A very enticing "earn out" clause in a 2001 acquisition led to a guilty plea today by Bill D. Deaton, the CEO of Image Entry Inc., the acquired company.

In 2001, publicly-traded Image Entry was acquired by SourceCorp Inc. In addition to over $32 million paid to Deaton at closing, an additional $11 million was held back to be paid during the three succeeding years if Image Entry met its earnings targets, and an "earn out" of up to $25 million was to be paid in three annual installments if Image Entry exceeded its target earnings.

The DOJ announced today that in his guilty plea, Deaton admitted that he and others conspired to fraudulently inflate Image Entry's reported earnings and the subsequent earn out payments, by failing to report and recognize approximately $971,000 in operating expenses incurred by Image Entry. In addition, Deaton admitted that he and others fraudulently inflated Image Entry's reported earnings (and the earn out payment) by having Image Entry limit or entirely omit a particular quality control procedures for a governemtn customer while continuing to recognize revenues as if the quality control procedures were still being performed.

Deaton faces a maximum penalty of five years in prison and a fine of $250,000, and he is due to be sentenced on July 2, 2010.