EXHIBIT 10.3
EARNOUT AGREEMENT
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This Earnout Agreement ("Agreement") is entered into this day of
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January, 2006, by and between Joel Stephen Logan, II, Charles L. Murphree, Jr.,
John Steven Lawler, James David Shaw, William Joseph Aycock, Jr., Jerry Ray
Cooper, Jr., Timothy Wayne Gann, and Jimmy Ray Hawkins (individually, a "Seller"
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and collectively, the "Sellers"), Deer Valley Homebuilders, Inc., an Alabama
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corporation ("Deer Valley"), and DeerValley Acquisitions Corp., a Florida
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corporation (the "Buyer").
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RECITALS
A. Pursuant to the Common Stock Purchase Agreement dated November 1,
2005 (the "Purchase Agreement"), Sellers have, on this date, sold 100% of the
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issued and outstanding capital stock of Deer Valley to the Buyer.
B. The Purchase Agreement provides that a portion of the Purchase Price
(as defined in the Purchase Agreement) is to be calculated and paid as an
earnout based upon the Net Income Before Taxes (hereinafter defined) of Deer
Valley.
C. Sellers have agreed that determination and payment of the earnout
contemplated by the Purchase Agreement is to be in accordance with the terms of
this Agreement.
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and provisions herein contained, each Seller and Buyer agree as
follows:
ARTICLE I.
PRICE ADJUSTMENT
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1.1 Annual Price Adjustment. For each Earnout Year (as defined below),
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the Buyer shall accrue a liability in an amount equal to: (a) the Net Income
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Before Taxes of Deer Valley for such Earnout Year (as determined pursuant to
Article II below) minus $1,000,000; multiplied by (b) fifty (50%) percent (the
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"Annual Price Adjustment"). For example, if the Net Income Before Taxes for a
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particular Earnout Year is $3,000,000, then the Annual Price Adjustment for such
Earnout Year will be $1,000,000. The Annual Price Adjustment shall be determined
and deposited annually on or before the earlier of: (y) twenty days (20) after
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the completion of the audit of the Parent Company's financial statements for
such Earnout Year; or (z) ninety days following the end of such Earnout Year.
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The annual period used to measure the Annual Price Adjustment shall be the
Company's fiscal year (each, an "Earnout Year"). All payments made under this
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Agreement shall be treated as an adjustment to the Purchase Price. The
aggregate of such accrued liabilities being referred to herein as the "Price
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Adjustment Target Account or"PATA." As to the start date, calculation of the
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contributions related to the PATA shall include the Net Income Before Taxes of
Deer Valley for the fourth quarter of 2005 (which shall include revenue
generated by homes delivered by Deer Valley on or after October 2, 2005),
however the $1,000,000 calculation for the fourth quarter of 2005 shall be
$250,000. Such accrual for the fourth quarter of 2005 shall be available for a
cash distribution in accordance with Section 1.3 below after the 2006 fiscal
year.
1.2 Security for the PATA Account. The Buyer shall secure liabilities
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accrued under Section 1.1 above by either: (a) depositing cash into a segregated
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account maintained with an escrow agent mutually agreed to by the Buyer and a
Majority of the Sellers (the "Escrow Agent"); (b) by delivering or depositing
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marketable securities, which shall not be securities of the Buyer or the Parent
Company, or bonds with the Escrow Agent; or (c) by posting a letter of credit
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provided by a federally insured bank for the benefit of the Sellers, which may
or may not be the escrow agent. The form of the security referenced above being
in Buyer's sole discretion. The Buyer and the Seller shall mutually agree upon
an escrow agent within thirty (30) days of the date of this Agreement. The PATA
Account does not decrease for losses sustained by Deer Valley in subsequent
years, by devaluation of the securities deposited with the Escrow Agent, or by
any other means, except as provided herein by the provisions allowing for Cash
Distributions (as defined below), for payments on the Distribution Date (as
defined below), Forfeiture (as defined below), or otherwise provided herein.
1.3 Early Cash Distributions. At any time after determination of the
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Annual Price Adjustment for each Earnout Year, each Seller may request, in
writing, a cash payment in an amount equal to: (a) the Cumulative Price
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Adjustments multiplied by fifty (50%) percent; multiplied by (b) the percentage
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(%) set forth next to such Seller's name on Exhibit"A" attached hereto, as
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Exhibit"A" may be amended pursuant to Section 1.5 below; (c) minus any Cash
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Distributions previously made to such Seller under this Section 1.3 (each, a
"Cash Distribution"). For example, if (a) the Cumulative Adjustments are
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$1,000,000, (b) the percentage set forth next to a particular Seller's name on
Exhibit A is 30%, and (c) such Seller has not previously received any Cash
Distributions under this Section 1.3, then the Cash Distribution available for
such Seller is $150,000. By way of additional example, if (a) the Cumulative
Adjustments are $1,000,000, (b) the percentage set forth next to a particular
Seller's name on Exhibit A is 30%, and (c) the total amount previously paid to
such Seller under this Section 1.3 is $75,000, then the Cash Distribution
available for such Seller is $75,000. Deer Valley shall make a Seller's Cash
Distribution within forty-five (45) days after receipt of written notice from
such Seller. Each Seller is entitled to receive only one cash distribution per
fiscal year under this Section 1.3. The security required pursuant to Section
1.2 above shall be reduced by the aggregate Cash Distributions.
1.4 Payments on the Distribution Date. Within forty-five (45) days
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after the earlier of: (a) the determination of the Annual Price Adjustment for
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the 2013 fiscal year; (b) the date that both (i) the Cumulative Price
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Adjustments (as defined in Section 4.1 below) equals $6,000,000 and (ii) the
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five (5) year term of each Employment Agreement has expired; or (c) upon the
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Sale of the Business (as defined in Section 4.1 below) (the "Distribution
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Date"), Deer Valley shall pay to each Seller an amount equal to: (y) the
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Cumulative Price Adjustments multiplied by the percentage (%) set forth next to
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such Seller's name on Exhibit"A" attached hereto, as may be amended from time to
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time pursuant to Section 1.5 below; minus (z) any Cash Distributions made to
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such Seller under Section 1.3 above; provided, however, if payment is being made
under this Section 2.4 due to the Sale of the Business, then the Cumulative
Price Adjustments shall be deemed to be $6,000,000, minus any payments that may
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have been forfeited under Section 1.5(y) below.
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1.5 Forfeiture. If, before the Distribution Date, (a) the Parent
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Company or Deer Valley terminates a Seller's employment for Cause (as defined in
each Employment Agreement), (b) a Seller terminates his employment with Deer
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Valley prior to the five (5) year term of each Employment Agreement, or (c) a
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Seller breaches the terms of a Non-Competition Agreement (in each case, a
"Forfeiture Event"), then, upon written notice by Parent Company or Deer Valley
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to such Seller, such Seller (a "Forfeiting Seller") shall have forfeited his
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interest in the Price Adjustment Target Account (the "Forfeited PATA Interest").
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Upon a Forfeiture Event, (y) fifty (50%) percent of the Forfeited PATA Interest
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shall be immediately released from the Price Adjustment Target Account to the
Buyer, and (z) the remaining fifty (50%) percent of the Forfeited PATA Interest
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shall be allocated to the remaining Seller's pro-rata according to Exhibit"A",
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as amended, and distributed accordingly on the Distribution Date. Upon a
Forfeiture Event, Exhibit"A" shall be deemed amended to reflect that the
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Forfeiting Seller's interest has been allocated to the remaining Sellers, as
follows: each remaining Seller's percentage interest shall equal (i) the number
of shares stated next to such Seller's name on Exhibit "A," divided by (ii) the
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total number of shares held by all Sellers less the shares held by the
Forfeiting Seller. Notwithstanding anything to the contrary, a Forfeiture Event
shall not affect any Cash Distributions made prior to the date of the Forfeiture
Event.
ARTICLE II.
COMPUTATION OF NET INCOME BEFORE TAXES
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2.1 Manner of Computation. For purposes of this Agreement, "Net Income
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Before Taxes" for any Earnout Year shall mean the consolidated net income before
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taxes of Deer Valley, after deduction of all expenses, including deductions for
profit sharing or bonuses accrued by any employees of Deer Valley, including
profit sharing of the Sellers under the terms of each Employment Agreement. Net
Income Before Taxes shall be determined in accordance with generally accepted
accounting principles ("GAAP") as determined by the firm of independent
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certified public accountants engaged by the Parent Company for purposes of
auditing its year end financial statements for reporting purposes under the
Exchange Act (the "Audit"), or such other firm of independent certified public
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accountants as selected by the Board of Directors of the Parent Company
("Accountants"). In determining Net Income Before Taxes:
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(a) No deduction shall be made for expenses necessary to maintain the
Parent Company's status as a public company reporting under the Exchange Act of
1934, as amended (the "Exchange Act"), including any additional staff that Deer
Valley may require to facilitate additional record keeping necessary for
compliance with the Exchange Act, and any audit and legal fees incurred by the
Parent Company in connection with filings under the Exchange Act;
(b) The purchase and sales prices of goods and services sold by Deer
Valley to Parent Company or its Affiliates or purchased or received by Deer
Valley from Parent Company or its Affiliates shall be adjusted to reflect the
amounts that Deer Valley would have realized or paid if dealing with an
independent party in an arm's-length commercial transaction;
(c) The Parent Company may charge interest on any loans or advances
made by Parent Company to Deer Valley in connection with its business operations
at an annual rate equal to that rate of interest from time to time announced by
The Wall Street Journal as its prime rate (adjusted annually); provided,
however, that the Parent Company may not take monies from Deer Valley and loan
or advance those monies back to Deer Valley.
(d) An annual audit and associated quarterly reviews fee of $30,000 per
manufacturing plant per year shall be expensed to Deer Valley; and
(e) The Net Income Before Taxes of any additional plants or facilities
acquired or added by Deer Valley shall be included in the Net Income Before
Taxes (an "Additional Plant"); provided, however, the costs of financing the
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acquisition of each Additional Plant (including dividends paid on preferred
stock), and expenses related to the operation of such Additional Plant, shall
reduce the Net Income Before Taxes.
2.2 Time of Determination.
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(a) The Net Income Before Taxes of Deer Valley shall be determined by
the Accountants promptly after completion of the Audit. Copies of its report
setting forth its computation of the Net Income Before Taxes of Deer Valley
shall be submitted in writing to the Sellers and Parent Company and, unless
either Parent Company or a Majority of the Sellers provides written notice
within forty-five (45) days after receipt of the report that it objects to the
computation of the Net Income Before Taxes set forth therein, the report shall
be binding and conclusive for the purposes of this Agreement. Sellers shall have
access to the books and records of Deer Valley and to Accountants' workpapers
during regular business hours to verify the computation of the Net Income Before
Taxes made by the Accountants.
(b) If either Parent Company or a Majority of the Sellers provides
notice in writing within forty-five (45) days after receipt of Accountants'
report that it objects to the computation of the Net Income Before Taxes set
forth therein, the amount of the Net Income Before Taxes for the fiscal year to
which such report relates shall be determined by negotiation between Sellers and
Parent Company. If a Majority of the Sellers and Parent Company are unable to
reach agreement within forty-five (45) days after such notification, the
determination of the amount of the Net Income Before Taxes for the period in
question shall be submitted to a mutually agreeable third-party firm of
independent certified public accountants ("Special Accountants") for
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determination, whose determination shall be binding and conclusive on the
parties. If the Special Accountants determine that the Net Income Before Taxes
has been understated by three percent (3%) percent or more, then the Buyer shall
pay the Special Accountants' fees, costs and expenses. If Net Income Before
Taxes has not been understated or has been understated by less than three
percent (3%) percent, then the Special Accountants' fees, costs and expenses
shall be deducted as expenses from the Special Accountants' determination of Net
Income Before Taxes for that particular fiscal year.
ARTICLE III.
SETOFF; ACKNOWLEDGMENT
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3.1 Right of Setoff. Notwithstanding anything contained herein to
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the contrary, and as a non-exclusive remedy, Buyer and Parent Company shall have
the right to withhold and set-off any amounts due to a Seller under Section 1.3
or Section 1.4 above against any amounts owed by such Seller to the Buyer,
Parent Company, or Deer Valley for any claim for damages or indemnification to
which Parent Company, Buyer or their Affiliates may be entitled under the
Purchase Agreement or any other agreement entered into pursuant to the Purchase
Agreement (a "Claim"). If Buyer, Parent Company, or Deer Valley is entitled to
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set-off against one or more Sellers pursuant to this Article III in respect of a
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Claim, such party shall give each such Seller written notice thereof. Any such
notice shall set forth in reasonable detail and to the extent then known the
basis for such Claim and the amount of such Claim. The providing of such notice
shall not (a) relieve the Buyer from providing security pursuant to Section 1.2
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above, or (b) making distributions pursuant to Section 1.3 or 1.4 above to each
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Seller that does not have any liability relative to such Claim. If notice of a
Claim is provided, then Buyer, Parent Company and each Seller that has received
such written notice shall attempt to resolve the Claim by negotiation. If Buyer,
Parent Company and each such Seller are unable to reach agreement within
forty-five (45) days after such notification, the determination of the amount
shall be determined in a court of law pursuant to Section 4.8 below.
3.2 Operation of Business. The Sellers acknowledge that (i) the earnout
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amounts are speculative and is subject to numerous factors outside the control
of Parent Company, (ii) Parent Company owes no fiduciary duty or express or
implied duty to the Sellers, including an implied duty of good faith and fair
dealing, or duty to maximize Net Income Before Taxes of Deer Valley, and (iii)
the parties solely intend the express provisions of this Agreement to govern
their contractual relationship.
ARTICLE IV.
MISCELLANEOUS
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4.1 Definitions. For purposes of this Agreement, the terms listed
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below have the following meanings. Other terms not listed below are defined
elsewhere in this Agreement.
(a) "Affiliate" means any other person or entity that directly or
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indirectly controls, or is under common control with, or is controlled by the
specified person or entity, and if a person, any member of the immediate family
of such individual. As used in this definition, "control" (including, with its
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correlative meanings, "controlled by" and "under common control with") shall
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mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other ownership interests, by contract, or otherwise) and
"immediate family" shall mean any parent, child, grandchild, spouse, or sibling.
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(b) "Cumulative Price Adjustments" means the cumulative total of all
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Annual Price Adjustments made under Section 1.1 above, minus any payments that
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may have been forfeited under Section 1.5(y) above.
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(c) "Employment Agreement" means: (i) as to Joel Stephen Logan, II, the
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Employment Agreement dated as of the same date as this Agreement, between Deer
Valley and Joel Stephen Logan, II; (ii) as to Charles L. Murphree, Jr., the
Employment Agreement dated as of the same date as this Agreement, between Deer
Valley and Charles L. Murphree, Jr.; (iii) as to John Steven Lawler, the
Employment Agreement dated as of the same date as this Agreement, between Deer
Valley and John Steven Lawler; (iv) as to James David Shaw, the Employment
Agreement dated as of the same date as this Agreement, between Deer Valley and
James David Shaw; (v) as to William Joseph Aycock, Jr., the Employment Agreement
dated as of the same date as this Agreement, between Deer Valley and William
Joseph Aycock, Jr.; (vi) as to Jerry Ray Cooper, Jr, the Employment Agreement
dated as of the same date as this Agreement, between Deer Valley and Jerry Ray
Cooper, Jr and; (vii) as to Timothy Wayne Gann, the Employment Agreement dated
as of the same date as this Agreement, between Deer Valley and Timothy Wayne
Gann; and (viii) as to Jimmy Ray Hawkins, the Employment Agreement dated as of
the same date as this Agreement, between Deer Valley and Jimmy Ray Hawkins.
(d) "Majority of the Sellers" means Sellers holding a majority of the
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shares as set forth next to their names on Exhibit"A", as Exhibit"A" may be
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amended from time to time pursuant to Section 1.5 above.
(e) "Non-Competition Agreement" means: (i) as to Joel Stephen Logan,
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II, the Non-Competition Agreement dated as of the same date as this Agreement,
between Deer Valley and Joel Stephen Logan, II; (ii) as to Charles L. Murphree,
Jr., the Non-Competition Agreement dated as of the same date as this Agreement,
between Deer Valley and Charles L. Murphree, Jr.; (iii) as to John Steven
Lawler, the Non-Competition Agreement dated as of the same date as this
Agreement, between Deer Valley and John Steven Lawler; (iv) as to James David
Shaw, the Non-Competition Agreement dated as of the same date as this Agreement,
between Deer Valley and James David Shaw; (v) as to William Joseph Aycock, Jr.,
the Non-Competition Agreement dated as of the same date as this Agreement,
between Deer Valley and William Joseph Aycock, Jr.; (vi) as to Jerry Ray Cooper,
Jr, the Non-Competition Agreement dated as of the same date as this Agreement,
between Deer Valley and Jerry Ray Cooper, Jr and; (vii) as to Timothy Wayne
Gann, the Non-Competition Agreement dated as of the same date as this Agreement,
between Deer Valley and Timothy Wayne Gann; and (viii) as to Jimmy Ray Hawkins,
the Non-Competition Agreement dated as of the same date as this Agreement,
between Deer Valley and Jimmy Ray Hawkins.
(f) "Parent Company" means Cytation Corporation, a Delaware
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corporation.
(g) "Sale of the Business" shall mean (a) a merger, combination,
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consolidation or similar business combination involving Deer Valley in which the
Parent Company is not, directly or indirectly, the holder of a majority in
interest of the voting securities of the surviving entity in such transaction,
(b) a sale, lease or conveyance of all or substantially all of the assets of
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Deer Valley or the Parent Company, or (c) a sale of a majority of the
outstanding voting securities (including those securities convertible into or
exchangeable for voting securities) of Deer Valley by DVA to any "person" or
"group" (within the meaning of Securities Exchange Act of 1934, as amended)
other than a transfer to the Parent Company upon dissolution of Buyer.
Notwithstanding anything to the contrary herein, a change in ownership of the
Parent Company shall not be deemed a Sale of the Business, unless the change in
ownership is as the result of a merger, combination, consolidation or similar
business combination.
4.2 Benefit of Parties and No Assignment. All of the terms and
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provisions of this Agreement shall be binding upon and inure to the benefit of
the parties and their respective permitted successors and assigns. This
Agreement shall not be assignable by any of the Sellers, except upon death by
will or intestacy.
4.3 Counterparts. This Agreement may be executed simultaneously in two
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or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
4.4 Cooperation. During the Term, each party will cooperate with and
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assist the other party in taking such acts as may be appropriate to enable all
parties to effect compliance with the terms of this Agreement and to carry out
the true intent and purposes hereof.
4.5 Notices. All notices, elections, requests, demands or other
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communications hereunder shall be in writing and shall be deemed given at the
time delivered personally or upon receipt if deposited in the United States
mail, certified or registered, return receipt requested, postage prepaid
addressed to the parties as follows (or to such other person or place, written
notice of which any party hereto shall have given to the other):
(a) If to a Seller, to the address set forth on Exhibit "A" attached
hereto.
(b) If to Parent Company or Buyer:
Cytation Corporation or DeerValley Acquisitions Corp.
Attn: Charles G. Masters
4902 Eisenhower Blvd.
Suite 185
Tampa, FL 33634
Facsimile: (813) 885-5911
4.6 Waiver of Compliance. The party for whose benefit a warranty,
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representation, covenant or condition is intended may, in writing, waive any
inaccuracies in the warranties, representations, covenants or conditions
contained in this Agreement or waive compliance with any of the foregoing and so
waive performance of any of the obligations of the other party hereto and any
defaults hereunder, provided, however, that such waiver shall not affect or
impair the waiving party's rights in respect to any other warranty,
representation, covenant, condition or default hereunder.
4.7 Index and Captions. The captions of the Articles and Sections of
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this Agreement are solely for convenient reference and shall not be deemed to
affect the meaning or interpretation of any Article or Section hereof.
4.8 Application ofAlabama Law; Venue; Jurisdiction. This Agreement,
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and the application or interpretation thereof, shall be governed exclusively by
its terms and by the laws of the State of Alabama. Venue for any legal action
which may be brought thereunder shall be deemed to lie in Marion County,
Alabama. The parties agree that, irrespective of any wording that might be
construed to be in conflict with this paragraph, this agreement is one for
performance in Alabama. The parties to this agreement agree that they waive any
objection, constitutional, statutory or otherwise, to a n Alabama's court's
taking jurisdiction of any dispute between them. By entering into this
agreement, the parties, and each of them understand that they might be called
upon to answer a claim asserted in an Alabama court.
4.9 Legal Fees and Costs. If a legal action is initiated by any party
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to this Agreement against the other party arising out of or relating to the
alleged performance or non-performance of any right or obligation established
hereunder, each party shall bear its respective fees, costs and expenses for,
prosecuting, defending against, or providing evidence, producing documents or
taking any other action in respect of, such action shall be the obligation of
and shall be paid or each respective party.
4.10 Waiver of Jury Trial. The parties hereby acknowledge that any
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dispute arising out of this Agreement will necessarily include various
complicated legal and factual issues and therefore knowingly, voluntarily and
intentionally waive trial by jury in any litigation in any court with respect
to, in connection with or arising out of this Agreement, or the validity,
interpretation, or enforcement hereof.
4.11 Acknowledgments: The Employee acknowledges that he has been
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provided with a copy of this Agreement for review prior to signing it, that the
Company has encouraged the Employee to have this Agreement reviewed by his
attorney prior to signing it and that the Employee understands the purposes and
effects of this Agreement.
4.12 Entire Agreement; Amendment: This Agreement, and any other
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document referenced herein, constitute the entire understanding of the parties
hereto with respect to the subject matter hereof, and no amendment, modification
or alteration of the terms hereof shall be binding unless the same be in
writing, dated subsequent to the date hereof and duly approved and executed by
each of the parties hereto and approved by the Board of Directors of the Parent
Company.
[Signature page to Earnout Agreement]
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed in multiple original counterparts as of the date set forth above.
"Sellers"
/s/ Joel Stephen Logan, II
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Joel Stephen Logan, II
/s/ Charles L. Murphree, Jr.
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Charles L. Murphree, Jr.
/s/ John Steven Lawler
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John Steven Lawler
/s/ James David Shaw
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James David Shaw
/s/ William Joseph Aycock, Jr.
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William Joseph Aycock, Jr.
/s/ Jerry Ray Cooper, Jr.
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Jerry Ray Cooper, Jr.
/s/ Timothy Wayne Gann
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Timothy Wayne Gann
/s/ Jimmy Ray Hawkins
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Jimmy Ray Hawkins
"Buyer"
DeerValley Acquisitions, Corp., a Florida corporation
By:
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Name:
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Its:
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"Parent Company"
Cytation Corporation, a Delaware corporation
By:
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Name:
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Its:
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