EXHIBIT 10.w
EARN-OUT OBLIGATIONS.
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Section 2.2.
(b) Additional Merger Consideration. The Shareholders shall be
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entitled to receive payment of possible additional consideration ( collectively
the "Additional Merger Consideration") with respect to shares of Class A Common
Stock and Class B Common Stock, up to a maximum aggregate amount of $24,600,000,
which Additional Merger Consideration will be divided between the Class A
Shareholders and Class B Shareholders in accordance with Section 2.2(b)(ii), to
be computed as follows:
(i) Definitions. For purposes hereof, the following terms shall have
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the following meanings:
(A) "HCCI Year" shall mean, respectively, the fiscal year
beginning on the first day of the month in which the Closing Date occurs
and ending December 31, 1993 and each of the fiscal years ending December
31, 1994, 1995, 1996, 1997 and 1998.
(B) "Revenues" shall mean the revenues payable to HCCI from the
sources and from the sales of products and services listed on Exhibit B
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hereto, determined in accordance with MicroBilt's accounting policies.
(C) "Eligible Revenues" for any HCCI Year shall mean: (i) for the
first HCCI Year (commencing on the first day of the month in which the
Closing Date occurs), the Revenues actually collected by HCCI after June
30, 1993, not reflected on HCCI's June 30, 1993 Financial Statements
delivered to MicroBilt in accordance with Section 8.9 and recorded in the
first HCCI Year, together with Revenues for such HCCI Year recorded in such
HCCI Year and either collected inn such HCCI Year or collected within the
90 day period immediately following the end of such HCCI Year or collected
in such HCCI Year and recorded within the 90 day period immediately
following the end of such HCCI Year; (ii) for each of the second through
fifth HCCI Years, the Revenues recorded in the immediately preceding HCCI
Year but collected more than 90 days from the end of the preceding HCCI
Year, plus the Revenues recorded in such HCCI Year and either collected in
such HCCI Year or collected within the 90 day period immediately following
the end of such HCCI Year or collected in such HCCI Year and recorded
within the 90 day period immediately following the end of such HCCI Year;
and (iii) for the sixth HCCI Year, the Revenues recorded in the preceding
HCCI Year but collected more than 90 days after the end of such HCCI Year,
plus the Revenues recorded in the sixth HCCI Year and either collected in
such sixth HCCI Year or collected within the 180 day period following the
end of the sixth HCCI Year or collected in such sixth HCCI Year and
recorded within the 180 day period immediately following the end of such
HCCI Year. Notwithstanding the foregoing, no amount collected in any HCCI
Year and recorded in the subsequent year pursuant to the foregoing will be
included in Eligible Revenues for the earlier such HCCI
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Year if it is attributable to a software sale accounted for by the
percentage of completion method or a sale for which direct sales expenses
exceed 10% of the total Revenues attributable to such software sale.
(D) "Net Collected Revenues" for any HCCI Year shall mean the
Eligible Revenues for such HCCI Year, less all "direct" expenses incurred
by the Company in such HCCI Year attributable to such Revenues as described
on Exhibit B hereto. There shall be excluded from Net Collected Revenues
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any income or expense related to the assets or business of any corporation
or other entity acquired after the Closing Date by HCCI or any subsidiary
of HCCI from any third party or MicroBilt or any of its Affiliates (defined
below) (including expenses of acquisition of any such assets or business),
unless and except to the extent that the Shareholders' Agent and MicroBilt
agree to the inclusion of such income or expense and the percentages and
"Threshold Amounts" set forth on Exhibit B hereto are adjusted accordingly.
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For purposes of calculating Net Collected Revenues, there shall be no
adjustments to the value of assets or liabilities or other accounting
adjustments resulting from the application of purchase accounting
principles to the Merger.
(ii) Computation. For each HCCI Year, the Additional Merger
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Consideration shall be an amount equal to the percentage of Net Collected
Revenues for such HCCI Year in excess of the Threshold Amount for such HCCI
Year, each as set forth on Exhibit B. Additional Merger Consideration shall
be payable to the Class A Shareholders and the Class B Shareholders in
accordance with the percentage allocations set forth on Exhibit B based
upon the aggregate Additional Merger Consideration paid or payable from
time to time.
(iii) Adjustments.
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(A) Neither MicroBilt nor any Affiliate or successor thereto
shall be under any obligation to maintain the Company as a separate legal
entity for any particular length of time whatsoever. MicroBilt and any
successor thereto may at any time reorganize or merge or otherwise cause
the Company to cease to exist. Should the Company cease its separate legal
existence during an HCCI Year, MicroBilt or any successor thereto will
continue to compute Net Collected Revenues during such HCCI Year and the
following HCCI Years, if any, in such a manner as to enable the
Shareholders to continue to be eligible to earn Additional Merger
Consideration during such HCCI Years as though no such change to the
Company's separate corporate existence had occurred.
(B) In the event that MicroBilt fundamentally changes the
business of the Company during an HCCI Year (including moving the Company's
principal place of business from Pleasanton, California) or sells the
Company to an entity other than an Affiliate of MicroBilt (whether by
merger, sale of stock or sale of assets), in a manner that materially and
adversely affects the Shareholders with respect to the earning or
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computation of Additional Merger Consideration for purposes of this Section
2.2, MicroBilt will continue to compute Net Collected Revenues during such
HCCI Year and the following HCCI Years, if any, in such a manner as to
enable the Shareholders to be eligible to earn Additional Merger
Consideration during such HCCI Years as though no such change in the
business of the company or sale of the Company had occurred.
(C) In the event that MicroBilt changes its revenue recognition
policies applicable to the Company after the date of this Agreement and
during an HCCI Year in a manner that, taking into account any corresponding
change in expense recognition, adversely affects the Shareholders with
respect to the computation of additional Merger Consideration, for purposes
of this Section 2.2, MicroBilt will continue to account for Net Collected
Revenues during such HCCI Year and the following HCCI Years, if any, in
such a manner as to enable the Shareholders to be eligible to earn
Additional Merger Consideration during such HCCI Years as though no such
change in MicroBilt's revenue recognition policies had occurred.
(D) For purposes of Section 2.2(b)(iii)(A) and (B), MicroBilt may
make any appropriate adjustment, including without limitation including or
excluding items of income or expense and adjusting the percentages and
Threshold Amounts set forth on Exhibit B hereto, to appropriate reflect any
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such change. If the Shareholders' Agent disagrees with MicroBilt's
computation or accounting under Section 2.2(b)(iii)(A), (B) or (C),
including the need for or appropriateness of any adjustment described in
the first sentence of this Section 2.2(b)(iii)(D), he shall within thirty
days after he receives notice of such change send a written notice to
MicroBilt setting forth the basis for his disagreement. If within thirty
days after the receipt of such notice, MicroBilt and the Shareholders'
Agent shall not have resolved the dispute, the dispute shall be submitted
to and settled by arbitration in accordance with the then prevailing
commercial arbitration rules of the American Arbitration Association. Such
arbitration shall be held in the Atlanta, Georgia area before a panel of
three arbitrators, one selected by MicroBilt, on selected by the
Shareholders' Agent and the third selected by mutual agreement of the first
two. The decision of the arbitrators shall be final and binding as to any
matters submitted. Judgment upon any award rendered by the arbitrators may
be entered in any court of competent jurisdiction.
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"EXHIBIT B"
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Applicable Products and Services
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Applicable products and services for purposes of determining Revenues shall be
the Company's existing and planned product offering for hospitals, independent
physicians' associations ("IPA's"), hospital physicians' organizations ("HPO's")
and similar entities at the Closing Date which are described below:
Managed Competition: Managed Competition is a variety of products from
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software licensing to consulting services. Software products in production
include the HCCI Managed Care System comprised of five modules: Managed
Care Core, Profitability, Modeling, Government Logs, and Bill Audit Review.
HCCI Provides consulting services to its client base in conjunction with
HCCI-provided licenses or application programs. HCCI also provides
Retrospective Resolution Services for health care related services.
Retrospective Resolution Services are lost charge recovery services that
provide for the reconciliation of funds received for services rendered.
HCCI is in the process of developing a Trans-Industry Capitation System.
The initial product offering will include the following five base modules:
Claims Processing, Authorizations, Membership, Capitation and Utilization
Review. It is expected that this system will be suitable for and applicable
to the entire health care industry. Consulting services are being
established to support this product line.
Cost Containment: The Cost Containment product line is comprised of a set
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of applications and services which assist HCCI's clients in understanding
their cost structure. HCCI has the following applications within this
category: Cost Accounting, Productivity, Resource Utilization and
Budgeting. Product Line Budgeting is in the development phase with a
scheduled market entry in the first half of 1994.
HCCI also offers consulting services in its Cost Containment offering.
Productivity studies, clinical pathways, cost accounting services and
budget process review are principal examples of these services.
Data Warehousing: HCCI has developed a software tool set which operates in
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a client server mode that stores and accesses data. This product is called
the Enterprise Workstation. The Workstation allows data to be retrieved
from various legacy systems within HCCI's client and prospect base and
stored on a relational database in the HCCI data schema. HCCI has provided
a tool that allows users to interactively access data and view it on a
graphical, user friendly front-end. The user is also afforded the ability
to build
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screens or views into the database. This product is scheduled for
availability in all markets in March 1994.
Various starter sets are in development as part of the Enterprise
Workstation to augment particular functional areas within the health care
industry. These starter sets are being offered in a run time license
scenario as part of the Enterprise Workstation. For more advanced needs
HCCI is offering limited use and full use Executive Workstation licenses.
Consulting services will also be made available in support of Data
Warehousing. HCCI is developing standard consulting templates for broad
functional areas within HCCI's client and prospect base. The Company
envisions building a business process re-engineering service with the use
of the HCCI Data Warehouse software tools.
Time Share: The implementation and availability of the above-described
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products and services in a time sharing or service bureau form will also
qualify for purposes of determining Revenues.
Net Collected Revenues
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"Net Collected Revenues" means "Eligible Revenues" less the following
direct expenses:
1. cost of hardware
2. cost of third party software
3. all direct operating costs, including, without limitation:
(a) salaries and commissions
(b) travel and lodging expenses
(c) technical support
(d) employee benefits
(e) general and administrative expenses
(f) marketing and advertising expenses
(g) communications expenses
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(h) development costs (including purchased software) in excess of
amounts reflected below:
Year Amount
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1993 $ 36,300
1994 685,000
1995 1,169,000
1996 1,346,000
1997 1,629,000
1998 1,799,000
but not less the following:
(a) depreciation
(b) amortization
(c) federal and state income taxes
(d) interest expense
(e) allocation of the overhead expenses of FFMC or MicroBilt
Percentages of Net Collected Revenue for Purposes of computing Additional Merger
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Consideration under Section 2.2(b)(ii)
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Year Ended December 31,
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Effective Time through 1994 1995 1996 1997 1998
December 31, 1993
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60% 55% 50% 45% 36% 20%
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Threshold Amount for purposes of computing Additional Merger
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Consideration under Section 2.2(b)(ii)
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1993 1994 1995 1996 1997 1998
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$0 $694,000 $1,089,000 $2,177,000 $2,177,000 $2,690,000
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Percentage of Additional Merger Consideration Allocated Between Class A and
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Class B Shareholders for purposes of Section 2.2(b)(ii)
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Aggregate Additional Class A Class B
Merger Consideration Merger Consideration Merger Consideration
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$ 0 to $ 1,600,000 80.0% 20.0%
$ 1,600,001 to $ 3,600,000 70.0% 30.0%
$ 3,600,001 to $ 6,100,000 60.0% 40.0%
$ 6,100,001 to $ 8,600,000 50.0% 50.0%
$ 8,600,001 to $11,600,000 40.0% 60.0%
$11,600,001 to $16,600,000 30.0% 70.0%
$16,600,001 to $24,600,000 20.0% 80.0%
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