1
Exhibit 10.22
EARNOUT AGREEMENT
THIS EARNOUT AGREEMENT ("Agreement") dated as of September 13, 2000, by
and among MERIDIAN DIAGNOSTICS, INC., an Ohio corporation ("Meridian"), XXXXXXX
X. XXXXXXX, XXXXX X. XXXXXXX, XXXXXX X. XXXXXXX and XXXXXX X. XXX (individually
a "Stockholder" and collectively the "Stockholders").
WHEREAS, Meridian, the Stockholders, Meridian Acquisition Company
("Transitory Subsidiary") and Viral Antigens, Inc. ("Viral") have entered into a
Merger Agreement dated as of September 13, 2000 (the "Merger Agreement");
WHEREAS, pursuant to the Merger Agreement, Meridian has agreed to
acquire all of the issued and outstanding stock of Viral pursuant to the merger
of Transitory Subsidiary with and into Viral with Viral being the company
surviving the Merger (the "Surviving Corporation");
WHEREAS, pursuant to the terms of the Merger Agreement, the Earnout
Consideration (as calculated herein) is payable only on the condition that the
Surviving Corporation meets certain target financial objectives; and
WHEREAS, the parties desire to define the target financial objectives
and other events which would result in the distribution of the Earnout
Consideration.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and conditions contained herein, and other good and valuable
consideration, the parties agree as follows:
1. DEFINITIONS. The following terms for purposes of this Agreement
shall have the respective meanings as follows:
(a) "ACQUISITION DEBT" means Nine Million Dollars ($9,000,000)
under the Merger Agreement, which debt shall be adjusted annually based upon the
net increase in cash, if any, as reflected in Viral's audited statement of cash
flows for the fiscal year ended September 30, and the payment of this cash flow
to Meridian. For purposes of determining the Year 1 Earnout Consideration, the
Acquisition Debt shall be deemed to be $9 million.
(b) "CONTRIBUTION EARNINGS" means:
Surviving Corporation's Adjusted Pretax Income (as defined
herein);
LESS
Cost of Acquisition Debt (as defined herein);
2
-2-
LESS
Financing costs related to future working capital or capital
expenditures incurred by Meridian on behalf of Surviving
Corporation;
LESS
Non-deductible Depreciation and/or Amortization (as defined
herein);
LESS
federal, state and local income taxes calculated on Adjusted
Pretax Income reduced by the Cost of Acquisition Debt and
financing costs related to future working capital or capital
expenditures incurred by Meridian on behalf of Surviving
Corporation, and the applicable GAAP treatment of
non-deductible depreciation and/or amortization using a
Surviving Corporation separate-company basis tax rate in
accordance with GAAP (the effective tax rate);
(c) "COST OF ACQUISITION DEBT" means:
i. Year 1 - Acquisition Debt multiplied by an interest rate of
eight percent (8%).
ii. Year 2 through Year 6 - At each September 30 anniversary
date, the interest rate will be adjusted to the weighted average interest rate
in effect for the Acquisition Debt over the previous year.
iii. In the event that Meridian retires the Acquisition Debt with
proceeds from an offering of debt or equity securities, the interest rate in
Year 2 through Year 6, as applicable, will be adjusted (increase or decrease) to
Meridian's cost of equity. The cost of equity capital shall be determined by
dividing the average closing price of Meridian Diagnostics common stock for the
20 trading days immediately preceding the equity transaction date by the
preceding four quarters' reported earnings per share from continuing operations,
and before extraordinary gains or losses, to determine the adjusted price
earnings ratio and then dividing one (1) by such price earnings ratio. The
result being the cost of equity capital, providing such capital is used to
retire or reduce the acquisition debt.
(d) "EARNOUT PERIOD" means Year 1, Year 2, Year 3, Year 4, Year 5
or Year 6, as the case may be.
(e) "ADJUSTED PRETAX INCOME" means the Surviving Corporation's
audited income before federal, state and local income taxes, determined in
accordance with GAAP and adjusted for the following:
3
-3-
EXCLUSIONS:
i. Changes in application of GAAP unless such changes are
accretive to Meridian's consolidated net income and the Earnout
Calculation;
ii. Extraordinary items as defined by GAAP in accordance with
Accounting Principles Board Opinion No. 30;
iii. Gain(s) or loss(es) on sale(s) of assets that exceed
$25,000 on a cumulative basis in any one year;
iv. Gain(s) or loss(es) on insurance settlements;
v. Gain(s) or loss(es) on litigation settlements; and
vi. Intercompany interest charges from Meridian to Viral for
Acquisition Debt or financing costs related to future working capital
or capital expenditures incurred by Meridian on behalf of the Surviving
Corporation.
INCLUSIONS:
i. Discontinued operations.
(f) "PRO RATA SHARE" means, with respect to each Stockholder, his
or her share of the Earnout Consideration, expressed as a percentage, as set
forth on EXHIBIT A.
(g) "NON-DEDUCTIBLE DEPRECIATION AND/OR AMORTIZATION" means the
sum of (i) the lesser of
(1) the actual depreciation and amortization related to
adjustments to state tangible and intangible assets at fair value as of
the effective date of the Merger Agreement based on the initial $9
million purchase price
or
(2) the calculated amount of amortization where such amount is
defined as the sum of $9 million less total equity reported in the
Audited Balance Sheet of Viral as of the closing date less acquisition
costs less $20,000 divided by 20 years
or
(3) $195,000
plus (ii) additional amortization related to the Earnout
Consideration.
(h) "YEAR 1" means the twelve (12) month period commencing
October 1, 2000 through and including September 30, 2001.
(i) "YEAR 2" means the twelve (12) month period commencing
October 1, 2001 through and including September 30, 2002.
4
-4-
(j) "YEAR 3" means the twelve (12) month period commencing
October 1, 2002 through and including September 30, 2003.
(k) "YEAR 4" means the twelve (12) month period commencing
October 1, 2003 through and including September 30, 2004.
(l) "YEAR 5" means the twelve (12) month period commencing
October 1, 2004 through and including September 30, 2005.
(m) "YEAR 6" means the twelve (12) month period commencing
October 1, 2005 through and including September 30, 2006.
(n) "ZERO BASIS PRETAX INCOME" means Non-deductible Depreciation
and/or Amortization; PLUS Cost of Acquisition Debt; PLUS financing costs at
Meridian's interest cost related to future working capital or capital
expenditures incurred by Meridian on behalf of Surviving Corporation; PLUS
federal, state and local income taxes calculated by the following formula:
[A/(1-Surviving Corporation's statutory tax rate)] - A
Where A equals goodwill amortization.
(o) "GAAP" means generally accepted accounting principles.
Capitalized terms which appear in this Agreement but are not defined
herein shall have the respective meanings therefor set forth in the Merger
Agreement, unless the context requires otherwise.
2. EARNOUT CONSIDERATION. Stockholders may receive additional purchase
price consideration ("Earnout Consideration" as calculated in this Section 2),
up to a maximum aggregate amount of $8.25 million, contingent upon Surviving
Corporation achieving certain financial targets within a specified time period
as defined herein. As a general guideline, it is the intention of the parties
that the earnout be based on the operating results of Viral as a stand-alone
business using fair and reasonable business practices, after consideration of
Non-Deductible Depreciation and/or Amortization, Cost of Acquisition Debt and
financing costs related to working capital or capital expenditures incurred by
Meridian on behalf of Viral. No Earnout Consideration may be earned subsequent
to September 30, 2006. Earnout Consideration will be measured during each year
of the Earnout Period. If Earnout Consideration is payable hereunder, it shall
be payable between 75 and 120 days, at the option of the Stockholder(s),
following the close of each year of the Earnout Period.
In order for Earnout Consideration to be earned and payable for a year
during the Earnout Period, Contribution Earnings, as defined herein, must be
greater than zero. If Contribution Earnings are less than or equal to zero, no
Earnout Consideration is payable for the applicable
5
-5-
Earnout Period. If Viral's Adjusted Pretax Income is negative, or a loss, such
loss does not affect the amount of Earnout paid in a previous year, nor payable
in a future year.
If Contribution Earnings are greater than zero, then Earnout
Consideration for the period is equal to the LESSER of:
a) 50% of Adjusted Pretax Income of Surviving Corporation; or
b) 100% of Adjusted Pretax Income of Surviving Corporation less Zero
Basis Pretax Income.
The Earnout Consideration shall be paid to each Stockholder based upon
his or her Pro Rata Share.
3. MERIDIAN BUSINESS TRANSFERRED TO SURVIVING CORPORATION. The parties
hereby agree that any Meridian business transferred to the Surviving Corporation
will be provided on a basis commercially reasonable to the Surviving Corporation
and mutually agreeable to Meridian. The parties hereby further agree that
Meridian reserves the right to move its business (present and future) from Viral
to another vendor.
4. TERMINATION OF XXXXXXX XXXXXXX OR XXXXXX XXXXXXX.
(a) TERMINATION WITH CAUSE. Notwithstanding anything to the
contrary contained in Section 2, if Xxxxxxx X. Xxxxxxx ("Xxxxxxx") or Xxxxxx X.
Xxxxxxx ("Xxxxxxx") is terminated by Meridian "for cause" (as defined in his
respective employment agreement), the right to Earnout Consideration payable to
Xxxxxxx or Xxxxxxx, as the case may be, pursuant to this Agreement shall
automatically terminate and Xxxxxxx or Xxxxxxx, as the case may be, shall
forfeit all future payments of Earnout Consideration.
(b) TERMINATION WITHOUT CAUSE DURING YEAR 1. Notwithstanding
anything to the contrary contained in Section 2, if Xxxxxxx or Xxxxxxx is
terminated by Meridian other than "for cause" (as defined in his respective
employment agreement) on or before September 30, 2001, the total Earnout
Consideration payable to the Stockholders shall be as follows:
i. Year 1 Earnout Consideration - $ 330,000
ii. Year 2 Earnout Consideration - $ 637,000
iii. Year 3 Earnout Consideration - $ 912,000
iv. Year 4 Earnout Consideration - $1,200,000
v. Year 5 Earnout Consideration - $1,046,000
The Earnout Consideration will be paid on a pro rata share basis
to each Stockholder between 75 and 120 days, at the option of the Stockholders,
after the close of the respective Earnout Period.
6
-6-
(c) TERMINATION WITHOUT CAUSE DURING YEAR 2 THROUGH YEAR 6.
Notwithstanding anything to the contrary contained in Section 2, if Xxxxxxx or
Xxxxxxx is terminated by Meridian other than "for cause" (as defined in his
respective employment agreement) after September 30, 2001 but on or before
September 30, 2006, the Earnout Consideration payable to the Stockholders shall
be equal to the average of the actual Earnout Consideration earned in all
Earnout Periods prior to the effective date of termination other than "for
cause" based upon the following projected payments:
i. Projected Year 1 Earnout Consideration - $ 660,000
ii. Projected Year 2 Earnout Consideration - $1,274,000
iii. Projected Year 3 Earnout Consideration - $1,824,000
iv. Projected Year 4 Earnout Consideration - $2,400,000
v. Projected Year 5 Earnout Consideration - $2,092,000
For example, if either Xxxxxxx or Xxxxxxx is terminated on
December 1, 2002 and if the actual Earnout Consideration paid to the
Stockholders in Year 1 and Year 2 is $1,500,000 then the Stockholders would be
entitled to 77.6% ($1,500,000 divided by $1,934,000) of the remaining Earnout
Consideration based upon the Projected Earnout Payments for each remaining
Earnout Period (i.e. the Year 3 Earnout Consideration payable to the
Stockholders would be $1,415,424 (77.6% of $1,824,000); Year 4 Earnout
Consideration payable to the Stockholders would be $1,862,400 (77.6% of
$2,400,000) and the Year 5 Earnout Consideration would be $1,623,392 (77.6% of
$2,092,000)).
The Earnout Consideration will be paid on a pro rata share
basis to each Stockholder between 75 and 120 days, at the option of the
Stockholders, after the close of the respective Earnout Period.
(d) OTHER TERMINATION PROVISIONS. If Xxxxxxx'x and/or Xxxxxxx'x
employment with Meridian is terminated upon mutual agreement of Xxxxxxx or
Xxxxxxx, as the case may be, and Meridian, or if Xxxxxxx or Xxxxxxx, as the case
may be, elect to resign, then the Earnout Consideration shall be paid to the
Stockholders (including Xxxxxxx and Xxxxxxx) in accordance with Section 2. In
the event of Xxxxxxx'x or Xxxxxxx'x, as the case may be, death or disability (as
defined in his respective employment agreement), then the Earnout Consideration
shall be paid to the Stockholders or, as applicable, pursuant to probate or
intestacy laws in accordance with Section 2. If both Xxxxxxx and Xxxxxx die or
become disabled then the Earnout Consideration shall be paid to the Stockholders
or, as applicable, pursuant to probate or intestacy laws in accordance with
Section 4(b) if such event occurs in Year 1, or 4(c) if such event occurs in
Year 2 through Year 6.
5. ASSIGNMENT. All provisions contained in this Agreement shall extend
to and be binding upon the parties hereto or their respective successors and
permitted assigns whether such succession or assignment occurs by operation of
law or otherwise.
7
-7-
6. SIGNATURES. For purposes of this Agreement, facsimile signatures
shall be treated as original signatures and shall be binding upon the parties.
It is further agreed that the parties shall exchange original hard copies of
signature pages as soon as reasonably possible.
7. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal substantive laws of Tennessee without giving effect
to any choice or conflict of law provision or rule, whether of Tennessee or any
other jurisdiction, that would cause or result in the application of the laws of
any jurisdiction other than Tennessee.
8. SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable for any reason, the invalidity shall not affect the validity of
the remaining provisions of this Agreement, and the parties shall substitute for
the invalid provisions a valid provision which most closely approximates the
intent and economic effect of the invalid provision.
9. ENTIRE AGREEMENT. This Agreement and the Merger Agreement, including
Exhibits to the Merger Agreement, sets forth all of the promises, agreements,
conditions and understandings between the parties respecting the subject matter
hereof and supersedes all negotiations, conversations, discussions,
correspondence, memorandums and agreements between the parties concerning the
subject matter. This Agreement may not be modified except by a writing signed by
authorized representatives of both parties to this Agreement. This Agreement may
be executed in any number of counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same instrument.
10. DISPUTE RESOLUTION.
(a) Meridian will cause Xxxxxx Xxxxxxxx, L.L.P., Meridian's
auditors, to audit a calculation of the Earnout Consideration of the Company for
each Earnout Period. Xxxxxx Xxxxxxxx LLP shall have fifteen days after receipt
of the calculation of the Earnout Consideration ("Earnout Calculation") from
Meridian to review the Earnout Calculation and deliver to Meridian and the
Stockholders the Auditor's Report stating that the Earnout Calculation fairly
presents the Earnout Calculation for the respective Earnout Period in conformity
with this Agreement. If within ten days following delivery of the Earnout
Calculation, the Viral Stockholders have not given Meridian notice of their
objection to the Earnout Calculation (such notice must contain a detailed
statement of the basis of such objection), then the Earnout Calculation will be
used and the Earnout Consideration paid. If the Viral Stockholders give such
notice of objection, Meridian and the Viral Stockholders shall attempt in good
faith to resolve the matter or matters in dispute. If Meridian and the Viral
Stockholders, notwithstanding such good faith effort, shall have failed to
resolve the matter or matters in dispute within twenty Business Days after
receipt of the written notice of dispute, then any remaining disputed matters
shall be submitted to the Ernst & Young, L.L.P., or any successor thereto
("E&Y") for arbitration. Any such arbitration shall take place in, and shall be
in accordance with the Commercial Arbitration Rules in Tennessee. Each of
Meridian and the Viral Stockholders shall promptly file with E&Y a notice of
appointment. The fees and expenses of E&Y shall be borne fifty percent by
Meridian and fifty percent by the Viral Stockholders. In
8
-8-
resolving any disputed item, E&Y may not assign a value to any particular item
more than the greatest value for such item claimed by either party or less than
the smallest value for such item claimed by either party in each case, as
presented to E&Y. The fees and disbursements of E&Y shall be allocated between
Meridian and the Seller based upon the percentage ratio that the sum of the net
amounts subject to dispute resolved against each of the parties bears to the
total of the net amounts subject to dispute. For this purpose, the "net amounts
subject to dispute" shall represent the difference between the amount of such
items as proposed by Meridian and the corresponding amount of such items
proposed by the Viral Stockholders, in each case as submitted to E&Y.
(b) On the fifth Business Day following the date on which the
Earnout Consideration is established to in accordance with this Section 10, the
final determination of the Earnout Consideration shall be made, and Meridian
will pay the Earnout Consideration, if any.
For purposes of complying with the terms set forth herein, each
party shall cooperate with and promptly make available to the other party and
E&Y and their representatives, all information, records, data, auditors' working
papers, and access to its personnel, shall permit access to its facilities and
shall permit the other party and its auditors and representatives to make copies
of all information, records, data and auditors' working papers, in each case as
may be reasonably required in connection with the analysis of the Earnout
Consideration and the resolution of any dispute(s) thereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE FOLLOWS.]
9
-9-
IN WITNESS WHEREOF, the undersigned do hereby execute this Contingent
Earnout Agreement as of the day and year first above written.
MERIDIAN DIAGNOSTICS, INC.
BY: /s/ Xxxxxxx X. Xxxxx
----------------------------------------
Its: Chairman and Chief Executive Officer
-------------------------------------
STOCKHOLDERS:
/s/ Xxxxxxx X. Xxxxxxx
------------------------------------------
Xxxxxxx X. Xxxxxxx
/s/ Xxxxx X. Xxxxxxx
------------------------------------------
Xxxxx X. Xxxxxxx
/s/ Xxxxxx X. Xxxxxxx
------------------------------------------
Xxxxxx X. Xxxxxxx
/s/ Xxxxxx X. Xxx
------------------------------------------
Xxxxxx X. Xxx
10
EXHIBIT A
Xxxxxxx X. Xxxxxxx and Xxxxx X. Xxxxxxx 51.6%
Xxxxxx X. Xxxxxxx 27.5%
Xxxxxx X. Xxx 20.9%
