Exhibit 2.2
CONTINGENT PAYMENT AGREEMENT
THIS CONTINGENT PAYMENT AGREEMENT (the "Agreement"), is being entered
into this ____ day of ________________ 1996, by and among Citizens Utilities
Company, a Delaware corporation ("Parent"), Conference-Call USA, Inc., a
Delaware corporation ("CC/USA"), and CC/USA Representative, Inc., a Delaware
corporation ("CC/USA Shareholders' Representative").
R E C I T A L S
- - - - - - - -
A. Parent and CC/USA are parties to that certain Agreement and Plan of
Merger dated as of October 10, 1996 (the "Merger Agreement") among Parent,
CC/USA and Citizens Conference Call Company, a Delaware corporation ("Mergeco"),
pursuant to which Parent is acquiring all of the issued and outstanding shares
of capital stock of CC/USA;
B. Parent and CC/USA have agreed to accomplish this
transaction through a reverse triangular merger whereby Mergeco will merge
with and into CC/USA, and CC/USA will be the surviving corporation (the
"Merger");
C. In connection with the Merger, the CC/USA Shareholders (as defined
herein) will receive in exchange for their shares of CC/USA capital stock, (i)
shares of Series A Common Stock of Parent, $0.25 par value (the "CUC Common
Shares"), having an aggregate value of $15,500,000 (subject to certain
adjustments), and (ii) a Contingent Payment Right (as defined in the Merger
Agreement) representing the right to receive CUC Common Shares having an
aggregate value of up to $17,500,000 (the "Contingent Purchase Price"), which
shares will accrue to the CC/USA Shareholders based upon whether CC/USA and/or
Dial Services, Ltd., a Delaware corporation ("Dial"), achieve certain financial
results in future periods; and
D. The parties hereto desire to set forth in this Agreement, among
other things, the terms and conditions upon which the Contingent Purchase Price
will accrue and be payable to the CC/USA Shareholders, and certain restrictions
on CC/USA, Dial and the Parent regarding the operation and management of CC/USA
and Dial during the earn-out periods.
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements hereinafter set forth, the parties hereby agree
as follows:
ARTICLE I.
DEFINITIONS
-----------
SECTION 1.1.Definitions. Capitalized terms used herein and
------------
not otherwise defined shall have the meanings ascribed to them in the Merger
Agreement. In addition, the following terms have the meanings specified or
referred to in this Section 1.1 and shall be equally applicable to both the
singular and plural forms.
"Company" collectively refers to CC/USA, together with its wholly-owned
subsidiary, Dial.
"CC/USA Shares" means, collectively, the CC/USA Preferred Shares and
the CC/USA Common Shares.
"CC/USA Shareholders" collectively refers to all of the shareholders of
CC/USA who have tendered their CC/USA Shares pursuant to the Merger Agreement,
and does not include those shareholders who have exercised their appraisal
rights and received consideration other than as provided under the Merger
Agreement.
"CC/USA Common Shares" means all of the shares of common stock of
CC/USA, $.0001 par value, outstanding immediately prior to the effective time of
the Merger.
"CC/USA Preferred Shares" means all of the shares of Series A Preferred
Stock, $.01 par value, of CC/USA outstanding immediately prior to the effective
time of the Merger.
"Prime Rate" means the prime rate of interest as reported in The Wall
Street Journal from time to time.
"Pre-Tax Earnings" means, with respect to CC/USA, CC/USA's income on an
unconsolidated basis with Dial, and, with respect to Dial, Dial's income on an
unconsolidated basis with CC/USA, each as used in preparing the Company's annual
audited consolidated financial statements for a full calendar year or unaudited
consolidated summary financial statements for a partial calendar year, in each
case before deduction for any federal, state or local income taxes, all in
accordance with and as adjusted pursuant to the rules on Exhibit C.
ARTICLE II.
CONTINGENT PAYMENT AMOUNT
-------------------------
SECTION 2.1. Contingent Purchase Price. In further consideration
----------------------------
of their CC/USA Shares, the CC/USA Shareholders are receiving pursuant to the
Merger Agreement the right to receive up to an aggregate additional amount of
SEVENTEEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($17,500,000) (subject to
certain adjustments pursuant to Sections 2.3 (e) and 2.10) (the "Contingent
Purchase Price") to accrue to the CC/USA Shareholders in the form of CUC Common
Shares based upon CC/USA and/or Dial achieving
2
certain Financial Targets (as defined herein) in each of the Earn-Out Periods
(as defined herein), all as further provided in Section 2.2 below. The aggregate
number of CUC Common Shares deliverable to the CC/USA Shareholders in payment of
the accrued Contingent Purchase Price (the "Accrued Earn-Out Shares") shall be
calculated and payable as provided in Section 2.3 of this Agreement and shall be
subject to possible holdback and non-issuance as provided in Sections 2.3 and
2.11 of this Agreement.
SECTION 2.2. Accrual of Contingent Purchase Price.
-------------------------------------
(a) Attached hereto as Exhibit A are projected financial results (each
a "Financial Target" and collectively, the "Financial Targets") for each of
CC/USA and Dial, which projections show Pre-Tax Earnings for each company for
each Earn-Out Period (as defined below). Portions of the Contingent Purchase
Price shall accrue to the CC/USA Shareholders contingent upon the achievement by
CC/USA and Dial, individually, of a certain percentage of their respective
Financial Targets for each of the following periods (each, an "Earn-Out
Period"):
Period I January 1, 1996 through December 31, 1996
Period II January 1, 997 through December 31, 1997
Period III January 1, 1998 through December 31, 1998
Period IV January 1, 1999 through December 31, 1999
For purposes of calculating whether a Financial Target has been met,
the respective financial performances of CC/USA and Dial shall be calculated
separately, and not on a consolidated basis. The failure of one company to meet
a Financial Target shall not affect whether the other meets a Financial Target.
(b) The Contingent Purchase Price shall be divided into two baskets,
(i) one basket consisting of $14,500,000 ("Basket I") and (ii) the other basket
consisting of $3,000,000 ("Basket II" and together with Basket I, collectively
referred to as the "Baskets" and individually as a "Basket"). Each Basket will
be subdivided into two sub-baskets, with (i) one sub-basket relating to CC/USA
and being allocated ninety percent (90%) of the total amount of such Basket and
(ii) the other sub-basket relating to Dial and being allocated ten percent (10%)
of the total amount of such Basket.
(c) Each sub-basket of Basket I will be further subdivided into four
separate parts, one for each of the four Earn-Out Periods, which parts will
accrue based on the degree to which CC/USA or Dial, as the case may be, achieve
the corresponding Financial Target. The maximum aggregate amount that can accrue
to the CC/USA Shareholders with respect to each part of each sub-basket of
Basket I for each Earn-Out Period is as follows (each such amount herein
referred to as a "Basket I Maximum Amount"):
(i) CC/USA Basket I Maximum Amounts
3
Period I - 1,305,000
Period II - 3,915,000
Period III - 3,915,000
Period IV - 3,915,000
(ii) Dial Basket I Maximum Amounts
Period I - 145,000
Period II - 435,000
Period III - 435,000
Period IV - 435,000
Subject to the catch-up provisions of Section 2.2(e) below, each of the
foregoing Basket I Maximum Amounts shall accrue to the CC/USA Shareholders as
follows:
(1) No amount of a Basket I Maximum Amount shall accrue to the
CC/USA Shareholders if CC/USA or Dial, as the case may be, fails to
achieve at least seventy percent (70%) of the applicable Financial
Target corresponding to such Basket I Maximum Amount; and
(2) Seventy percent (70%) of a Basket I Maximum Amount shall
accrue to the CC/USA Shareholders if CC/USA or Dial, as the case may
be, achieves seventy percent (70%) of the applicable Financial Target
corresponding to such Basket I Maximum Amount, and such accrual
percentage of the Basket I Maximum Amount shall increase pro-rata, up
to 100% of the Basket I Maximum Amount, as the percentage of
achievement of the applicable Financial Target increases.
(d) With respect to Basket II, each sub-basket of Basket II will be
further subdivided into four separate parts, one for each Earn-Out Period, which
parts will accrue based on the degree to which CC/USA or Dial, as the case may
be, achieve the Financial Target. The maximum aggregate amount that can accrue
to the CC/USA Shareholders with respect to each part of each sub-basket of
Basket II for each Earn-Out Period is as follows (each such amount herein
referred to as a "Basket II Maximum Amount"):
(i) CC/USA Basket II Maximum Amounts
Period I - $270,000
Period II - $810,000
Period III - $810,000
Period IV - $810,000
(ii) Dial Basket II Maximum Amounts
4
Period I - $30,000
Period II - $90,000
Period III - $90,000
Period IV - $90,000
Subject to the catch-up provisions of Section 2.2(e) below, each of the
foregoing Basket II Maximum Amounts shall accrue to the CC/USA Shareholders as
follows:
(1) No amount of a Basket II Maximum Amount shall accrue to
the CC/USA Shareholders if CC/USA or Dial, as the case may be, fails to
achieve in excess of one hundred percent (100%) of the applicable
Financial Target corresponding to such Basket II Maximum Amount; and
(2) One hundred percent (100%) of a Basket II Maximum Amount
shall accrue to the CC/USA Shareholders if CC/USA or Dial, as the case
may be, achieves one hundred and twenty percent (120%) of the
applicable Financial Target corresponding to such Basket II Maximum
Amount, and such accrual percentage of the Basket II Maximum Amount
shall decrease pro-rata down to nothing (0%) of the Basket II Maximum
Amount, as the percentage of achievement of the applicable Financial
Target decreases from 120% to 100% (i.e., a 5% decrease in the accrual
percentage of the Basket II Maximum Amount for each 1% drop in the
percentage of achievement of the applicable Financial Target from 120%
to 100%).
(e) Notwithstanding any of the foregoing to the contrary, it is the
parties' intent that the accruals of the Basket I Maximum Amounts and the Basket
II Maximum Amounts be calculated on a cumulative basis, retroactively applied.
Accordingly, to the extent that Pre-Tax Earnings of either CC/USA or Dial, as
the case may be, exceeds 100% of a Financial Target relating to a Basket I
Maximum Amount in any Earn-Out Period, or exceeds 120% of a Financial Target
relating to a Basket II Maximum Amount in any Earn-Out Period (an "Excess
Earnings Amount"), such Excess Earnings Amount shall be credited towards
CC/USA's or Dial's Pre-Tax Earning in any prior Earn-Out Period in which the
full amount of any Basket I Maximum Amount or Basket II Maximum Amount was not
achieved (a "Shortfall"). Excess Earnings Amounts shall be applied to the
earliest occurring Shortfall until such Shortfall is extinguished and then to
the next successive occurring Shortfall, until such Excess Earnings Amounts are
used in full. Any Excess Earnings Amounts shall only be applied to Shortfalls
relating to Earn-Out Periods occurring prior to the Earn-Out Period in which
such Excess Earnings Amount was achieved, and shall not be carried forward.
After applying any Excess Earnings Amounts, the accrued portion of the Basket I
Maximum Amount or Basket II Maximum Amount shall then be recalculated, and the
Parent shall issue additional CUC Common Shares to the CC/USA Shareholders in
payment of any recaptured Shortfall.
5
(f) Attached as Exhibit B are examples of calculations of the
Accrued Earn-Out Amount.
SECTION 2.3. Calculation and Payment of Contingent Purchase
---------------------------------------------------
Price.
------
(a) For purposes of this Agreement, Pre-Tax Earnings shall be
calculated by the Company in accordance with its definition (as provided in
Section 1.1) and the additional rules set forth on Exhibit C, attached hereto.
The Company shall send to the Parent and the CC/USA Shareholders' Representative
by February 10 of each of 1997, 1998, 1999 and 2000 a statement (the "Certified
Annual Statement") showing, in reasonable detail and with sufficient supporting
documentation, the calculation of the accrued portion, if any, of the Contingent
Purchase Price earned by the CC/USA Shareholders during such Earn-Out Period
(the "Accrued Earn-Out Amount"), certified by the Company's Chief Financial
Officer, together with audited financial statements of the Company for the
relevant period and the certificate required by Section 2.11 of this Agreement.
The Certified Annual Statement shall show, among other things, the calculation
of Pre-Tax Earnings for each of CC/USA and Dial to the extent not reflected on
the audited financial statements as a line item.
(b) Subject to Section 2.3(d) and to the Parent's receipt by February
10 of the Certified Annual Statement, the certificate required by Section 2.11,
and the audited financial statements of the Company for the prior fiscal year,
the Parent, prior to March 1, shall issue and deliver to the CC/USA Shareholders
that number of Accrued Earn-Out Shares equal to the Accrued Earn-Out Amount (as
adjusted, if necessary, pursuant to Section 2.12) divided by $12.125 (as
adjusted, if necessary, pursuant to Section 2.8). The Parent shall be obligated
to issue to the CC/USA Shareholders that number of Accrued Earn-Out Shares not
in dispute, with the balance to be heldback and not issued by the Parent pending
resolution of any dispute. If not all of the Accrued Earn-Out Shares are issued
prior to March 1 (other than due to the failure of the Company to deliver to the
Parent by February 10 the Certified Annual Statement and the audited financial
statements of the Company for the prior year), then:
(i) to the extent the price of the CUC Common Shares decreases
between March 1 of such year and the time payment is made, the Parent
shall issue and deliver to the CC/USA Shareholders additional CUC
Common Shares having an aggregate value, based upon the closing price
of a CUC Common Share as reported in the New York Stock Exchange
sections of The Wall Street Journal on the third trading day
immediately prior to the date of issuance, equal to the amount of the
decrease in market value of the number of such Accrued Earn-Out Shares
that are issued on or after March 1; and
(ii) the Parent shall pay to the CC/USA Shareholders any
dividends declared on the CUC Common Shares, payable to holders of
record on or after March 1, which would have been payable on the number
of such Accrued Earn-Out Shares issued on or after March 1 had they
been issued prior to March 1. No fractional shares of CUC Common Shares
will be issued in payment of any CC/USA Shareholder's right to receive
6
Accrued Earned-Out Shares or other CUC Common Shares, but in lieu of
such fractional shares, the Parent shall make a cash payment therefor
based upon the closing price of a CUC Common Share as reported in the
New York Stock Exchange section of The Wall Street Journal on the
third trading day immediately prior to the date of issuance. The
provisions of this Section 2.3(b) shall apply to the issuance of
additional or heldback CUC Common Shares pursuant to Section 2.3(d)
or (e).
(c) The CC/USA Shareholders' Representative, the Parent and the
Parent's auditors shall have reasonable access to the working papers of the
Company and its auditors for purposes of confirming the accuracy of the
calculations of the Accrued Earn-Out Amount for each Earn-Out Period. The
Company shall engage Ernst & Young to perform its sole independent financial
audit for each of the Earn-Out Periods, and shall direct Ernst & Young to
coordinate their efforts with the Parent's auditors.
(d) In the event that the Parent or the CC/USA Shareholders'
Representative disputes the calculation of the Accrued Earn-Out Amount, it shall
deliver a written notice to the Company at least three (3) business days prior
to the last business day in February, including the reason for such dispute. If
no notice of dispute is received by the Company by such date, the Parent and the
CC/USA Shareholders shall be deemed to have accepted the calculations shown in
the Certified Annual Statement. If the Company, on the one hand, and Parent or
the CC/USA Shareholders' Representative, on the other, fail to resolve any
dispute within 10 days after the day on which the Parent or the CC/USA
Shareholders' Representative gave notice of the dispute, then the dispute shall
be submitted to an accounting firm mutually agreed to by the parties to the
dispute. If the parties to the dispute are unable to agree upon an accounting
firm to resolve the dispute, then the accounting firms of Ernst & Young and the
Parent's auditors shall be instructed to select a third firm (the "Accounting
Firm") and the dispute shall be submitted to such firm. The Company on the one
hand, and the Parent or the CC/USA Shareholders' Representative, on the other,
shall engage the Accounting Firm to resolve the dispute and the Accounting Firm
shall be required to render its decision within 30 days. The decision of the
Accounting Firm shall be final and binding and the calculation on the Certified
Annual Statement shall be adjusted to reflect such decision. The Parent promptly
shall issue to CC/USA Shareholders the appropriate number of additional CUC
Common Shares to the extent the resolution of the dispute(s) supports a
calculation of the Accrued Earn-Out Amount that requires the issuance of
additional Accrued Earn-Out Shares. If resolution of the dispute(s) supports a
calculation of the Accrued Earn-Out Amount that does not require the issuance of
additional Accrued Earn-Out Shares in excess of the number of Accrued Earn-Out
Shares heldback by the Parent pursuant to Section 2.3(b), then the Parent will
have no obligation to issue the heldback CUC Common Shares remaining after the
Parent's compliance with the immediately preceding sentence. If resolution of
the dispute(s) supports a calculation of the Accrued Earn-Out Amount that
reduces the number of Accrued Earn-Out Shares that should have been issued to a
number that is less than the number of CUC Common Shares previously issued as
Accrued Earn-Out Shares by the Parent, then the Parent not only will have no
obligation to issue the heldback CUC Common Shares, but also will be entitled to
reduce the number of Accrued Earn-Out Shares that the Parent may otherwise be
7
required to issue with respect to the next successive Earn-Out Period in an
amount equal to the number of such excess CUC Common Shares previously issued
plus any CUC Common Shares issued as dividends thereon. The provisions of
Section 2.3(b) shall apply to the issuance of additional or heldback CUC Common
Shares under this Section. The fees and expenses of the Accounting Firm shall
initially be paid by the Company, but the Parent or the CC/USA Shareholders'
Representative, as the case may be, shall reimburse the Company for such fees if
such party disputes the calculation and the Company's calculation is
substantially upheld.
(e) If the Adjusted Consolidated Working Capital, as determined in
accordance with Section 2.8 of the Merger Agreement, is less than the Adjusted
Consolidated Working Capital estimated in the Initial Adjustment Certificate,
then the number of Accrued Earn-Out Shares to be first issued hereunder shall be
reduced by that number of shares as determined pursuant to Section 2.8 of the
Merger Agreement. If Adjusted Consolidated Working Capital has not been finally
determined pursuant to Section 2.8 of the Merger Agreement prior to the date
that Accrued Earned-Out Shares are to be first issued hereunder, then the Parent
shall holdback and not issue such number of Accrued Earned-Out Shares as would
not be issuable if Adjusted Consolidated Working Capital as finalized in
accordance with Section 2.8 of the Merger Agreement was equal to Adjusted
Consolidated Working Capital as calculated by the Parent in accordance with
Section 2.8 of the Merger Agreement. The Parent shall issue the appropriate
number of such heldback Accrued Earned-Out Shares if and to the extent that
Adjusted Consolidated Working Capital as set forth in the Final Adjustment
Certificate, as finalized by the parties or by the Qualified Auditor, is more
than Adjusted Consolidated Working Capital as calculated by the Parent. The
provisions of Section 2.3(b) shall apply to the issuance of such heldback CUC
Common Shares under this Section 2.3(e).
SECTION 2.4. Operating Control During Earn-Out Period.
-----------------------------------------
(a) Subject to the restrictions in this Section 2.4 and subject to any
contrary provision of the GCL, the persons set forth on Exhibit D (each a "Key
Manager" and collectively the "Management Team") shall at all times during the
Earn-Out Periods retain and have full and exclusive operating control and
management authority to direct the businesses of CC/USA and Dial, including the
authority to incur and satisfy all liabilities arising in the ordinary course of
the business of CC/USA or Dial. Notwithstanding the foregoing, the Management
Team shall not take any of the following actions on the behalf of the Company
without Board of Director approval:
(i) issue any securities for capital stock of
CC/USA or Dial or any securities exchangeable for, or creating a
right to purchase any capital stock of CC/USA or Dial;
(ii) assume, incur or guarantee any obligation or liability
for borrowed money from any third-party other than Parent, provided,
however, purchase money financing to obtain additional equipment used
in the business shall be permitted, provided such capital expenditures
are permissible hereunder;
8
(iii) make any capital expenditures or commit to make any
capital expenditures in excess of the amounts, or for purposes other
than as, set forth in an annual budget that is approved by CC/USA's or
Dial's Board of Directors;
(iv) enter into any transaction with any Key Manager, the
CC/USA Shareholders' Representative, any former officer or director of
CC/USA or Dial, any CC/USA Shareholder, or any affiliate of any of the
foregoing or of CC/USA or Dial;
(v) make any regulatory filing with the FCC or any state
regulatory commission;
(vi) acquire or dispose of a business, division or product
line of the Company, provided that the Board of Directors of CC/USA or
Dial shall not unreasonably withhold their approval of any such
acquisition or disposition;
(vii) enter into any contract, agreement, lease or other
arrangement binding on CC/USA or Dial that has a term that extends
beyond December 31, 2000, or that contains terms or conditions that are
more onerous on CC/USA or Dial during the period after December 31,
1999, than applied to CC/USA or Dial during any Earn-Out Period, or
which otherwise has the effect of shifting operating or financial
burdens or adverse economic effects from any Earn-Out Period to any
other Earn-Out Period or to the period commencing after December 31,
1999; or
(viii) take any action or omit to take any action the direct
or indirect effect of which could shift the financial consequences to
CC/USA or Dial from any Earn-Out Period to any other Earn-Out Period or
to the period following December 31, 1999, or that could impair the
Parent's operation or ownership of the Company after December 31, 1999,
or take any action that is intended to artificially inflate the Pre-Tax
Earnings of CC/USA or Dial for any Earn-Out Period or otherwise to
artifically enhance the Company's ability to meet the Financial
Targets.
(b) Parent shall not require CC/USA or Dial to increase the benefits
payable under or add any employee benefit or welfare plans to match similar
plans currently offered by Parent to its employees. The Parent shall not,
without the written consent of the most senior Key Manager at CC/USA or Dial, as
appropriate, transfer, fire or change the responsibilities, salary, position,
title, or general working conditions of any Key Manager of CC/USA or Dial,
respectively, or cause either CC/USA or Dial to hire other individuals having
any of the current responsibilities of any Key Manager. The Management Team
shall have the right to replace any Key Manager who ceases to be employed by the
Company, and such replacement person shall be deemed a Key Manager for purposes
of this Agreement.
9
(c) (i) If Pre-Tax Earnings of CC/USA for any Earn-Out Period shall
fall below fifty percent (50%) of the corresponding Financial Target,
the Parent shall have the unrestricted right (A) to replace any or all
of the Key Managers who are employed by CC/USA and assume operating and
management control of CC/USA, (B) to terminate the CC/USA Shareholders'
Contingent Payment Rights to the extent relating to the CC/USA Basket I
Maximum Amounts and the CC/USA Basket II Maximum Amounts, and (C) to
discontinue the operations or to sell (whether by sale of substantially
all of the assets, stock, merger or otherwise) CC/USA (excluding Dial).
(ii) If Pre-Tax Earnings of Dial for any Earn-Out Period shall
fall below fifty percent (50%) of the corresponding Financial Target
(if the Financial Target is a negative amount, then "50% of the
Financial Target" shall be deemed to be 150% of such negative amount),
the Parent shall have the unrestricted right (A) to replace any or all
of the Key Managers who are employed by Dial and who spend a majority
of their time on Dial matters, and assume operating and management
control of Dial, (B) to terminate the CC/USA Shareholders' Contingent
Payment Right to the extent relating to the Dial Basket I Maximum
Amounts and the Dial Basket II Maximum Amounts, and (C) to discontinue
the operations or to sell (whether by sale of substantially all of the
assets, stock, merger or otherwise) Dial.
(iii) The Parent shall exercise these rights (separately or in
combination) within thirty (30) days from the date of its receipt of
the Annual Certified Statement and the Company's audited financial
statements by giving written notice to the most senior Key Manager at
CC/USA or Dial, as appropriate, and the CC/USA Shareholders'
Representative; otherwise, the Contingent Payment Rights shall continue
unaffected, and the Management Team shall remain in place until the
delivery of the Annual Certified Statement and the Company's audited
financial statements for the next Earn-Out Period.
(d) The Parent shall have the further right to remove any or all of the
Management Team at any time in its sole discretion provided that (i)
simultaneously with such removal it shall pay to the CC/USA Shareholders the
balance of the Contingent Purchase Price, including all Shortfalls; and (ii) any
terminated Key Manager shall be entitled to his salary and bonus (not to exceed
the bonus paid to such Key Manager for the immediately preceding year) for the
remainder of the Earn-Out Periods as if he had remained in the employ of the
applicable company for such period.
(e) The Parent shall have the further right to require the Company to
pursue business opportunities related to the services then provided by the
Company that are presented to the Company by the Parent. The Management Team may
be required by the Board of Directors of the Company to pursue and manage such
business opportunities with the same priority and sense of urgency that are
being applied to other comparable business opportunities of the Company. The
Parent shall have the further right to require the Management Team to coordinate
the business activities of the Company with the Parent and its affiliates to the
extent such coordination makes reasonable business sense.
10
(f) The Parent shall prepare all local, state, federal and foreign tax
returns which either CC/USA or Dial may be required to file, except that the
Company shall retain responsibility for payroll taxes unless the Parent
otherwise specifically requires.
SECTION 2.5. Manipulation.
--------------
(a) Parent shall not take any action with respect to the operation or
ownership of CC/USA or Dial that is intended to artificially reduce or inhibit
the Company's ability to meet the Financial Targets, provided that any action by
the Parent that has been approved in writing by the most senior Key Manager at
CC/USA or Dial, as appropriate, shall be deemed not to be an action that is
intended to artificially reduce or inhibit the Company's ability to meet the
Financial Targets.
(b) The Parent shall not require the Company to pay cash dividends to
it if such payment would adversely affect the ability of the Company to meet its
current liabilities as they become due and payable, provided that
notwithstanding the foregoing, the Parent may require the Company to pay cash
dividends to it in an amount equal to the tax liabilities of the Company to the
extent included in any tax return of the Parent or any affiliate of the Parent
other than the Company.
(c) The Company may require the Parent to advance funds to the Company
in an amount equal to the cash dividends made to the Parent by the Company net
of the portion of such cash dividends that are equal to the Company's tax
liabilities that are included in any tax return of the Parent or any affiliate
of the Parent, provided that such financing may be used solely for the purposes
of making capital expenditures permitted pursuant to Section 2.4(a).
(d) The Parent shall permit the most senior Key Employee of CC/USA or
Dial, or his designee, to attend, at his expense, all meetings of the Board of
Directors of CC/USA or
11
Dial, and all meetings of any committee established by either such Board of
Directors, that may be held during the period in which the Contingent Payment
Right remains in effect for CC/USA or Dial, respectively.
SECTION 2.6. Sale of CC/USA or DIAL. Except as provided below, and
-----------------------
subject to Section 2.4(c), all or a portion of the unpaid balance of the
Contingent Purchase Price, including any Shortfalls, shall become immediately
due and payable upon the sale (whether by sale of substantially all of the
assets, stock, merger, or otherwise) or the discontinuation of operations of
CC/USA, Dial, or both, as follows:
(a) 90% of the Contingent Purchase Price shall be
payable upon the sale or discontinuation of CC/USA, including any
Shortfalls relating to CC/USA's performance;
(b) 10% of the Contingent Purchase Price shall be
payable upon the sale or discontinuation of Dial, including any
Shortfalls relating to Dial's performance; and
(c) all of the Contingent Purchase Price and any
Shortfalls shall be payable upon the sale or discontinuation of the
Company.
In the event of a discontinuation of operations other than as permitted by
Section 2.4(c), this requirement shall be inapplicable if the decision to
discontinue operations is made or consented to by the most senior Key Manager at
CC/USA or Dial, as the case may be.
SECTION 2.7. Stock Fully Paid; Reservation of Shares. All CUC Common
-----------------------------------------
Shares that may be issued under the Contingent Payment Right will, upon
issuance, be fully paid and nonassessable, and free from Encumbrances (other
than Encumbrances arising pursuant to the Securities Act) with respect to the
issue thereof. During the Earn-Out Periods and for 120 days thereafter, the
Parent will at all times have authorized and reserved for the purpose of
issuance, a sufficient number of CUC Common Shares to provide for the issuance
of Accrued Earn-Out Shares assuming the full realization of the Contingent
Purchase Price.
SECTION 2.8. Certain Adjustments. If the Parent at any time while the
---------------------
Contingent Payment Right remains outstanding subdivides (which term shall not
include payment of a dividend declared payable in shares of CUC Common Stock) or
combines it CUC Common Stock, the dollar figure that is the divisor by which the
Accrued Earn-Out Amount is divided shall be proportionately adjusted. The Parent
shall promptly give notice to the CC/USA Shareholders' Representative upon the
occurrence of any of the foregoing events.
SECTION 2.9. Quarterly Meetings. During the Earn-Out Periods and at
-------------------
the request of the CC/USA Shareholders' Representative, the senior management of
the Company shall meet at Company headquarters with the CC/USA Shareholders'
Representative no more frequently than quarterly to report on the condition
(financial and otherwise) of the Company, and the likelihood of meeting the
Financial Targets for such Earn-Out Period.
12
SECTION 2.10. Adjustment for Excluded Stock. The Contingent
-------------------------------
Purchase Price shall be reduced by an amount equal to the Contingent Purchase
Price multiplied by the percentage of Excluded Stock (as defined in the Merger
Agreement) as to the total of all of the CC/USA Shares. Further, each of the
Basket I and II Maximum Amounts for each Earn-Out Period shall be
proportionately reduced by the same percentage.
SECTION 2.11. Contingent Liabilities. The Company shall include with
------------------------
each Certified Annual Statement a certificate signed by the Company's Chief
Financial Officer that, to the best of his knowledge after reasonable inquiry,
the Company does not have any liabilities or obligations (absolute, accrued,
contingent or otherwise) which in the aggregate would have an adverse effect on
the financial condition or results of operations of either CC/USA or Dial except
for liabilities and obligations either (a) reflected in the audited financial
statements included with the Certified Annual Statement, (b) incurred in the
ordinary course of business since the date of such financial statements, none of
which, individually, is material in amount or (c) disclosed in such certificate.
With respect to any contingent liability, if the Parent determines that GAAP
requires CC/USA or Dial to establish a reserve for such contingent liability or
to increase an existing reserve for such contingent liability, and the Company
disagrees with the Parent, then the Parent shall have the right to holdback and
not to issue as Accrued Earn-Out Shares the appropriate number of CUC Common
Shares pending resolution of such dispute pursuant to Section 2.3(d). With
respect to any liability reserves of the Company that are outstanding as of
December 31, 1999, whether required pursuant to GAAP or required by the Parent
pursuant to Item 12 on Exhibit C, the Parent shall have the further right to
continue to holdback and not to issue the CUC Common Shares that would have been
issuable as Accrued Earn-Out Shares but for the existence of such reserves. Such
heldback shares shall be issued or the obligation to issue such shares shall be
cancelled from time to time as and to the extent any dispute regarding such
reserves is resolved pursuant to Section 2.3(d) or as and to the extent the
contingent liabilities that are the subject of such reserves are finally
settled.
SECTION 2.12 Adjustment to Accrued Earn-Out Amount. The Accrued
------------------------------------------
Earn-Out Amount for any Earn-Out Period shall be reduced by the aggregate amount
of (i) all extraordinary losses or expenses incurred by the Company, and all
losses or expenses incurred by the Parent or any affiliate of the Parent other
than indirect losses or expenses of the Parent which arise solely as a result of
the Company having incurred losses or expenses, during the relevant Earn-Out
Period arising from events or circumstances that would have been a breach of a
representation, warranty or covenant of the Company in the Merger Agreement if
such representations, warranties and covenants had survived the Closing, and
(ii) all investment banking fees payable as a result of a portion of the
Contingent Purchase Price being earned in such Earn-Out Period.
13
ARTICLE III.
MISCELLANEOUS PROVISIONS
------------------------
SECTION 3.1. Amendment and Modification. This Agreement may be amended,
---------------------------
modified and supplemented only by written agreement of the parties hereto.
SECTION 3.2. Waiver of Compliance, Consents. Any failure of the
---------------------------------
parties to comply with any obligation, covenant, agreement or condition herein
may be waived in writing by the parties, or by their respective officers or
representatives thereunto duly authorized, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or on
behalf of any party hereto, such consent shall be given in writing in a manner
consistent with the requirements for a waiver of compliance as set forth in this
Section 3.2.
SECTION 3.3. Expenses. Except as otherwise provided herein,
---------
each party will pay its own legal and other expenses incurred by it, or on its
behalf, in connection with the negotiation and preparation of this Agreement and
monitoring of the transactions contemplated herein.
SECTION 3.4. Headings. The article and section headings
--------
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
SECTION 3.5. Notices. All notices, requests, demands and other
--------
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been given as follows: on the day established by the
sender as having been delivered personally; on the day delivered by a private
courier as established by the sender by evidence obtained from the courier; or
on the third (3rd) day after the date mailed, by certified or registered mail,
return receipt requested, postage prepaid. Such communications, to be valid,
must be addressed as follows:
(a) If to the Company:
Conference-Call USA, Inc.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇ ▇▇▇▇▇▇▇▇▇
with a copy to:
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ Ltd.
14
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
Citizens Utilities Company
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: L. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇, Esq.
(b) If to the Parent :
Citizens Utilities Company
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
With a copy to:
Citizens Utilities Company
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: L. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇, Esq.
▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇, L.L.P.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇.
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
(c) If to CC/USA Shareholders' Representative:
c/o ▇▇▇ ▇▇▇▇▇▇▇▇▇
c/o Conference-Call USA, Inc.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
with a copy to:
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ Ltd.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
15
or to such other address or to the attention of person or persons as the
recipient party has specified by prior written notice to the sending party (or
in the case of counsel, to such other readily ascertainable business address as
such counsel may hereafter maintain). If more than one method for sending notice
as set forth above is used, the earliest notice date established as set forth
above shall control.
SECTION 3.6. Assignment.
-----------
This Agreement and all of the provisions hereof shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any party hereto without the prior
written consent of the other party.
SECTION 3.7. Governing Law. This Agreement shall be governed by
---------------
the law of the State of Delaware as to all matters, including, but not limited
to, matters of validity, construction, effect and performance. The parties agree
that any dispute arising in connection with this Agreement may first be
submitted for good faith resolution by a form of mutually agreed upon
alternative dispute resolution. Should the parties fail to agree upon a form of
alternative dispute resolution or should such form of alternative dispute
resolution not be successful in resolving the dispute, the parties irrevocably
agree that all actions arising directly or indirectly as a result or in
consequence of this Agreement, shall be instituted and litigated only in courts
having situs in the State of Delaware and each of the parties hereby consents to
the exclusive jurisdiction and venue of any such court, and waives any objection
based on forum nonconveniens. Each of the parties hereby waives personal service
of any and all process, and consents that all such service of process may be
made by certified mail, return receipt requested, directed to the party at the
address set forth in Section 3.5 in the manner provided by applicable statute,
law, rule of court or otherwise.
SECTION 3.8. Counterparts. This Agreement may be executed in one or
-------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 3.9. No Third Party Beneficiaries. This Agreement shall not
-----------------------------
confer any rights on any Persons other than the CC/USA Shareholders and the
parties to this Agreement as provided herein.
SECTION 3.10. Severability. In the event that any
------------
particular provision or provisions of this Agreement shall for any reason be
determined to be unenforceable, or in violation of any law, government order or
regulation, such unenforceability or violation shall not affect the remaining
provisions of this Agreement which shall continue in full force and effect and
be binding upon the parties.
SECTION 3.11. Entire Agreement. This Agreement
-------------------
(including the Exhibits attached hereto), the Merger Agreement, each Contingent
Payment Right issued to a CC/USA Shareholder, and the agreements referred to
herein or therein contain the entire agreement
16
between the parties with respect to the transactions contemplated hereby, and
supersede all written or verbal negotiations, representations, warranties,
commitments, and other understandings prior to the date hereof between the
Parent, CC/USA and the CC/USA Shareholders' Representative. There are no
agreements, covenants, representations or warranties with respect to the
transactions contemplated hereby other than those expressly set forth herein.
SECTION 3.12. CC/USA Shareholders' Representative. As an
--------------------------------------
inducement to the Parent to enter into this Agreement, the CC/USA Shareholders'
Representative represents and warrants to the Parent, as follows:
(a) Organization. The CC/USA Shareholders' Representative is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The CC/USA Shareholders' Representative has full
corporate power and authority to carry on its business as presently conducted.
(b) Authority. The CC/USA Shareholder' Representative has full
corporate power and authority to enter into this Agreement and perform its
obligations hereunder. The execution and delivery of this Agreement by the
CC/USA Shareholders' Representative and its performance hereunder have been duly
authorized by the Board of Directors of the CC/USA Shareholders' Representative
and no further corporate action on the part of the CC/USA Shareholders'
Representative is necessary. This Agreement has been duly executed and delivered
by the CC/USA Shareholders' Representative and constitutes the legal valid and
binding obligation of the CC/USA Shareholders' Representative enforceable
against it in accordance with its terms.
(c) Corporate Documents. Copies of (i) the charter of the CC/USA
Shareholders' Representative, certified by the Secretary of State of Delaware,
(ii) the Bylaws of the CC/USA Shareholders' Representative, certified by its
corporate secretary, and (iii) an incumbency certificate showing the names,
titles and signature specimens of all officers of the CC/USA Shareholders'
Representative, certified by its corporate secretary, have been delivered to
Parent, are true and complete copies of such instruments, as amended to date,
and are in full force and effect on the date hereof.
(d) Other Documents. Copies of all agreements made and executed between
the CC/USA Shareholders' Representative and the CC/USA Shareholders authorizing
the CC/USA Shareholders' Representative to act on behalf of the CC/USA
Shareholders in regard to matters arising under this Agreement have been
delivered to Parent, are true and complete copies of such instruments, as
amended to date, and are in full force and effect on the date hereof.
(e) Reliance by Parent. The CC/USA Shareholders' Representative
acknowledges and agrees that Parent may rely upon these representations and the
authorizations granted in any agreements between the CC/USA Shareholders'
Representative and the CC/USA Shareholders in its performance hereunder and,
except as expressly provided in this Agreement to the contrary,
17
may deal exclusively with the CC/USA Shareholders' Representative as the sole
representative of all of the CC/USA Shareholders in connection with all matters
arising in this Agreement.
SECTION 3.13 Further Information. From and after the date hereof, the
---------------------
Company will afford the CC/USA Shareholders' Representative and its counsel and
accountants, during normal business hours, reasonable access to the books,
records and other data of the Company in its possession with respect to periods
prior to and during the Earn-Out Periods and the right to make copies and
extracts therefrom, to the extent that such access may be reasonably required by
the CC/USA Shareholders' Representative (i) to facilitate the investigation,
litigation and final disposition of any claims which may have been or may be
made against any party that relate to the Company, and (ii) for any other
reasonable business purpose. Any expenses incurred by the CC/USA Shareholders'
Representative and its counsel and accountants in connection with any such
inspection shall be the sole responsibility of the CC/USA Shareholders'
Representative.
SECTION 3.14 Imputed Interest. To the extent the CC/USA Shareholders
------------------
are required to treat a portion of the Accrued Earn-Out Amount as interest on
the earned portion of the Contingent Purchase Price, a portion of the Accrued
Earn-Out Shares received by each CC/USA Shareholder shall be deemed to be in
payment for the earned portion of the Contingent Purchase Price and the balance
shall be deemed to be in payment of the interest imputed on such earned portion
of the Contingent Purchase Price. For each payment received by the CC/USA
Shareholders, the Company shall notify each CC/USA Shareholder of the number of
shares such CC/USA Shareholder received in payment of imputed interest.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
CITIZENS UTILITIES COMPANY:
By:___________________________________
Name:
Its:
CONFERENCE-CALL USA, INC.
By:___________________________________
Name:
Its:
18
CC/USA REPRESENTATIVE, INC.
By:___________________________________
Name:
Its:
19
EXHIBIT A
Financial Targets
-----------------
===================================== ==============================================================================
Conference-Call USA Period
===================================== ------------------ ------------------- ------------------- -------------------
I II III IV
===================================== ------------------ ------------------- ------------------- -------------------
Pre-Tax Earnings 1,930,533 2,884,250 4,326,670 6,268,334
===================================== ------------------ ------------------- ------------------- -------------------
===================================== ==============================================================================
Dial Services, Ltd. Period
===================================== ------------------ ------------------- ------------------- -------------------
I II III IV
===================================== ================== =================== =================== ===================
Pre-Tax Earnings (905,000) (383,885) 56,468 736,107
===================================== ================== =================== =================== ===================
20
EXHIBIT C
---------
Earn-Out Rules
--------------
For purposes of calculating Pre-Tax Earnings, the following
adjustments, rules, and agreements shall be followed:
1. Expenses between CC/USA and Dial shall be allocated in accordance
with historic practice and facility rental agreements currently in
place.
2. Financial statements shall be prepared in accordance with GAAP,
consistent with past practice. The cost of the audit shall be a Company
expense, and such expense shall be allocated 90% to CC/USA and 10% to
Dial.
3. Extraordinary gains and losses will not be included in the calculation
of Pre-Tax Earnings.
4. Add back amount of amortization expense of goodwill and other costs
associated with the acquisition of the Company.
5. Add back amount of any other out-of-pocket expenses relating to the
sale of the Company incurred by the Company, including but not limited
to all investment banking fees, legal, accounting, closing costs and
costs of notification of securityholders.
6. Add back amount of any allocated general administrative overhead
expenses of Parent or any other expenses of Parent that may be charged
to the Company and relating to Parent's administration of its
investment in the Company, including consultant expenses and salary for
supervisory personnel of Parent except to the extent approved by a Key
Manager in writing.
7. Add back any severance payment expenses paid to any Key Manager if
such Key Manager was terminated at the direction of Parent.
8. Any debt or equity financing for the Company provided by Parent or an
affiliate of Parent shall be deemed to be third party debt bearing
interest at an annual percentage rate equal to Prime plus one percent
except (a) if such financing was used to pay off or otherwise refinance
a third party debt of the Company, in which case the rate of interest
on such financing shall be the greater of the rate applicable to such
paid off or refinanced third party debt or Prime plus one percent and
(b) if such financing is required by the Company pursuant to Section
2.5(c) of the Contingent Payment Agreement, in which case no interest
shall be deemed to accrue on such financing.
9. The operating results of any business acquired by either CC/USA or Dial
(it being understood that no acquisition may occur without the approval
of the Board of Directors
C-1
of CC/USA or Dial pursuant to Section 2.4(a)(vi) of the Contingent
Payment Agreement) shall be included in the results of operation;
provided that the funds for the payment of the purchase price of the
acquired business came from the capital expenditure budget of the
Company for the year in which the acquisition agreement was executed
and/or was financed from the pre-tax cash flow of the acquired company.
10. Add back any expense recognition as a result of the exercise of
any non-qualified stock options exercised prior to Closing.
11. Deduct a portion of any revenues generated by customers or business
opportunities directly referred to CC/USA or Dial by Parent or any of
Parent's affiliates (for example, through ▇▇▇▇ inserts or other direct
solicitation of the customers of Parent or any of its affiliates or
through use of dedicated toll-free lines for purposes of customer
identification), such portion to be equal to the amount obtained by
multiplying such revenues times a fraction, the numerator of which is
the Pre-Tax Earnings of CC/USA or Dial, as appropriate, determined
prior to such deduction, and the denominator of which is the total
revenues of CC/USA or Dial, as appropriate.
12. Notwithstanding anything in the Earn-Out Rules to the contrary,
the size of any liability reserve required by GAAP to be established
by CC/USA or Dial shall be subject to the prior approval of the Parent
and any difference between the Parent and the Management Team
regarding the need for and size of any such reserve shall be deemed to
be a dispute regarding the calculation of the Accrued Earned-Out
Amount to be resolved in accordance with Section 2.3 (d) of the
Contingent Payment Agreement. In addition, for purposes of
calculating Pre-Tax Earnings for the Earn-Out Period that comprises
calendar year 1999, each of CC/USA and Dial shall establish such
liability reserves as the Parent may require in its reasonable
business discretion, whether or not such reserves may also be
required by GAAP, if the Parent has a reasonable basis for believing
that the contingent liability that is the subject of such reserve
will become a "contingent liability" of CC/USA or Dial under GAAP
prior to December 31, 2000. Any difference between the Parent and
the Management Team regarding the reasonableness of the basis for
such belief by Parent or the size of any such required reserve shall be
deemed to be a dispute regarding the calculation of the Accrued Earn-
Out Amount to be resolved in accordance with Section 2.3(d) of the
Contingent Payment Agreement.
13. Add back an amount equal to the result obtained by multiplying (x) the
remainder of the total cash dividends paid by the Company less the
portion of such cash dividends attributable to the tax liabilities of
the Company pursuant to Section 2.5(b) of the Contingent Payment
Agreement and less the portion of such cash dividends that have been
advanced back to the Company pursuant to Section 2.5(c) of the
Contingent Payment Agreement, times (y) an annual percentage rate equal
to Prime minus 2.50 percent.
C-2
EXHIBIT D
LIST OF KEY MANAGERS
▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇-Veise
▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇
