Earnout Agreement

EARNOUT AGREEMENT


THIS EARNOUT AGREEMENT ("Agreement") dated as of September 13, 2000, by and among MERIDIAN DIAGNOSTICS, INC., an Ohio corporation ("Meridian"), PRESTON H. DORSETT, KAREN C. DORSETT, ROBERT F. NAEGELE and RONALD W. KIM (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);


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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:


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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.


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(j) "YEAR 3" means the twelve (12) month period commencing October 1, 2002 through and including September 30, 2003.
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