been
notified or is otherwise aware of any actual or threatened adverse
proceeding of any Person pertaining to any challenge to the scope,
validity or enforceability of, or the Company's ownership of, any of the
Company Intellectual Property Rights; (B) is the subject of any claim of
infringement or misappropriation by the Company or any of its
Subsidiaries of any third party Intellectual Property Rights; or (C) has
any claim for infringement or misappropriation of, or breach of any
license or agreement involving, any of the Company Intellectual Property
Rights.
(q) Tax Matters.
(i) (A) All returns, declarations, reports, estimates, information
returns and statements required to be filed on or before the Effective
Date under federal, state, local or any foreign tax laws ("Tax Returns")
with respect to it or any of its Subsidiaries, have been or will be
timely filed, or requests for extensions have been timely filed and have
not expired, except where a failure or failures to so timely file would
not, individually or in the aggregate, be expected to be material; (B)
all material Tax Returns filed by it are complete and accurate in all
material respects; (C) all Taxes shown to be due and payable (without
regard to whether such Taxes have been assessed) on such Tax Returns
have been paid or adequate reserves have been established for the
payment of such Taxes; (D) the proper and accurate amounts have been
withheld from all employees (and timely paid to the appropriate
Governmental Authority or set aside in an account for such purposes) for
all periods through the Closing date in compliance in all material
respects with all Tax withholding provisions of applicable federal,
state, local and foreign laws (including, without limitation, income,
social security, and employment tax withholding for all types of
compensation); (E) neither it nor any of its subsidiaries is a party to
any tax sharing or similar agreement or any agreement pursuant to which
it or any of its subsidiaries has an obligation to indemnify any party
(other than it or one of its subsidiaries) with respect to Taxes; (F)
all Taxes due with respect to completed and settled examinations or
concluded litigation relating to it or any of its subsidiaries have been
paid in full or adequate reserves have been established for the payment
thereof; and (G) no material audit or examination or refund litigation
with respect to any Tax Return is pending.
(ii) The Company has no reason to believe that any conditions exist
that might prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
(r) Regulatory Approvals. No consents or approvals of, or filings or
registrations with, any Governmental Authority or instrumentality are
necessary to consummate the Merger except (i) as may be required under, and
other applicable requirements of, the Hart-Scott Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the Competition Act
(Canada) and antitrust or other competition laws of other jurisdictions;
(ii) as may be required by the by-laws, rules, regulations or policies of
the Canadian Stock Exchanges in respect of the assumption by Nortel, and
the exercisability by the holders, of the Company Stock Options and of the
NYSE and the Canadian Stock Exchanges in respect of the Nortel Common
Shares to be issued in the Merger and upon exercise of the Company Stock
Options to be assumed by Nortel by reason of the Merger and the listing of
such Nortel Common Shares on such stock exchanges; (iii) the filing with
the SEC of the Company Proxy Statement and the filing and declaration of
effectiveness of the Registration Statement; (iv) the filing of a
certificate of merger with the Secretary of State of the State of Delaware
pursuant to the DGCL; (v) such filings as are required to be made or
approvals as are required to be obtained under the securities or "Blue Sky"
laws of various states in connection with the issuance of Nortel Common
Shares in the Merger; (vi) such filings as are required to be made and
exemption rulings or orders as are required to be obtained under the Canada
Business Corporations Act and Canadian securities laws; and (vii) as may be
required under Section 721
A-23
<PAGE> 101
of the U.S. Defense Production Act of 1950, as amended, and the rules
promulgated thereunder ("Exon-Florio") and the rules and regulations
promulgated by the U.S. Department of Defense.
(s) Fairness Opinion. On or before the date hereof, the Company
Financial Advisor has delivered its opinion to the Company Board that the
Exchange Ratio is fair, from a financial point of view, to the holders of
Company Common Stock and such opinion has not been withdrawn.
(t) Year 2000 Compliance.
(i) Except as set forth in Section 5.01(t)(i) of the Company
Disclosure Schedule, all Material Systems of the Company and its
Subsidiaries have been remediated through modification, upgrade or
replacement so that they are (A) able to receive, record, store,
process, calculate, manipulate and output dates from and after January
1, 2000, time periods that include January 1, 2000 and information that
is dependent on or relates to such dates or time periods, in the same
manner and with the same accuracy, functionality, data integrity and
performance as when dates or time periods prior to January 1, 2000 are
involved and (B) able to store and output date information in a manner
that is unambiguous as to century ("Year 2000 Compliant").
(ii) To the Company's Knowledge, the material suppliers and vendors
of goods and services to the Company and its Subsidiaries ("Material
Suppliers") are taking, or will in a timely manner take, such steps as
are necessary to make their respective Material Systems Year 2000
Compliant by December 31, 1999, except to the extent that the failure of
any such Material Systems of Material Suppliers to be Year 2000
Compliant would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect on the Company.
(iii) All Company application products shipped to customers since
August 1, 1998, and all other Company products shipped to customers
since September 1, 1998, are Year 2000 Compliant in all material
respects and have been tested by the Company (including custom testing
of all third-party manufactured content of such Company products) to
confirm such status. With respect to Company products shipped prior to
such dates, the Company and its Subsidiaries have undertaken reasonable
efforts to notify all end-users of such products of the need to upgrade
such products to be Year 2000 Compliant and of the need to audit any
custom application products to identify any respects in which they are
not Year 2000 Compliant.
(iv) The Company has furnished to Nortel copies of, or copies of
all documents relating to, (A) all complaints, investigations or audits
of any Governmental Authority, (B) all unresolved customer complaints,
demands or claims (excluding routine requests for information regarding
matters relating to the year 2000 turnover), (C) all attorney letters or
demands and (D) all litigation, arbitrations or similar proceedings, in
each case insofar as they relate to the Year 2000 Compliant status of
Company products, the cost of upgrading Company products to a Year 2000
Compliant status or injuries and damages suffered as a result of the
non-Year 2000 Compliant condition of Company products.
(v) The Company has provided to Nortel copies of its written
contingency plan relating to interruptions to its business or the
functioning of Company products caused by the year 2000 turnover, and
the Company has no other contingency plans relating thereto.
(u) No Material Adverse Effect. Since May 31, 1999, and until the
date hereof, the Company and its Subsidiaries have conducted their
respective businesses in the ordinary course (excluding the incurrence of
reasonable and customary liabilities related to this Agreement and the
transactions contemplated hereby). Since May 31, 1999, and until the date
hereof, no event has occurred or circumstance arisen that, individually or
taken together with all other facts, circumstances and events (described in
any paragraph of Section 5.01 or otherwise), has had or is reasonably
likely to have a Material Adverse Effect with respect to the Company.
5.02. Representations and Warranties of Nortel and Sub. Except as set
forth in the disclosure schedule delivered by Nortel to the Company prior to the
execution of this Agreement (the "Nortel
A-24
<PAGE> 102
Disclosure Schedule") (each section of which qualifies the correspondingly
numbered representation and warranty or covenant to the extent specified
therein), Nortel and Sub hereby represent and warrant to the Company as follows:
(a) Organization, Standing and Authority. Each of Nortel and Sub (x)
is a corporation duly organized, validly existing and, in the case of Sub,
in good standing under the laws of the jurisdiction of its organization and
(y) is duly qualified to do business and, as applicable, is in good
standing in the provinces of Canada and in the states of the United States
and foreign jurisdictions where its ownership or leasing of property or
assets or the conduct of its business requires it to be so qualified,
except where the failure to be duly organized, validly existing, in good
standing, or duly qualified does not have and would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Nortel. Each of Nortel and Sub has in effect all federal,
provincial, state, local and foreign governmental authorizations necessary
for it to own or lease its properties and assets and to carry on its
business as it is now conducted, except where failure to have in effect
such authorizations does not have and would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on
Nortel. Each of Nortel and Sub has made available to the Company a complete
and correct copy of its constitutive documents, each as amended to date and
in full force and effect.
(b) Shares.
(i) As of the date hereof, the authorized capital stock of Nortel
consists solely of (A) an unlimited number of Nortel Common Shares, of
which 1,358,418,380 shares were outstanding as of August 17, 1999
(giving effect to the one-for-one stock dividend effected by Nortel as
of such date); (B) an unlimited number of Class A Preferred Shares
issuable in series, without nominal or par value, of which 200
Cumulative Redeemable Class A Preferred Shares Series 4 (which are
exchangeable at certain times, and subject to certain conditions, into
Nortel Common Shares), 16,000,000 Cumulative Redeemable Class A
Preferred Shares Series 5 (which are convertible at certain times, and
subject to certain conditions, into an equal number of Cumulative
Redeemable Class A Preferred Shares Series 6) and 14,000,000
Non-cumulative Redeemable Class A Preferred Shares Series 7 (which are
convertible at certain times, and subject to certain conditions, into an
equal number of Non-cumulative Redeemable Class A Preferred Shares
Series 8) were outstanding as of August 17, 1999; and (C) an unlimited
number of Class B Preferred Shares, issuable in series, without nominal
or par value, of which no shares were outstanding as of August 17, 1999.
As of the date hereof, there are no outstanding Rights to acquire
capital stock from Nortel other than pursuant to Nortel's stock option
and other employee compensation plans, Nortel's shareholder dividend
reinvestment and stock purchase plan and the exchange rights associated
with Nortel's Series 4 Preferred Shares that have been Previously
Disclosed.
(ii) The authorized capital stock of Sub consists of one share of
common stock, $0.01 per share, which one share is outstanding and is
owned directly by Nortel. Sub has not conducted any business prior to
the date hereof and has no Subsidiaries and no assets, liabilities or
obligations of any nature other than incident to its formation and
incident to this Agreement.
(iii) The outstanding shares of Nortel's and Sub's capital stock
have been duly authorized and are validly issued and outstanding, fully
paid and nonassessable, and subject to no preemptive rights (and were
not issued in violation of any preemptive rights). As of the date
hereof, there are no shares of capital stock of Sub authorized and
reserved for issuance and Sub does not have any Rights issued or
outstanding with respect to its capital stock or any commitment to
authorize, issue or sell any such shares or Rights, except pursuant to
this Agreement.
(iv) The Nortel Common Shares to be issued in exchange for shares
of Company Common Stock in the Merger or upon exercise of Company Stock
Options to be assumed by Nortel by reason of the Merger, when issued
will be duly authorized, validly issued, fully paid and nonassessable
and will not have been issued in violation of any subscriptive or
preemptive rights.
A-25
<PAGE> 103
(c) Corporate Power. Each of Nortel and Sub has the corporate power
and authority to carry on its business as it is now being conducted and to
own all its properties and assets; and each of Nortel and Sub has the
corporate power and authority to execute, deliver and perform its
obligations under this Agreement and, in the case of Nortel, the Option
Agreement and to consummate the transactions contemplated hereby and, in
the case of Nortel, thereby.
(d) Corporate Authority. (i) This Agreement and the transactions
contemplated hereby, including the issuance of Nortel Common Shares in the
Merger or upon the exercise of Company Stock Options to be assumed by
Nortel by reason of the Merger, and the Option Agreement and the
transactions contemplated thereby, as applicable, have been authorized and
approved by all necessary corporate action of Nortel (no shareholder
approvals being required), Sub, the Nortel Board and the Board of Directors
of Sub prior to the date hereof (which action has not been rescinded or
modified in any way) and (ii) each of this Agreement and, in the case of
Nortel, the Option Agreement, is a legal, valid and binding agreement of
each of Nortel and Sub, enforceable in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general
equity principles, whether considered at law or in equity).
(e) No Defaults. Subject to receipt of the regulatory approvals, and
expiration of the waiting periods, referred to in Section 5.02(i) and any
required filings under federal, state and provincial securities laws and
the Canada Business Corporations Act, the execution, delivery and
performance of this Agreement and, as applicable, the Option Agreement and
the consummation of the transactions contemplated hereby and, as
applicable, thereby by Nortel and Sub do not and will not (i) constitute a
material breach or violation of, or a material default under, any law, rule
or regulation or any judgment, decree, order, governmental permit or
license, or agreement, indenture or instrument of Nortel or of any of
Nortel's Subsidiaries or to which it or any of its Subsidiaries or any of
their respective properties or assets are subject or bound, (ii) constitute
a breach or violation of, or a default under, the articles or certificate
of incorporation or by-laws of either Nortel or Sub, or (iii) require any
consent or approval under any such material law, rule, regulation,
judgment, decree, order, governmental permit or license, agreement,
indenture or instrument, except in the case of (i) and (iii), where such
breach, violation or default or the failure to obtain such consents or
approvals would not in the aggregate have a Material Adverse Effect on the
Company, the Surviving Corporation or Nortel and would not prevent or
materially impair Nortel's ability to consummate the transactions
contemplated by this Agreement.
(f) Financial Reports and SEC Documents. Nortel's Annual Reports on
Form 10-K for the fiscal years ended December 31, 1996, 1997 and 1998, its
Quarterly Reports on Form 10-Q for the periods ended March 31, 1999 and
June 30, 1999, and all other reports or registration statements, filed or
to be filed by it or any of its Subsidiaries subsequent to December 31,
1996 under the Securities Act, or under Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act, in the form filed, or to be filed (collectively, the
"Nortel SEC Documents"), with the SEC, as of the date filed (A) complied or
will comply in all material respects as to form with the applicable
requirements under the Securities Act or the Exchange Act, as the case may
be; and (B) did not 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 to make the statements therein, in light of the circumstances
under which they were made, not misleading; and each of the balance sheets
contained in or incorporated by reference into any such Nortel SEC Document
(including the related notes and schedules thereto) fairly presents and
will fairly present the financial position of the entity or entities to
which it relates as of its date, and each of the statements of income and
changes in stockholders' equity and cash flows or equivalent statements in
such Nortel SEC Documents (including any related notes and schedules
thereto) fairly presents and will fairly present the results of operations,
changes in stockholders' equity and changes in cash flows, as the case may
be, of the entity or entities to which it relates for the periods to which
they relate, in each case in accordance with Canadian GAAP consistently
applied during the periods involved and Regulation S-X of the SEC, except
in each case as may be noted therein, subject to normal year-end audit
adjustments in the case of unaudited statements. The books and records of
Nortel and its Subsidiaries have been, and are being, maintained in all
material
A-26
<PAGE> 104
respects in accordance with Canadian GAAP and any other applicable legal
and accounting requirements and reflect only actual transactions.
(g) Litigation. Except as Previously Disclosed, no litigation, claim
or other proceeding before any court or governmental agency that is pending
or, to Nortel's Knowledge, threatened against Nortel or any of its
Subsidiaries would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Nortel.
(h) No Brokers. No action has been taken by it that would give rise
to any valid claim against any party hereto for a brokerage commission,
finder's fee or other like payment with respect to the transactions
contemplated by this Agreement, excluding fees to be paid to Credit Suisse
First Boston.
(i) Regulatory Approvals. No consents or approvals of, or filings or
registrations with, any Governmental Authority or with any third party are
necessary to consummate the Merger except for (i) as may be required under,
and other applicable requirements of, the HSR Act and the Competition Act
(Canada); (ii) as may be required by the by-laws, rules, regulations or
policies of the Canadian Stock Exchanges in respect of the assumption by
Nortel, and the exercisability by the holders, of the Company Stock Options
and of the NYSE and the Canadian Stock Exchanges in respect of the Nortel
Common Shares to be issued in the Merger and upon the exercise of the
Company Stock Options to be assumed by Nortel by reason of the Merger and
the listing of such Nortel Common Shares on such stock exchanges; (iii) the
filing with the SEC of the Company Proxy Statement in definitive form and
the filing and declaration of effectiveness of the Registration Statement;
(iv) the filing of a certificate of merger with the Secretary of State of
the State of Delaware pursuant to the DGCL; (v) such filings as are
required to be made or approvals as are required to be obtained under the
securities or "Blue Sky" laws of various states in connection with the
issuance of Nortel Common Shares in the Merger; (vi) such filings as are
required to be made and exemption rulings or orders as are required to be
obtained under the Canada Business Corporations Act and Canadian securities
laws; and (vii) as may be required under Exon-Florio and the rules and
regulations promulgated by the U.S. Department of Defense.
(j) No Material Adverse Effect. Since December 31, 1998, until the
date hereof, no event has occurred or circumstance arisen that,
individually or taken together with all other facts, circumstances and
events (described in any paragraph of Section 5.02 or otherwise), has had
or is reasonably likely to have a Material Adverse Effect with respect to
Nortel.
(k) Taxes. Nortel has not taken or agreed to take any action with
the Knowledge that such action would, or failed to take any action with the
Knowledge that the omission of such action would, prevent or impede the
Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code. Nortel has no Knowledge of any facts or circumstances
that would, with respect to the Merger, prevent Nortel from being treated
as a corporation pursuant to Section 367 of the Code or the Treasury
regulations promulgated thereunder.
ARTICLE VI
COVENANTS
The Company hereby covenants to and agrees with Nortel, and each of Nortel
and Sub hereby covenants to and agrees with the Company, that:
6.01. Reasonable Best Efforts. Subject to the terms and conditions of
this Agreement, it shall use its reasonable best efforts in good faith to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or desirable (including obtaining any consents of third
parties required under any agreement to be obtained by it or its subsidiaries
prior to, or as a result of, the consummation of the Merger so that such
agreement is not terminable as a result of the Merger), or advisable under
applicable laws, so as to permit consummation of the Merger as promptly as
practicable and otherwise to enable consummation of the transactions
contemplated hereby and shall cooperate fully with the other party hereto to
that end. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purpose of
A-27
<PAGE> 105
this Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such necessary action
as may be reasonably requested by, and at the sole expense of, Nortel.
6.02. Stockholder Approvals. The Company shall take, in accordance with
this Agreement, applicable law, applicable NASD rules and its certificate of
incorporation and by-laws, all action necessary to convene an appropriate
meeting of stockholders of the Company to consider and vote upon the approval
and adoption of the "agreement of merger" (as such term is used in Section 251
of the DGCL) contained in this Agreement and the Merger and any other matters
required to be approved by the Company's stockholders for consummation of the
Merger (including any adjournment or postponement, the "Company Meeting") as
promptly as practicable. The Company Board, subject to Section 6.06, shall at
all times recommend such approval and shall take all reasonable lawful action to
solicit such approval by its stockholders.
6.03. Registration Statement. (a) Each of Nortel and the Company agrees
to cooperate in the preparation of a registration statement on Form S-4 (the
"Registration Statement") to be filed by Nortel with the SEC in connection with
the issuance of Nortel Common Shares in the Merger (including the proxy
statement and prospectus and other proxy solicitation materials of the Company
constituting a part thereof (the "Company Proxy Statement") and all related
documents). The Registration Statement and the Company Proxy Statement shall
comply as to form in all material respects with the applicable provisions of the
Securities Act and the Exchange Act and the rules and regulations thereunder.
Provided the other party has cooperated as required above, the Company agrees to
file the Company Proxy Statement in preliminary form with the SEC as promptly as
practicable, and Nortel agrees to file the Registration Statement with the SEC
as promptly as practicable after any SEC comments with respect to the
preliminary Proxy Statement are resolved or at such earlier time as Nortel may
elect. Each of Nortel and the Company shall, as promptly as practicable after
receipt thereof, provide copies of any written comments received from the SEC
with respect to the Registration Statement and the Company Proxy Statement, as
the case may be, to the other party, and advise the other party of any oral
comments with respect to the Registration Statement or the Company Proxy
Statement received from the SEC. Each of Nortel and the Company agrees to use
reasonable best efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as practicable after filing
thereof, and the Company agrees to mail the Company Proxy Statement to its
shareholders as promptly as practicable after the Registration Statement is
declared effective. Nortel also agrees to use reasonable best efforts to obtain
all necessary state securities law or "Blue Sky" permits and approvals required
to carry out the transactions contemplated by this Agreement. The Company agrees
to furnish to Nortel all information concerning the Company, its Subsidiaries,
officers, directors and stockholders as may be reasonably requested in
connection with the foregoing.
(b) Each of Nortel and the Company agrees, as to itself and its
Subsidiaries, that none of the information supplied or to be supplied by it for
inclusion or incorporation by reference in (i) the Registration Statement will,
at the time the Registration Statement and each amendment or supplement thereto,
if any, becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and (ii) the
Company Proxy Statement and any amendment or supplement thereto will, at the
date of mailing to stockholders and at the time of the Company Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading.
(c) Nortel agrees to advise the Company, promptly after Nortel receives
notice thereof, of the time when the Registration Statement has become effective
or any supplement or amendment has been filed, of the issuance of any stop order
or the suspension of the qualification of the Nortel Common Shares for offering
or sale in any jurisdiction, of the initiation or threat of any proceeding for
any such purpose, or of any request by the SEC for the amendment or supplement
of the Registration Statement or for additional information.
(d) Nortel will use its reasonable best efforts to obtain, and will
provide evidence reasonably satisfactory to the Company, of all necessary
rulings or orders of Canadian securities regulatory authorities exempting the
distribution by Nortel of the Nortel Common Shares and options to purchase
Nortel Common
A-28
<PAGE> 106
Shares under the Merger and the resale of Nortel Common Shares issued under the
Merger in Canada as contemplated by this Agreement from the registration and
prospectus requirements under applicable Canadian securities laws on terms
reasonably satisfactory to Nortel and the Company.
6.04. Press Releases. Nortel and the Company shall jointly agree on an
initial press release with respect to the transactions contemplated hereby and
in compliance with applicable law. The Company will not, without the prior
approval of Nortel, issue any other press release or written statement for
general circulation (including any written statement circulated to employees,
customers or other third parties) relating to the transactions contemplated
hereby, except, based on the advice of counsel, as otherwise required by
applicable law or regulation or NASD rules and only after consulting, or using
its reasonable best efforts to consult, with Nortel.
6.05. Access; Information. (a) Upon reasonable notice and subject to
applicable laws relating to the exchange of information, the Company shall
afford to the officers, employees, counsel, accountants and other authorized
representatives of Nortel, reasonable access, during normal business hours
throughout the period prior to the Effective Date, to all of its properties,
books, contracts, commitments and records and, during such period, it shall
furnish promptly to Nortel (i) a copy of each material report, schedule and
other document filed by it pursuant to the requirements of federal or state
securities laws, and (ii) all other information concerning the business,
properties and personnel of it as Nortel may reasonably request; provided that
such information may not be used for any purpose unrelated to the consummation
of the transactions contemplated by this Agreement. The Company shall promptly
inform Nortel of any material litigation, claim or other proceeding before any
court or other governmental authority that arises following the date of this
Agreement and any material development in any such existing material litigation,
claim or other proceeding. The Company and its Subsidiaries shall not be
required to provide access to or to disclose information where such access or
disclosure would contravene any law, rule, regulation, order, judgment, decree
or agreement. Nortel and the Company shall make appropriate substitute
disclosure arrangements under circumstances in which the restrictions of the
preceding sentence apply.
(b) Subject to the requirements of applicable law, pending consummation of
the Merger, all non-public information provided by the Company to Nortel and
Nortel to the Company pursuant to this Agreement or otherwise will remain
subject to the obligations of Nortel and the Company under the Confidentiality
Agreement.
(c) No investigation by a party, pursuant to this Section 6.05 or
otherwise, shall affect or be deemed to modify any representation or warranty of
the other party contained herein.
6.06. Acquisition Proposals. (a) The Company shall not, and shall cause
its Subsidiaries and the officers, directors, agents and advisors of the Company
and its Subsidiaries not to, initiate, solicit or encourage inquiries or
proposals with respect to, or engage in any negotiations concerning, or provide
any confidential information to, or have any discussions with, any person
relating to, any Acquisition Proposal. Notwithstanding the foregoing, the
Company shall be permitted to engage in any discussions or negotiations with, or
provide any information to, any Person in response to a bona fide written
Acquisition Proposal by any such Person, if and only to the extent that in each
such case such proposal was not solicited or encouraged in violation of this
Agreement and (i) the Company Meeting shall not have occurred; (ii) the Company
Board determines in good faith that such Acquisition Proposal would, if
consummated, constitute a Superior Proposal and is reasonably likely to be
consummated; (iii) the Company Board determines, in good faith after
consultation with outside counsel, that such action is legally required as a
matter of the fiduciary duties of the directors under applicable law; and (iv)
prior to providing any information or data to any Person or entering into
discussions or negotiations with any Person, the Company receives from such
Person an executed confidentiality agreement containing terms no less
restrictive with respect to such Person than the terms of the Confidentiality
Agreement with respect to Nortel. The Company shall notify Nortel promptly, but
in any event within 24 hours, of any such inquiries, proposals, or offers
received by, any such information requested from, or any such discussions or
negotiations sought to be initiated or continued with, any of its
representatives indicating, in connection with such notice, the name of such
Person and the material terms and conditions of any proposals or offers. For the
purposes of this Agreement, "Superior Proposal" shall
A-29
<PAGE> 107
mean any bona fide Acquisition Proposal made by a third party that was not
solicited or encouraged in violation of this Agreement and which the Company
Board determines in its good faith judgment (based on the written opinion to
such effect by a financial advisor of nationally recognized reputation) to be
materially more favorable to the stockholders of the Company than the
transactions contemplated by this Agreement. the Company shall immediately cease
and cause to be terminated any activities, discussions or negotiations conducted
prior to the date of this Agreement with any parties other than Nortel with
respect to any Acquisition Proposal. The Company shall advise Nortel of any
material developments with respect to any proposal as to which the Company is
exercising its rights pursuant to the second sentence of this Section 6.06
promptly upon the occurrence thereof.
(b) Subject to Section 8.01 (e)(ii), neither the Company Board nor any
committee thereof shall (i) withdraw or modify, or propose to withdraw or
modify, in a manner adverse to Nortel, the approval and declaration of
advisability by the Company Board of the "agreement of merger" (as such term is
used in Section 251 of the DGCL) contained in this Agreement notwithstanding any
withdrawal by the Company Board of its recommendation of such "agreement of
merger" (whether or not permitted by subsection (c) below), (ii) approve or
recommend, or propose to approve or recommend, any Acquisition Proposal, (iii)
cause the Company or any of its Subsidiaries to enter into any letter of intent,
agreement in principle, acquisition agreement, merger agreement or other similar
agreement with respect to any Acquisition Proposal or (iv) other than in
accordance with subsection (c) below, withdraw or modify, in a manner adverse to
Nortel, or fail to make, the recommendation to Company stockholders of such
"agreement of merger."
(c) Notwithstanding subsection (b)(iv) above, but subject to subsections
(b)(i)-(iii) above in the event (but only in the event) that the Company Board
determines in good faith, after consultation with outside counsel, that, having
received a Superior Proposal, such action is legally required as a matter of the
fiduciary duties of the directors under applicable law, the Company Board may
withdraw or modify its recommendation to Company stockholders of the "agreement
of merger" contained in this Agreement (or not recommend it in the Company Proxy
Statement), but only at a time that is after the third Business Day following
Nortel's receipt of written notice advising Nortel that the Company Board has
received a proposal which may be a Superior Proposal, specifying the material
terms and conditions of such proposal and identifying the Person making such
proposal.
(d) Nothing in this Section 6.06 shall (i) prohibit the Company from
complying, to the extent applicable, with Rules 14d-9 and 14e-2(a) promulgated
under the Exchange Act with respect to an Acquisition Proposal or (ii) permit
the Company to violate its obligations under the first sentence of Section 6.02.
6.07. Affiliate Agreements. (a) Not later than the mailing of the
Company Proxy Statement, the Company shall deliver to Nortel a schedule of each
person that, to the best of its knowledge, is or is reasonably likely to be, as
of the date of the Company Meeting, deemed to be an "affiliate" of it (each, a
"Company Affiliate") as that term is used in Rule 145 under the Securities Act.
Thereafter, the Company shall promptly notify Nortel upon becoming aware of any
other person that is or is reasonably likely to be, as of the date of the
Company Meeting, deemed to be a Company Affiliate.
(b) The Company shall use its reasonable best efforts to cause each person
who may be deemed to be a Company Affiliate to execute and deliver to Nortel on
or before the date of mailing of the Company Proxy Statement (or, in the case of
any person identified as a possible Company Affiliate after such date, as
promptly thereafter as possible) an agreement in the form attached hereto as
Exhibit A.
6.08. Takeover Laws. Subject to Section 6.06, no party shall take any
action that would cause the transactions contemplated by this Agreement, the
Option Agreement, and the Stockholders' Agreement to be subject to requirements
imposed by any Takeover Law and each of them shall take all necessary steps
within its control to exempt (or ensure the continued exemption of), or minimize
the effect on, the transactions contemplated by this Agreement and the Option
Agreement from, or if necessary challenge the validity or applicability of, any
applicable Takeover Law, as now or hereafter in effect, including, without
limitation, Section 203 of the DGCL or any other Takeover Laws that purport to
apply to this Agreement or the Option Agreement or the transactions contemplated
hereby or thereby.
A-30
<PAGE> 108
6.09. The Company Rights Agreement. The Company Board shall take all
further action (in addition to that referred to in Section 5.01(n)) necessary
(including redeeming the Company Stockholder Protection Rights immediately prior
to the Effective Time or amending the Company Rights Agreement) in order to
render the Company Stockholder Protection Rights inapplicable to the Merger and
the other transactions contemplated by this Agreement, the Option Agreement, and
the Stockholders' Agreement. The Company Board shall take no action (including
redeeming the Company Stockholder Protection Rights or amending the Company
Rights Agreement) in order to render the Company Stockholder Protection Rights
inapplicable in connection with any Acquisition Proposal.
6.10. Shares Listed. Nortel shall use its reasonable best efforts to
list, prior to the Effective Date, on the NYSE and the Canadian Stock Exchanges,
subject to official notice of issuance, the Nortel Common Shares to be issued to
the holders of Company Common Stock in the Merger and upon exercise of Company
Stock Options to be assumed by Nortel by reason of the Merger.
6.11. Regulatory Applications. (a) Nortel and the Company and their
respective Subsidiaries shall cooperate and use their respective reasonable best
efforts (i) to prepare all documentation, to effect all filings (including,
without limitation, filings under the HSR Act and the Competition Act (Canada))
and to obtain all permits, consents, approvals and authorizations of all third
parties and Governmental Authorities necessary to consummate the transactions
contemplated by this Agreement and (ii) to cause the Merger to be consummated as
expeditiously as reasonably practicable. Each of Nortel and the Company shall
have the right to review in advance, and to the extent practicable each will
consult with the other, in each case subject to applicable laws relating to the
exchange of information, with respect to, all material written information
submitted to any third party or any Governmental Authority in connection with
the transactions contemplated by this Agreement. In exercising the foregoing
right, each of the parties hereto agrees to act reasonably and as promptly as
practicable. Each party hereto agrees that it will consult with the other party
hereto with respect to the obtaining of all material permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement and each party will keep the other party apprised of the status of
material matters relating to completion of the transactions contemplated hereby.
(b) Each party agrees, upon request, to furnish the other party with all
information concerning itself, its Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other party or any of its Subsidiaries to any third party or Governmental
Authority.
(c) In furtherance and not in limitation of the covenants of the parties
contained in Sections 6.11(a) and (b), if any objections are asserted with
respect to the transactions contemplated hereby under any Regulatory Law or if
any suit is instituted or threatened by any Governmental Authority or any
private party challenging any of the transactions contemplated hereby as
violative of any Regulatory Law, each of Nortel and the Company shall use its
reasonable best efforts to resolve any such objections or challenge as such
Governmental Authority or private party may have to such transactions under such
Regulatory Law so as to permit consummation of the transactions contemplated by
this Agreement, and if any administrative or judicial action or proceeding,
including any proceeding by a private party, is instituted (or threatened to be
instituted) challenging any transaction contemplated by this Agreement as
violative of any Regulatory Law, each of Nortel and the Company shall cooperate
in all respects with each other and use its respective reasonable best efforts
to contest and resist any such action or proceeding and to have vacated, lifted,
reversed or overturned any decree, judgment, injunction or other order, whether
temporary, preliminary or permanent, that is in effect and prohibits, prevents
or restricts consummation of the transactions contemplated by this Agreement.
Notwithstanding the foregoing or any other provision of this Agreement, nothing
in this Section 6.11 shall limit a party's right to terminate this Agreement
pursuant to Section 7.01(b) or 8.01(d) so long as such party has theretofore
complied in all respects with its obligations under this Section 6.11.
(d) Nothing contained in this Agreement shall require Nortel or any of its
Subsidiaries to sell or otherwise dispose of, or to hold separately, or permit
the sale or other disposition of, any assets of Nortel, the Company or their
respective Subsidiaries, or require Nortel to refrain from exercising full
authority over the
A-31
<PAGE> 109
Company and its Subsidiaries after the Effective Time, whether as a condition to
obtaining any approval from a Governmental Authority or any other Person or for
any other reason.
6.12. Indemnification. (a) Following the Effective Date and until the
expiration of any applicable statutory limitations period, the Surviving
Corporation shall indemnify, defend and hold harmless the present and former
directors and officers of the Company and its Subsidiaries (each, an
"Indemnified Party") against all costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
this Agreement and the Option Agreement) to the fullest extent that the Company
is permitted to indemnify its directors and officers under the laws of the State
of Delaware, the Company Certificate and the Company's by-laws as in effect on
the date hereof (and the Surviving Corporation shall also advance expenses as
incurred to the fullest extent permitted under applicable law).
(b) For a period of six years from the Effective Time, Nortel shall
provide a "runoff" policy with respect to that portion of director's and
officer's liability insurance that serves to cover the present and former
officers and directors of the Company and its Subsidiaries (determined as of the
Effective Time) with respect to claims against such directors and officers
arising from facts or events which occurred at or before the Effective Time,
which "runoff" insurance shall contain at least the same maximum coverage and
amounts to such officers and directors, and contain terms and conditions no less
advantageous, as that coverage currently provided by the Company; provided,
however, that in no event shall Nortel be required to expend to maintain or
obtain the insurance called for by this Section 6.12(b) more than 200 percent of
the current annual amount expended by the Company to maintain or procure such
directors and officers insurance coverage for the current year (the "Insurance
Amount"); provided, further, that if Nortel is unable to maintain or obtain the
insurance called for by this Section 6.12(b), Nortel shall use its reasonable
best efforts to obtain as much comparable insurance as is available for the
Insurance Amount; provided, further, that officers and directors of the Company
or any Subsidiary of the Company may be required to make application and provide
customary representations and warranties to Nortel's insurance carrier for the
purpose of obtaining such insurance.
(c) Any Indemnified Party wishing to claim indemnification under Section
6.12(a), upon learning of any claim, action, suit, proceeding or investigation
described above, shall promptly notify Nortel thereof; provided, that the
failure so to notify shall not affect the obligations of Nortel under Section
6.12(a) unless and to the extent such failure materially increases Nortel's
liability under such subsection (a).
(d) If Nortel or any of its successors or assigns shall consolidate with
or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any entity, then and in each case, proper provision shall
be made so that the successors and assigns of Nortel shall assume the
obligations set forth in this Section 6.12.
6.13. Certain Employee Benefit Matters. (a) For the one year period
ending on the first anniversary of the Effective Date (the "Continuation
Period"), the Surviving Corporation shall, or shall cause its Subsidiaries to,
(i) pay to each of their respective employees, during any portion of the
Continuation Period that such employee is employed by the Surviving Corporation
or any such Subsidiary, an annual salary or hourly wage rate, as applicable,
that is no less than the annual salary or hourly wage rate payable to such
employee immediately prior to the Effective Time and (ii) provide such employee
in the aggregate with employee benefits, during any portion of the Continuation
Period that such employees are employed by the Surviving Corporation or any such
Subsidiary, that are substantially similar in the aggregate to the employee
benefits provided to such employees pursuant to the Company Plans (other than
equity based benefits) immediately prior to the Effective Time. Without limiting
the foregoing, during the Continuation Period, the Surviving Corporation and its
Subsidiaries shall continue to maintain without modification those Company Plans
that provide severance benefits and that are listed on Section 6.13(a) of the
Company Disclosure Schedule. Notwithstanding any other provision herein, none of
the Surviving Corporation, any of its
A-32
<PAGE> 110
Subsidiaries or Nortel will have any obligation to continue the employment of
any such employee for any period following the Effective Time.
(b) With respect to the Plans, if any, of Nortel in which employees of the
Company or its Subsidiaries ("Company Employees") become eligible to participate
after the Effective Time (the "Nortel Plans"), Nortel shall, or shall cause the
Surviving Corporation to: (i) with respect to each Nortel Plan that is a medical
or health plan, (x) waive any exclusions for pre-existing conditions under such
Nortel Plan that would result in a lack of coverage for any condition for which
the applicable Company Employee would have been entitled to coverage under the
corresponding Company Plan in which such Company Employee was an active
participant immediately prior to his or her transfer to the Nortel Plan; (y)
waive any waiting period under such Nortel Plan to the extent that such period
exceeds the corresponding waiting period under the corresponding Company Plan in
which such Company Employee was an active participant immediately prior to his
or her transfer to the Nortel Plan (after taking into account the service credit
provided for herein for purposes of satisfying such waiting period); and (z)
provide each Company Employee with credit for any co-payments and deductibles
paid by such Company Employee prior to his or her transfer to the Nortel Plan
(to the same extent such credit was given under the analogous Company Plan prior
to such transfer) in satisfying any applicable deductible or out-of-pocket
requirements under such Nortel Plan for the plan year that includes such
transfer; and (ii) recognize all service of the Company Employees with the
Company or any of its Subsidiaries for purposes of eligibility to participate,
vesting credit, entitlement to benefits, and, solely with respect to vacation
and severance benefits, benefit accrual in any Nortel Plan in which the Company
Employees are eligible to participate after the Effective Time; provided that
the foregoing shall not apply to the extent it would result in duplication of
benefits. Nothing in this paragraph shall be interpreted to require Nortel to
provide for the participation of any Company Employee in any Nortel Plan.
(c) To the extent applicable, Nortel and the Company shall each take such
reasonable steps as are required to cause the disposition and acquisition of
equity securities (including derivative securities) pursuant to Article III of
this Agreement in connection with the consummation of the Merger by each
individual who is an officer or director of the Company to qualify for exemption
from Section 16(b) of the Exchange Act pursuant to Rule 16b-3(e) promulgated
under the Exchange Act.
6.14. Accountants' Letters. Each of the Company and Nortel shall use its
reasonable best efforts to cause to be delivered to the other party a letter of
Deloitte & Touche LLP ("Deloitte"), respectively, independent auditors, dated a
date within two Business Days of the date on which the Registration Statement
shall become effective and addressed to such other party, and in form and
substance customary for "comfort" letters delivered by independent accountants
(x) in the case of Deloitte in its capacity as independent auditors to the
Company, in accordance with Statement of Accounting Standards No. 72 and (y) in
the case of Deloitte in its capacity as independent auditors to Nortel, in
accordance with the Handbook of The Canadian Institute of Chartered Accountants.
6.15. Notification of Certain Matters. (a) Each of the Company and
Nortel shall give prompt notice to the other of any fact, event or circumstance
known to it that would cause or constitute a material breach of any of its
representations, warranties, covenants or agreements contained herein.
(b) Nortel shall promptly notify the Company, and the Company shall
promptly notify Nortel, in writing, of any notice or other communication from
any regulatory authority or self-regulatory organization in connection with the
transactions contemplated by this Agreement or the Option Agreement.
(c) Each of Nortel and the Company shall promptly notify the other of any
fact, event or circumstance known to it that could reasonably be expected to,
individually or taken together with all other facts, events and circumstances
known to it, cause the Merger to fail to qualify as a "reorganization" within
the meaning of Section 368(a) of the Code.
6.16. Certain Tax Matters. Each of Nortel and the Company will use its
reasonable best efforts to cause the Merger to constitute a reorganization
within the meaning of Section 368(a) of the Code, and to timely satisfy, or
cause to be timely satisfied, all applicable tax reporting and filing
requirements contained in
A-33
<PAGE> 111
the U.S. Code and Treasury Regulations with respect to the Merger, including the
reporting requirements contained in U.S. Treasury Regulation Section
1.367(a)-3(c)(6).
6.17. Agreements with Respect to Assumption of Company Stock
Options. Nortel will use its reasonable best efforts to obtain any requisite
approval of the Canadian Stock Exchanges of Nortel's assumption of the Company
Stock Options and the exercisability thereof by the holders thereof to acquire
Nortel Common Shares. If the Canadian Stock Exchanges require, as a condition to
granting any such approval, that the holders of Nortel Common Shares approve
such assumption and exercisability, Nortel will, subject to the second
succeeding sentence, take, in accordance with this Agreement, applicable law,
applicable rules of the Canadian Stock Exchanges and its articles of
incorporation and by-laws, all action necessary to convene an appropriate
meeting of its shareholders to consider and vote upon the approval of such
assumption and exercisability, such meeting to be held no later than five
business days after the Company Meeting. Nortel shall at all times recommend
such approval and shall take all reasonable lawful action to solicit such
approval by its shareholders. In lieu of seeking such approval, Nortel may elect
to permit the following (and, if such approval of Nortel's shareholders is not
obtained, the following shall apply): the Company shall be permitted to take all
necessary or appropriate actions to cause the acceleration of the vesting of the
Company Stock Options so that they may be exercised by the holders thereof
beginning three business days prior to the Effective Time and the Company shall
take all necessary or appropriate actions so that any Company Stock Options
remaining unexercised at the Effective Time shall, without the necessity of any
further action by the holders thereof, be canceled and converted into the right
of the holder thereof to receive, in lieu of shares of Company Common Stock and
subject to applicable income tax withholding and employer taxes, for each share
of Company Common Stock covered thereby, an amount in cash equal to the
difference obtained by subtracting the exercise price per share of such Company
Stock Option from $29.23. In the event that Nortel makes the described election,
or such Nortel shareholder approval has not been obtained, from and after the
Effective Time, all Company Stock Options shall represent only the right of the
holders thereof to receive payment of the amount described above upon surrender
thereof and all Company Stock Option Plans shall terminate as of the Effective
Time. In such event, the Company shall take all permitted actions necessary to
ensure that, following the Effective Time, no participant in any Company Stock
Option Plan shall have any right thereunder to acquire equity securities or
other ownership interests of Nortel, the Company, the Surviving Corporation or
any Subsidiary thereof and to terminate all Company Stock Option Plans.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each of Nortel, Sub and the Company to consummate the
Merger is subject to the fulfillment or written waiver by Nortel, Sub and the
Company prior to the Effective Time of each of the following conditions:
(a) Stockholder Approvals. This "agreement of merger" (as that term
is used in Section 251 of the DGCL) and the Merger shall have been duly
adopted by the requisite vote of the stockholders of the Company.
(b) Regulatory Approvals. All regulatory approvals required to
consummate the transactions contemplated hereby shall have been obtained
and shall remain in full force and effect and all statutory waiting periods
in respect thereof shall have expired and (in the case of Nortel's
obligation to consummate the Merger) no such approvals shall contain any
conditions, restrictions or requirements which would reasonably be expected
to (i) following the Effective Time, have a Material Adverse Effect on
Nortel and its Subsidiaries taken as a whole or on the Surviving
Corporation or (ii) require Nortel to take any action that it is not
required to take under Section 6.11(d) hereof.
(c) No Injunction. No Governmental Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any statute, rule, regulation, judgment, decree, injunction or
A-34
<PAGE> 112
other order (whether temporary, preliminary or permanent) which is in
effect and enjoins or prohibits consummation of the Merger.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and be
in effect and no proceedings for that purpose shall have been initiated or
threatened by the SEC and not concluded or withdrawn.
(e) Listing. The Nortel Common Shares to be issued in the Merger and
upon exercise of Company Stock Options to be assumed by Nortel by reason of
the Merger shall have received approval for listing on the NYSE and the
Canadian Stock Exchanges, subject to official notice of issuance.
7.02. Conditions to Obligation of the Company. The obligation of the
Company to consummate the Merger is also subject to the fulfillment or written
waiver by the Company prior to the Effective Time of each of the following
conditions:
(a) Representations and Warranties. All representations and
warranties of Nortel set forth in this Agreement (without giving effect to
any standard, qualification or exception contained therein with respect to
materiality or Material Adverse Effect) shall be true and correct, as of
the date of this Agreement and as of the Effective Date as though made on
and as of the Effective Date (except that representations and warranties
that by their terms speak as of the date of this Agreement or some other
date shall be true and correct as of such date), except as would not have
or reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Nortel; and the Company shall have received a
certificate, dated the Effective Date, signed on behalf of Nortel by the
Chief Executive Officer or the Chief Financial Officer of Nortel to such
effect.
(b) Performance of Obligations. Nortel shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and the Company shall have
received a certificate, dated the Effective Date, signed on behalf of
Nortel by the Chief Executive Officer or the Chief Financial Officer of
Nortel to such effect.
(c) Opinion of the Company's Counsel. The Company shall have
received an opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel to
the Company, dated the Effective Date, to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, (a) the
Merger constitutes a reorganization within the meaning of Section 368 (a)
of the Code, (b) Nortel shall be treated as a corporation under Section
367(a)(1) of the Code with respect to each transfer of property thereto
pursuant to the Merger, and (c) that, accordingly, (i) no gain or loss will
be recognized by the Company as a result of the Merger and (ii) no gain or
loss will be recognized by a stockholder of the Company who receives Nortel
Common Shares in exchange for shares of Company Common Stock, except with
respect to cash received in lieu of fractional share interests. In
rendering its opinion, such counsel may require and rely upon
representations contained in letters from the Company, Nortel, Sub and
stockholders of the Company. Counsel's opinion shall not address the tax
consequences applicable to any stockholder of the Company who, immediately
after the Merger, will be a "five percent transferee shareholder" with
respect to Nortel within the meaning of U.S. Treasury Regulation Section
1.367(a)-3(c)(5).
(d) No Material Adverse Effect. From the date of this Agreement, no
event shall have occurred or circumstance arisen or been discovered that,
individually or taken together with all other such events and
circumstances, has had or would reasonably be expected to have a Material
Adverse Effect on Nortel.
7.03. Conditions to Obligation of Nortel and Sub. The obligations of
Nortel and Sub to consummate the Merger are also subject to the fulfillment or
written waiver by Nortel and Sub prior to the Effective Time of each of the
following conditions:
(a) Representations and Warranties. All representations and
warranties of the Company set forth in this Agreement (without giving
effect to any standard, qualification or exception contained therein
A-35
<PAGE> 113
with respect to materiality or Material Adverse Effect) shall be true and
correct, as of the date of this Agreement and as of the Effective Date as
though made on and as of the Effective Date (except that representations
and warranties that by their terms speak as of the date of this Agreement
or some other date shall be true and correct as of such date), except as
would not have or reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company; and Nortel and Sub
shall have received a certificate, dated the Effective Date, signed on
behalf of the Company by the Chief Executive Officer and the Chief
Financial Officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall
have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Effective Time, and
Nortel and Sub shall have received a certificate, dated the Effective Date,
signed on behalf of the Company by the Chief Executive Officer and the
Chief Financial Officer of the Company to such effect.
(c) Material Adverse Effect. From the date of this Agreement, no
event shall have occurred or circumstance arisen or been discovered that,
individually or taken together with all other such events and circumstances
has had or would reasonably be expected to have a Material Adverse Effect
on the Company.
(d) Opinion of Nortel and Sub's Counsel. Nortel shall have received
an opinion of Cleary, Gottlieb, Steen & Hamilton, special counsel to Nortel
and Sub dated the Effective Date, to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, (a) the
Merger constitutes a reorganization under Section 368(a) of the Code, (b)
Nortel shall be treated as a corporation under Section 367(a)(1) of the
Code with respect to each transfer of property thereto pursuant to the
Merger and (c) that, accordingly, (i) no gain or loss will be recognized by
the Company as a result of the Merger and (ii) no gain or loss will be
recognized by a stockholder of the Company who receives Nortel Common
Shares in exchange for shares of the Company Common Stock, except with
respect to cash received in lieu of fractional share interests. In
rendering its opinion, such counsel may require and rely upon
representations contained in letters from the Company, Nortel, Sub and
stockholders of the Company. Counsel's opinion shall not address the tax
consequences applicable to any stockholder of the Company who, immediately
after the Merger, will be a "five percent transferee shareholder" with
respect to Nortel within the meaning of U.S. Treasury Regulation Section
1.367(a)-3(c)(5).
(e) No Action Seeking Injunction. No Governmental Authority of
competent jurisdiction shall have brought an action or proceeding seeking
to enjoin or prohibit consummation, or require the unwinding, of the
Merger, or to impose substantial penalties as a result of the Merger, which
action or proceeding is reasonably likely to succeed.
ARTICLE VIII
TERMINATION
8.01. Termination. This Agreement may be terminated, and the Merger may
be abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the
mutual consent of Nortel and the Company by action taken by their
respective Boards of Directors.
(b) Breach. At any time prior to the Effective Time, by Nortel or
the Company, in the event of either: (i) a breach by the other party of any
representation or warranty contained herein which would result in the
non-satisfaction of the conditions set forth in Sections 7.02(a) and
7.03(a), as the case may be, which breach is not capable of being cured or
has not been cured within 10 calendar days after the giving of written
notice to the breaching party of such breach; or (ii) a material breach by
the other party of any of the covenants or agreements contained herein,
which breach is not capable of being cured or has not been cured within 10
calendar days after the giving of written notice to the breaching party of
such breach. Without limiting the foregoing, for all purposes of this
Agreement, any breach of
A-36
<PAGE> 114
the agreements contained in Section 6.06 or in the first sentence of
Section 6.02 shall constitute a breach which is not capable of being cured.
(c) Delay. At any time prior to the Effective Time, by Nortel or the
Company, if its Board of Directors so determines, in the event that the
Merger is not consummated by March 31, 2000, or, in the event that an
approval of any Governmental Authority required to be obtained for the
consummation of the transactions contemplated by this Agreement has not
been obtained, June 30, 2000, except to the extent that the failure of the
Merger then to be consummated arises out of or results from the knowing
action or inaction of the party seeking to terminate pursuant to this
Section 8.01(c) which action or inaction is in violation of its obligations
under this Agreement.
(d) No Approval.
(i) By the Company or Nortel, by action taken by its Board of
Directors, in the event the approval of any Governmental Authority
required for consummation of the Merger and the other transactions
contemplated by this Agreement shall have been denied by final
nonappealable action of such Governmental Authority.
(ii) By Nortel, by action taken by its Board of Directors, in the
event any required approval of a Governmental Authority contains any
final, nonappealable conditions, restrictions or requirements which
would reasonably be expected to (A) following the Effective Time, have a
Material Adverse Effect on Nortel and its Subsidiaries taken as a whole
or on the Surviving Corporation or (B) require Nortel to take any action
that it is not required to take under Section 6.11(d) hereof.
(iii) By the Company, by action taken by its Board of Directors, in
the event any required approval of a Governmental Authority contains any
final, nonappealable conditions, restrictions or requirements which
would reasonably be expected to (A) following the Effective Time, have a
Material Adverse Effect on Nortel and its Subsidiaries taken as a whole
or (B) require Nortel to take any action that it is not required to take
under Section 6.11(d) hereof, unless (in either case) within 30 days
following receipt by Nortel of written notice of the Company's intent to
terminate this Agreement under this clause (iii) Nortel notifies the
Company that it waives its right to terminate this Agreement under
clause (ii) above.
(iv) By Nortel or the Company, if its Board of Directors so
determines, in the event the approval of the Company's stockholders
required by Section 7.01(a) herein is not obtained at the Company
Meeting by reason of the failure to obtain the requisite vote required
by Section 7.01(a) at a duly held meeting or an adjournment thereof.
(e) Board Action.
(i) By Nortel if the Board of Directors of the Company, prior to
the Company Meeting (A) shall withdraw or modify in any adverse manner
its recommendation of the "agreement of merger" (as such term is used in
Section 251 of the DGCL) contained in this Agreement (whether or not
such withdrawal or modification is permitted by Section 6.06(c)), or (B)
shall resolve to do so.
(ii) By the Company if the Board of Directors of the Company, prior
to the Company Meeting shall elect to terminate this Agreement, in order
to recommend or approve a Superior Proposal; provided that (x) the
Company has notified Nortel in writing that it intends to recommend or
approve a Superior Proposal, attaching the most current version of such
proposal to such notice, and (y) at any time after the third Business
Day following written notification by the Company to Nortel of the
Company's intention to enter into a binding agreement with respect to
such proposal, after taking into account any modifications to the
transactions contemplated by the Agreement that Nortel has then proposed
in writing and not withdrawn, the Company Board has determined that such
proposal is and continues to be a Superior Proposal, and (z)
concurrently with the giving of notice of such termination, pays to
Nortel the Termination Fee due under Section 8.02(b) (unless Nortel
A-37
<PAGE> 115
has previously notified the Company of its election to defer such
payment pursuant to Section 8.02(c)).
8.02. Effect of Termination and Abandonment. (a) In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article VIII, no party to this Agreement shall have any liability or further
obligation to any other party hereunder except as set forth in subsections (b),
(c) and (d) below and in Section 9.01.
(b) Nortel and the Company agree that the Company shall pay to Nortel the
sums described below (the "Termination Fee") solely as follows:
(i) the sum of $15,000,000 either if (x) the Company shall terminate
this Agreement pursuant to Section 8.01(c) (unless the failure to
consummate the Merger by the relevant date results primarily from the
action or inaction of Nortel or from Nortel's or Sub's inability to obtain
consent or approval of, or make any filing or registration with, any
Governmental Authority), (y) at any time after the date of this Agreement
and at or before the time of the event giving rise to such termination
there shall exist an Acquisition Proposal and (z) within 12 months of the
termination of this Agreement, the Company enters into a definitive
agreement with any third party with respect to an Acquisition Proposal or
an Acquisition Proposal is consummated, or if (A) the Company or Nortel
shall terminate this Agreement pursuant to Section 8.01(d)(iv) due to the
failure of the Company's stockholders to approve and adopt this Agreement,
(B) at any time after the date of this Agreement and at or before the time
of the event giving rise to such termination there shall exist an
Acquisition Proposal which has been publicly announced or the existence of
which is a matter of public knowledge and (C) within 12 months of the
termination of this Agreement, the Company enters into a definitive
agreement with any third party with respect to an Acquisition Proposal or
an Acquisition Proposal is consummated;
(ii) the sum of $4,000,000 if Nortel shall terminate this Agreement
pursuant to Section 8.01(b)(i) or Section 8.01(b)(ii) following a willful
breach of any of the representations, covenants or agreements contained
herein, and an additional sum of $11,000,000 if (x) at any time after the
date of this Agreement and at or before the time of the event giving rise
to such termination there shall exist an Acquisition Proposal and (y)
within 12 months of the termination of this Agreement, the Company enters
into a definitive agreement with any third party with respect to an
Acquisition Proposal or an Acquisition Proposal is consummated;
(iii) the sum of $15,000,000 if Nortel shall terminate this Agreement
pursuant to Section 8.01(e)(i); or
(iv) the sum of $15,000,000 if the Company shall terminate this
Agreement pursuant to Section 8.01(e)(ii).
(c) Any Termination Fee required to be paid pursuant to subsection (b)(i)
above shall be payable by the Company to Nortel not later than two Business Days
after the date the Company enters into a definitive agreement with respect to,
or the date of consummation of, an Acquisition Proposal, whichever is earlier.
The sum of $4,000,000 required to be paid upon termination pursuant to
subsection (b)(ii) above shall be payable by the Company to Nortel not later
than two Business Days after the termination referred to therein, and any
additional sum of $11,000,000 required to be paid thereafter pursuant to
subsection (b)(ii) above shall be payable by the Company to Nortel not later
than two Business Days after the date the Company enters into a definitive
agreement with respect to, or the date of consummation of, an Acquisition
Proposal, whichever is earlier. Any Termination Fee required to be paid pursuant
to subsection (b)(iii) above shall be payable by the Company to Nortel not later
than two Business Days after the termination referred to therein. Any
Termination Fee required to be paid pursuant to subsection (b)(iv) shall be
payable as set forth in clause (z) of Section 8.01(e)(ii). In no event shall
more than $15,000,000 be payable in respect of the Termination Fee.
Notwithstanding the foregoing, (i) Nortel may elect, by notice to the Company,
to defer the payment of the Termination Fee from time to time for a period or
periods of up to an aggregate of twelve months after the date such fee would
otherwise be payable and (ii) the Termination Fee (including any portion thereof
pursuant to Section 8.02(b)(ii)) shall cease to be payable immediately following
any exercise by Nortel of the
A-38
<PAGE> 116
Option under the Option Agreement. All payments under this Section 8.02 shall be
made by wire transfer of immediately available funds to an account designated by
the party entitled to receive payment.
(d) If the Company shall terminate this Agreement pursuant to Section
8.01(b)(i) or Section 8.01(b)(ii) following a willful breach of any of the
representations, covenants or agreements contained herein, Nortel shall pay to
the Company the sum of $4,000,000 (the "Company Termination Fee"). The Company
Termination Fee shall be payable by Nortel to the Company not later than two
Business Days after the termination by the Company pursuant to Section
8.01(b)(i) or Section 8.01(b)(ii); provided that in no event shall more than one
Company Termination Fee be payable. All payments under this Section 8.02(d)
shall be made by wire transfer of immediately available funds to an account
designated by the Company.
ARTICLE IX
MISCELLANEOUS
9.01. Survival. All representations, warranties, agreements and covenants
contained in this Agreement shall not survive the Effective Time or termination
of this Agreement if this Agreement is terminated prior to the Effective Time;
provided, however, if the Effective Time occurs, the agreements of the parties
in Sections 6.01, 6.03, 6.10, 6.12, 6.13 and 6.16 and this Article IX shall
survive the Effective Time, and if this Agreement is terminated prior to the
Effective Time, the agreements of the parties in the proviso to Section 6.05(a),
Sections 6.05(b) and 8.02 and Article IX and in the Confidentiality Agreement
shall survive such termination and the Option Agreement shall survive to the
extent provided therein.
9.02. Amendment; Extension; Waiver. (a) Subject to compliance with
applicable law, this Agreement may be amended by the parties hereto, by action
taken or authorized by their respective Boards of Directors, at any time before
or after approval of the matters presented in connection with the Merger by the
stockholders of the Company; provided, however, that after any approval of the
transactions contemplated by this Agreement by the stockholders of the Company,
there may not be, without further approval of such stockholders, any amendment
of this Agreement which by law requires further approval by such stockholders
without such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
(b) Prior to the Effective Time, the parties hereto, by action taken or
authorized by their respective Boards of Directors, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party, but such extension or waiver or
failure to insist on strict compliance with an obligation, covenant, agreement
or condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
9.03. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.04. Governing Law. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of New York (except insofar as
mandatory provisions of Delaware law are applicable), without regard to the
conflict of law principles thereof.
9.05. Expenses. Subject to Section 8.02(b), each party hereto will bear
all expenses incurred by it in connection with this Agreement and the
transactions contemplated hereby, except that printing and mailing expenses and
SEC registration and filing fees shall be shared equally between the Company and
Nortel.
9.06. Notices. All notices, requests and other communications hereunder
to a party shall be in writing and shall be deemed given if personally
delivered, telecopied (with confirmation) or three Business Days after being
mailed by registered or certified mail (return receipt requested) or one
Business Day after being
A-39
<PAGE> 117
delivered by overnight courier to such party at its address set forth below or
such other address as such party may specify by notice to the parties hereto.
If to Nortel or to Sub, to:
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario
Canada L6T 5P6
Attention: Corporate Secretary
Fax: (905) 863-8386
Phone: (905) 863-0000
With a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Victor I. Lewkow, Esq.
Fax: (212) 225-3999
Phone: (212) 225-2000
If to the Company, to:
Periphonics Corporation
4000 Veterans Memorial Highway
Bohemia, NY 11716
Attention: Peter J. Cohen
Fax: (516) 467-1755
Phone: (516) 468-9000
With a copy to:
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Avenue
Suite 800
Washington, DC 20004
Attention: Stephen I. Glover, Esq.
Fax: (202) 639-7008
Phone: (202) 639-7000
and another copy to:
Ruskin, Moscou, Evans & Faltischek, P.C.
170 Old Country Road
Mineola, New York 11501
Attention: Norman Friedland, Esq.
Fax: (516) 663-6601
Phone: (516) 663-6600
9.07. Entire Understanding. This Agreement (including the Disclosure
Schedules), the Option Agreement and the Confidentiality Agreement represent the
entire understanding of the parties hereto with reference to the transactions
contemplated hereby and thereby and this Agreement supersedes any and all other
oral or written agreements (other than the Option Agreement and the
Confidentiality Agreement) heretofore made.
9.08. Assignment; No Third Party Beneficiaries. Neither this Agreement,
nor any of the rights, interests or obligations shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
A-40
<PAGE> 118
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns. Except for Section
6.12, nothing in this Agreement expressed or implied, is intended to confer upon
any person, other than the parties hereto or their respective successors, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
9.09. Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Disclosure Schedules, such reference shall be to a Section
of, or Exhibit or Disclosure Schedule to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and are not part of this Agreement. Whenever the
words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation". Any reference
to "herein" or "hereof" or similar terms shall refer to the agreement as a whole
rather than to the individual paragraph, section or article.
9.10. 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 it is enforceable.
9.11. Pre-Termination Equitable Remedies. Prior to any termination of
this Agreement, each party hereto shall retain all rights to equitable remedies
to which it is entitled under applicable law.
* * *
A-41
<PAGE> 119
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
NORTEL NETWORKS CORPORATION
By: /s/ FRANK A. DUNN
--------------------------------------
Name: Frank A. Dunn
Title: Senior Vice-President and
Chief Financial Officer
By: /s/ NICHOLAS J. DEROMA
--------------------------------------
Name: Nicholas J. DeRoma
Title: Senior Vice-President and
General Counsel
NORTH SUBSIDIARY, INC.
By: /s/ FRANK A. DUNN
--------------------------------------
Name: Frank A. Dunn
Title: President
PERIPHONICS CORPORATION
By: /s/ PETER J. COHEN
--------------------------------------
Name: Peter J. Cohen
Title: CEO
A-42
<PAGE> 120
EXHIBIT A
FORM OF AFFILIATE LETTER
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario, Canada
L6T 5P6
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to
be an "affiliate" of Periphonics Corporation, a Delaware corporation (the
"Company"), as the term "affiliate" is defined for purposes of paragraphs (c)
and (d) of Rule 145 of the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of the
Agreement and Plan of Merger dated as of August 23, 1999 (the "Agreement"), by
and between Nortel Networks Corporation, a Canadian corporation ("Nortel"),
North Subsidiary, Inc., a Delaware corporation and wholly owned subsidiary of
Nortel ("Sub") and the Company, Sub will merge into the Company or the Company
will merge with and into Sub (the "Merger").
As a result of the Merger, I may receive common shares, without par value,
of Nortel (the "Nortel Common Shares") in exchange for shares owned by me of
common stock, par value $0.01 per share, of the Company.
I represent, warrant and covenant to Nortel that in the event I receive any
Nortel Common Shares as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of Nortel
Common Shares in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed the
requirements of such documents and other applicable limitations upon my ability
to sell, transfer or otherwise dispose of the Nortel Common Shares, to the
extent I felt necessary, with my counsel or counsel for Nortel.
C. I have been advised that the issuance of Nortel Common Shares to me
pursuant to the Merger has been registered with the Commission under the Act on
a Registration Statement on Form S-4. However, I have also been advised that,
since at the time the Merger was submitted for a vote of the stockholders of the
Company, I may be deemed to have been an affiliate of the Company and the
distribution by me of the Nortel Common Shares has not been registered under the
Act, I may not sell, transfer or otherwise dispose of the Nortel Common Shares
issued to me in the Merger unless (i) such sale, transfer or other disposition
has been registered under the Act, (ii) such sale, transfer or other disposition
is made in conformity with Rule 145 promulgated by the Commission under the Act
or (iii) in the opinion of counsel reasonably acceptable to Nortel, or pursuant
to a "no action" letter obtained by the undersigned from the staff of the
Commission, such sale, transfer or other disposition is otherwise exempt from
registration under the Act.
D. I understand that, except as may be provided in any registration rights
agreement entered into by Nortel and the undersigned, Nortel is under no
obligation to register the sale, transfer or other disposition of the Nortel
Common Shares by me or on my behalf under the Act or to take any other action
necessary in order to make compliance with an exemption from such registration
available.
A-43
<PAGE> 121
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of the Company as described in the first paragraph of
this letter or as a waiver of any rights I may have to object to any claim that
I am such an affiliate on or after the date of this letter.
Very truly yours,
--------------------------------------
Agreed to and Accepted this
day of , 1999
NORTEL NETWORKS CORPORATION
By:
- ---------------------------------------------------------
Name:
Title:
By:
- ---------------------------------------------------------
Name:
Title:
A-44
<PAGE> 122
ANNEX B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of August 24, 1999 (the "Agreement"),
between NORTEL NETWORKS CORPORATION, a Canadian corporation ("Grantee"), and
PERIPHONICS CORPORATION, a Delaware corporation ("Issuer").
WITNESSETH:
WHEREAS, concurrently herewith, Grantee and Issuer are entering into an
Agreement and Plan of Merger (the "Merger Agreement");
WHEREAS, as a condition and inducement to Grantee's execution of the Merger
Agreement and in furtherance of the transactions contemplated thereby and in
consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined); and
WHEREAS, the Board of Directors of Issuer has approved the grant of the
Option and the Merger Agreement prior to the execution hereof;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. The Option. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof, up
to an aggregate of 2,634,131 fully paid and nonassessable shares of the common
stock, $0.01 par value per share, of Issuer ("Common Stock") at a price per
share equal to $29.23 (such price, as adjusted if applicable, the "Option
Price"); provided, however, that in the event Issuer issues or agrees to issue
any shares of Common Stock (other than as permitted under the Merger Agreement)
at a price less than the Option Price (as adjusted pursuant to Section 5), the
Option Price shall be equal to such lesser price; provided, further, that in no
event shall the number of shares for which this Option is exercisable exceed
19.9% of the issued and outstanding shares of Common Stock at the time of
exercise without giving effect to the shares of Common Stock issued or issuable
under the Option. The number of shares of Common Stock that may be received upon
the exercise of the Option and the Option Price are subject to adjustment as
herein set forth.
(b) In the event that any additional shares of Common Stock are issued or
otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement and other than pursuant to an event described in
Section 5(a) hereof), the number of shares of Common Stock subject to the Option
shall be increased so that, after such issuance, such number together with any
shares of Common Stock previously issued pursuant hereto, equals 19.9% of the
number of shares of Common Stock then issued and outstanding without giving
effect to any shares subject or issued pursuant to the Option. Nothing contained
in this Section 1(b) or elsewhere in this Agreement shall be deemed to authorize
Issuer to breach any provision of the Merger Agreement.
2. Exercise; Closing. (a) Grantee and/or any other person that shall
become a holder of all or part of the Option in accordance with the terms of
this Agreement (each such person being referred to herein as the "Holder") may
exercise the Option, in whole or part, if, but only if, both an Initial
Triggering Event (as defined below) and a Subsequent Triggering Event (as
defined below) shall have occurred prior to the occurrence of an Exercise
Termination Event (as defined below), provided that the Holder shall have sent
written notice of such exercise (as provided in subsection (f) of this Section
2) within 180 days following such Subsequent Triggering Event (or such later
period as provided in Section 10).
(b) Each of the following shall be an "Exercise Termination Event":
(i) the Effective Time (as defined in the Merger Agreement);
(ii) termination of the Merger Agreement in accordance with the
provisions thereof if such termination occurs prior to the occurrence of an
Initial Triggering Event, except a termination by Grantee
B-1
<PAGE> 123
pursuant to Section 8.01(b) of the Merger Agreement as a result of a breach
of a covenant by Issuer or a breach of a representation by Issuer;
(iii) the passage of 12 months after termination of the Merger
Agreement (or such later period as provided in Section 10) if such
termination (A) follows or is concurrent with the occurrence of an Initial
Triggering Event or (B) is a termination by Grantee pursuant to Section
8.01(b) of the Merger Agreement as a result of a breach of a covenant by
Issuer or a breach of a representation by Issuer; or
(iv) the receipt by Grantee (pursuant to its request) of the sum of
$15 million in respect of the Termination Fee.
(c) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (as defined in Rule 1-02 of
Regulation S-X promulgated by the Securities and Exchange Commission (the
"SEC")) (each an "Issuer Subsidiary"), without having received Grantee's
prior written consent, shall have entered into an agreement to engage in an
Acquisition Transaction (as defined below) with any person (the term
"person" for purposes of this Agreement having the meaning assigned thereto
in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) other than Grantee or
any of its Subsidiaries (each a "Grantee Subsidiary") or the Board of
Directors of Issuer shall have recommended that the stockholders of Issuer
approve or accept any Acquisition Transaction (other than the Merger
referred to in the Merger Agreement). For purposes of this Agreement,
"Acquisition Transaction" shall mean (w) a merger or consolidation, or any
similar transaction, involving Issuer, (x) a purchase, lease or other
acquisition or assumption of all or more than 20% of the consolidated
assets of Issuer (including by way of merger, consolidation, share exchange
or otherwise involving any Subsidiary of Issuer), (y) a purchase or other
acquisition (including by way of merger, consolidation, share exchange or
otherwise) of beneficial ownership (the term "beneficial ownership" for
purposes of this Agreement having the meaning assigned thereto in Section
13(d) of the Exchange Act, and the rules and regulations thereunder) of
securities representing 20% or more of the voting power of Issuer, or (z)
any substantially similar transaction; provided, however, that in no event
shall any merger, consolidation, purchase or similar transaction involving
only the Issuer and one or more of its wholly-owned Subsidiaries or
involving only any two or more of such wholly-owned Subsidiaries, be deemed
to be an Acquisition Transaction, if such transaction is not entered into
in violation of the terms of the Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended,
proposed or publicly announced its intention to authorize, recommend or
propose, to engage in an Acquisition Transaction with any person other than
Grantee or a Grantee Subsidiary or shall have authorized or engaged in, or
announced its intention to authorize or engage in, any negotiations
regarding an Acquisition Transaction with any person other than the Grantee
or a Grantee Subsidiary, or the Board of Directors of Issuer shall have
failed to recommend or shall have publicly withdrawn or modified, or
publicly announced its intention to withdraw or modify, in any manner
adverse to Grantee, its recommendation that the stockholders of Issuer
approve the Merger;
(iii) The shareholders of Issuer shall have voted and failed to
approve the Merger at a meeting which has been held for that purpose or any
adjournment or postponement thereof, or such meeting shall not have been
held in violation of the Merger Agreement or shall have been canceled prior
to termination of the Merger Agreement if, prior to such meeting (or if
such meeting shall not have been held or shall have been canceled, prior to
such termination), any person (other than the Grantee or a Grantee
Subsidiary) shall have made a proposal to Issuer or its stockholders by
public announcement or written communication that is or becomes the subject
of public disclosure to engage in an Acquisition Transaction;
(iv) (a) Any person other than Grantee, any Grantee Subsidiary or any
party to the Stockholders Agreement dated as of August 24, 1999, by and
among Grantee and the Stockholders named therein (the "Stockholders
Agreement") shall have acquired beneficial ownership or the right to
acquire beneficial
B-2
<PAGE> 124
ownership of 20% or more of the then outstanding shares of Common Stock or
(b) any group (the term "group" having the meaning assigned in Section
13(d)(3) of the Exchange Act), other than a group of which the Grantee or
any Grantee Subsidiary is a member, shall have been formed that
beneficially owns 20% or more of the shares of Common Stock then
outstanding;
(v) Any person other than Grantee or any Grantee Subsidiary shall
have made a bona fide proposal to Issuer or its stockholders to engage in
an Acquisition Transaction and such proposal shall have become publicly
known;
(vi) Issuer shall have breached any covenant or obligation contained
in the Merger Agreement in anticipation of engaging in an Acquisition
Transaction and such breach (x) would entitle Grantee to terminate the
Merger Agreement and (y) shall not have been cured prior to the Notice Date
(as defined below); or
(vii) Any person other than Grantee or any Grantee Subsidiary, other
than in connection with a transaction to which Grantee has given its prior
written consent, shall have filed with any federal or state regulatory or
governmental authority an application for approval or notice of intention
to engage in an Acquisition Transaction.
(d) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person or by a group other than Grantee or
any Grantee Subsidiary or persons party to the Stockholders Agreement
(provided that the Stockholders Agreement remains in full force and effect
and such persons are not claiming that such Agreement is not in full force
and effect) of beneficial ownership of 25% or more of the then outstanding
Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
paragraph (i) of subsection (c) of this Section 2, except that the
references to 20% in clause (x) and clause (y) shall each be deemed to be a
reference to 25%.
(e) Issuer shall notify Grantee promptly in writing of the occurrence of
any Initial Triggering Event or Subsequent Triggering Event (together, a
"Triggering Event"), it being understood that the giving of such notice by
Issuer shall not be a condition to the right of the Holder to exercise the
Option.
(f) In the event the Holder is entitled to and wishes to exercise the
Option (or any portion thereof), it shall send to Issuer a written notice (the
date of which being herein referred to as the "Notice Date") specifying (i) the
total number of shares it will purchase pursuant to such exercise and (ii) a
place and date not earlier than three business days nor later than 60 business
days from the Notice Date for the closing of such purchase (the "Closing Date");
provided, that if the closing of such purchase cannot be consummated by reason
of any applicable judgment, injunction, decree, order, law or regulation, the
period of time that would otherwise run pursuant to this sentence shall run
instead from the date on which such restriction on consummation has expired or
been terminated; and provided, further, that if prior notification to or
approval of any regulatory or antitrust agency is required in connection with
such purchase, the Holder shall promptly file the required notice or application
for approval and shall expeditiously process the same and the period of time
that otherwise would run pursuant to this sentence shall run instead from the
date on which any required notification periods have expired or been terminated
or such approvals have been obtained and any requisite waiting period or periods
shall have passed. Any exercise of the Option shall be deemed to occur on the
Notice Date relating thereto.
(g) At the closing referred to in subsection (f) of this Section 2, the
Holder shall (i) pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option.
(h) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (g) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part
B-3
<PAGE> 125
only, a new Option evidencing the rights of the Holder thereof to purchase the
balance of the shares purchasable hereunder.
(i) Certificates for Common Stock delivered at a closing hereunder may be
endorsed with a restrictive legend that shall read substantially as follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under applicable
securities laws (including the Securities Act of 1933, as amended). A
copy of such agreement is on file at the principal office of Issuer
and will be provided to the holder hereof without charge upon receipt
by Issuer of a written request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
arising under applicable securities laws, including the Securities Act of 1933,
as amended (the "Securities Act"), in the above legend shall be removed by
delivery of substitute certificate(s) without such reference if the Holder shall
have delivered to Issuer a copy of a letter from the staff of the SEC, or an
opinion of counsel, in form and substance reasonably satisfactory to Issuer, to
the effect that such legend is not required for purposes of the Securities Act
or other applicable securities laws; (ii) the reference to the provisions of
this Agreement in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference in the opinion
of counsel to the Holder, in form and substance reasonably satisfactory to
Issuer; and (iii) the legend shall be removed in its entirety if the conditions
in the preceding clauses (i) and (ii) are both satisfied. In addition, such
certificates shall bear any other legend as may be required by law.
The Holder understands and agrees that the Option is being issued to the
Holder pursuant to the registration and prospectus exceptions in paragraph 35(1)
and clause 72(1)(b) of the Securities Act (Ontario) (the "Ontario Act") and that
the resale of the Option or Common Stock issued upon exercise of the Option is
restricted by the provisions of the Ontario Act and other applicable Canadian
securities legislation.
(j) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (f) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates under this Section 2 in the name of the
Holder or its assignee, transferee or designee.
3. Covenants of Issuer. In addition to its other agreements and covenants
herein, Issuer agrees:
(a) that it shall at all times maintain, free from any subscriptive or
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights of third parties to purchase
Common Stock from Issuer or to cause Issuer to issue shares of Common Stock;
(b) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer; and
(c) promptly to take all action (i) as may from time to time be required
(including complying with all applicable notification, filing reporting and
waiting period requirements under HSR or otherwise, and cooperating fully with
the Holder in preparing any applications or notices and providing such
information to any regulatory authority as it may require) in order to permit
the Holder to exercise the Option and Issuer duly and effectively to issue
shares of Common Stock pursuant hereto, and (ii) as may from time to time be
required to protect the rights of the Holder against dilution.
B-4
<PAGE> 126
4. Exchange; Replacement. This Agreement (and the Option granted hereby)
are exchangeable, without expense, at the option of the Holder, upon
presentation and surrender of this Agreement at the principal office of Issuer,
for other Agreements providing for Options of different denominations entitling
the holder thereof to purchase, on the same terms and subject to the same
conditions as are set forth herein, in the aggregate the same number of shares
of Common Stock purchasable hereunder. The terms "Agreement" and "Option" as
used herein include any Agreements and related Options for which this Agreement
(and the Option granted hereby) may be exchanged. Upon receipt by Issuer of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Agreement, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of
like tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer, whether
or not the Agreement so lost, stolen, destroyed or mutilated shall at any time
be enforceable by any person other than the holder of the new Agreement.
5. Adjustments. In addition to the adjustment in the number of shares of
Common Stock that are purchasable upon exercise of the Option pursuant to
Section 1 hereof, the number of shares of Common Stock purchasable upon the
exercise of the Option and the Option Price shall be subject to adjustment from
time to time as provided in this Section 5.
(a) In the event of any change in, or distributions in respect of, the
Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of shares
or the like, the type and number of shares of Common Stock purchasable upon
exercise hereof shall be appropriately adjusted and proper provision shall be
made so that, in the event that any additional shares of Common Stock are to be
issued or otherwise become outstanding as a result of any such change (other
than pursuant to an exercise of the Option), the number of shares of Common
Stock that remain subject to the Option shall be increased so that, after such
issuance and together with shares of Common Stock previously issued pursuant to
the exercise of the Option (as adjusted on account of any of the foregoing
changes in the Common Stock), it equals 19.9% of the number of shares of Common
Stock then issued and outstanding.
(b) Whenever the number of shares of Common Stock purchasable upon
exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the numerator
of which shall be equal to the number of shares of Common Stock purchasable
prior to the adjustment and the denominator of which shall be equal to the
number of shares of Common Stock purchasable after the adjustment.
6. Registration. (a) Upon the occurrence of any Subsequent Triggering
Event that occurs prior to an Exercise Termination Event, Issuer shall, subject
to Section 6(d) hereof, at the request of Grantee delivered within twelve (12)
months (or such later period as provided in Section 10 hereof) of such
Subsequent Triggering Event (whether on its own behalf or on behalf of any
subsequent holder of this Option (or part thereof) or any of the shares of
Common Stock issued pursuant hereto), promptly prepare, file and keep current a
shelf registration statement under the Securities Act covering this Option and
any shares issued and issuable pursuant to this Option and shall use its
reasonable best efforts to cause such registration statement to become effective
and remain current in order to permit the sale or other disposition of this
Option and any shares of Common Stock issued upon total or partial exercise of
this Option ("Option Shares") in accordance with any plan of disposition
requested by Grantee. Issuer will use its reasonable best efforts to cause such
registration statement promptly to become effective and then to remain effective
for a period not in excess of 180 days from the day such registration statement
first becomes effective or such shorter time as may be reasonably necessary, in
the judgment of the Grantee or the Holder, to effect such sales or other
dispositions. Grantee shall have the right to demand two such registrations. The
Issuer shall bear the costs of such registrations (including, but not limited
to, Issuer's attorneys' fees, printing costs and filing fees, except for
underwriting discounts or commissions, brokers' fees and the fees and
disbursements of Grantee's counsel related thereto). The foregoing
notwithstanding, if, at the time of any request by Grantee for registration of
the Option or Option Shares as provided above, Issuer is in registration with
respect to an underwritten public offering by Issuer of shares of Common Stock,
and if in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters, of such
offering the
B-5
<PAGE> 127
inclusion of the Option or Option Shares would interfere with the successful
marketing of the shares of Common Stock offered by Issuer, the number of Option
Shares otherwise to be covered in the registration statement contemplated hereby
may be reduced to the extent necessary to eliminate such condition; provided,
however, that if such reduction occurs (including a reduction to zero), then
Issuer shall file a registration statement for the balance as promptly as
practicable thereafter as to which no reduction pursuant to this Section 6 shall
be permitted or occur and the Holder shall be deemed not to have made an
additional registration demand and the twelve (12) month period referred to in
the first sentence of this section shall be increased to twenty-four (24)
months. Each such Holder shall provide all information reasonably requested by
Issuer for inclusion in any registration statement to be filed hereunder. If
requested by any such Holder in connection with such registration, Issuer shall
become a party to any underwriting agreement relating to the sale of such
shares, but only to the extent of obligating itself in respect of
representations, warranties, indemnities and other agreements customarily
included in such underwriting agreements for Issuer. Upon receiving any request
under this Section 6 from any Holder, Issuer agrees to send a copy thereof to
any other person known to Issuer to be entitled to registration rights under
this Section 6, in each case by promptly mailing the same, postage prepaid, to
the address of record of the persons entitled to receive such copies.
Notwithstanding anything to the contrary contained herein, in no event shall the
number of registrations that Issuer is obligated to effect be increased by
reason of the fact that there shall be more than one Holder as a result of any
assignment or division of this Agreement.
(b) In the event that Grantee so requests, the closing of the sale or
other disposition of the Common Stock or other securities pursuant to a
registration statement filed pursuant to Section 6(a) hereof shall occur
substantially simultaneously with the exercise of the Option.
(c) If the Common Stock or the class of any other securities to be
acquired upon exercise of the Option are then listed on the Nasdaq National
Market of The Nasdaq Stock Market, Inc. ("Nasdaq") or any national securities
exchange, Issuer, upon the request of the Holder, shall promptly file an
application to list the Common Stock or other securities to be acquired upon
exercise of the Option on Nasdaq or such exchange and will use its reasonable
best efforts to obtain approval of such listing as soon as practicable.
(d) Issuer may delay any registration of the Option or Option Shares
required pursuant to Section 6(a) hereof for a period not in excess of 90 days
if, in the reasonable good faith judgment of Issuer, such registration would
materially and adversely affect a proposed merger, consolidation or similar
transaction (including through the premature disclosure thereof) or offering or
contemplated offering of other securities by Issuer.
7. Repurchase of Option and/or Option Shares. (a) At any time commencing
upon the occurrence of a Repurchase Event (as defined in Section 7(d) hereof)
and ending twelve (12) months thereafter, (i) at the request of the Holder,
delivered in writing prior to an Exercise Termination Event (or such later
period as provided in Section 10), Issuer (or any successor thereto) shall
repurchase the Option from the Holder at a price (the "Option Repurchase Price")
equal to the amount by which (A) the market/offer price (as defined below)
exceeds (B) the Option Price, multiplied by the number of shares for which this
Option may then be exercised, and (ii) at the request of the owner of Option
Shares from time to time (the "Owner"), delivered in writing prior to an
Exercise Termination Event (or such later period as provided in Section 10),
Issuer (or any successor thereto) shall repurchase such number of the Option
Shares from the Owner as the Owner shall designate at a price (the "Option Share
Repurchase Price") equal to the market/offer price multiplied by the number of
Option Shares so designated. The term "market /offer price" shall mean the
highest of (i) the price per share of Common Stock at which a tender or exchange
offer therefor has been made and has been consummated or remains outstanding,
(ii) the price per share of Common Stock to be paid by any third party pursuant
to an agreement with Issuer, (iii) the highest average closing price for shares
of Common Stock for any 20 trading day period within the three-month period
immediately preceding the date the Holder gives notice of the required
repurchase of this Option or the Owner gives notice of the required repurchase
of Option Shares, as the case may be, or (iv) in the event of a sale of all or a
majority of the consolidated assets of Issuer, the sum of the net price paid in
such sale for such assets and the current market value of the remaining net
assets of Issuer as determined by a nationally recognized investment banking
firm selected by the Holder or the Owner, as the case may be, and reasonably
acceptable to Issuer, divided by the number of
B-6
<PAGE> 128
shares of Common Stock outstanding at the time of such sale, which
determination, absent manifest error, shall be conclusive for all purposes of
this Agreement. In determining the market/offer price, the value of
consideration other than cash shall be determined by a nationally recognized
investment banking firm selected by the Holder or Owner, as the case may be, and
reasonably acceptable to Issuer, which determination, absent manifest error,
shall be conclusive for all purposes of this Agreement.
(b) The Holder and the Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option and any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that the Holder
or the Owner, as the case may be, elects to require Issuer to repurchase this
Option and/or the Option Shares in accordance with the provisions of this
Section 7. Prior to the later of (x) the date that is five business days after
the surrender of the Option and/or certificates representing Option Shares and
the receipt of such notice or notices relating thereto and (y) the day on which
a Repurchase Event occurs, Issuer shall deliver or cause to be delivered to the
Holder the Option Repurchase Price and/or to the Owner the Option Share
Repurchase Price or the portion thereof that Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall promptly so notify the Holder and/or the Owner and thereafter deliver or
cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after delivery of a
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation from delivering to the Holder and/or the
Owner, as appropriate, the Option Repurchase Price and the Option Share
Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its
reasonable best efforts to obtain all required regulatory and legal approvals
and to file any required notices as promptly as practicable in order to
accomplish such repurchase), the Holder or Owner may revoke its notice of
repurchase of the Option and/or the Option Shares whether in whole or to the
extent of the prohibition, whereupon, in the latter case, Issuer shall promptly
(i) deliver to the Holder and/or the Owner, as appropriate, that portion of the
Option Repurchase Price and/or the Option Share Repurchase Price that Issuer is
not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to
the Holder, a new Agreement evidencing the right of the Holder to purchase that
number of shares of Common Stock obtained by multiplying the number of shares of
Common Stock for which the surrendered Agreement was exercisable at the time of
delivery of the notice of repurchase by a fraction, the numerator of which is
the Option Repurchase Price less the portion thereof theretofore delivered to
the Holder and the denominator of which is the Option Repurchase Price, and/or
(B) to the Owner, a certificate for the Option Shares it is then so prohibited
from repurchasing. If an Exercise Termination Event shall have occurred less
than 30 days prior to the date of the notice by Issuer described in the first
sentence of this subsection (c), or shall be scheduled to occur at any time
before the expiration of a period ending on the thirtieth day after such date,
the Holder shall nonetheless have the right to exercise the Option until the
expiration of such 30-day period after the date of the Exercise Termination
Event or the notice date, respectively.
(d) For purposes of this Section 7, a Repurchase Event shall be deemed to
have occurred (i) upon the consummation of any merger, consolidation or similar
transaction involving Issuer or any purchase, lease or other acquisition of all
or a majority of the assets of Issuer on a consolidated basis, other than any
such transaction which would not constitute an Acquisition Transaction pursuant
to the proviso to Section 2(b)(i) hereof or (ii) upon the acquisition by any
person of beneficial ownership of 50% or more of the then outstanding shares of
Common Stock; provided that no such event shall constitute a Repurchase Event
unless a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event. The parties hereto agree that Issuer's obligations to
repurchase the Option or Option Shares under this Section 7 shall not terminate
upon the occurrence of an Exercise Termination Event unless no Subsequent
Triggering Event shall have occurred prior to the occurrence of an Exercise
Termination Event.
B-7
<PAGE> 129
8. Substitute Option. (a) In the event that prior to an Exercise
Termination Event, Issuer shall enter into an agreement (i) to consolidate with
or merge into any person, other than Grantee or any of its Subsidiaries
(collectively, "Excluded Persons") and Issuer shall not be the continuing or
surviving corporation of such consolidation or merger, (ii) to permit any
person, other than an Excluded Person, to merge into Issuer and Issuer shall be
the continuing or surviving or acquiring corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the outstanding voting shares and voting share
equivalents of the merged or acquiring company, or (iii) to sell or otherwise
transfer all or substantially all of its assets to any person, other than an
Excluded Person, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of the Holder, of either (x) the Acquiring Corporation
(as hereinafter defined) or (y) any person that controls the Acquiring
Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving person of a consolidation or merger with Issuer (if other than
Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving or acquiring person, and (iii) the transferee of all or
substantially all of Issuer's assets.
(ii) "Substitute Shares" shall mean the shares of capital stock (or
similar equity interest) with the greatest voting power in respect of the
election of directors (or other persons similarly responsible for direction
of the business and affairs) of the issuer of the Substitute Option.
(iii) "Assigned Value" shall mean the market/offer price as defined
in Section 7.
(iv) "Average Price" shall mean the average closing price per
Substitute Share, on the principal trading market on which such shares are
traded as reported by a recognized source, for the 20 trading day period
immediately preceding the consolidation, merger or sale in question, but in
no event higher than the closing price of the Substitute Shares on such
market on the day preceding such consolidation, merger or sale; provided
that if Issuer is the issuer of the Substitute Option, the Average Price
shall be computed with respect to a share of common stock issued by the
person merging into Issuer or by any company which controls or is
controlled by such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible to the
terms of the Option and (to the extent permitted by applicable law) in no event
less advantageous to the Holder. The issuer of the Substitute Option shall also
enter into an agreement with the then Holder or Holders of the Substitute Option
in substantially the same form as this Agreement (after giving effect for such
purpose to the provisions of Section 9 hereof), which agreement shall be
applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
Substitute Shares as is equal to the Assigned Value multiplied by the number of
shares of Common Stock for which the Option was exercisable immediately prior to
the event described in the first sentence of Section 8(a) hereof, divided by the
Average Price. The exercise price of the Substitute Option per Substitute Share
shall then be equal to the Option Price multiplied by a fraction, the numerator
of which shall be the number of shares of Common Stock for which the Option was
exercisable immediately prior to the event described in the first sentence of
Section 8(a) hereof and the denominator of which shall be the number of
Substitute Shares for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
number of shares purchasable upon exercise of the Substitute Option exceed 19.9%
of the Substitute Shares then issued and outstanding at the time of exercise
(without giving effect to Substitute Shares issued or issuable under the
Substitute Option). In the event that the Substitute Option would be exercisable
for more than 19.9% of the Substitute Shares then issued and outstanding prior
to exercise but for this clause (e), the issuer of the Substitute Option
B-8
<PAGE> 130
(the "Substitute Option Issuer") shall make a cash payment to Holder equal to
the excess of (i) the value of the Substitute Option without giving effect to
the limitation in this clause (e) over (ii) the value of the Substitute Option
after giving effect to the limitation in this clause (e). This difference in
value shall be determined by a nationally recognized investment banking firm
selected by Grantee (or, if Grantee is not then the Holder owning Options with
respect to the largest number of Shares, the largest Holder) and reasonably
acceptable to Issuer, which determination, absent manifest error, shall be
conclusive for all purposes of this Agreement.
(f) In addition to any other restrictions or covenants, Issuer agrees that
it shall not enter or agree to enter into any transaction described in Section
8(a) hereof unless (i) the Acquiring Corporation and any person that controls
the Acquiring Corporation assume in writing all the obligations of Issuer
hereunder and (ii) the Substitute Option Issuer agrees to comply with this
Section 8 and agrees to take all action necessary to prevent the exercise of any
rights of any holder of Substitute Shares or shares of capital stock of any
successor to the Substitute Option Issuer that any holder of the Substitute
Option (each such person being referred to herein as a "Substitute Option
Holder") or any holder of Substitute Shares (each such person being referred to
herein as a "Substitute Share Owner") purchased upon exercise of the Substitute
Option by a Substitute Option Holder would be prohibited or precluded from
exercising or the exercise of which would adversely affect the rights of any
Substitute Option Holder under the agreement for such Substitute Option or the
transactions contemplated by the Merger Agreement.
9. Repurchase of Substitute Option. (a) At the written request of a
Substitute Option Holder, the Substitute Option Issuer shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "Substitute
Option Repurchase Price") equal to the amount by which (i) the Highest Closing
Price (as hereinafter defined) exceeds (ii) the exercise price of the Substitute
Option multiplied by the number of Substitute Shares for which the Substitute
Option may then be exercised, and at the request of the Substitute Share Owner,
the Substitute Option Issuer shall repurchase the Substitute Shares at a price
(the "Substitute Share Repurchase Price") equal to the Highest Closing Price
multiplied by the number of Substitute Shares so designated. The term "Highest
Closing Price" shall mean the highest average closing price for Substitute
Shares for any 20 trading day period within the three-month period immediately
preceding the date the Substitute Option Holder gives notice of the required
repurchase of the Substitute Option or the Substitute Share Owner gives notice
of the required repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as the
case may be, may exercise its respective rights to require the Substitute Option
Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to
this Section 9 by surrendering for such purpose to the Substitute Option Issuer,
at its principal office, the agreement for such Substitute Option (or, in the
absence of such an agreement, a copy of this Agreement) and/or certificates for
Substitute Shares accompanied by a written notice or notices stating that the
Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Shares in accordance with the provisions of this
Section 9. As promptly as practicable and in any event within five business days
after the surrender of the Substitute Option and/or certificates representing
Substitute Shares and the receipt of such notice or notices relating thereto,
the Substitute Option Issuer shall deliver or cause to be delivered to the
Substitute Option Holder the Substitute Option Repurchase Price and/or to the
Substitute Share Owner the Substitute Share Repurchase Price therefor or the
portion thereof which the Substitute Option Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation from repurchasing the Substitute Option and/or the
Substitute Shares in part or in full, the Substitute Option Issuer shall
promptly so notify the Substitute Option Holder and/or the Substitute Share
Owner and thereafter deliver or cause to be delivered, from time to time, to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the
portion of the Substitute Option Repurchase Price and/or the Substitute Share
Repurchase Price, respectively, which it is no longer prohibited from
delivering, within five (5) business days after the date on which the Substitute
Option Issuer is no longer so prohibited; provided, however, that if the
Substitute Option Issuer is at any time after delivery of a notice of repurchase
pursuant to subsection (b) of this Section 9 is prohibited under applicable law
or regulation from delivering to the
B-9
<PAGE> 131
Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the
Substitute Option Repurchase Price and the Substitute Share Repurchase Price,
respectively, in full (and the Substitute Option Issuer shall use its best
efforts to receive all required regulatory and legal approvals as promptly as
practicable in order to accomplish such repurchase), the Substitute Option
Holder and/or Substitute Share Owner may revoke its notice of repurchase of the
Substitute Option or the Substitute Shares either in whole or to the extent of
the prohibition, whereupon, in the latter case, the Substitute Option Issuer
shall promptly (i) deliver to the Substitute Option Holder or Substitute Share
Owner, as appropriate, that portion of the Substitute Option Repurchase Price or
the Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of Substitute Shares obtained
by multiplying the number of Substitute Shares for which the surrendered
Substitute Option was exercisable at the time of delivery of the notice of
repurchase by a fraction, the numerator of which is the Substitute Option
Repurchase Price less the portion thereof theretofore delivered to the
Substitute Option Holder and the denominator of which is the Substitute Option
Repurchase Price, and/or (B) to the Substitute Share Owner, a certificate for
the Substitute Option Shares it is then so prohibited from repurchasing. If an
Exercise Termination Event shall have occurred less than 30 days prior to the
date of the notice by the Substitute Option Issuer described in the first
sentence of this subsection (c), or shall be scheduled to occur at any time
before the expiration of a period ending on the thirtieth day after such date,
the Substitute Option Holder shall nevertheless have the right to exercise the
Substitute Option until the expiration of such 30-day period after the date of
the Exercise Termination Event or the notice date, respectively.
10. Extension. The period for exercise of certain rights under Sections
2, 6, 7, 9 and 12 hereof shall be extended: (i) to the extent necessary to
obtain all governmental and regulatory approvals for the exercise of such rights
(for so long as the Holder, Substitute Option Holder or Substitute Share Owner,
as the case may be, is using its reasonable best efforts to obtain such
regulatory approvals), and for the expiration of all statutory waiting periods;
(ii) during any period for which an injunction or similar legal prohibition on
exercise shall be in effect; (iii) to the extent necessary to avoid liability
under Section 16(b) of the Exchange Act by reason of such exercise; and (iv) by
the number of days by which Issuer shall have delayed any registration pursuant
to Section 6(d) hereof.
11. Representations and Warranties. (a) Issuer hereby represents and
warrants to Grantee as follows:
(i) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of Issuer and no other corporate
proceedings on the part of Issuer are necessary to authorize this Agreement
or to consummate the transactions so contemplated. This Agreement has been
duly and validly executed and delivered by Issuer and constitutes a valid
and legally binding obligation of Issuer enforceable in accordance with its
terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors'
rights or by general equity principles, whether such principles are
considered at law or in equity).
(ii) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms will
have reserved for issuance upon the exercise of the Option, that number of
shares of Common Stock equal to the maximum number of shares of Common
Stock at any time and from time to time issuable hereunder, and all such
shares, upon issuance pursuant to the Option, will be duly authorized,
validly issued, fully paid, nonassessable, and will be delivered free and
clear of all claims, liens, encumbrances and security interests and not
subject to any preemptive rights.
(iii) The execution, delivery and performance of this Agreement does
not or will not, and the consummation by Issuer of any of the transactions
contemplated hereby will not, constitute or result in (i) a breach or
violation of or a default under, its articles or certificate of
incorporation or by-laws, or the comparable governing instruments of any of
its subsidiaries, or (ii) a breach or violation of or a
B-10
<PAGE> 132
default under, any agreement, lease, contract, note, mortgage, indenture,
arrangement or other obligation of it or any of its subsidiaries (with or
without the giving of notice, the lapse of time or both) or under any law,
rule, ordinance or regulation or judgment, decree, order, award or
governmental or non-governmental permit or license to which it or any of
its subsidiaries is subject, except where such breach, violation or default
would not in the aggregate have a Material Adverse Effect (as defined in
the Merger Agreement) and would not materially impair Issuer's ability to
consummate the transactions contemplated by this Agreement.
(b) Grantee hereby represents and warrants to Issuer that Grantee has full
corporate power and authority to enter into this Agreement and, subject to
obtaining the approvals referred to in this Agreement, to consummate the
transactions contemplated by this Agreement; the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of Grantee; and
this Agreement has been duly executed and delivered by Grantee and constitutes a
valid and legally binding obligation of Grantee enforceable in accordance with
its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors' rights
or by general equity principles, whether such principles are considered at law
or in equity).
12. Assignment. Neither of the parties hereto may assign any of its
rights or obligations under this Agreement or the Option created hereunder to
any other person, without the express written consent of the other party, except
that in the event a Subsequent Triggering Event shall have occurred prior to an
Exercise Termination Event, Grantee, subject to the express provisions hereof,
may assign in whole or in part its rights and obligations hereunder within
twelve (12) months following such Subsequent Triggering Event (or such later
period as provided in Section 10 hereof) provided that the assignee executes a
supplement to this Agreement agreeing to be bound by this Agreement's terms.
13. Filings; Other Actions. Each of Grantee and Issuer will use its
reasonable best efforts to make all filings with, and to obtain consents of, all
third parties and regulatory and governmental authorities necessary to the
consummation of the transactions contemplated by this Agreement, including,
without limitation, notices and filings under HSR.
14. Best Efforts. Each of Grantee and Issuer will use its reasonable best
efforts to make all filings with, and to obtain consents of, all third parties
and governmental authorities necessary for the consummation of the transactions
contemplated by this Agreement, including without limitation making application
to list the shares of Common Stock issuable hereunder on Nasdaq upon official
notice of issuance.
15. Specific Performance. The parties hereto acknowledge that damages
would be an inadequate remedy for a breach of this Agreement by either party
hereto and that the obligations of the parties hereto shall be enforceable by
either party hereto through injunctive or other equitable relief.
16. Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal or state regulatory
agency of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions and covenants and restrictions contained in
this Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Holder is not permitted to acquire, or Issuer or
Substitute Option Issuer, as applicable, is not permitted to repurchase pursuant
to Section 7 or 9 hereof, as applicable, the full number of shares of Common
Stock provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or
Section 5 hereof), it is the express intention of Issuer to allow the Holder to
acquire or to require Issuer to repurchase such lesser number of shares as may
be permissible, without any amendment or modification hereof.
17. Notices. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when delivered
in person, by fax, telecopy, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement or such other address as shall be provided in
writing.
B-11
<PAGE> 133
18. Governing Law. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of New York, without regard to the
conflicts of laws principles thereof.
19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
20. Expenses. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all 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 consultants, investment bankers,
accountants and counsel.
21. Entire Agreement. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement between the
parties with respect to the transactions contemplated hereunder and supersedes
all prior arrangements or understandings with respect thereof, written or oral.
The terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assignees. Nothing in this Agreement, expressed or implied, is intended to
confer upon any party, other than the parties hereto, and their respective
successors except as assignees, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided herein.
22. Limitation on Profit. (a) Notwithstanding any other provision of
this Agreement, in no event shall the Grantee's Total Profit (as hereinafter
defined) exceed $16.5 million and, if it otherwise would exceed this amount, the
Grantee, at its sole election, shall either (i) reduce the number of shares of
Common Stock subject to this Option (or the number of shares of common stock of
the Substitute Option Issuer subject to this Substitute Option, as the case may
be), (ii) deliver to the Issuer (or Substitute Option Issuer) for cancellation
Option Shares (or Substitute Shares) previously purchased by Grantee, (iii) pay
cash to the Issuer (or Substitute Option Issuer), or (iv) any combination
thereof, so that Grantee's realized Total Profit shall not exceed $16.5 million
after taking into account the foregoing actions; provided, that the amounts
referred to in this Section 22(a) shall be reduced by any amount received by
Grantee in respect of the Termination Fee pursuant to Section 8.02(b)(ii) of the
Merger Agreement.
(b) Notwithstanding any other provision of this Agreement, this Option (or
Substitute Option) may not be exercised for a number of shares as would, as of
the date of exercise, result in a Notional Total Profit (as defined below) which
would exceed $16.5 million; provided, that nothing in this sentence shall
restrict any exercise of the Option (or Substitute Option) permitted hereby on
any subsequent date; and provided further that the amount referred to in this
Section 22(b) shall be reduced by any amount received by Grantee in respect of
the Termination Fee pursuant to Section 8.02(b)(ii) of the Merger Agreement.
(c) As used in this Agreement, the term "Total Profit" shall mean the
aggregate amount (before taxes) of the following: (i)(x) the amount received by
Grantee and any other Holder or Substitute Option Holder pursuant to Issuer's
repurchase of the Option (or any portion thereof) or any Option Shares in
accordance with Section 7, or pursuant to Substitute Option Issuer's repurchase
of the Substitute Option (or any portion thereof) or any Substitute Shares in
accordance with Section 9, less, in the case of any repurchase of Option Shares
or Substitute Shares, (y) the Grantee's and any other Holder's or Substitute
Option Holder's purchase price for such Option Shares or Substitute Shares, as
the case may be, (ii)(x) the net cash amounts (and the fair market value of any
other consideration) received by Grantee and any other Holder or Substitute
Option Holder pursuant to the sale of Option Shares or Substitute Shares (or any
other securities into which such Option Shares or Substitute Shares are
converted or exchanged) to any unaffiliated party, less (y) the Grantee's (or
any other Holder's or Substitute Option Holder's) purchase price of the Option
Shares or Substitute Shares, and (iii) the net cash amounts (and the fair market
value of any other consideration) received by Grantee (or any other Holder or
Substitute Option Holder) on the transfer of the Option or Substitute Option (or
any portion thereof) to any unaffiliated party. In the case of clauses (ii)(x)
and (iii) above, the Grantee and any Holder or Substitute Option Holder agree to
furnish as promptly as reasonably practicable after any disposition of all or a
portion of the Option or Option Shares or of the Substitute Option or Substitute
Shares a complete and correct statement, certified by a responsible executive
officer or partner of the Grantee or Holder or Substitute Option Holder, of the
net cash amounts (and the fair
B-12
<PAGE> 134
market value of any other consideration) received in connection with any sale or
transfer of the Option or Option Shares or of the Substitute Option or
Substitute Shares.
(d) As used in this Agreement, the term "Notional Total Profit" with
respect to any number of shares as to which Grantee and any other Holder or
Substitute Option Holder may propose to exercise this Option or Substitute
Option shall be the Total Profit determined as of the date of this proposal
assuming that this Option or Substitute Option were exercised on such date for
this number of shares and assuming that such shares, together with all other
Option Shares or Substitute Shares held by Grantee and any other Holders or
Substitute Option Holders and their respective affiliates as of such date, were
sold for cash at the closing market price for the Common Stock (or the common
stock of the Substitute Option Issuer, as the case may be) as of the close of
business on the preceding trading day (less customary brokerage commissions).
23. Captions; Capitalized Terms. The section and paragraph captions
herein are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof. Capitalized terms used in this Agreement and not defined
herein shall have the meanings assigned thereto in the Merger Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
NORTEL NETWORKS CORPORATION
By: /s/ FRANK A. DUNN
--------------------------------------
Name: Frank A. Dunn
Title: Senior Vice-President and
Chief Financial Officer
By: /s/ NICHOLAS J. DEROMA
--------------------------------------
Name: Nicholas J. DeRoma
Title: Senior Vice-President and
General Counsel
PERIPHONICS CORPORATION
By: /s/ PETER J. COHEN
--------------------------------------
Name: Peter J. Cohen
Title: CEO
B-13
<PAGE> 135
ANNEX C
STOCKHOLDERS AGREEMENT
This STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of August 24,
1999, is entered into by and among Peter J. Cohen, George W. Cole, Richard A.
Daniels, Kevin J. O'Brien and Jayandra Patel (each a "Stockholder Party") and
Nortel Networks Corporation, a corporation organized under the laws of Canada
("Nortel").
WHEREAS, simultaneously with the execution of this Agreement, Nortel, North
Subsidiary, Inc., a wholly owned subsidiary of Nortel ("Sub"), and Periphonics
Corporation, a corporation organized under the laws of Delaware (the "Company"),
are entering into an Agreement and Plan of Merger, dated as of the date hereof
(as the same may be amended or supplemented, the "Merger Agreement") providing,
among other things, for either the Merger of Sub with and into the Company or
the Merger of the Company with and into Sub (the "Merger"); and
WHEREAS, as of the date hereof, each Stockholder Party is the Beneficial
Owner (as defined below) of, and has the sole right to vote and dispose of, the
shares of common stock, par value $0.01 per share of the Company ("Common
Stock"), set forth in Schedule A (the "Owned Shares"); and
WHEREAS, as an inducement and a condition to their entering into the Merger
Agreement and incurring the obligations set forth therein, Nortel has required
that each Stockholder Party enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual premises,
representations, warranties, covenants and agreements contained herein and in
the Merger Agreement, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. Certain Definitions. Capitalized terms used but not defined in this
Agreement are used in this Agreement with the meanings given to such terms in
the Merger Agreement. In addition, for purposes of this Agreement:
"Affiliate" means, with respect to any specified Person, any Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Person specified. For
purposes of this Agreement, with respect to any Stockholder Party, "Affiliate"
shall not include the Company and the Persons that directly, or indirectly
through one or more intermediaries, are controlled by the Company.
"Alternative Transaction" has the meaning set forth in Section 2(b) hereof.
"Beneficially Owned" or "Beneficial Ownership" with respect to any
securities means having beneficial ownership of such securities (as determined
pursuant to Rule 13d-3 under the Exchange Act, disregarding the phrase "within
60 days" in paragraph (d)(1)(i) thereof), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without duplicative
counting of the same securities by the same holder, securities Beneficially
Owned by a Person shall include securities Beneficially Owned by all Affiliates
of such Person and all other Persons with whom such Person would constitute a
"Group" within the meaning of Section 13(d) of the Exchange Act and the rules
promulgated thereunder.
"Beneficial Owner" with respect to any securities means a Person who has
Beneficial Ownership of such securities.
"Company Meeting" has the meaning set forth in Section 3 hereof.
"Proposed Business Combination" means the transactions contemplated by the
Merger Agreement.
"Transfer" means, with respect to a security, the sale, transfer, pledge,
hypothecation, encumbrance, assignment or disposition of such security or the
Beneficial Ownership thereof, the offer to make such a sale, transfer or other
disposition, and each option, agreement, arrangement or understanding, whether
or not in writing, to effect any of the foregoing. As a verb, "Transfer" shall
have a correlative meaning.
C-1
<PAGE> 136
2. No Disposition or Solicitation.
(a) Each Stockholder Party agrees that from and after the date hereof,
except as contemplated by this Agreement, he will not Transfer or agree to
Transfer any Common Stock Beneficially Owned by him other than with Nortel's
prior written consent, or grant any proxy or power-of-attorney with respect to
any such Common Stock other than pursuant to this Agreement; provided, that
nothing in this Section 2(a) shall prohibit any Stockholder Party from effecting
any Transfer of Common Stock Beneficially Owned by him (i) by will or applicable
laws of descent and distribution or (ii) to any member of the immediate family
of such Stockholder Party, or any trust, limited partnership or other similar
entity the Beneficial Ownership of which is held by the Stockholder Party or
such family members (each a "Permitted Transferee"), so long as such Permitted
Transferee agrees in writing, in form and substance reasonably satisfactory to
Nortel, to be bound by the terms of this Agreement to the same extent as such
Stockholder Party is bound.
(b) Each Stockholder Party agrees that from and after the date hereof,
except as contemplated by this Agreement or, solely in his capacity as an
officer or director of the Company, as permitted by the Merger Agreement, he and
his Affiliates and representatives, will not directly or indirectly solicit,
initiate, or encourage any inquiries or proposals from, discuss or negotiate
with, or provide any non-public information to, any Person relating to, or
otherwise facilitate any tender or exchange offer, proposal for a merger,
consolidation or other business combination involving the Company or any of its
subsidiaries or any proposal or offer to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets of, the Company or
any of its subsidiaries other than the Proposed Business Combination (an
"Alternative Transaction").
(c) Each Stockholder Party agrees that unless required by applicable law,
neither he nor any of his Affiliates shall make any press release, public
announcement or other communication with respect to Nortel or the business or
affairs of the Company, including this Agreement and the Merger Agreement and
the transactions contemplated hereby and thereby, without the prior written
consent of Nortel.
3. Stockholder Vote; Offer. Each Stockholder Party agrees that (i) at
such time as the Company conducts a meeting of or otherwise seeks a vote or
consent of its stockholders for the purpose of approving the Merger Agreement
and the Merger (such meeting or any adjournment thereof, or such consent
process, the "Company Meeting"), he will vote, or provide a consent with respect
to, all Common Stock (including the Owned Shares) then Beneficially Owned by him
over which he has voting power ("Voting Shares") in favor of the Merger
Agreement and the Merger, provided that he shall not be required to vote for, or
provide a consent with respect to, any action that would reduce the number of
Nortel Common Shares to be received by him in respect of his Common Stock in the
Merger, and (ii) he will (at any meeting of stockholders) vote his Voting Shares
against, and he will not consent to, any Alternative Transaction or any action
that would delay, prevent or frustrate the transactions contemplated by the
Merger Agreement.
Without limiting the foregoing, it is understood that the obligations under
clause (i) above shall remain applicable in respect of each meeting of
stockholders of the Company duly called for the purpose of approving the Merger
Agreement and the Merger regardless of the position of the Company Board as to
the Merger at the time of such meeting, and that the obligations under clause
(ii) above shall continue to the extent set forth in Section 10.
4. Reasonable Efforts to Cooperate. Each Stockholder Party will (a) use
all reasonable efforts to cooperate with the Company, Nortel and Sub in
connection with the transactions contemplated by the Merger Agreement, (b)
promptly take such actions as are necessary or appropriate to consummate such
transactions and (c) provide any information reasonably requested by the
Company, Nortel or Sub for any regulatory application or filing made or approval
sought for such transactions (including filings with the SEC).
5. Additional Stock. Each Stockholder Party agrees that any additional
shares of Common Stock acquired by him or over which he acquires Beneficial
Ownership, whether pursuant to existing stock option agreements, warrants or
otherwise, shall be subject to the provisions of this Agreement.
6. Irrevocable Proxy. (i) In furtherance of the agreements contained in
Section 3 of this Agreement, each Stockholder Party hereby irrevocably grants
to, and appoints, Nortel and J.A. Roth, Vice Chairman and
C-2
<PAGE> 137
Chief Executive Officer of Nortel, F.A. Dunn, Senior Vice President and Chief
Financial Officer of Nortel, and W.R. Kerr, Senior Vice President, Finance and
Business Development, of Nortel, in their respective capacities as officers of
Nortel, and any individual who shall hereafter succeed to any such office of
Nortel, and each of them individually, such Stockholder Party's proxy and
attorney-in-fact (with full power of substitution), for and in the name, place
and stead of such Stockholder Party, to vote all Voting Shares Beneficially
Owned by such Stockholder Party, or grant a consent or approval in respect of
such Voting Shares, or execute and deliver a proxy to vote such Voting Shares,
(x) subject to the proviso set forth in clause (i) of the first paragraph of
Section 3, in favor of the Merger and the Merger Agreement and approval of the
terms thereof and each of the other transactions contemplated by the Merger
Agreement and (y) against any Alternative Transaction or any other matter
referred to in clause (ii) of the first sentence of Section 3 hereof.
(ii) Each Stockholder Party represents and warrants to Nortel that any
proxies heretofore given in respect of his Voting Shares are not irrevocable,
and hereby revokes any such proxies.
(iii) Each Stockholder Party hereby affirms that the irrevocable proxy set
forth in this Section 6 is given in connection with, and in consideration of,
the execution of the Merger Agreement by Nortel and Sub, and that such
irrevocable proxy is given to secure the performance of the duties of such
Stockholder Party under this Agreement. Each Stockholder Party hereby further
affirms that the irrevocable proxy is coupled with an interest and may under no
circumstances be revoked. Such Stockholder Party hereby ratifies and confirms
all that such irrevocable proxy may lawfully do or cause to be done by virtue
hereof. Such irrevocable proxy is executed and intended to be irrevocable in
accordance with the provisions of Section 218 of the Delaware General
Corporation Law. The proxy granted in this Section 6 shall remain valid until
terminated pursuant to Section 10 hereof or until earlier terminated with
respect to shares of Common Stock that are Transferred in accordance with this
Agreement.
7. Covenant of Stockholder Parties. Each Stockholder Party agrees that he
will take all action necessary to (i) permit (a) his Owned Shares to be acquired
in the Merger and (b) the voting of his Voting Shares in accordance with the
terms of this Agreement and (ii) prevent creditors in respect of any pledge of
his Owned Shares from exercising their rights under such pledge.
8. Representations, Warranties and Covenants of Stockholder Parties. Each
Stockholder Party hereby represents and warrants to, and agrees with, Nortel as
follows:
(a) Such Stockholder Party has all necessary power and authority and legal
capacity to execute and deliver this Agreement and perform his obligations
hereunder.
(b) This Agreement has been duly and validly executed and delivered by
such Stockholder Party and constitutes the valid and binding agreement of such
Stockholder Party, enforceable against such Stockholder Party in accordance with
its terms except to the extent limited by (i) applicable bankruptcy, insolvency
or similar laws affecting creditors' rights or (ii) general equity principles,
whether considered at law or in equity.
(c) Each Stockholder Party is the sole Beneficial Owner of his Owned
Shares. Each Stockholder Party has good and marketable title (which may include
holding in nominee or "street" name) to all of his Owned Shares, free and clear
of all liens, claims, options, proxies, voting agreements and security interests
(other than as created by this Agreement and restrictions on Transfer under
applicable securities laws). Except as set forth in Schedule A, the Owned Shares
constitute all of the capital stock of the Company Beneficially Owned by such
Stockholder Party and neither such Stockholder Party nor his Affiliates is the
Beneficial Owner of, or has any right to acquire (whether currently upon lapse
of time, following the satisfaction of any conditions, upon the occurrence of
any event or any combination of the foregoing) any Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock.
(d) Neither the execution and delivery of this Agreement by each
Stockholder Party nor the consummation of the transactions contemplated hereby
will (i) conflict with, result in any violation of, require any consent under or
constitute a default (whether with notice or lapse of time or both) by such
Stockholder Party under any mortgage, bond, indenture, agreement, instrument or
obligation to which such Stockholder Party is a party or by which such
Stockholder Party or any of the Voting Shares is bound; (ii) violate any
C-3
<PAGE> 138
judgment, order, injunction, decree or award of any court, administrative agency
or governmental body that is binding on such Stockholder Party; or (iii)
constitute a violation by such Stockholder Party of any law or regulation of any
jurisdiction.
(e) Each Stockholder Party understands and acknowledges that Nortel and
Sub are entering into the Merger Agreement in reliance upon such Stockholder
Party's execution, delivery and performance of this Agreement. Each Stockholder
Party acknowledges that his irrevocable proxy set forth in Section 6 is granted
in consideration of the execution and delivery of the Merger Agreement by
Nortel.
9. Representations and Warranties of Nortel. Nortel represents and
warrants to the Stockholder Parties that Nortel has full corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution, delivery and performance of this Agreement by Nortel
will not constitute a violation of, conflict with or result in a default under,
(i) any contract, understanding or arrangement to which Nortel is a party or by
which it is bound or requires the consent of any other Person or any party
pursuant thereto, (ii) any judgment, decree or order applicable to Nortel, or
(iii) any law, rule or regulation of any governmental body, in each case except
for violations, conflicts or defaults that would not have a material adverse
effect on the ability of Nortel to perform its obligations under this Agreement;
and this Agreement constitutes a legal, valid and binding agreement on the part
of Nortel, enforceable against Nortel in accordance with its terms, except as
such enforceability may be limited by principles applicable to creditors' rights
generally or governing the availability of equitable relief. The execution and
delivery by Nortel of this Agreement and the consummation by Nortel of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Nortel and no other corporate proceedings on the part of
Nortel are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Nortel.
10. Termination. This Agreement, and all rights and obligations of the
parties hereunder, shall terminate on the earlier of (a) the Effective Time; (b)
the date upon which the Merger Agreement is terminated by the Company pursuant
to Section 8.01(b) thereof (unless at such time Nortel would be entitled to
terminate, or following the giving of notice and lapse of time would be entitled
to terminate, the Merger Agreement); and (c) 30 days following the termination
of the Merger Agreement other than as set forth in (b) above; provided, however,
that the term of this Agreement shall be extended by a period of days equal to
the duration of any temporary or permanent order, writ or injunction issued by a
court of competent jurisdiction that invalidates, impedes or enjoins the
operation or enforcement of this Agreement, the Merger Agreement or any
agreement contemplated hereby or thereby or entered into in connection herewith
or therewith.
11. Miscellaneous.
(a) This Agreement represents the entire understanding of the parties
hereto with reference to the subject matter hereof and supersedes any and all
other oral or written agreements and understandings among the parties heretofore
made.
(b) Each Stockholder Party agrees that this Agreement and the respective
rights and obligations of such Stockholder Party hereunder shall attach to any
Common Stock, and any securities convertible into such shares, that may become
Beneficially Owned by such Stockholder Party.
(c) Except as otherwise provided in this Agreement, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses.
(d) This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties and their respective successors,
personal or legal representatives, executors, administrators, heirs,
distributees, devisees, legatees and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any party (whether by operation of law or otherwise) without the
prior written consent of the other parties; provided, that Nortel may assign any
or all rights under this Agreement to Sub or any other Subsidiary. Nothing in
this Agreement, express or implied, is intended to or shall confer upon any
other Person any rights, benefits or remedies of any nature whatsoever under or
by reason of this Agreement.
C-4
<PAGE> 139
(e) This Agreement may not be amended, changed, supplemented, or otherwise
modified or terminated, except upon the execution and delivery of a written
agreement executed by the parties hereto; provided, that Nortel may waive
compliance by any other party with any representation, agreement or condition
otherwise required to be complied with by any other party under this Agreement
or release any other party from its obligations under this Agreement, but any
such waiver or release shall be effective only if in writing executed by Nortel.
(f) All notices and other communications hereunder shall be in writing and
shall be deemed given upon (a) transmitter's confirmation of a receipt of a
facsimile transmission, (b) confirmed delivery by a standard overnight carrier
or when delivered by hand or (c) the expiration of five business days after the
day when mailed by certified or registered mail, postage prepaid, addressed at
the address for such party set forth below.
(i) If to a Stockholder Party, to such Stockholder Party at the
address set forth beside its name on Schedule A hereto with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Avenue
Suite 800
Washington, DC 20004
Attention: Stephen I. Glover, Esq.
Fax: (202) 639-7008
Phone: (202) 639-7000
and another copy to:
Ruskin, Moscou, Evans & Faltischek, P.C.
170 Old Country Road
Mineola, New York 11501
Attention: Norman Friedland, Esq.
Fax: (516) 663-6601
Phone: (516) 663-6600
If to Nortel, to:
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario
Canada L6T 5P6
Attention: Corporate Secretary
Fax: (905) 863-8386
Phone: (905) 863-0000
With a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Victor I. Lewkow, Esq.
Fax: (212) 225-3999
Phone: (212) 225-2370
or to such other address or facsimile number as the Person to whom notice is
given shall have previously furnished to the others in writing in the manner set
forth above.
(g) If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the
C-5
<PAGE> 140
remainder of the terms, provisions and covenants and restrictions contained in
this Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated.
(h) Each Stockholder Party acknowledges and agrees that in the event of
any breach of this Agreement, Nortel would be irreparably and immediately harmed
and could not be made whole by monetary damages. It is accordingly agreed that
(a) each Stockholder Party will waive, in any action for specific performance,
the defense of adequacy of a remedy at law, and (b) Nortel shall be entitled, in
addition to any other remedy to which it may be entitled at law or in equity, to
compel specific performance of this Agreement.
(i) All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity shall be cumulative
and not alternative, and the exercise of any thereof by any party shall not
preclude the simultaneous or later exercise of any other such right, power or
remedy by such party. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in respect
hereof at law or in equity, or to insist upon compliance by any other party
hereto with its obligations hereunder, and any custom or practice of the parties
at variance with the terms hereof, shall not constitute a waiver by such party
of its right to exercise any such or other right, power or remedy or to demand
such compliance.
(j) This Agreement shall be governed by, and interpreted in accordance
with, the laws of the State of New York.
(k) The section and paragraph captions herein are for convenience of
reference only, do not constitute part of this Agreement and shall not be deemed
to limit or otherwise affect any of the provisions hereof.
(l) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to constitute an original.
12. Stockholder Capacity. No Stockholder Party executing this Agreement
who is or becomes during the term hereof a director or officer of the Company
makes any agreement or understanding herein in his capacity as such director or
officer. Each Stockholder Party signs solely in his capacity as the record
holder and/or beneficial owner of the Owned Shares and Voting Shares, and
nothing herein shall limit or affect any actions taken or omitted to be taken by
a Stockholder Party in his capacity as an officer or director of the Company to
the extent specifically permitted by the Merger Agreement.
13. Further Assurances. From time to time, at Nortel's reasonable request
and without further consideration, each Stockholder Party shall execute and
deliver such additional documents and take all such further lawful action as may
be necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this Agreement.
C-6
<PAGE> 141
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
/s/ PETER J. COHEN
------------------------------------------
Peter J. Cohen
/s/ GEORGE W. COLE
------------------------------------------
George W. Cole
/s/ RICHARD A. DANIELS
------------------------------------------
Richard A. Daniels
/s/ KEVIN J. O'BRIEN
------------------------------------------
Kevin J. O'Brien
/s/ JAYANDRA PATEL
------------------------------------------
Jayandra Patel
NORTEL NETWORKS CORPORATION
By: /s/ FRANK A. DUNN
---------------------------------------
Name: Frank A. Dunn
Title: Senior Vice-President and
Chief Financial Officer
By: /s/ NICHOLAS J. DEROMA
---------------------------------------
Name: Nicholas J. DeRoma
Title: Senior Vice-President and
General Counsel
C-7
<PAGE> 142
SCHEDULE A
STOCKHOLDER PARTIES
<TABLE>
<CAPTION>
NAME SHARES ADDRESS
- ---- ------ -------
<S> <C> <C>
Peter J. Cohen Owned Shares: 394,986(1) c/o Periphonics Corporation
Other Voting Shares: 0 4000 Veterans Memorial Highway
Total: 394,986 Bohemia, NY 11756
Fax: (516) 467-1755
George W. Cole Owned Shares: 345,528 c/o Periphonics Corporation
Other Voting Shares: 0 4000 Veterans Memorial Highway
Total: 345,528 Bohemia, NY 11756
Fax: (516) 467-1755
Richard A. Daniels Owned Shares: 0 c/o Periphonics Corporation
Other Voting Shares: 399,498(2) 4000 Veterans Memorial Highway
Total: 399,498 Bohemia, NY 11756
Fax: (516) 467-1755
Kevin J. O'Brien Owned Shares: 230,352 c/o Periphonics Corporation
Other Voting Shares: 0 4000 Veterans Memorial Highway
Total: 230,352 Bohemia, NY 11756
Fax: (516) 467-1755
Jayandra Patel Owned Shares: 421,444 c/o Periphonics Corporation
Other Voting Shares: 0 4000 Veterans Memorial Highway
Total: 421,444 Bohemia, NY 11756
Fax: (516) 467-1755
Aggregate Owned Shares: 1,392,310
Aggregate Other Voting Shares: 399,498
Aggregate Total: 1,791,808
</TABLE>
- ---------------
(1) 130,160 shares owned jointly with wife.
(2) 66,500 shares held in grant for brother. 332,998 shares held in grant for
children.
C-8
<PAGE> 143
ANNEX D
August 23, 1999
Board of Directors
Periphonics Corporation
4000 Veterans Memorial Highway
Bohemia, NY 11716-0493
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the common shareholders, other than Parent or any of its affiliates
(the "Shareholders") of Periphonics Corporation (the "Company") of the Exchange
Ratio, as defined below, contemplated by the draft Agreement and Plan of Merger
dated as of August 23, 1999 (the "Merger Agreement") by and among the Company,
Nortel Networks Corporation ("Parent") and SUB Inc., a wholly-owned subsidiary
of Parent ("Purchaser").
Pursuant to the terms of, and subject to the conditions of, the Merger
Agreement, Purchaser will either be merged into the Company (the "Reverse
Merger") or, at the Parent's request, the Company will be merged into the
Purchaser (the "Forward Merger") in a merger (collectively, the "Merger") in
which each of the outstanding shares of common stock of the Company ("Company
Common") will be converted into the right to receive a fraction of a share,
without par value, of common stock of the Parent ("Parent Common") based upon
the Exchange Ratio. The Exchange Ratio is the fraction obtained by dividing
$29.23 by the Average Parent Trading Price, as defined in the Merger Agreement,
and rounding the result to the nearest hundredth; provided however, that if such
fraction is less than .62, then the Exchange Ratio shall be .62, and if such
fraction is more than .76, then the Exchange Ratio shall be .76.
We have acted as financial advisor to the Company in connection with the
Merger. In connection with our review of the Merger and the preparation of our
opinion herein, we have: (a) reviewed the draft dated August 23, 1999 of the
Merger Agreement; (b) reviewed the historical revenue, operating earnings, net
income, and capitalization of both the Company, the Parent and certain other
publicly held companies in businesses we believe to be comparable to the Company
and the Parent; (c) reviewed certain financial and other information relating to
the prospects of the Company provided to us by the Company's management; (d)
reviewed certain financial projections for the Parent contained in securities
analysts' research reports; (e) discussed the past and current operations and
financial condition and prospects of the Company with senior executives of the
Company and of the Parent with the Chief Financial Officer of the Parent; (f)
reviewed the historical market prices and trading volume of the common stock of
the Company and the Parent; (g) reviewed the financial terms, to the extent
publicly available, of selected actual business combinations we believe to be
relevant; and (h) performed such other analyses as we have deemed appropriate.
We were not requested to, nor did we seek alternative participants for the
proposed Merger.
We have assumed the accuracy and completeness of all information reviewed
by us and have not attempted to verify independently any of such information,
nor have we made or obtained an independent valuation or appraisal of any of the
assets or liabilities of the Company. With respect to Company's financial
forecasts, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the Company's
management. With respect to the financial projections of the Parent included in
the securities analysts' research reports reviewed by us, we have assumed that
the analyses contained in these reports were reasonably comprehensive and
detailed and were based on assumptions about the trends influencing the Parent's
financial results that were generally consistent with those of the Parent's
management. We assume no responsibility for, and express no view as to, such
forecasts or the assumptions on which they are based.
Our opinion is necessarily based solely upon information available to us
and business, market, economic and other conditions as they exist on, and can be
evaluated as of, the date hereof. It should be understood that, although
subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm this opinion.
D-1
<PAGE> 144
In rendering our opinion, we have assumed that the Merger will be
consummated on the terms described in the Merger Agreement, without any waiver
of any material terms or conditions by the Company and that obtaining the
necessary regulatory approvals for the Merger will not have an adverse effect on
the Company. We have assumed that the Merger will be treated as a tax-free
reorganization pursuant to the Internal Revenue Code of 1986, as amended, and
that the shares received by the Shareholder's will be freely tradable.
William Blair & Company has been engaged in the investment banking business
since 1935. We undertake the valuation of investment securities in connection
with public offerings, private placements, business combinations, estate and
gift tax valuations and similar transactions. For our services, including the
rendering of this opinion, the Company will pay us a fee, which is contingent
upon consummation of the Merger, and indemnify us against certain liabilities.
William Blair & Company has provided investment banking and financial advisory
services to the Company in the past for which we have received customary
compensation.
We are expressing no opinion herein as to the price at which the Company
Common or Parent Common will trade at any future time or as to the effect of the
Merger on the trading price of the Parent Common. Such trading prices may be
effected by a number of factors, including but not limited to (i) dispositions
of the Company Common or Parent Common by stockholders, (ii) changes in
prevailing interest rates and other factors which generally influence the price
of securities, (iii) adverse changes in the current capital markets, (iv) the
occurrence of adverse changes in the financial condition, business, assets,
results of operations or prospects of the Company or Parent, (v) any necessary
actions by or restrictions of federal, state or other governmental agencies or
regulatory authorities, and (vi) timely completion of the Merger on terms and
conditions that are acceptable to all parties at interest.
Our engagement and the opinion expressed herein are solely for the benefit
of the Company's Board of Directors and are not on behalf of, and are not
intended to confer rights or remedies upon the Company, Shareholders of the
Company or any other person. It is understood that this letter may not be
disclosed or otherwise referred to without our prior written consent, except
that this opinion may be included in a proxy statement mailed to Shareholders by
the Company with respect to the Merger and the Form S-4 to be filed with the
Securities and Exchange Commission in connection with the Merger. Based upon and
subject to the foregoing, it is our opinion as investment bankers that, as of
August 23, 1999, the Exchange Ratio is fair, from a financial point of view, to
the Shareholders.
Very truly yours,
/s/ WILLIAM BLAIR & COMPANY, L.L.C.
WILLIAM BLAIR & COMPANY, L.L.C.
D-2
<PAGE> 145
PROXY
PERIPHONICS CORPORATION
4000 Veterans Memorial Highway
Bohemia, NY 11716
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all previous proxies, hereby appoints Peter J. Cohen,
Jayandra Patel and Kevin J. O'Brien, and each of them, proxies with power of
substitution to each, for and in the name of the undersigned to vote all shares
of Common Stock of Periphonics Corporation (the "Company"), held of record by
the undersigned on October 1, 1999 which the undersigned would be entitled to
vote if present at the Annual Meeting of Stockholders of the Company to be held
on November 10, 1999, at 10:00 a.m. at The Wyndham Wind Watch Hotel, Hauppauge,
New York 11788, and any adjournments thereof, upon the matters set forth in the
Notice of Annual Meeting.
The undersigned acknowledges receipt of the Notice of Annual Meeting, Proxy
Statement/Prospectus and the Company's 1999 Annual Report.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN THIS PROXY PROMPTLY
IN THE ENCLOSED ENVELOPE.
SEE REVERSE
SIDE
<PAGE> 146
[X] Please mark your
votes as in this
example
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
2. The election of two FOR WITHHOLD
Class II directors to hold all nominees listed below Authority to vote THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
office until the merger is (except as marked to the for all nominees DIRECTORS and when properly executed will be voted
completed or, if the contrary below) listed below as directed herein. If no direction is given, this
merger is not completed, [ ] [ ] Proxy will be voted FOR Proposals 1, 2, 3, and 4.
until the 2002 annual FOR AGAINST ABSTAIN
meeting of stockholders 1. The proposal to [ ] [ ] [ ]
and until their approve and adopt the
respective successors Agreement and Plan
have been elected and of Merger by and
qualified. among Nortel
Networks Corporation,
North Subsidiary, Inc.
(Instruction: To withhold authority to vote (a wholly-owned
for an individual nominee strike a line subsidiary of Nortel
through such nominee's name in the list below) Networks Corporation),
and Periphonics
Richard A. Daniels Corporation dated as
Edward H. Blum of August 24, 1999,
and to approve the
merger and other
transactions described
in the merger agreement
and as described in the
proxy
statement/prospectus.
3. The ratification of the [ ] [ ] [ ]
selection of Deloitte
& Touche LLP as
Periphonics'
independent auditors
until the merger is
completed or, if the
merger is not
completed, for the
fiscal year ending
May 31, 2000.
4. In their discretion, [ ] [ ] [ ]
on such other matters
as may properly come
before the meeting.
Please sign, date and return promptly in the enclosed
envelope. No postage need be affixed if mailed in the
United States.
</TABLE>
Signature(s) _____________________________________________ Date ________________
Please sign exactly as name appears above. If shares are held by joint tenants,
both should sign. When signing as attorney, executor, administrator, trustee or
guardian please list full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
