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Serologicals - Earnout Agreement
EARNOUT AGREEMENT
This Earnout Agreement (this "Earnout Agreement"), dated as of December 13, 2001 (the "Effective Date"), by and among Serologicals Corporation, a Delaware corporation ("Serologicals"), and Intergen Investors, L.P., STJ Bio Corp., Spencer Paige Corp., Ronald Dilling, Donald Gutekunst, President and Fellows of Harvard College, and University of Illinois Foundation (the "Partners") represented herein by Intergen Investors L.P. (the "Partner Representative"), their agent and attorney-in-fact pursuant to that certain letter agreement among the Partners and Intergen dated November 13, 2001, by and among the Partners.
WITNESSETH
WHEREAS, Serologicals, Serocor Incorporated, a Delaware corporation ("Surviving Corporation"), Intergen Company, L.P., a Delaware limited partnership ("Intergen") and the Partner Representative have agreed pursuant to that Plan and Agreement of Merger, dated November 5, 2001 (the "Merger Agreement") that a portion of the consideration to be paid by Serologicals for Intergen shall be based on the future earnings of the Intergen Business;
NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions. Capitalized terms used in this Earnout Agreement and not otherwise defined in this Earnout Agreement shall have the meanings ascribed to them in the Merger Agreement. When used herein the following terms have the meanings set forth below:
"Actual Sales Revenues" shall mean, for the period in question, all sales revenues recognized by Serologicals, the Surviving Corporation or their Affiliates during the relevant period with respect to sales of products shipped, or services provided, by the Business during the relevant period determined in accordance with GAAP, net of the addition to the reserve for bad debts allocable to the revenue in question. Notwithstanding the foregoing, returns shall be allocated to the period the relevant revenue was recognized, and Gross License Fees and Technology Products Revenues shall be excluded from Actual Sales Revenues, except for the periods preceding January 1, 2002.
"Allowable Costs" shall mean, for the period in question and as determined in accordance with GAAP, the sum of (i) any royalties based on sales incurred by Serologicals, the Surviving Corporation or their Affiliates to any third party with respect to the Earnout Technologies during the relevant period (including without limitation, any royalties payable to Dan P. Hartmann, Ph.D., if any, (ii) the direct costs to market, sell and deliver the Earnout Technologies, including, without limitation, the compensation, commissions and benefits of marketing personnel to the extent directly related to the Earnout Technologies incurred by Serologicals, the Surviving Corporation or their Affiliates during the relevant period; provided
that, for purposes of calculating the Technology Earnout Payments under this Agreement, Allowable Costs of the type set forth in clause (ii) of this sentence shall not exceed $200,000 during any calendar year (pro rated for partial calendar years), (iii) cost of goods sold with respect to Technology Product Revenues, and (iv) license and similar fees to third parties, and expenses relating to the amortization of acquisition costs paid to third parties, in each case solely applicable to the Minor Modifications.
"Earnout Base" shall mean, for the period in question, the amount by which Actual Sales Revenues for such period exceed the applicable Sales Target.
"Earnout Payments" shall mean, collectively, the Sales Earnout Payment and the Technology Earnout Payment, calculated and payable pursuant to this Agreement and each may be referred to as an "Earnout Payment."
"Earnout Technologies" shall mean the processes and technologies currently owned by or licensed to Intergen, as of the Effective Date, for Ampliflour,(R) chemiluminescence and methylation, which processes and technologies are covered by claims in patents (including pending patents) or subject to licenses listed or described on Exhibit A attached hereto, as such patents or licensed technologies and processes exist as of the date of this Earnout Agreement, together with any Minor Modifications.
"Escrow Agent" shall have the meaning assigned to it in the Escrow Agreement
"Escrow Agreement" shall mean that certain Escrow Agreement of even date herewith, the form of which is attached to the Merger Agreement as Exhibit B.
"Firm" shall mean PricewaterhouseCoopers LLP or such other independent certified public accounting firm mutually acceptable to Serologicals and the Partner Representative.
"Gross License Fees" shall mean, for the period in question, all license, royalty or other consideration, cash and non-cash, received by Serologicals, the Surviving Corporation or any of their Affiliates during such period (or any time thereafter, but only to the extent that any such payments represent a retroactive adjustment, correction or calculation pertaining to a payment made or required to be made during the Technology Earnout Period) for the licensing of any of the Earnout Technologies; provided that (i) payments received by Serologicals, the Surviving Corporation, or any of their Affiliates from a third party with respect to the sale of any mass-produced, non-customized commercial products that utilize the Earnout Technologies (e.g., detection kits) or to services provided by Serologicals, the Surviving Corporation, any of their Affiliates or third parties (other than Technology Products Revenues) associated with the Earnout Technologies, shall not be Gross License Fees; and (ii) payments received by Serologicals, the Surviving Corporation or any of their Affiliates from a third party with respect to the use of the Earnout Technologies in a manufacturing or research process shall be Gross License Fees. To the extent that Serologicals, the Surviving Corporation or any of their Affiliates receives during the Technology Earnout Period payments in connection with an infringement dispute that represent damages or similar compensation relating to the use by the purported infringer during the Technology Earnout Period of any of the Earnout Technologies, then such payments (net of
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the out-of-pocket costs incurred to obtain such payments) shall be considered Gross License Fees.
"Gross Margin Percentage" shall mean, for the period in question, the excess, if any, of the Actual Sales Revenues for goods or inventory sold (but excluding Actual Sales from licenses or royalties or for services provided) during such period over the related cost-of-goods-sold during such period, determined in accordance with GAAP and expressed as a percentage.
"Minor Modifications" shall mean changes or developments in or to the Earnout Technologies that would not give rise to or allow the filing of an application for a new patent for the Earnout Technologies after such change or development.
"Sales Earnout Payment" shall mean, for the period in question, an amount equal to the product of (A) the Earnout Base multiplied by 1.75, and (B) the Gross Margin Percentage.
"Sales Earnout Period" shall mean the fifteen -month period ending March 31, 2002.
"Sales Target" shall mean (i) for the fiscal year ending on December 31, 2001, US $31,500,000 and (ii) for the fiscal quarter ending on March 31, 2002, US $8,000,000.
"Technology Earnout Payment" shall mean, for the period in question, one-half of the excess, if any, of the sum of the Gross License Fees and the Technology Products Revenues over the Allowable Costs with respect to such fees and revenues.
"Technology Earnout Period" shall mean the period commencing on January 1, 2002 and terminating on December 31, 2006.
"Technology Products Revenues" shall mean, for the period in question, all revenues recognized by Serologicals, the Surviving Corporation or any of their Affiliates during such period that relate to any products (e.g., reagents), and any services necessary to deliver such products, that incorporate a portion of the Earnout Technologies, provided that the products are provided pursuant to a supply or other similar agreement calling for delivery of a customized, customer specified end-product that could not be provided without the use of a portion of the Earnout Technologies and are supplied pursuant to a minimum purchase order (or series of purchase orders from the same customer group) of at least $100,000 in the aggregate.
2. Earnout Payments.
2.1. Payments. Subject to the provisions of Section 3 of this Earnout Agreement and the last sentence of this Section 2.1, Serologicals shall pay to the Partner Representative (i) the Sales Earnout Payments (if any) promptly following the final determination of the amount thereof in accordance with Section 2.4 hereof and (ii) the Technology Earnout Payments (if any) promptly following the quarterly determination thereof pursuant to Section 2.4. Subject to the provisions of Section 3 of this Earnout Agreement, the Earnout Payments shall be paid to the Partner Representative by wire transfer of immediately available funds in accordance with the wire transfer instructions set forth on Exhibit B. Serologicals, the Surviving Corporation and their Affiliates shall have no liability as to the distribution of such payments by the Partner Representative and the Partner Representative shall
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indemnify, protect and hold Serologicals, the Surviving Corporation, and their respective affiliates harmless from any such liability. Notwithstanding any provision of this Earnout Agreement to the contrary, if Serologicals is required to pay any fees, expenses, or other charges to the Escrow Agent pursuant to the Escrow Agreement (other than the Escrow Fees to be paid to Escrow Agent by Serologicals pursuant to Section 2.6(e) of the Merger Agreement) Serologicals shall be reimbursed for one-half of such fees, expenses and other charges paid by Serologicals from any Earnout Payments, prior to such Earnout Payments being paid (y) to the Partner Representative pursuant to this Section 2.1 or (z) to the Escrow Agent pursuant to Section 3 of this Earnout Agreement.
2.2. Itemization. To the extent feasible, Serologicals or the Surviving Corporation, as the case may be, shall list Gross License Fees and Technology Product Revenues as a separate item in invoices, bills and reports to customers. However, in the event that the Earnout Technologies are licensed in combination with other products or services and such an itemization is not feasible, Serologicals and the Partner Representative shall work together to identify an appropriate value of the Earnout Technologies in such combination.
2.3. Noncash Consideration. To the extent that Gross License Fees or Technology Products Revenues include noncash consideration, Serologicals shall, upon the receipt of such noncash consideration, pay to the Partner Representative an amount in cash equal to the fair market value thereof; and to the extent such noncash consideration is illiquid and has a value in excess of $2,000,000 in a calendar year, Serologicals shall have the option to issue a note (or notes) in payment of any Earnout Payments relating thereto. The fair market value of the noncash consideration shall be determined by the Board of Directors of Serologicals in good faith. Such note (or notes) shall be payable no later than three (3) years after issuance and shall bear an interest rate equal to 200 basis points above the rate being paid by Serologicals to its principal working capital lender.
2.4. Calculation of Earnout Payments.
(a) Not later than 15 days following receipt by Serologicals of the financial statements of the Surviving Corporation as of and for the year ended December 31, 2001 and not later than 15 days following receipt by Serologicals of the financial statements of the Surviving Corporation as of and for the calendar quarter ended March 31, 2002, Serologicals shall prepare and submit to the Partner Representative a statement setting forth, in reasonable detail, Serologicals' calculation of the Actual Sales Revenue, the Gross Margin Percentage and the Sales Earnout Payment (if any) for the year or quarter then ended, together with reasonably detailed support for such calculation.
(b) Within 20 days following the last day of each fiscal quarter during the Technology Earnout Term or the last day of the Technology Earnout Term, if other than the last day of a fiscal quarter, Serologicals shall prepare and submit to the Partner Representative a statement setting forth, in reasonable detail, Serologicals' calculation of the Technology Earnout Payment for the calendar year-to-date period ending on the last day of such immediately preceding calendar quarter, together with reasonably detailed support for such calculations (including any calculations of the items described in Section 2.3 of this Earnout Agreement).
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(c) If the Partner Representative disputes the correctness of Serologicals' calculation of any Earnout Payment or any amount necessary to compute any Earnout Payment, the Partner Representative shall notify Serologicals of the objections within 15 business days of receipt of Serologicals' calculation of the Earnout Payment. If the Partner Representative fails to deliver such notice of objections within such time, the Partners shall be deemed to have accepted Serologicals' calculation. The parties shall endeavor in good faith to resolve any disputed matters within 5 business days after the receipt of a notice of objections. If the parties are unable to resolve all of the items that were identified in the notice of objection, Serologicals and the Partner Representative will jointly retain the Firm to resolve any disagreements. Serologicals and the Partner Representative will direct the Firm to render a determination as soon as practicable and Serologicals, the Partner Representative, and their respective agents will cooperate with the Firm during its engagement. The Firm will determine the actual amount of the Earnout Payments for the applicable period in accordance with the provisions of this Agreement. In making its determination, the Firm shall consider only those items or amounts as to which the Partner Repres...
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