<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1998
REGISTRATION NO. 333-36209
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CLAIMSNET.COM INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7374 75-2649230
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
</TABLE>
------------------------
CLAIMSNET.COM INC.
12801 North Central Expressway
Dallas, Texas 75243
(Address of principal place of business)
BO W. LYCKE
President and Chairman of the Board of Directors
Claimsnet.com inc.
12801 North Central Expressway
Dallas, Texas 75243
(972) 458-1701
(Name, address, and telephone number of principal executive offices and agent
for service)
COPIES TO:
<TABLE>
<S> <C>
ROBERT STEVEN BROWN, ESQ. JAMES R. TANENBAUM, ESQ.
GERARDO A. LAPETINA, ESQ. Stroock & Stroock & Lavan LLP
Brock Silverstein McAuliffe LLC 180 Maiden Lane
One Citicorp Center New York, New York 10038-4982
153 East 53rd Street (212) 806-5400 / (212) 806-6006 (Telecopy)
New York, New York 10022-4611
(212) 371-2000 / (212) 371-5500 (Telecopy)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. / /
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES PURSUANT TO RULE
462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
------------------------
CALCULATION OF REGISTRATION FEE
SEE ATTACHED PAGE.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT (1) PRICE (1) FEE
<S> <C> <C> <C> <C>
Common Stock,
par value $.001 per share... 1,840,000 shares (2) $7.00 $12,880,000.00 3,799.60
Representative's Warrants.... 160,000 warrants (3) 0.001 $160.00 0.06
Common Stock, par value,
$.001 per share, issuable
upon exercise of the
Redeemable Warrants......... 160,000 Shares (4) 11.55 1,848,000 545.16
Total.................... -- -- $14,728,160 $4,344.82 (5)
</TABLE>
(1) Estimated solely for purposes of calculation of the registration fee in
accordance with Rule 457 under the Securities Act of 1993, as amended.
(2) Includes 240,000 shares of the Common Stock, par value $.001 per share, of
the Company, which the Underwriters have the option to purchase solely to
cover over-allotments, if any.
(3) To be acquired by the Representative.
(4) Issuable upon exercise of the Representative's Warrants.
(5) A filing fee of $11,430.82 was previously paid.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Front Cover
[Provides a brief overview of the Claimsnet.com process and contains three
examples of processing screens. The text and graphics emphasize the three
primary benefits of the Claimsnet.com service.]
Back Cover
[Contains an image of the Claimsnet.com internet home page imposed over a
background of a starry sky. The home page shows the Claimsnet.com logo and name,
along with the messages, "Healthcare Transaction Processing" and "Reducing
Healthcare Provider Costs with Internet Technology."]
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1998
PROSPECTUS
1,600,000 SHARES
[LOGO]
COMMON STOCK
----------------
Claimsnet.com inc., a Delaware corporation (the "Company"), hereby offers
1,600,000 shares (the "Shares") of common stock, par value $.001 per share (the
"Common Stock"). It is currently contemplated that the initial public offering
price of the Common Stock will be $7.00 per Share. See "Underwriting" for the
factors to be considered in the determination of the initial public offering
price of the Shares.
Prior to this offering, there has been no public market for the Shares, and
there can be no assurance that an active market will develop therefor upon
completion of this offering. Application has been made for the quotation of the
Common Stock on the Nasdaq SmallCap-Registered Trademark- Market under the
symbol "CLAI," and application for the listing of the Common Stock has been made
to the Boston Stock Exchange under the symbol "CLA."
SEE "RISK FACTORS" LOCATED ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
</TABLE>
(1) Does not include additional consideration to be received by Strasbourger
Pearson Tulcin Wolff Incorporated, the representative (the "Representative")
of the several underwriters (the "Underwriters"), in the form of (a) a 2.5%
non-accountable expense allowance, (b) warrants to purchase up to an
aggregate of 160,000 shares of Common Stock (the "Representative's
Warrants"), (c) a 24-month consulting agreement. The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting estimated expenses of the offering payable by the Company
of $ , including the Representative's non-accountable expense
allowance, assuming no exercise of the Underwriters' over-allotment option.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
an additional 240,000 shares of Common Stock, on the same conditions as set
forth herein, solely to cover over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ ,
$ , and $ , respectively. See "Underwriting."
------------------------------
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as, and if delivered to, and accepted by them, and subject to their
right to reject orders in whole or in part and to certain other conditions. It
is expected that delivery of certificates will be made against payment therefor
at the offices of Strasbourger Pearson Tulcin Wolff Incorporated on or about
December , 1998.
------------------------
STRASBOURGER PEARSON TULCIN WOLFF INCORPORATED
THE DATE OF THIS PROSPECTUS IS DECEMBER , 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION THEREIN MAINTAINED
BY THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish to its stockholders annual reports, which
will include Consolidated Financial Statements audited by independent
accountants, and such other periodic reports as it may determine to furnish or
as may be required by law, including Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED HEREIN, THE INFORMATION IN THIS
PROSPECTUS DOES NOT GIVE EFFECT TO (I) THE REPRESENTATIVE'S WARRANTS OR THE
EXERCISE THEREOF; (II) THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR THE EXERCISE
THEREOF; (III) UP TO 500,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON
THE EXERCISE OF OPTIONS WHICH MAY BE GRANTED PURSUANT TO THE COMPANY'S 1997
STOCK OPTION PLAN, AS AMENDED (THE "1997 PLAN"), 150,000 OF WHICH WERE GRANTED
ON DECEMBER 9, 1998; (IV) UP TO 100,000 SHARES OF COMMON STOCK RESERVED FOR
ISSUANCE UPON THE EXERCISE OF OPTIONS WHICH MAY BE GRANTED PURSUANT TO THE
COMPANY'S NON-EMPLOYEE DIRECTORS' PLAN (THE "DIRECTORS' PLAN"), OF WHICH OPTIONS
EXERCISABLE FOR AN AGGREGATE OF 50,000 SHARES OF COMMON STOCK SHALL HAVE BEEN
GRANTED UPON THE CLOSING OF THIS OFFERING; AND (V) WARRANTS EXERCISABLE FOR AN
AGGREGATE OF 30,000 SHARES OF COMMON STOCK OUTSTANDING ON THE DATE HEREOF.
EXCEPT AS OTHERWISE INDICATED, THE INFORMATION HEREIN REFLECTS (I) A
2.325578-FOR-ONE STOCK SPLIT OF THE OUTSTANDING SHARES OF COMMON STOCK EFFECTED
ON MAY 15, 1997, AND A 2.796117-FOR-ONE REVERSE STOCK SPLIT OF THE OUTSTANDING
SHARES OF COMMON STOCK EFFECTED ON NOVEMBER 18, 1998, (II) THE CONSUMMATION OF A
MERGER ON DECEMBER 7, 1998 PURSUANT TO WHICH THE COMPANY WAS REINCORPORATED IN
THE STATE OF DELAWARE AND ITS AUTHORIZED CAPITALIZATION WAS INCREASED TO
40,000,000 SHARES OF COMMON STOCK AND 4,000,000 SHARES OF PREFERRED STOCK, AND
(III) THE CONSUMMATION OF THE 1998 PRIVATE PLACEMENTS (AS HEREINAFTER DEFINED).
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE CERTAIN
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS."
THE COMPANY
Claimsnet.com inc. (the "Company") is an electronic commerce company engaged
in healthcare transaction processing for the medical and dental industries by
means of the Internet. The Company's proprietary software, which was developed
over the last six years and resides entirely on the Company's servers, allows
healthcare providers to prepare and enter healthcare claims interactively on the
Internet and electronically transmits the claims to the Company for processing.
The proprietary software also allows the Company to download claims from the
healthcare providers' computers directly to the Company's servers. The software
provides real-time editing of the claims data for compliance with payor format
and converts the claims to satisfy specific payor processing requirements. The
Company then electronically transmits processed claims on behalf of healthcare
providers, directly or indirectly, to medical and dental payors that accept
claims processing transmissions electronically. In addition, the Company's
software provides for secure encryption of all claims data transmitted. The
payors to which claims processed by the Company have been submitted, primarily
through clearinghouses such as HBO & Company and Envoy Corporation with which
the Company has agreements, include plans and affiliates of Aetna Life &
Casualty Company, Inc., MetLife Healthcare/Metropolitan Healthcare Corporation,
Cigna Healthcare, Inc., The Prudential Insurance Company of America, Blue
Cross/Blue Shield of Louisiana ("BCLA"), and United Healthcare Corporation.
The Company believes that (i) the ability of healthcare providers utilizing
the Company's website to interactively prepare claims on the Internet and
receive real time edits prior to claim submission, (ii) the ease and
availability of Company-provided training over the Internet, (iii) the minimal
software and processing power required for providers to utilize the Company's
proprietary software, and (iv) the ability to add incremental services, such as
patient statements, eligibility verification, electronic remittance advices, and
data modeling, through the same browser interface and website as the Company's
claims processing services are significant advantages of the Company's
electronic claims transmission services over other currently available services.
The Company believes that the improved claims processing procedure will result
in a sharply reduced average number of outstanding accounts receivable days,
thereby
3
<PAGE>
improving the provider's working capital. The Company believes that the services
offered by its competitors are generally based on legacy mainframe technology,
proprietary networks, and proprietary file formats, which limit the ability of
those competitors to offer interactive Internet-based processing services on an
economical basis. In addition, competitors' services generally require extensive
formal training, the installation of substantial software on each healthcare
provider's computer, and significant processing power.
The healthcare claims processing market, including dental claims, was
estimated by Health Data Management ("HDM"), an industry publication, to be over
4.0 billion healthcare claim and HMO encounter form (the HMO equivalent of a
claim) submissions in 1997. HDM has estimated that electronically submitted
claims volume increased by 13% in 1997 over 1996 levels, that physicians
submitted approximately 38% of their claims electronically in 1997, compared to
35% in 1996, and that the rate of growth in dental electronic claim submissions
increased from 10% in 1996 to 13% in 1997.
The Company seeks to generate revenue by charging commercial payors, or
clearinghouses acting for commercial payors, a transaction fee for claims
submitted electronically and by charging healthcare providers a subscription fee
for use of the Company's services. Generally, the Company collects a monthly
subscription fee of $19.95 from customers who subscribed to the Company's
services on or after January 1, 1998. The Company has, however, determined to
waive all provider subscription fees through at least December 31, 1998 for
customers who subscribed to the Company's services prior to January 1, 1998 as
part of its marketing strategy to attract healthcare providers to use its
services. There can be no assurance that the Company will be able to collect
subscription fees from such healthcare providers after December 31, 1998 or, if
collected, the amount of such fees.
In February 1998, the Company entered into a development and marketing
agreement with Millbrook Corporation ("Millbrook"), a Microsoft solution
provider, to be the default claims processing, statement, and remittance advice
vendor for all healthcare provider customers of Millbrook. The processing
solution offered by the Company pursuant to such agreement is tightly integrated
through distinctive software controls allowing automatic updates within each
provider's practice management system.
In April 1998, the Company signed an agreement with Island Automated Medical
Services, Inc. ("IAMS"), to provide services to over 2,500 IAMS customers
providing physician billing services. The Company and IAMS will jointly market
the program through training programs, newsletters, and a fee reduction for new
customers utilizing the IAMS standard software.
In September 1998, the Company entered into an agreement with Electronic
Data Interchange Services, a department of BCLA, to provide claim processing
services to BCLA network providers. Under the terms of the agreement, the
Company and BCLA will jointly promote the Company's services to the 9,600
network providers of BCLA through website links, BCLA network communication
resources, educational seminars, telemarketing, and direct mail campaigns. In
September 1998, the Company entered into a group purchasing agreement with
Provider Select, Inc., an affiliate of Premier, Inc. ("Premier"), the nation's
largest alliance of hospitals and healthcare organizations. Under the terms of
the agreement, the Company will provide claim processing, patient statements,
eligibility verification, and other services to participating members of
Premier.
In October 1998, as part of the 1998 Private Placements, DVI Business Credit
Corporation made a strategic investment of $500,000 in the Company at a purchase
price of $6.00 per share of Common Stock. DVI Business Credit Corporation is a
wholly-owned subsidiary of DVI, Inc. (NYSE: DVI), a leading independent
specialty finance company for healthcare providers.
The Company's business strategy is: (i) to aggressively market electronic
claims processing services to outpatient healthcare providers, including
clinics, hospitals, physicians, HMOs, third party administrators, dentists, and
other outpatient service providers; (ii) to expand the services offered by the
Company to
4
<PAGE>
include additional transaction processing functions, such as eligibility for
benefit coverage, HMO encounter forms, and practice management functions (e.g.,
CPT code analysis, fee schedule analysis, etc.) in order to diversify sources of
revenue; (iii) to acquire and integrate electronic claims processing companies
that enable the Company to accelerate its entry into the inpatient hospital
claims market; (iv) to offer new customers initial and ongoing American
Airlines-Registered Trademark- AAdvantage-Registered Trademark- mileage rewards
relative to the commerical insurance claims submitted; and (v) to license its
claims processing technology for other applications, including stand-alone
purposes, Internet systems, private label use, and original equipment
manufacturers ("OEMs").
The Company was organinized under the laws of the State of Delaware on
September 11, 1997 under the name Claimsnet.com.inc. as a wholly owned
subsidiary of American Net Claims, Inc. American Net Claims, Inc. was
incorporated under the laws of the State of Texas on April 8, 1996. On December
7, 1998, American Net Claims, Inc. merged with and into the Company, which was
organized solely for purposes of effecting the merger. The Company's principal
office is located at 12801 North Central Expressway, Suite 1515, Dallas, Texas
75243, and its telephone number is (972) 458-1701. On July 31, 1996, the Company
acquired all of the Internet software, licenses, intellectual property rights,
and technology developed by an affiliated company, American Medical Finance,
Inc. ("AMF"). See "Use of Proceeds" and "Certain Transactions." On June 2, 1997,
the Company acquired (the "Medica Acquisition") 100% of the capital stock of
Medica Systems, Inc. ("Medica"), a software development firm from which the
Company had licensed a portion of the Company's healthcare transaction
processing software. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company operated in the development
stage through March 31, 1997 and thereafter commenced processing claims for
healthcare providers. The Company maintains its Web page at http://claimsnet.com
and has registered the Internet domain of Claimsnet.com.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares of Common Stock Offered by the
Company.................................... 1,600,000 shares
Shares of Common Stock Outstanding
Immediately Prior to this Offering......... 3,250,000 shares(1)
Shares of Common Stock Outstanding
Immediately Following Offering............. 4,850,000 shares
Use of Proceeds.............................. To repay indebtedness, including indebtedness
to AMF incurred by AMF in connection with the
development of the Company's proprietary
software; to increase marketing and research
and development; to acquire additional
capital equipment; and for general corporate
and working capital purposes, including
possible acquisitions of, and investment in,
competing or complementary businesses. See
"Use of Proceeds."
Risk Factors................................. An investment in the securities offered
hereby involves a high degree of risk and
immediate and substantial dilution and should
not be made by investors who cannot afford
the loss of their entire investment. See
"Risk Factors" and "Dilution."
Proposed Nasdaq Small
Cap-Registered Trademark- Market Trading
Symbol..................................... "CLAI"
Proposed Boston Stock Exchange Trading
Symbol..................................... "CLA"
</TABLE>
- ------------------------
(1) Includes 460,417 shares of Common Stock sold in the 1998 Private
Placements. See "Risk Factors--Possible Recission of 1998 Private
Placements."
6
<PAGE>
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED SEPTEMBER
APRIL 8, 1996 30,
(INCEPTION) YEAR ENDED ----------------------------
THROUGH DECEMBER 31, 1997
DECEMBER 31, 1996 1997(1) -------------
----------------- ------------------- (UNAUDITED) 1998
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................... $ -- $ 81,712 $ 66,879 $ 103,165
----------------- ------------------- ------------- -------------
Total operating expenses................... 147,918 2,514,290 1,403,624 2,814,712
----------------- ------------------- ------------- -------------
Interest expense--affiliate................ 158,123 389,548 316,312 223,269
Interest income............................ -- (40,817) (34,610) (3,788)
----------------- ------------------- ------------- -------------
Net loss................................... (306,041) (2,781,309) (1,618,447) (2,931,028)
----------------- ------------------- ------------- -------------
----------------- ------------------- ------------- -------------
Basic and diluted loss per weighted average
common share outstanding................. $ (0.15) $ (1.09) (0.65) (1.01)
----------------- ------------------- ------------- -------------
----------------- ------------------- ------------- -------------
Weighted average common shares outstanding
(basic and diluted)...................... 2,108,651 2,555,886 2,477,130 2,898,565
----------------- ------------------- ------------- -------------
----------------- ------------------- ------------- -------------
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------------ ------------------------
PRO FORMA PRO FORMA
AS ACTUAL AS
ACTUAL ADJUSTED(2)(3) --------- ADJUSTED(2)(3)
--------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets......................... $ 419,329 $ 8,906,712 $ 219,351 $ 6,430,911
Total assets........................... 2,174,597 10,625,277 1,685,190 7,705,457
Working capital........................ 36,202 8,423,585 (174,984) 5,936,576
Long-term debt......................... 3,468,320 -- 4,898,733 --
Stockholders' equity (deficit)......... (1,676,850) 10,142,150 (3,607,878) 7,211,122
</TABLE>
- ------------------------
(1) Includes the results of operations of Medica from the date of acquisition,
June 2, 1997.
(2) Adjusted to reflect the estimated net proceeds of approximately $9,344,000
from the sale of the Shares at an assumed initial public offering price of
$7.00 per Share and the initial application of such net proceeds as
described under "Use of Proceeds."
(3) Adjusted to reflect the net proceeds of approximately $2,025,000 in cash
from, and the conversion of $450,000 of indebtedness in connection with, the
sale of Common Stock in the second and third quarters of 1998, as described
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE,
INVOLVES A HIGH DEGREE OF RISK, AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE
OTHER MATTERS REFERRED TO HEREIN, INCLUDING THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO, THE FOLLOWING RISK FACTORS. PROSPECTIVE INVESTORS
SHOULD BE IN A POSITION TO RISK THE LOSS OF THEIR ENTIRE INVESTMENT. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING INFORMATION WHICH INVOLVES RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED BY SUCH FORWARD-LOOKING INFORMATION AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
PROSPECTUS.
STOCKHOLDERS' DEFICIT; ANTICIPATED LOSSES
As of December 31, 1996 and 1997, and September 30, 1998, the Company had
working capital of $15,659, $36,202 and $(174,984), respectively, and
stockholders' deficit of $(3,430,041), $(1,676,850) and $(3,607,878),
respectively. See the Consolidated Financial Statements and the Notes thereto.
The Company generated revenues of $81,712 through December 31, 1997 and $103,165
for the nine months ended September 30, 1998, and has incurred net losses since
inception and expects to continue to operate at a loss for the foreseeable
future. For the period from April 8, 1996 (inception) through December 31, 1996,
the year ended December 31, 1997, and the nine months ended September 30, 1998,
the Company incurred net losses of $(306,041), $(2,781,309), and $(2,931,028)
respectively. There can be no assurance that the Company will ever achieve
profitability. In addition, during the nine months ended September 30, 1998, the
Company recorded negative cash flow of $224,696. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--General."
A significant portion of the Company's revenues for the year ended December
31, 1997 were from software licensing fees to a former customer of Medica. The
customer was a home-based claims processing business opportunity vendor. License
revenues to the customer, totalling $51,011 are included in the Company's
revenues for the year ended December 31, 1997. The Company has since cancelled
the contract.
LIMITED OPERATING HISTORY
The Company, organized on April 8, 1996, was a development stage company
through March 31, 1997, is currently processing claims for approximately 500
providers, and has entered into agreements with clearinghouses providing access
to more than 150 payors which, on average, provide for a payment to the Company
of $.10 per claim. Consequently, the Company has a very limited operating
history upon which prospective investors may base an evaluation of the Company
and determine its prospects for achieving its intended business objectives. The
Company is subject to all of the risks inherent to the establishment of any new
business venture. The likelihood of the future success of the Company is highly
speculative and must be considered in light of its limited operating history, as
well as the limited resources, problems, expenses, risks, and complications
frequently encountered by similarly situated companies in the early stages of
development, particularly companies in new and rapidly evolving markets, such as
electronic commerce. To address these risks, the Company must, among other
things, maintain and increase its customer base, implement and successfully
execute its business and marketing strategy, continue to develop and upgrade its
technology and transaction-processing systems, continually update and improve
its website, provide superior customer service, respond to competitive
developments, and attract, retain, and motivate qualified personnel. There can
be no assurance that the Company will be successful in addressing such risks,
and the failure to do so could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
8
<PAGE>
POSSIBLE RESCISSION OF 1998 PRIVATE PLACEMENTS
During the second quarter of 1998, the Company consummated a private
offering of 20 units, each unit consisting of 10,729 shares of Common Stock, for
aggregate gross proceeds of approximately $1,000,000 and during July to October
1998, the Company consummated a private offering of 29.5 units, each unit
consisting of 8,333 shares of Common Stock, for aggregate gross proceeds of
approximately $1,475,000 (the "1998 Private Placements"). Pursuant to the
Securities Act, the rules and regulations thereunder, and the interpretations of
the Commission, the Company may be required to offer rescission to investors in
the 1998 Private Placements. If the Company is so required and all of such
investors determine to exercise such rescission rights, the Company would be
required to refund the entirety of the gross proceeds of such private offerings
to such investors. Such proceeds would be paid in part with the net proceeds of
this offering. The business, prospects, financial condition, and results of
operations of the Company could be materially adversely affected. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
SUBSTANTIAL PORTION OF NET PROCEEDS TO BE USED TO REPAY INDEBTEDNESS; BENEFITS
TO AFFILIATES
The Company intends to utilize approximately $3,850,000 (41.2%) of the net
proceeds of this offering to repay the AMF Note (as hereinafter defined) and to
repay advances accrued under the Company's line of credit with AMF. Accordingly,
AMF will directly benefit from the sale of the Shares offered hereby. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include: (i) the Company's ability to retain
existing customers, attract new customers at a steady rate, and maintain
customer satisfaction; (ii) the announcement or introduction of new sites,
services, and products by the Company and its competitors; (iii) price
competition or higher prices in the industry; (iv) the level of use of the
Internet and online services and the rate of market acceptance of the Internet
and other online services for the purchase of "business to business" services,
such as those offered by the Company; (v) the Company's ability to upgrade and
develop its systems and infrastructure in a timely and effective manner; (vi)
the level of traffic on the Company's website; (vii) technical difficulties,
system downtime, or Internet brownouts; (viii) the amount and timing of
operating costs and capital expenditures relating to expansion of the Company's
business, operations, and infrastructure; (ix) government regulation; and (x)
general economic conditions and economic conditions specific to the Internet,
electronic commerce, and the medical claims processing industry.
Due to the foregoing factors, in one or more future quarters, the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Common Stock would likely be
materially adversely affected.
UNTESTED MARKETING STRATEGY
To date, the Company has engaged in limited marketing efforts. Achieving
market penetration will require significant efforts by the Company to create
awareness of, and demand for, the Company's products and services. The Company
intends to upgrade its marketing efforts to include advertising on the Internet,
direct mail, e-mail, and an expanded sales staff. The Company seeks to generate
revenue by charging commercial payors, or clearinghouses acting on behalf of
commercial payors, a transaction fee for each claim submitted and healthcare
providers a monthly subscription fee for the use of the Company's services. The
Company has, however, determined to waive all provider subscription fees through
at least December 31, 1998 for those customers which subscribed to the Company's
services prior to January 1, 1998. All of these marketing efforts have been
largely untested in the marketplace, and there can be no
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assurance that such efforts will result in sales of the Company's products and
services. Further, there can be no assurance that the Company will be able to
build a provider customer base or be able to collect subscription fees from such
healthcare providers after December 31, 1998 or, if collected, the amount of
such fees. The failure of the Company to develop its marketing capabilities,
succesfully market its products or services, or recover the cost of its services
would have a material adverse effect on the Company's business, prospects,
financial condition, and results of operations. The waiver of such subscriber
fees through at least December 31, 1998 and a potential determination by the
Company to waive subscriber fees after such date could have a material adverse
effect on the business, prospects, financial condition, and results of
operations of the Company. See "Use of Proceeds," "Business--Business Strategy,"
and "Business--Customers."
SUBSTANTIAL INFLUENCE OF EXISTING MANAGEMENT
Upon the completion of this offering, the current directors and executive
officers of the Company will, in the aggregate, beneficially own approximately
2,046,459, or 42.2%, of the outstanding shares of Common Stock, or approximately
40.2% of such outstanding shares of Common Stock if the Underwriters'
over-allotment option is exercised in full. As a result, the current officers
and directors of the Company will have the ability to substantially influence
the outcome of all matters on which stockholders are entitled to vote, including
the elections of the Company's directors and the approval of significant
corporate transactions.
ADDITIONAL FINANCING REQUIREMENTS
The Company believes that the net proceeds of this offering, together with
anticipated revenues from operations, will be sufficient to satisfy its capital
requirements for at least the next 18 months. This belief is based on the
Company's operating plan which is based on certain assumptions, which may prove
to be incorrect. See "Risk Factors--Possible Rescission of 1998 Private
Placements." Accordingly, there can be no assurance that the Company's financial
resources will be sufficient to satisfy the Company's capital requirements for
such period. If the Company's financial resources are insufficient and, in any
case, after such 18-month period, the Company will require additional financing
in order to meet its plans for expansion. Additional financing may take the form
of the issuance of common or preferred equity securities or debt securities, or
may involve bank financings. There can be no assurance that the Company will be
able to obtain the necessary additional capital on a timely basis or on
acceptable terms, if at all. In any of such events, the Company may be unable to
implement its current plans for expansion or to repay its debt obligations as
they become due. In the event that any such financing should take the form of
equity securities, the holders of the Common Stock may experience additional
dilution. See "Use of Proceeds," "Dilution," and "Business--Business Strategy."
RISK ASSOCIATED WITH GROWTH; NEW MANAGEMENT TEAM AND LIMITED SENIOR MANAGEMENT
RESOURCES; COMPANY REQUIRED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL
From April 8, 1996 (inception) to December 31, 1996, during the year ended
December 31, 1997, and during the nine month period ended September 30, 1998,
the Company expanded from one to 11 employees, from 11 to 23 employees, and from
23 to 33 employees, respectively. The majority of the Company's senior
management joined the Company after January 1, 1997, and some officers have no
prior senior management experience at public companies. The Company's new
employees include a number of key managerial, technical, financial, marketing,
and operations personnel who have not yet been fully integrated into the
Company, and the Company expects to add additional key personnel in the near
future. Expansion of the Company's business is expected to place a significant
strain on its limited managerial, operational, and financial resources. The
Company will be required to expand its operational and financial systems
significantly and to expand, train, and manage its work force in order to manage
the expansion of its operations. Failure to fully integrate such new employees
into the Company's operations could have a
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material adverse effect on the Company's business, prospects, financial
condition, and results of operations. The ability of the Company to attract and
retain highly skilled personnel is critical to the operations and expansion of
the Company. The Company faces competition for such personnel from other
technology companies and more established organizations, many of which have
significantly larger operations and greater financial, marketing, human, and
other resources than the Company. There can be no assurance that the Company
will be successful in attracting and retaining qualified personnel on a timely
basis, on competitive terms, or at all. If the Company is not successful in
attracting and retaining such personnel, the Company's business, prospects,
financial condition, and results of operations will be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--Strategy," and "Business--Employees."
DEPENDENCE UPON SENIOR MANAGEMENT
The Company currently depends upon the efforts and abilities of its senior
executives. The loss or unavailability of the services of any such individuals
for any significant period of time could have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
The Company has obtained, owns, and is the sole beneficiary of, key-person life
insurance in the amount of $2,000,000 on the life of Bo W. Lycke, the Chairman
of the Board of Directors, President, and Chief Executive Officer of the
Company. There can be no assurance that such insurance, will continue to be
available to the Company on reasonable terms, or at all. Mr. Lycke and Messrs.
Ward L. Bensen and Robert H. Brown Jr., Directors of the Company, serve as the
Chairman of the Board of Directors, a Director and Senior Vice President, and a
Director, respectively, of AMF. See "Certain Transactions." In addition, while
Mr. Lycke has entered into an employment agreement with the Company, such
agreement is terminable by Mr. Lycke on 30 days' notice. See
"Management--Employment Agreements."
INTERNET SECURITY RISKS
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. The
Company relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect secure
Internet transmission of confidential information, such as medical information.
There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise or breach of the algorithms used by the Company to
protect customer transaction data. A party who is able to circumvent the
Company's security measures could misappropriate proprietary information or
cause interruptions in the Company's operations. If any such compromise of the
Company's security or misappropriation of proprietary information were to occur,
it could have a material adverse effect on the Company's business, prospects,
financial condition, and results of operations. The Company may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by security breaches. Concerns over the
security of the Internet and other online transactions and the privacy of users
may also inhibit the growth of the Internet and other online services generally,
and the website in particular, especially as a means of conducting commercial
transactions. To the extent that activities of the Company or third-party
contractors involve the storage and transmission of proprietary information,
such as diagnostic and treatment data, security breaches could damage the
Company's reputation and expose the Company to a risk of loss or litigation and
possible liability. There can be no assurance that the Company's security
measures will prevent security breaches or that failure to prevent such security
breaches will not have a material adverse effect on the Company's business,
prospects, financial condition, and results of operations. See
"Business--Healthcare Transaction Processing Software and Security."
RISK OF CAPACITY CONSTRAINTS
A key element of the Company's strategy is to generate a high volume of
traffic on, and use of, its website. The Company's revenues depend on the number
of clients who submit claims on its website and
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the volume of claims it processes. Accordingly, the satisfactory performance,
reliability, and availability of the Company's website, claims processing
systems, and network infrastructure are critical to the Company's reputation and
its ability to attract and retain customers and maintain adequate customer
service levels. Any system interruptions that result in the unavailability of
the Company's website or reduced claims processing performance would reduce the
volume of claims processed and the attractiveness of the Company's products and
services. While the Company has not experienced any system interruptions, it
believes that such interruptions may occur from time to time. Any substantial
increase in the volume of traffic on the Company's website or the number of
claims submitted by customers will require the Company to expand and upgrade
further its technology, claims processing systems, and network infrastructure.
There can be no assurance that the Company will be able to accurately project
the rate or timing of increases, if any, in the use of its website or timely
expand and upgrade its systems and infrastructure to accommodate such increases.
The Company's inability to add additional software and hardware or to develop
and upgrade its existing technology, claims processing systems, or network
infrastructure to accommodate increased traffic on its website or increased
claims submission volume through its claims processing systems may cause
unanticipated system disruptions, slower response times, degradation in levels
of customer service, impaired quality and speed of claims processing, and delays
in reporting accurate financial information. In addition, although the Company
takes safeguards, including data encryption and firewalls, to prevent
unauthorized access to Company data, it is impossible to completely eliminate
this risk. There can be no assurance that the Company will be able in a timely
manner to effectively upgrade and expand its claims processing system or to
integrate smoothly any newly developed or purchased modules with its existing
systems. Any inability to do so could have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
See "Business-- Business Strategy."
RELIANCE ON INTERNALLY DEVELOPED SYSTEMS
The Company uses an internally developed system for its website and for a
portion of its claims processing software. The website was developed using
industry standard tools and stores information in databases that will be
integrated with the remainder of the Company's accounting and financial systems.
To date, development efforts for the Company's claims processing system have
focused primarily on support for rapid growth of claim submission volume and
customer service, and less on traditional accounting, control, and reporting
aspects of system development. As a result, the Company's current management
information system, which produces frequent operational reports, is inefficient
with respect to traditional accounting-oriented reporting and requires a
significant amount of manual effort to prepare information for financial and
accounting reporting. The Company intends to upgrade and expand its claims
processing systems and to integrate newly developed and/or purchased modules
with its existing systems in order to improve the efficiency of its reporting
methods and support increased transaction volume.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates.
As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with such "Year 2000" requirements. The Company's
business depends on the operation of numerous systems that could potentially be
impacted by Year 2000 related problems. Those systems include, among others:
hardware and software systems used by the Company to deliver services to its
customers (including the Company's proprietary software systems as well as
hardware and software supplied by third parties); communications networks, such
as the Internet and private intranets, which the Company depends on to provide
electronic transactions from its customers; the internal systems of the
Company's customers and suppliers; the hardware and software systems used
internally by the Company in the management of its business; and non-information
technology systems and devices used by the Company in its business, such as
telephone systems and building systems.
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The Company has internally reviewed the proprietary software systems it uses
to deliver services to its customers. Although the Company believes that its
internally developed applications and systems are designed to be Year 2000
compliant, the Company utilizes third-party equipment and software that may not
be Year 2000 compliant. Failure of such third-party equipment or software to
operate properly with regard to the Year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could have
a material adverse effect on the Company's business, prospects, financial
condition, and results of operations. In certain of its agreements, the Company
warrants that its applications and services are Year 2000 compliant. Failure of
the Company's applications and services to be Year 2000 compliant could result
in the termination of these agreements or in liability for damages, the
occurrence of either of which could have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
Furthermore, the success of the Company's efforts may depend on the success
of other healthcare participants in dealing with their Year 2000 issues. Many of
these organizations are not Year 2000 compliant, and the impact of widespread
customer failure on the Company's systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose the Company to significant
potential liability. If client failures result in the failure of the Company's
systems, the Company's business, prospects, financial condition, and results of
operations would be materially adversely affected. Furthermore, the purchasing
patterns of these customers or potential customers may be affected by Year 2000
issues as companies expend significant resources to become Year 2000 compliant.
The costs of becoming Year 2000 compliant for current or potential customers may
result in reduced funds being available to purchase and implement the Company's
applications and services.
The Company is conducting a formal assessment of its Year 2000 exposure in
order to determine what steps, if any, beyond those identified by the Company's
internal review may be advisable. The Company expects to complete such
assessment in the fourth quarter of 1998. The Company does not presently have a
contingency plan for handling Year 2000 problems that are not detected and
corrected prior to their occurrence. Any failure of the Company to address
unforeseen Year 2000 issues could adversely affect the Company's business,
financial condition, and results of operations.
RISK OF SYSTEM FAILURE; DEPENDENCE UPON SINGLE SITE
The Company's ability to successfully receive and process claims and provide
high-quality customer service largely depends on the efficient and uninterrupted
operation of its computer and communications hardware systems. The Company's
proprietary software resides solely on its servers, all of which, as well as all
of its communications hardware, are located in a monitored co-location server
facility in Washington, DC. The Company's systems and operations are in a
secured facility utilizing hospital-grade electrical power, redundant
telecommunications connections to the Internet backbone, uninterruptible power
supplies, and generator back-up power facilities. Further, the Company maintains
redundant systems at a separate facility for backup and disaster recovery.
Notwithstanding the foregoing, the Company remains vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake, and similar events. In addition, the Company does not,
and may not in the future, carry sufficient business interruption insurance to
compensate it for losses that may occur. Despite the implementation of network
security measures by the Company, its servers are vulnerable to computer
viruses, physical or electronic break-ins, and similar disruptions, which could
lead to interruptions, delays, loss of data, or the inability to accept and
process customer claims. The occurrence of any of the foregoing risks could have
a material adverse effect on the Company's business, prospects, financial
condition, and results of operations. See "Business--Healthcare Transaction
Processing Software and Security," and "Business--Facilities."
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DEPENDENCE ON CONTINUED GROWTH OF ELECTRONIC COMMERCE
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of commerce by submitters of medical
claims. Rapid growth in the use of, and interest in, the Internet, the Web, and
online services is a recent phenomenon, and there can be no assurance that
acceptance will be achieved on a lasting basis and use will continue to develop
or that a sufficiently broad base of customers will adopt, and continue to use,
the Internet and other online services as a medium of commerce. Demand and
market acceptance for recently introduced services and products over the
Internet are subject to a high level of uncertainty, and there exist few
services and products which have generated profits. For the Company to be
successful, the healthcare community must accept and utilize novel and cost
efficient ways of conducting business and exchanging information.
In addition, the Internet and other online services may not be accepted as a
viable commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. To the extent
that the Internet and other online "business to business" services continue to
experience significant growth in the number of users, their frequency of use, or
in their bandwidth requirements, there can be no assurance that the
infrastructure for the Internet and online services will be able to support the
demands placed upon them. In addition, the Internet or other online services
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in, or
insufficient availability of, telecommunications services to support the
Internet or other online services also could result in slower response times and
adversely affect usage of the Internet and other online services generally and
the Company in particular. If use of the Internet and other online services does
not continue to grow or grows more slowly than expected, if the infrastructure
for the Internet and other online services does not effectively support growth
that may occur, or if the Internet and other online services do not become a
viable commercial marketplace, the Company's business, prospects, financial
condition, and results of operations would be materially adversely affected.
PROPRIETARY RIGHTS; ABSENCE OF PATENT PROTECTION; UNAVAILABILITY OF TRADEMARK
AND SERVICE MARK PROTECTION
The Company's ability to compete effectively will depend on its ability to
maintain the proprietary nature of its services and technologies, including its
proprietary software and the proprietary software of third parties with which
the Company has entered into software licensing agreements. A portion of the
proprietary software that the Company received in the Medica Acquisition, was
the subject of litigation between Vision Software, Inc. and Medica. The
litigation was settled and withdrawn with prejudice. The Company holds no
patents and relies on a combination of trade secrets and copyright laws,
nondisclosure, and other contractual agreements and technical measures to
protect its rights in its technological know-how and proprietary services. In
addition, the Company has been advised that trademark and service mark
protection of its corporate name is not available. The Company depends upon
confidentiality agreements executed by officers, directors, employees,
consultants, and subcontractors of the Company to maintain the proprietary
nature of the Company's technology. These measures may not afford the Company
sufficient or complete protection, and there can be no assurance that others
will not independently develop know-how and services similar to those of the
Company, otherwise avoid the confidentiality agreements of the Company, or
produce patents and copyrights that would materially and adversely affect the
Company's business, prospects, financial condition, and results of operations.
The Company believes that its services are not subject to any infringement
actions based upon the patents or copyrights of any third parties; however,
there can be no assurance that the Company's know-how and technology will not be
found to infringe upon the rights of third parties. Others may assert
infringement claims against the Company, and if the Company should be found to
infringe upon the patents or copyrights, or otherwise impermissibly utilize the
intellectual property, of others, the Company's ability to utilize the
technology referred to herein
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could be materially restricted or prohibited. If such an event occurs, the
Company may be required to obtain licenses from such third parties, enter into
royalty agreements, or redesign its products so as not to utilize such
intellectual property, each of which may prove to be uneconomical or otherwise
impossible. There can be no assurance that any licenses or royalty agreements
required under any such proprietary rights could be obtained on terms acceptable
to the Company or the third party, or at all. Such claims could result in
litigation, which could materially adversely affect the Company's business,
prospects, financial condition, and results of operations. See
"Business--Intellectual Property."
RAPID TECHNOLOGICAL CHANGE
The Internet and the electronic commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies, and
the emergence of new industry standards and practices that could render the
Company's existing website and proprietary technology and systems obsolete. The
Company's success will depend, in part, on its ability to enhance and improve
the responsiveness and functionality of its online claims processing services,
to license leading technologies useful in its business, enhance its existing
services, develop new services and technology that address the increasingly
sophisticated and varied needs of its prospective or current customers, and to
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of website and other
proprietary technology entails significant technical and business risks. There
can be no assurance that the Company will successfully adapt to such demands.
The failure of the Company to respond in a timely manner in response to changing
market conditions or customer requirements would have a material adverse effect
on the Company's business, prospects, financial condition, and results of
operations. See "Business--Business Strategy."
BROAD DISCRETION OF MANAGEMENT IN APPLICATION OF PROCEEDS
Approximately $5,369,000, or 57.5%, of the estimated net proceeds of this
offering has been allocated for marketing, research and development, and general
corporate and working capital purposes. Accordingly, the Company's management
will have broad discretion as to the application thereof, and investors will not
know in advance how such net proceeds will be utilized by the Company. See "Use
of Proceeds."
AFFILIATED TRANSACTIONS; BENEFITS TO AFFILIATES
The Company's core technologies were initially developed by AMF. Since
inception, the Company has engaged in transactions with AMF, an affiliate of the
Company, including the acquisition of all of the Internet software, licenses,
intellectual property rights, and technology developed by AMF and an agreement
(the "Service Agreement") in which AMF provided staff and office support
services to the Company and for which the Company was billed monthly. The
Services Agreement was terminated by the Company, effective April 1, 1997. While
the Company believes that such transactions were on terms no less favorable to
the Company than could be obtained from unaffiliated third parties, there can be
no assurance thereof. See "Certain Transactions."
COMPETITION
The medical claims processing industry is highly competitive. The Company
competes with, and expects to continue to compete with, numerous national,
regional, and local companies, many of which have significantly larger
operations, greater financial, marketing, human, and other resources than the
Company. Major companies in the healthcare claims processing industry include:
Envoy/NEIC, Inc., HBO & Company; National Data Corporation; QuadraMed
Corporation; Proxymed Corporation; and Healtheon. The Company estimates, based
on information from various trade journals, that there are approximately 300 or
more small independent electronic claims processing companies and clearinghouses
in addition to the aforementioned large competitors, which operate as local
sub-clearinghouses for the processing of medical and dental claims. While the
Company competes with all other providers of
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electronic claims processing services, it is not aware of any other companies
that provide healthcare electronic claims processing services in the same manner
as those provided by the Company and thus represent a direct competitor.
Notwithstanding the foregoing, Company anticipates that competition will arise
in the processing of claims on the Internet. There can be no assurance that the
Company will successfully compete in any market in which it conducts or may
conduct operations. Certain segments of the medical and dental claims processing
industry are not currently suited to the use of inpatient electronic claims
processing. Among such segments are psychiatry and surgery, each of which
requires substantial documentation in addition to the claim to be submitted. In
these market segments, the Company believes that it is not currently able to
compete with existing potential competitors and, accordingly, the Company has
designed its business plan to address other market segments. See
"Business--Electronic Claims Processing Market" and "Business--Competition."
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any government
agency other than laws or regulations applicable to electronic commerce, but the
Company processes information which, by law, must remain confidential. Due to
the increasing popularity and use of the Internet and other online services, it
is possible that laws and regulations may be adopted with respect to the
Internet or other online services covering issues such as user privacy, pricing,
content, copyrights, distribution, and characteristics and quality of products
and services. Furthermore, the growth and development of the market for
electronic commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in turn, decrease
the demand for the Company's services and increase the Company's cost of doing
business, or otherwise have material adverse effect on the Company's business,
prospects, financial condition, and results of operations. Moreover, the
applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership and personal
privacy is uncertain and may take time to resolve. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business, or the application of
existing laws and regulations to the Internet and other online services could
have a material adverse effect on the Company's business, prospects, financial
condition, and results of operations.
ABSENCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; VOLATILITY; NASDAQ
MAINTENANCE REQUIREMENTS
Prior to this offering, there has been no public market for the Shares, and
there can be no assurance that any active trading market therefor will develop
or, if any such market develops, that it will be sustained. Accordingly, unless
and until a public market develops, purchasers of the Shares may experience
difficulty selling or otherwise disposing of such securities.
The initial public offering price of the Shares was arbitrarily determined
by negotiations between the Company and the Representative, and does not
necessarily bear any relationship to the Company's assets, book value, results
of operations, or any other generally accepted indicia of value. See
"Underwriting." From time to time after this offering, there may be significant
volatility in the market price of the Common Stock. Quarterly operating results
of the Company or other developments affecting the Company, such as
announcements by the Company or its competitors regarding acquisitions or
dispositions, new procedures or technology, changes in general conditions in the
economy, and general market conditions could cause the market price of the
Common Stock to fluctuate substantially. The equity markets have, on occasion,
experienced significant price and volume fluctuations that have affected the
market prices for many companies' securities and have often been unrelated to
the operating performance of these companies.
Under the currently effective criteria for listing of securities on the
Nasdaq SmallCap-Registered Trademark- Market, for initial listing, a company
must have at least $4,000,000 in net tangible assets, a minimum bid price of
$4.00
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per share, and a public float of at least $5,000,000. For continued listing, a
company must maintain $2,000,000 in net tangible assets, a minimum bid price of
$1.00, and a public float of at least $1,000,000.
In the event that the Company should be unable to maintain the standards for
continued listing, the Common Stock could be subject to delisting from the
Nasdaq SmallCap-Registered Trademark- Market. Trading, if any, in the Common
Stock would thereafter be conducted in the over-the-counter market on the OTC
Bulletin Board established for securities that do not meet the Nasdaq
SmallCap-Registered Trademark- Market listing requirements or in what are
commonly referred to as the "pink sheets." As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Shares.
RISK OF LOW-PRICED STOCKS
If the Common Stock were delisted from the Nasdaq SmallCap-Registered
Trademark- Market, and no other exclusion from the definition of a "penny stock"
under the Exchange Act were available, such securities would be subject to the
penny stock rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally defined as investors with net
worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
together with a spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase,
and must have received the purchaser's written consent to the transaction prior
to sale. Consequently, such delisting, if it were to occur, could materially
adversely affect the ability of broker-dealers to sell the Common Stock and the
ability of purchasers in this offering to sell their Shares in the secondary
market.
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET
A significant number of the Shares offered hereby may be sold to customers
of the Representative. Such customers may engage in transactions for the sale or
purchase of the Shares through or with the Representative. Although it has no
obligation to do so, the Representative intends to make a market in the Shares
and may otherwise effect transactions therein. If it participates in such
market, the Representative may influence the market, if one develops, for the
Shares. Such market-making activity may be discontinued by the Representative at
any time. Moreover, if the Representative sells the shares of Common Stock
issuable upon exercise of the Representative's Warrants, the Representative may
be required under the Exchange Act to temporarily suspend its market-making
activities. The price and liquidity of the Shares may be significantly affected
by the degree, if any, of the Representative's participation in such market. See
"Underwriting."
NO DIVIDENDS
The Company has not paid any cash dividends on the Common Stock and does not
intend to do so in the foreseeable future, but rather intends to retain future
earnings, if any, for reinvestment in the development and expansion of its
business. In addition, any credit agreements which the Company may enter into
with institutional lenders may contain restrictions on the payment of dividends
by the Company. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deems relevant. See "Dividend Policy" and
"Description of Securities--Common Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of $5.73 per share, assuming an initial public offering
price of $7.00 per Share, or approximately 81.9%, in the net tangible book value
of the shares of Common Stock purchased thereby. Additional dilution to future
net tangible book value per share may occur upon exercise of outstanding stock
options and warrants (including the Representative's Warrants) and may occur, in
addition, if the Company issues additional
17
<PAGE>
equity securities in the future. The current stockholders of the Company paid an
average of $2.16 per share for the 3,250,000 shares of Common Stock held
thereby. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The sale, or availability for sale, of a substantial number of shares of
Common Stock in the public market subsequent to this offering, pursuant to Rule
144 under the Securities Act ("Rule 144") or otherwise, could materially
adversely affect the market price of the Common Stock and could impair the
Company's ability to raise additional capital through the sale of its equity
securities or debt financing. The availability of Rule 144 to the holders of
restricted securities of the Company would be conditioned on, among other
factors, the availability of certain public information concerning the Company.
All of the 3,250,000 shares of Common Stock currently outstanding are
"restricted securities" as that term is defined in Rule 144 and may, under
certain circumstances, be sold without registration under the Securities Act. In
addition, any shares issuable upon exercise of options granted under the 1997
Plan or the Directors' Plan could be sold publicly commencing 90 days after the
Company becomes a reporting company under the Exchange Act, pursuant to Rule 701
under the Securities Act. However, officers and directors of the Company will
execute agreements ("Lock-Up Agreements") pursuant to which they have agreed not
to, directly or indirectly, issue, offer, agree to sell, sell, grant an option
for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute,
or otherwise dispose of, or encumber any shares of Common Stock or options,
rights, warrants, or other securities convertible into, or exercisable or
exchangeable for, or evidencing any right to purchase or subscribe for, shares
of Common Stock, whether or not beneficially owned by such person, or any
beneficial interest therein, for a period of 24 months from the date of this
Prospectus, and existing stockholders and option holders under the 1997 Plan
will execute Lock-Up Agreements with such restrictions for a period of 18 months
from the date of this Prospectus. See "Underwriting."
For a period of 18 months from the date of this Prospectus, the Company has
agreed that it will not sell or otherwise dispose of any securities of the
Company without the prior written consent of the Representative, which consent
shall not be unreasonably withheld. Notwithstanding the foregoing, during such
period, the Company shall be entitled to issue (i) shares of Common Stock in
connection with mergers and acquisitions, (ii) up to 500,000 shares of Common
Stock issuable upon exercise of options which may be granted under the 1997
Plan, (iii) up to 100,000 shares of Common Stock issuable upon exercise of
options which may be granted under the Directors' Plan, (iv) up to 30,000 shares
of Common Stock issuable upon the exercise of warrants outstanding on the date
hereof, and (v) shares of Common Stock issuable upon the exercise of the
Representative's Warrants (the "Warrant Shares"). See "Underwriting."
The Company has agreed to register the 883,681 shares of Common Stock issued
in the Private Placements (as hereinafter defined) for resale commencing 18
months from the date of this Prospectus. In addition, pursuant to the terms of
the Medica Acquisition, the Company granted "piggy-back" registration rights
with respect to the 107,292 shares of Common Stock issued in connection
therewith. See "Shares Eligible for Future Sale."
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK
Certain provisions of the Company's Amended Certificate of Incorporation and
Delaware Law may be deemed to have an anti-takeover effect. The Company's
Certificate of Incorporation and By-laws provide that its Board of Directors is
divided into two classes serving staggered two-year terms, resulting in
approximately one-half of the directors being elected each year and certain
other provisions relating to voting and the removal of the officers and
directors. Further, the By-laws of the Company contain provisions which regulate
the introduction of business at annual meetings of stockholders of the Company
by other than the Board of Directors. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law.
In general, such statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
18
<PAGE>
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Each of the foregoing provisions may have the effect of
rendering more difficult, delaying, discouraging, preventing, or rendering more
costly an acquisition of the Company or a change in control of the Company,
thereby preserving control of the Company by the current stockholders. See
"Description of Securities--Anti-Takeover Provisions" and "Description of
Securities--Regulation of the Introduction of Business at Annual Meetings of
Stockholders."
In addition, the Company's Certificate of Incorporation, as amended,
authorizes the Board of Directors to issue up to 4,000,000 shares of preferred
stock, which may be issued in one or more series, the terms of which may be
determined at the time of issuance by the Board of Directors, without further
action by stockholders, and may include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion and redemption rights, and sinking fund provisions. No
shares of preferred stock are currently outstanding, and the Company has no
present plans for the issuance of any preferred stock. However, the issuance of
any such preferred stock could materially adversely affect the rights of holders
of shares of Common Stock and, therefore, could reduce the value of the Common
Stock. In addition, specific rights granted to future holders of preferred stock
could be used to restrict the Company's ability to merge with, or sell its
assets to, a third party. The ability of the Board of Directors to issue
preferred stock could have the effect of rendering more difficult, delaying,
discouraging, preventing, or rendering more costly an acquisition of the Company
or a change in control of the Company, thereby preserving control of the Company
by the current stockholders. See "Description of Securities--Preferred Stock."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This Prospectus contains certain forward-looking statements regarding the
plans and objectives of management for future operations. The forward-looking
statements included herein are based on current expectations that involve
numerous risks and uncertainties. The Company's plans and objectives are based
on a successful execution of the Company's expansion strategy and are based upon
a number of assumptions, including assumptions relating to the growth in the use
of the Internet and that there will be no unanticipated material adverse change
in the Company's operations or business. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
political, competitive, and market conditions, and future business decisions,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that its
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Shares
offered hereby are estimated to be approximately $9,344,000, assuming an initial
public offering price of $7.00 per Share. The Company presently intends to use
the net proceeds of this offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
APPLICATION OF NET PROCEEDS AMOUNT NET PROCEEDS
- -------------------------------------------------------------------------------------- ------------ ---------------
<S> <C> <C>
Repayment of indebtedness (1)......................................................... $ 3,975,000 42.5%
Marketing (2)......................................................................... 1,750,000 18.7
Research and development (3).......................................................... 950,000 10.2
Acquisition of capital equipment (4).................................................. 450,000 4.8
General corporate and working capital purposes, including possible acquisitions of,
and investments in, competing or complementary businesses and technologies (5)....... 2,219,000 23.8
</TABLE>
- ------------------------------
(1) Represents (i) the repayment of $2,000,000 pursuant to the AMF Note, which
accrues interest at the rate of 9.50% per annum, is collateralized by all of
the Internet software, intellectual property rights, Internet technology,
and technology rights of the Company, (ii) the repayment of approximately
$1,010,000 pursuant to the AMF credit line, (iii) the repayment of
approximately $840,000 of accrued interest pursuant to the AMF Notes and
line of credit, and (iv) approximately $125,000 related to the Medica
Acquisition. The initial payment to the former holders of Medica,
representing $125,000 of principal amount, matures 60 days following the
closing of this offering. In addition, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Management--Directors and Executive Officers,"
"Principal and Management Stockholders," and "Certain Transactions."
(2) Represents estimated expenditures for advertising on the Internet, trade
publications, direct mail programs, vendor exhibits, salaries for personnel,
brochures, and public relations. Includes the offering to new customers of
ongoing grants of American Airlines-Registered Trademark-
AAdvantage-Registered Trademark- Miles relative to the commercial claims
submitted.
(3) Represents estimated expenditures in connection with the continued
enhancement of the Company's Internet-based healthcare transaction
processing system.
(4) Represents estimated costs in connection with the acquisition of computers,
servers, communication hardware and software, and networking equipment.
(5) Such proceeds are anticipated to be utilized, in part, by the Company to
fund the capital requirements associated with the growth of the Company,
including, without limitation, the retention and training of additional
personnel. In the ordinary course of its business, the Company from time to
time evaluates technologies for acquisition or license that, if acquired,
could be used in the development of product or software candidates. The
Company currently has no agreements, plans, or arrangements with respect to
any such acquisition or investment. Management of the Company, and in
particular the Board of Directors of the Company and the officers of the
Company authorized thereby, will have broad discretion as to the application
of such proceeds.
The net proceeds, if any, from the exercise of the Underwriters'
over-allotment option will be utilized for general corporate and working capital
purposes.
Pursuant to the Securities Act, the rules and regulations thereunder, and
the interpretations of the Commission, the Company may be required to offer
rescission to investors in the 1998 Private Placements. If the Company is so
required and all of such investors determine to exercise such rescission rights,
the Company would be required to refund the entirety of the gross proceeds of
such private offerings to such investors. Such proceeds would be paid in part
with the net proceeds of this offering. See "Risk Factors-- Possible Recission
of 1998 Private Placements."
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the sale of the Shares based upon the Company's contemplated
operations, the Company's business plan, and current economic and industry
conditions and is subject to reapportionment of proceeds among the categories
listed above or to new categories in response to, among other things, changes in
the Company's plans, regulations, industry conditions, and future revenues and
expenditures. The amount and timing of expenditures will vary depending on a
number of factors, including changes in the Company's contemplated operations or
business plan and changes in economic and industry conditions.
20
<PAGE>
Based on its operating plan, the Company believes that the net proceeds of
this offering, together with anticipated revenues from continuing operations,
will be sufficient to satisfy its capital requirements and finance its plans for
expansion for at least the next 18 months. Such belief is based upon certain
assumptions, which may prove to be incorrect. Accordingly, there can be no
assurance that such resources will satisfy the Company's capital requirements
for said period. The Company may require additional financing in order to expand
its operations. Such financing may take the form of the issuance of common or
preferred stock or debt securities, and/or may involve bank or other lender
financing. There can be no assurance that the Company will be able to obtain
needed additional capital on a timely basis, on favorable terms, or at all.
Pending their use, the net proceeds of this offering will be invested in
short-term, interest bearing, investment grade securities.
21
<PAGE>
DILUTION
As of September 30, 1998, the net tangible book value of the Company, was
$(4,831,927), or approximately $(1.61) per share of Common Stock based on
3,004,167 shares of Common Stock outstanding. The net tangible book value per
share represents the amount of the Company's total assets less the amount of its
intangible assets and its liabilities, divided by the number of shares of Common
Stock outstanding at such date. After giving effect to the net proceeds of
approximately $1,475,000 from the sale of shares of Common Stock from July to
October 1998 and to the estimated net proceeds from the sale by the Company of
1,600,000 shares of Common Stock offered hereby at the assumed initial public
offering price per share of $7.00 and the initial application thereof as set
forth under the heading "Use of Proceeds," the as adjusted net tangible book
value of the Company at September 30, 1998 would have been $6,178,366, or
approximately $1.27 per share of Common Stock. This would result in dilution to
the public investors (i.e., the difference between the assumed public offering
price per share of Common Stock and the as adjusted net tangible book value
thereof after giving effect to this offering) of approximately $5.73 (81.9%) per
share. The following table illustrates the per share dilution:
<TABLE>
<CAPTION>
PER SHARE OF
COMMON
STOCK
-------------
<S> <C> <C>
Assumed public offering price......................................................... $ 7.00
Net tangible book value at September 30, 1998....................................... $ (1.61)
Increase in net tangible book value................................................. 2.88
------------
As adjusted net tangible book value after this offering (1)........................... 1.27
-----
Dilution of net tangible book value to new investors (1).............................. $ 5.73
-----
-----
</TABLE>
- ------------------------
(1) If the Underwriters' over-allotment option is exercised in full, the as
adjusted net tangible book value per share after this offering would be
$1.50 and dilution per share to new investors in this offering would be
$5.50.
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased, the percentage of total shares of
Common Stock purchased, the total consideration paid, the percentage of total
consideration paid, and the average price per share of Common Stock paid by the
investors in this offering and the current stockholders of the Company.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Stockholders as of December 31, 1997.............. 2,789,583 57.5% $ 4,535,500 24.9% $ 1.63
1998 Private Placements Stockholders.............. 460,417 9.5% 2,475,000 13.6% $ 5.38
New Investors(1).................................. 1,600,000 33.0% 11,200,000 61.5% $ 7.00
---------- ----- ------------- -----
Total............................................. 4,850,000 100.0% $ 18,210,500 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Assuming an initial public offering price of $7.00 per Share.
22
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1998, (i) the actual
capitalization of the Company, (ii) the as adjusted capitalization of the
Company, adjusted to give effect to the receipt by the Company of net proceeds
of approximately $1,475,000 from the sale of shares of Common Stock from July
through October 1998 and (iii) the as adjusted capitalization of the Company,
adjusted to give effect to the sale of the Shares in this offering at the
assumed initial public offering price per Share of $7.00 and the initial
application of the net proceeds therefrom as set forth under the heading "Use of
Proceeds." The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and Notes
thereto and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------------------
<S> <C> <C> <C>
AS ADJUSTED
AS ADJUSTED AFTER INITIAL
AFTER 1998 PRIVATE PUBLIC
ACTUAL PLACEMENTS OFFERING
------------- ---------------------- --------------
Short-term debt:...................... $ 125,000 $ 125,000 $ --
------------- ----------- --------------
------------- ----------- --------------
Long-term debt:....................... 4,898,733 3,898,733 225,000
------------- ----------- --------------
Stockholders' equity
Preferred Stock--$0.001 par value,
Authorized--4,000,000 shares;
issued and outstanding--0
shares............................ -- --
Common Stock--$0.001 par value,
Authorized-- 40,000,000 shares;
issued and outstanding 3,004,167
shares--actual; 4,850,000 shares,
as adjusted....................... 3,004 3,250 4,850
Additional paid-in capital............ 2,407,496 3,882,250 13,224,650
Accumulated deficit................... (6,018,378) (6,018,378) (6,018,378)
------------- ----------- --------------
Total stockholders' equity............ (3,607,878) (2,132,878) 7,211,122
------------- ----------- --------------
Total capitalization.................. $ 1,290,855 $ 1,765,855 $ 7,436,122
------------- ----------- --------------
------------- ----------- --------------
</TABLE>
23
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock and does not
intend to do so in the foreseeable future, but intends to retain future
earnings, if any, for reinvestment in the development and expansion of its
business. The payment of future cash dividends, if any, by the Company will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements and
surplus, the general financial condition of the Company, restrictive covenants
in loan or other agreements to which the Company may become subject, and such
other factors as the Board of Directors of the Company may deem relevant. See
"Description of Securities."
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data for the period from
April 8, 1996 (inception) through December 31, 1996 and the year ended December
31, 1997 and the selected balance sheet data as of December 31, 1996 and 1997
are derived from the Consolidated Financial Statements of the Company and Notes
thereto included elsewhere herein audited by King Griffin & Adamson P.C.,
independent certified public accountants for the Company. The unaudited
statement of operations data presented for the nine month periods ended
September 30, 1997 and 1998, and the unaudited balance sheet data at September
30, 1998, are derived from the unaudited Consolidated Financial Statements of
the Company, which have been prepared on a basis consistent with the audited
Consolidated Financial Statements of the Company, and in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial condition and
results of operations of the Company as of the dates and for the periods
presented. The results of operations of any interim period are not necessarily
indicative of results expected for the entire year. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and Notes thereto included elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
APRIL 8, 1996 ENDED SEPTEMBER 30,
(INCEPTION) ----------------------------
THROUGH YEAR ENDED 1997 1998
DECEMBER 31, 1996 DECEMBER 31, 1997(1) ------------- -------------
----------------- -------------------- (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................................. $ -- $ 81,712 $ 66,879 $ 103,165
----------------- ----------- ------------- -------------
Total operating expense................... 147,918 2,514,290 1,403,624 2,814,712
----------------- ----------- ------------- -------------
Interest expense--affiliate............... 158,123 389,548 316,312 223,269
Interest income........................... -- (40,817) (34,610) (3,788)
----------------- ----------- ------------- -------------
Net loss.................................. $ (306,041) $ (2,781,309) $ (1,618,447) $ (2,931,028)
----------------- ----------- ------------- -------------
----------------- ----------- ------------- -------------
Basic and diluted loss per weighted
average common share outstanding........ $ (0.15) $ (1.09) $ (0.65) $ (1.01)
----------------- ----------- ------------- -------------
----------------- ----------- ------------- -------------
Weighted average common shares outstanding
(basic and diluted)..................... 2,108,651 2,555,886 2,477,130 2,898,565
----------------- ----------- ------------- -------------
----------------- ----------- ------------- -------------
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Current assets....................................................... $ 15,659 $ 419,329 $ 219,351
Total assets......................................................... 978,332 2,174,597 1,685,190
Working capital...................................................... 15,659 36,202 (174,984)
Long-term debt....................................................... 4,408,373 3,468,320 4,898,733
Stockholders' equity (deficit)....................................... (3,430,041) (1,676,850) (3,607,878)
</TABLE>
- ------------------------
(1) Includes the results of operations of Medica from the date of acquisition,
June 2, 1997.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING
INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE
IN THIS PROSPECTUS.
GENERAL
The Company is an electronic commerce company engaged in healthcare
transaction processing for the medical and dental industries by means of the
Internet. The Company's proprietary software, which was developed over the last
six years and resides entirely on the Company's servers, allows healthcare
providers to prepare and enter healthcare claims interactively on the Internet
and electronically transmits the claims to the Company for processing. It also
allows the Company to download claims from the healthcare providers' computers
directly to the Company's servers. The software provides real-time editing of
the claims data for compliance with payor format and converts the claims to
satisfy specific payor processing requirements. The Company then electronically
transmits processed claims on behalf of healthcare providers, directly or
indirectly, to medical and dental payors that accept claims processing
transmissions electronically. In addition, the Company's software provides for
secure encryption of all claims data transmitted. The payors to which claims
processed by the Company have been submitted, primarily through clearinghouses
such as HBO & Company and Envoy Corporation with which the Company has
agreements, include plans and affiliates of Aetna Life & Casualty Company, Inc.,
MetLife Healthcare/Metropolitan Healthcare Corporation, Cigna Healthcare, Inc.,
The Prudential Insurance Company of America, BCLA and United Healthcare
Corporation.
As of December 31, 1996 and December 31, 1997 and September 30, 1998, the
Company had working capital of $15,659, $36,202, and $(174,984), respectively,
and stockholders' equity (deficit) of $(3,430,041), $(1,676,850), and
$(3,607,878), respectively. The Company generated revenues of $81,712 through
December 31, 1997, and $103,165 for the nine month period ended September 30,
1998, and has incurred net losses since inception and expects to continue to
operate at a loss for the foreseeable future. For the period from April 8, 1996
(inception) through December 31, 1996, the year ended December 31, 1997, and the
nine month period ended September 30, 1998, the Company incurred net losses of
$(306,041), $(2,781,309), and $(2,931,028), respectively. There can be no
assurance that the Company will ever achieve profitability. In addition, during
the nine months ended September 30, 1998, the Company recorded negative cash
flow of $224,696.
On July 31, 1996, the Company acquired all of its core technology and
proprietary software, consisting of the Internet software, licenses,
intellectual property rights, and technology developed by an affiliated company,
AMF, in exchange for $3,740,000, payable through the issuance of the AMF Note.
On September 23, 1997, AMF reduced the principal amount of the AMF Note to
$2,000,000 and contributed the remaining $1,740,000 in principal amount of the
AMF Note to the capital of the Company. The AMF Note accrues interest at a rate
of 9.50% per annum and is collateralized by all of the Internet software and
technology of the Company, including software development costs. The Company
intends to utilize a portion of the net proceeds of this offering to satisfy the
AMF Note. AMF was engaged in the financing and processing of medical accounts
receivable and had made preliminary development efforts to expand into the
business of the Company, including the proprietary claims processing software.
AMF is currently in the process of dissolving and liquidating. Mr. Lycke, the
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company, and Messrs. Bensen and Brown, Directors of the Company,
26
<PAGE>
serve as the Chairman of the Board of Directors, a Director and Senior Vice
President, and a Director, respectively, of AMF. See "Certain Transactions."
On June 2, 1997, the Company acquired 100% of the capital stock of Medica, a
software development firm from which the Company had licensed a portion of the
Company's healthcare transaction processing software. In accordance with the
terms of the acquisition agreement, the purchase price for all of the
outstanding capital stock of Medica was (i) 107,292 shares of Common Stock, (ii)
$100,000 in cash upon the consummation of such acquisition, (iii) $125,000 in
cash payable within 60 days following the date of this offering and $225,000 on
the one-year anniversary of such date, and (iv) $57,797 representing 50% of
amounts collected on outstanding accounts receivable of Medica that existed on
the closing date. The software technology of Medica is the primary value to the
Company from the acquisition. The Company intends to utilize a portion of the
net proceeds of this offering to satisfy such $125,000 obligation.
The Company is in the early stage of operation and, as such, the
relationships between revenue, cost of revenue, and operating expenses reflected
in the financial information included herein do not represent future expected
financial relationships. Much of the cost of revenue and operating expenses
reflected herein are relatively fixed costs. The Company expects that such
expenses will increase with the escalation of sales and marketing activities and
transaction volumes, but at a much slower rate of growth than the corresponding
revenue increase. Accordingly, the Company believes that, at such stage of
operations period to period comparisons of results of operations are not
meaningful.
PLAN OF OPERATIONS
The Company's business strategy is: (i) to aggressively market electronic
claims processing services to outpatient healthcare providers, including
clinics, hospitals, physicians, HMOs, third party administrators, dentists, and
other outpatient service providers; (ii) to expand the services offered by the
Company to include additional transaction processing functions, such as
eligibility for benefit coverage, HMO encounter forms, and practice management
functions (e.g., CPT code analysis, fee schedule analysis, etc.) in order to
diversify sources of revenue; (iii) to acquire and integrate electronic claims
processing companies that enable the Company to accelerate its entry into the
inpatient hospital claims market; (iv) to offer new customers initial and
ongoing American Airlines-Registered Trademark- AAdvantage-Registered Trademark-
mileage rewards relative to the commercial insurance claims submitted; and (v)
to license its claims processing technology for stand-alone purposes, Internet
systems, private label use, and OEMs.
Through December 31, 1998, the Company anticipates that its primary source
of revenues will be fees paid by users for insurance claim and patient statement
services. Thereafter, the Company expects to receive fees from commercial
medical and dental payors and other payors for delivering claims electronically.
In addition, after an initial free period of unlimited technical support, the
Company intends to charge users a fee for technical support comparable to those
charged by other healthcare software vendors.
The Company's principal operating costs are anticipated to be marketing,
research and development, acquisition of capital equipment, and general and
administrative expenses. The Company intends to continue to develop and upgrade
its technology and transaction-processing systems and continually update and
improve its website to incorporate new technologies, protocols, and industry
standards. The Company intends to engage in a dedicated marketing and sales
plan, including advertising at relevant sites on the Internet and in trade
publications, conducting direct mail programs targeting healthcare providers and
payors, including commercial medical and dental payors, hiring additional sales
and marketing personnel, preparing brochures and other promotional materials,
and engaging in a public relations campaign designed to expose the Company and
its services to healthcare providers and payors which otherwise would not be
exposed thereto. In connection with the expansion of the Company's business, the
Company intends to acquire additional computers and networking equipment in
order to permit an increased volume of claims to be processed by the Company.
General and administrative expenses include all corporate and
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administrative functions that serve to support the Company's current and future
operations and provide an infrastructure to support future growth; management
and staff salaries and benefits, travel, network administration and data
processing, training, and rent are major items in this category.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include: (i) the Company's ability to retain
existing customers, attract new customers at a steady rate, and maintain
customer satisfaction; (ii) the announcement or introduction of new sites,
services, and products by the Company and its competitors; (iii) price
competition or higher prices in the industry; (iv) the level of use of the
Internet and online services and the rate of market acceptance of the Internet
and other online services for the purchase of "business to business" services,
such as those offered by the Company; (v) the Company's ability to upgrade and
develop its systems and infrastructure in a timely and effective manner; (vi)
the level of traffic on the Company's website; (vii) technical difficulties,
system downtime, or Internet brownouts; (viii) the amount and timing of
operating costs and capital expenditures relating to expansion of the Company's
business, operations, and infrastructure; (ix) government regulation; and (x)
general economic conditions and economic conditions specific to the Internet,
electronic commerce, and the medical claims processing industry.
Due to the foregoing factors, in one or more future quarters, the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Common Stock would likely be
materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
On July 31, 1996, the Company acquired all of the Internet software,
licenses, intellectual property rights, and technology developed by an
affiliated company, AMF, in exchange for $3,740,000 in the form of the AMF Note.
As discussed below, the principal amount of the AMF Note represents a portion of
the indebtedness incurred by AMF in connection with the financing of the
development of the Company's proprietary software. On September 23, 1997, AMF
reduced the principal amount of the AMF Note to $2,000,000 and contributed the
remaining $1,740,000 in principal amount of the AMF Note to the capital of the
Company. AMF is affiliated to the Company through common stockholders, including
Mr. Lycke, the Chairman of the Board of Directors, President, and Chief
Executive Officer of the Company, and Messrs. Bensen and Brown, Directors of the
Company, and as a stockholder of the Company. The AMF Note accrues interest at
the rate of 9.50% per annum and is collateralized by all of the Internet
software, intellectual property rights, internet technology and technology
rights of the Company, including software development costs. The Company intends
to utilize a portion of the net proceeds of this offering to satisfy such
obligation. The acquisition of the Internet software, licenses, intellectual
property rights, and technology was recorded at the book value of the assets
purchased.
Upon the consummation of the acquisition of the Internet software, licenses,
intellectual property rights, and technology developed by AMF, AMF agreed to
provide the Company with a credit line of up to $2,000,000 to facilitate
additional development of the Company's services and technology. During June
1998, AMF purchased nine units of the Company's then pending 1998 Private
Placements, each unit consisting of 10,729 shares of Common Stock for an
aggregate of 96,563 shares. As consideration for the purchase, AMF canceled
$450,000 of the principal balance then outstanding under the credit line. At
September 30, 1998, advances under such line of credit were approximately
$1,903,000. The line of credit accrues interest at the rate of 9.50% per annum
and is secured by all of the assets of the Company, other than the collateral
securing the AMF Note. Accrued interest at September 30, 1998, under the note
and
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line of credit with the AMF Note totaled $770,378 and is due on October 31,
1999. The Company intends to utilize a portion of the net proceeds of this
offering to satisfy such obligation.
In connection with the June 2, 1997 acquisition of Medica, the Company
issued (i) notes in the aggregate amount of $125,000 due within 60 days of
completion of an initial public offering and (ii) notes in the aggregate amount
of $225,000 due one year from the closing of an initial public offering. The
notes are unsecured, non-interest bearing prior to completion of an initial
public offering, and bear interest at 8% per annum thereafter.
In May 1997, the Company consummated the private offering of 45 units, each
unit consisting of 11,552 shares of Common Stock, for aggregate gross proceeds
of $2,250,000 (the "1997 Private Placements"). The Company has used, and intends
to use, the net proceeds of the 1997 Private Placements for ongoing working
capital requirements.
On June 2, 1997, the Company acquired 100% of the capital stock of Medica, a
software development firm from which the Company had licensed a portion of the
Company's healthcare transaction processing software. In accordance with the
terms of the acquisition agreement, the purchase price for all of the
outstanding capital stock of Medica was (i) 107,292 shares of Common Stock, (ii)
$100,000 in cash, paid upon the consummation of the acquisition, (iii) $125,000
in cash payable within 60 days following the date of this offering and $225,000
on the one-year anniversary of such date and accruing interest at the rate of 8%
per annum, and (iv) $57,797 representing 50% of amounts collected on outstanding
accounts receivable of Medica that existed on the closing date. The software
technology of Medica constitutes the primary value to the Company from the
acquisition. The Company intends to utilize a portion of the net proceeds of
this offering to satisfy such $125,000 obligation. Mr. Randall S. Lindner, Vice
President of Technology of the Company, served as the President of Medica prior
to the consummation of the Medica Acquisition.
During the second quarter of 1998, the Company consummated a private
placements of 20 units, each unit consisting of 10,729 shares of Common Stock,
for aggregate gross proceeds of $1,000,000 and from July through October 1998
the Company consummated a private placements of 29.5 units, each unit consisting
of 8,333 shares of Common Stock, for aggregate gross proceeds of approximately
$1,475,000 (together, the "1998 Private Placements," and together with the 1997
Private Placements, the "Private Placements"). The Company has used, and intends
to use, the net proceeds of 1998 Private Placements for ongoing working capital
purposes. Pursuant to the Securities Act, the rules and regulations thereunder,
and the interpretations of the Commission, the Company may be required to offer
rescission to investors in the 1998 Private Placements. If the Company is
required to offer rescission of the private placements and all of such investors
determine to exercise such rescission rights, the Company would be required to
refund the entirety of the gross proceeds of such private offerings to such
investors. In such event, the business, prospects, financial condition, and
results of operations of the Company could be materially adversely affected.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates.
As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with such "Year 2000" requirements. The Company's
business is dependent on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others: hardware and software systems used by the Company to deliver
services to its customers (including the Company's proprietary software systems
as well as hardware and software supplied by third parties); communications
networks, such as the Internet and private intranets, which the Company depends
on to provide electronic transactions to its customers; the internal systems of
the Company's customers and suppliers; the hardware and
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software systems used internally by the Company in the management of its
business; and non-information technology systems and services used by the
Company in its business, such as telephone systems and building systems.
The Company has internally reviewed the proprietary software systems it uses
to deliver services to its customers. Although the Company believes that its
internally developed applications and systems are designed to be Year 2000
compliant, the Company utilizes third-party equipment and software that may not
be Year 2000 compliant. Failure of such third-party or Company equipment or
software to operate properly with regard to the Year 2000 and thereafter could
require the Company to incur unanticipated expenses to remedy any problems,
which could have a material adverse effect on the Company's business, prospects,
financial condition, and results of operations. The Company does not believe
that its expenditures to upgrade its internal systems and applications will have
a material adverse effect on its business, prospects, financial condition, and
results of operations.
Futhermore, the success of the Company's efforts may depend on the success
of other healthcare participants in dealing with their Year 2000 issues. Many of
these organizations are not Year 2000 compliant, and the impact of widespread
customer failure on the Company's systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose the Company to significant
potential liability. If client failures result in the failure of the Company's
systems, the Company's business, prospects, financial condition, and results of
operations would be materially adversely affected. Futhermore, the purchasing
patterns of these customers or potential customers may be affected by Year 2000
issues as companies expend significant resources to become Year 2000 compliant.
The costs of becoming Year 2000 compliant for current or potential customers may
result in reduced funds being available to purchase and implement the Company's
applications and services.
The Company is conducting a formal assessment of its Year 2000 exposure in
order to determine what steps beyond those identified by the Company's internal
review may be advisable. The Company does not presently have a contingency plan
for handling Year 2000 problems that are not detected and corrected prior to
their occurrence. Any failure of the Company to address any unforeseen Year 2000
issue could adversely affect the Company's business, prospects, financial
condition, and results of operations.
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BUSINESS
GENERAL
The Company is an electronic commerce company engaged in healthcare
transaction processing for the medical and dental industries by means of the
Internet. The Company's proprietary software, which was developed over the last
six years and resides entirely on the Company's servers, allows healthcare
providers to prepare and enter healthcare claims interactively on the Internet
and electronically transmits the claims to the Company for processing. It also
allows the Company to download claims from the healthcare providers' computers
directly to the Company's servers. The software provides real-time editing of
the claims data for compliance with payor format and converts the claims to
satisfy specific payor processing requirements. The Company then electronically
transmits processed claims on behalf of healthcare providers, directly or
indirectly, to medical and dental payors that accept claims processing
transmissions electronically. In addition, the Company's software provides for
secure encryption of all claims data transmitted. The payors to which claims
processed by the Company have been submitted, primarily through clearinghouses,
include plans and affiliates of Aetna Life & Casualty Company, Inc., MetLife
Healthcare/Metropolitan Healthcare Corporation, Cigna Healthcare, Inc., The
Prudential Insurance Company of America, BCLA, and United Healthcare
Corporation.
The Company believes that (i) the ability of healthcare providers utilizing
the Company's website to interactively prepare claims on the Internet and
receive real time edits prior to claim submission, (ii) the ease and
availability of Company-provided training over the Internet, (iii) the minimal
software and processing power required for providers to utilize the Company's
proprietary software, and (iv) the ability to add incremental services, such as
patient statements, eligibility verification, electronic remittance advices and
data modeling, through the same browser interface and website as the Company's
claims processing services are significant advantages of the Company's
electronic claims transmission services over other currently available services.
The Company believes that the improved claims processing procedure will result
in a sharply reduced average number of outstanding accounts receivable days,
thereby improving the provider's working capital. The Company believes that the
services offered by its competitors are generally based on legacy mainframe
technology, proprietary networks, and proprietary file formats, which limit the
ability of those competitors to offer interactive Internet-based processing
services on an economical basis. In addition, competitors' services generally
require extensive formal training, the installation of substantial software on
each healthcare provider's computer, and significant processing power.
ELECTRONIC CLAIMS PROCESSING MARKET
The healthcare electronic claims processing market, including dental claims,
is estimated by HDM, an industry publication, to include over 4.0 billion
healthcare claim and HMO encounter form (the HMO equivalent of a claim)
submissions in 1997. HDM has forecasted such market to grow at the rate of
approximately 7% per annum through the year 2000 and has determined that, of the
current total claim volume, approximately 1.6 billion claims or more are
submitted on paper forms. Currently, electronic claims processing is used to
process approximately 38% of all medical outpatient claims and 13% of all dental
claims. The Company believes that, as a result of the low penetration of
electronic claims processing among healthcare providers and dentists, such
market presents an attractive opportunity for the Company to offer a low-cost
effective service. The Company intends to focus its marketing efforts on
outpatient claims, including claims of clinics, hospitals, physicians, dentists,
and other outpatient service providers, as the Company believes they are the
underserved segments of the market.
The Company believes that the least developed market segment for electronic
claims processing is the dental community. Due to the lower average number of
claims submitted by dental practitioners compared to medical providers, current
claims processing systems used in the dental market result in a high cost per
claim for dentists. Initially, the Company intends to devote substantial efforts
to enroll dentists and install
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the Company's healthcare transaction processing software. An estimated 30,000
dental practices have computer resources for Internet access.
The number of non-electronic paper claims transactions in the HMO market is
increasing rapidly and the Company believes that another underserved segment of
the outpatient claims processing market is HMO claims. Currently there is no
formal transmission document standard. Therefore, the Company believes that the
opportunity exists for the Company to utilize its claims processing
configuration to make available a document scanning service using hypertext
markup language ("HTML"). This will enable the Company to convert an encounter
form into a document that appears identical to the printed version, yet is
designed to reconfigure the data entered and presents it in a format that
conforms to a payor's specific requirements.
Healthcare claims are generally processed by clearinghouses using a similar
operating structure to that which exists in the credit card industry. A merchant
that accepts a credit card for payment does not send payment requests directly
to the bank that issued the card, but sends the payment request to a
clearinghouse. The payment request is processed and transmitted to the
appropriate bank. Healthcare claim clearinghouses accept, sort, process, edit,
and then forward the claims to the appropriate payors, either electronically or
on paper. The major healthcare clearinghouses operate in a mainframe computer
environment. This operating configuration is both expensive and time consuming
due to the source code changes required to continuously process claims correctly
to meet payor requirements. In contrast, the Company's healthcare transaction
processing software system on the Internet is designed to operate in an open
client-server configuration. This operating alternative can offer the provider a
method of bypassing the clearinghouse and communicating directly with the payor
in a rapid, accurate, and cost-effective manner. The Company believes that if
the industry evolves toward direct payor submission of claims, the Company's
software will be able to offer efficient access to payors to its healthcare
provider customers.
BUSINESS STRATEGY
The Company's business strategy is: (i) to aggressively market electronic
claims processing services to outpatient healthcare providers, including
clinics, hospitals, physicians, HMOs, third party administrators, dentists, and
other outpatient service providers; (ii) to expand the services offered by the
Company to include additional transaction processing functions, such as
eligibility for benefit coverage, HMO encounter forms, and practice management
functions (e.g., CPT code analysis, fee schedule analysis, etc.) in order to
diversify sources of revenue; (iii) to acquire and integrate electronic claims
processing companies that enable the Company to accelerate its entry into the
inpatient hospital claims market; (iv) to offer new customers initial and
ongoing American Airlines-Registered Trademark- AAdvantage-Registered Trademark-
mileage rewards relative to the commercial insurance claims submitted; and (v)
to license its claims processing technology for other applications, including
stand-alone purposes, Internet systems, private label use, and OEMs. There can
be no assurance that any of the Company's business strategies will succeed or
that any of its business objectives will be met with any success. See
"Business--General" and "Business--Healthcare Transaction Processing Software
and Security."
EXPANDED MARKETING EFFORTS
To date, the Company has engaged in limited marketing efforts. Achieving
market penetration will require significant efforts by the Company to create
awareness of, and demand for, the Company's products and services. The Company
intends to utilize a portion of the proceeds from this offering to upgrade its
marketing services to include advertising on the Internet and an expanded sales
staff, targeted e-mail and mail campaigns, and participation in major trade
shows.
The Company is also actively seeking partners for alliances and joint
ventures, including managed care companies, Internet service and information
providers, traditional healthcare information systems providers, and major
payors, seeking solutions to the costly handling of paper claims. In February
1998, the
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Company entered into a development and marketing agreement with Millbrook, a
Microsoft Solution Provider, to be the default claims processing, statement, and
remittance advice vendor for all healthcare provider customers of Millbook. The
processing solution offered by the Company pursuant to such agreement is tightly
integrated through distinctive software controls allowing automatic updates
within each provider's practice management system.
In April 1998, the Company signed an agreement with IAMS to provide services
to 3,000 IAMS customers providing physician billing services. The Company and
IAMS will jointly market the program through training programs, newsletters, and
a fee reduction for new customers utilizing the IAMS standard software.
In September 1998, the Company entered into an agreement with Electronic
Data Interchange Services, a department of BCLA, to provide claim processing
services to BCLA network providers. Under the terms of the agreement, the
Company and BCLA will jointly promote the Company's services to the 9,600
network providers of BCLA through website links, BCLA network communication
resources, educational seminars, telemarketing, and direct mail campaigns.
In September 1998, the Company entered into a group purchasing agreement
with Provider Select, Inc., an affiliate of Premier, the nation's largest
alliance of hospitals and healthcare organizations. Under the terms of the
agreement, the Company will provide claim processing, patient statements,
eligibility verification, and other services to participating members of
Premier.
The Company believes that there are opportunities for joint marketing with
banks, insurance companies, and pharmaceutical companies that desire online
interfacing with healthcare providers. There can be no assurance that the
Company will secure any alliances or joint venture relations, or if it does,
that such alliances or joint ventures relationships will be profitable.
On each of the Company's Internet and Extranet Web pages, there is space
reserved for advertisers. The Company intends to sell the space to quality
advertisers desiring to target healthcare providers.
EXPANSION OF ONLINE SERVICES
Following this offering, the Company intends to develop and offer other
service offerings to increase its revenue per client. The targeted services will
include eligibility for benefit coverage, HMO encounter forms, practice
management functions (e.g., CPT code analysis, fee schedule analysis, etc.),
batched claims delivery, and statistical data processing as it relates to claim
payments from insurance companies.
IDENTIFICATION OF POTENTIAL STRATEGIC ACQUISITIONS
The Company is seeking opportunities to capitalize on the fragmented nature
of the healthcare electronic claims processing market through the acquisition of
regional "wholesale" claims processing companies or software companies
complementing the Company's current services. Acquisitions would be targeted
which allow the Company to enter the hospital inpatient healthcare claims
processing marketplace rapidly and would permit the Company to implement its
Internet based healthcare transaction processing software solution in such
marketplace. There is currently no agreement, plan or arrangement with respect
to any such acquisition, and there can be no assurance that the Company's
management will be able identify suitable acquisition candidates, and if such
candidates are located, that the Company will be able to consummate any such
transaction.
Notwithstanding the foregoing, investors should be aware that the Company's
future plans are subject to a number of variables outside its control, such as
the availability of suitable acquisition candidates, the availability of
sufficient management resources, the continued growth of Internet commerce, and
the continued acceptance of the Internet as a suitable medium of transmission
for healthcare claims, and there can be no assurance that the Company will be
able to implement any or all of such plans, or that such plans, when and if
implemented, will be successful.
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AIRLINE MILEAGE REWARD PROGRAM
The Company has entered into an agreement with AMR Corporation to offer new
healthcare provider customers initial and ongoing American Airline-Registered
Trademark- AAdvantage-Registered Trademark- mileage rewards relative to the
commercial insurance claims submitted for the year ending December 31, 1998.
CONTINUING AND ENTERING LICENSING AGREEMENTS
The Company acquired Medica in June 1997 and expects to continue to realize
licensing revenues from existing license agreements entered into by Medica. The
Company may also seek to offer a complete private label solution on the Internet
to clearinghouses or payors seeking an internet solution to claims processing.
HEALTHCARE TRANSACTION PROCESSING SOFTWARE AND SECURITY
The Company's healthcare transaction processing software is designed for
in-patient, out-patient, and dental claims. The software is modular, providing
valuable flexibility, and generally consists of the following components: (i)
industry standard website management software; (ii) state-of-the-art commercial
security and encryption software licensed by the Company from third parties,
including Citrix; and (iii) core processing software developed by Medica which
provides claims review, claims processing, hard-coding of claims, and a
"table-based" software coding of claims variables. The expensive and time-
consuming hard-coding routines required by traditional systems have been
replaced by a user friendly system that is table-based. This permits
payor-specific edits to meet the requirements of payors and avoids expensive
onsite software changes. New edits can be input by Company personnel. Once
healthcare providers connect to the Company's secure website, claims are edited
on-line automatically, using a database containing more than 22,000 edit
variables. The direct provider-payor connections offered by the Company's system
are designed to allow for immediate billing data and information exchange when
it becomes available from the payors. In the event that a particular payor
cannot accept submission of claims electronically, the Company prints and mails
hard copies of such claims to such payors and charges the provider therefor.
During the initial application process, a new customer interacts with the
Company's proprietary "Print Wizard," that downloads claim files from the
provider's practice management system. When connecting to the Internet, the
provider's browser encryption is automatically enabled at the client extranet
site. The user must "log-in" through a secure firewall to reach the Company's
healthcare transaction processing system. At this point, an additional level of
encryption may be enabled automatically at the option of the healthcare
provider, claims are extracted from the provider's PC, and editing begins. Only
claims containing errors are identified for editing. Once claims are edited,
they are queued with accurate claims for transmission to payors. Should a claim
not be acceptable electronically by a payor, the claim is automatically printed
and mailed by the payor gateways. Such mailing service is optional to the
providers. To assure proper network operation and allow other revenue producing
services, such as custom reports, eligibility inquiries, and decision support
tools, all traffic is monitored through the Company's private application server
and firewall.
The Company's healthcare transaction processing software system is based
upon a client-server computing model and includes a variety of different
software applications. Individual applications work together to provide the
extraction and encryption of claims from a provider's practice management system
to the Company's Internet claims processing server, where editing and formatting
occurs in a secure environment. The claims are then delivered to the payor
gateway. The different software applications have either been purchased,
licensed, or developed by the Company. In June 1997, the Company consummated the
Medica Acquisition; Medica had licensed the core editing software to the
Company.
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The Company's website, claimsnet.com is structured into three sections:
"PUBLIC INTERNET," "CLIENT EXTRANET," and "PRIVATE INTRANET." The PUBLIC
INTERNET site provides company background, product demonstrations, and customer
enrollment forms. The CLIENT EXTRANET provides a secure individual customer area
for private customer communication and encrypted claims transmission.
Traditional claims clearinghouses that use regular phone and private data
networks cannot provide this level of data security. The PRIVATE INTRANET site
is designed for internal communications, website operating reports, customer
support, and reporting.
With the exception of the commercial software, such as that provided by
Citrix and Microsoft, the Company has either identified back-up sources for all
the software used or, in the event of a business failure by the licensing
vendor, the Company owns the source code.
TRAINING AND HARDWARE REQUIREMENTS
The training for the various products and services offered by the Company is
free and delivered online through the Client Extranet to the provider, seven
days a week, 24 hours a day. The tutorial and other training documents are
always available at the Company's Web home page (http://claimsnet.com). After an
initial free period of unlimited service, the Company will charge users a fee
for technical support comparable to those charged by other healthcare software
vendors.
No significant hardware investment by the customer is required in order to
take advantage of the Company's services. The system requires the provider to
use a 28,800 bps asynchronous modem and a PC with Windows 3.11 or Windows 95 or
98 operating system installed. An Internet Service Provider ("ISP"), such as
AT&T Worldnet, MCI, and Physicians' Online, offers local telecommunication to
the Internet. The Company's customers are responsible for obtaining and
maintaining the ISP connection.
INTERNET/INTRANET
The processing configuration used by the Company requires limited electronic
claims processing software to reside at the level of the healthcare provider.
All editing and formatting takes place at the Company's Internet application
server site. This application was initially developed internally by AMF and
acquired by the Company. From the standpoint of the user, the net effect is to
have "the latest" software version and all format changes available instantly.
The Company's healthcare transaction processing software has the effect of
turning a provider's "old" or "outdated" hardware into a terminal capable of
operating in a 32-bit Windows environment.
The Company's processing does not take place on the Internet, but rather in
an extranet configuration. The main advantage of this approach is to assure that
the communication between the Company and a provider takes place in a
highly-controlled, secure, and (because of the remote LAN software) encrypted
environment. The dual encryption utilized by the Company occurs at the browser
software and application server level. All processing and data storage occurs
behind a firewall, providing secure and controlled access to all data.
CUSTOMERS
The Company views its customers as both the healthcare providers submitting
claims and the payors accepting claims.
At the date hereof, the Company is processing claims for approximately 500
providers. The providers are geographically dispersed and represent a mix of
physician specialties and dentists. Approximately 200 additional providers are
in a "testing mode." This requires verification of each provider's claims format
with proper payors. There are over 700 providers in various stages of submitting
test claims through the Company's electronic claims processing system.
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The Company requires each healthcare provider using the Company's services
to enter into a standard subscription agreement available on the home page of
the Company's website. This system allows the healthcare provider to access,
complete, and return the subscription agreement on the Internet, thereby
enabling the provider to immediately access the Company's services. Each
subscription agreement provides (i) that the healthcare provider shall pay to
the Company monthly a subscription fee (which fee the Company has determined to
waive through at least December 31, 1998 for those which subscribed to the
Company's services prior to January 1, 1998), and (ii) the nature of the
services to be rendered by the Company and the terms and conditions under which
the Company will render such services. Such contracts are terminable by the
healthcare provider upon 30 days prior written notice. There can be no assurance
that the Company will be able to charge and collect subscription fees after
December 31, 1998 from those not currently paying such fees, or if charged, what
the level of fees (individually or in the aggregate) will be.
The Company also enters into agreements with the commercial medical and
dental payors or regional clearinghouses to which the Company submits processed
claims. Generally, such agreements provide for the payment of a fee per claim
averaging approximately $.10 to paid to the Company once certain minimum volume
requirements have been met. As a result of the varying submission requirements
of many insurance and other plans within any payor, the Company treats each plan
as a separate payor with its own particular requirements.
In February 1998, the Company entered into a development and marketing
agreement with Millbrook, a Microsoft solution provider, to be the default
claims processing, statement, and remittance advice vendor for all healthcare
provider customers of Millbrook. The processing solution offered by the Company
pursuant to such agreement is tightly integrated through distinctive software
controls allowing automatic updates within each provider's practice management
system.
In April 1998, the Company signed an agreement with IAMS to provide services
to 3,000 IAMS customers providing physician billing services. The Company and
IAMS will jointly market the program through training programs, newsletters and
fee reduction for new customers utilizing the IAMS standard software.
In September 1998, the Company entered into an agreement with Electronic
Data Interchange Services, a department of BCLA, to provide claim processing
services to BCLA network providers. Under the terms of the agreement, the
Company and BCLA will jointly promote the Company's services to the 9,600
network providers of BCLA through website links, BCLA network communication
resources, educational seminars, telemarketing, and direct mail campaigns.
In September 1998, the Company entered into a group purchasing agreement
with Provider Select, Inc., an affiliate of Premier, the nation's largest
alliance of hospitals and health care organizations. Under the terms of the
agreement, the Company will provde claim processing, patient statements,
eligibility verification, and other services to participating members of
Premier.
INTELLECTUAL PROPERTY
The Company regards its copyrights and similar intellectual property as
critical to its success, and relies on trademark and copyright law, trade secret
protection, and confidentiality and/or license agreements with its employees,
customers, partners and others to protect its proprietary rights. The Company
intends to pursue the registration of its trademarks and service marks in the
U.S., although the Company has been advised that trademark and service mark
protection of its corporate name is not available. A portion of the proprietary
software that the Company received in the Medica Acquisition, was the subject of
litigation between Vision Software, Inc. and Medica. The litigation was settled
and withdrawn with prejudice. See "Risk Factors--Proprietary Rights; Absence of
Patent Protection; Unavailability of Trademark and Service Mark Protection." The
Company has licensed in the past, and expects that it may license in the future,
certain of its proprietary rights, such as trademarks or copyrighted material,
to third parties. While the Company attempts to ensure that the quality of its
brand name is maintained by such licensees,
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there can be no assurance that such licensees will not take actions that might
materially adversely affect the value of the Company's proprietary rights or
reputation, which could have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations. There can
be no assurance that the steps taken by the Company to protect its proprietary
rights will be adequate or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks, trade dress, and similar
proprietary rights. In addition, there can be no assurance that other parties
will not assert infringement claims against the Company. The Company has been
subject to claims and expects to be subject to legal proceedings and claims from
time to time in the ordinary course of its business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties by the Company and its licensees. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources. The Company is not currently aware of any legal proceedings pending
against it.
COMPETITION
The segment of the industry in which the Company operates is dominated by
several large companies such as Envoy/NEIC, Inc., HBO & Company, National Data
Corporation, QuadraMed Corporation, Proxymed Corporation, and Healtheon, each of
which operates a regional or national clearinghouse of medical and dental
claims. In most cases, these companies have large existing capital and software
investments and focus on large healthcare providers, such as hospitals and large
clinics, or act as wholesale clearinghouses for smaller electronic claims
processing companies. The Company estimates, based on information from various
trade journals, that there are approximately 300 or more small independent
electronic claims processing companies and clearing houses in addition to the
aforementioned large competitors, which operate as local sub-clearinghouses for
the processing of medical and dental claims.
While the Company competes with all other providers of electronic claims
processing services, it is not aware of any other companies that provide
healthcare electronic claims processing services in the same manner as those
provided by the Company and thus represent a direct competitor. The Company
believes that its pricing structure and total cost is very competitive with
other providers of electronic claims processing services. The Company further
believes that existing competitors are constrained not only by capital
investments and existing hardware/software configurations, but by existing
customer agreements. Notwithstanding the foregoing, the Company anticipates that
competition will arise in the processing of claims on the Internet. No assurance
can be given that the Company will successfully compete in any market in which
it conducts or may conduct operations.
Certain segments of the medical and dental claims processing industry are
not currently suited to the use of inpatient electronic claims processing. Among
such segments are psychiatry and surgery, each of which requires substantial
documentation in addition to the claim to be submitted. In these market
segments, the Company believes that it is not currently able to compete with
existing potential competitors and, accordingly, the Company has designed its
business plan to address other market segments.
EMPLOYEES
As of September 30, 1998, the total number of full-time employees of the
Company was 33 persons, three of whom were executive officers, 20 of whom were
technical personnel, seven of whom were sales personnel, and three of whom were
administrative personnel. Eleven of such employees were individuals whose
services were theretofore obtained under the service agreement with AMF. Three
of the remaining employees were obtained as a result of the Medica acquisition.
None of the Company's employees are represented by a labor organization. The
Company believes that its relations with its employees are satisfactory.
Mr. Lycke, the Chairman of the Board of Directors, President, and Chief
Executive Officer of the Company, and Messrs. Bensen and Brown, Directors of the
Company, also serve as Chairman of the Board
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of Directors, a Director and Senior Vice President, and a Director,
respectively, of AMF. See "Certain Transactions."
The ability of the Company to attract and retain highly skilled personnel is
critical to the operations and expansion of the Company. To date, the Company
has been able to attract and retain the personnel necessary for its limited
operations. However, there can be no assurance that the Company will be able to
do so in the future, particularly in light of the Company's expansion plans. If
the Company is unable to attract and retain personnel with necessary skills when
needed, its business and expansion plans could be materially adversely affected.
FACILITIES
The Company currently leases 7,397 square feet of office space at the rate
of $13,561 per month. Such offices are located at Suite 1515, 12801 North
Central Expressway, Dallas, Texas 75243. The lease expires September 30, 1999.
The Company believes that, in the event alternative or larger offices are
required, such space is available at competitive rates. See "Certain
Transactions." For the Company's servers, the Company utilizes DIGEX Business
Internet Solutions, including a nationwide DS-3 backbone, a substantial
dedicated Web server management facility, and a 24 hour per day, 7 day per week
Network Operations Center at a cost of $11,400 per month.
LEGAL MATTERS
The Company is not currently party to any litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their ages, and their
positions held with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Bo W. Lycke.......................................... 52 Chairman of the Board of Directors, President, Chief
Executive Officer, and Class I Director
Terry A. Lee......................................... 44 Executive Vice President of Marketing and Technology
and Class II Director
Paul W. Miller....................................... 42 Vice President and Chief Financial Officer
Randall S. Lindner................................... 39 Vice President of Technology
Samuel A. Carrel..................................... 46 Vice President of Sales and Marketing
C. Kelly Campbell.................................... 40 Vice President, Corporate Controller, and Secretary
Abbas R. Kafi........................................ 45 Vice President of Information Systems
Ward L. Bensen....................................... 56 Class I Director
Robert H. Brown, Jr.................................. 45 Class I Director
Sture Hedlund........................................ 60 Class II Director
John C. Willems, III................................. 43 Class II Director
</TABLE>
Set forth below is certain information with respect to the executive
officers and directors of the Company.
BO W. LYCKE has served as the Chairman of the Board of Directors, President,
and Chief Executive Officer of the Company since its inception. In 1990, Mr.
Lycke founded AMF for the purpose of financing and processing medical accounts
receivable and, since such time, has served as the Chairman of the Board of
Directors thereof. During the period from 1983 to 1990, Mr. Lycke was involved
in a variety of entrepreneurial undertakings in the fields of satellite antenna
manufacturing, precious metal scrap recovery, and independent radio programming
production. He also has extensive experience as a director of several private
companies and is currently on the board of Diagnostic Health Services, Inc., a
public corporation. In 1972, Mr. Lycke founded, and from 1973 to 1983, was
president and director, of Scanoil, Inc., a company engaged in domestic and
international oil futures trading, as well as chartering and operating
ocean-going oil tankers. From 1971 to 1983 Mr. Lycke also served as a President
and director of various domestic operating subsidiaries of the Volvo
Automotive/Beijer Group, the indirect owner of Scanoil, Inc.
TERRY A. LEE has served as Executive Vice President of Marketing and
Technology of the Company since September 1996 and has served as director of the
Company since 1998. From October 1995 until September 1996, Mr. Lee served as a
director of North American Sales and Marketing, Internetworking Product Group of
Compaq Computer Corporation ("Compaq"). From January 1995 through December 1995,
Mr. Lee served as Vice President of Sales of Networth, a network hardware
manufacturer acquired by Compaq. From October 1988 to January 1995, Mr. Lee
served as Director of Major Accounts, with Lotus Development Corporation, a
software developer and marketer. From November 1983 to October 1988, Mr. Lee
served as a district manager with CompuServe, Inc., an online service provider.
PAUL W. MILLER is a Certified Public Accountant and served as Chief
Financial Officer of the Company since November 1997. From September 1995 to
October 1997, Mr. Miller served as Chief Financial Officer and Vice President of
Quality Management Services for Sweetwater Health Enterprises, Inc., a NCQA
accredited credentials verification organization and commercial software firm
serving the managed healthcare industry. From April 1991 to May 1995, Mr. Miller
served as Chief Financial Officer and Secretary of Quantra Corporation
(formerly, Melson Technologies), an information systems company serving the
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commercial real estate industry. From January 1984 to February 1991, Mr. Miller
held a variety of financial and operations management positions in the
independent clinical laboratory industry with SmithKline Beecham Clinical
Laboratories, Inc. and Nichols Institute Laboratories North Texas, Ltd. Mr.
Miller began his career in 1978 in the audit division of Arthur Andersen &
Company.
RANDALL S. LINDNER serves as Vice President of Technology of the Company,
coming to the Company as the former President of Medica, in connection with the
Company's acquisition of Medica. Mr. Lindner has over nineteen years of software
development and management experience, eight of which were dedicated to
healthcare and electronic claims processing. Mr. Lindner founded Medica in May
1994, and under Mr. Lindner's presidency, Medica developed a fourth generation
electronic claims processing and editing software, CyberClaim for Windows. From
1990 to April 1994, Mr. Lindner served as Director of Development after
developing a MS-DOS claims processing and tracking system for Vision Software,
Inc. From 1987 to 1990, Mr. Lindner served as Systems Director of Neilson Media
Research, a division of Dun & Bradstreet, and assumed responsibility for
management and development of products for the over 300 clients using over 35
different operating systems. From 1986 to 1987, Mr. Lindner was a member of CIS,
Inc., a company that developed one of the first electronic claims processing
systems for the hospital market and healthcare industry.
SAMUEL A. CARREL has served as Vice President of Sales and Marketing of the
Company since January, 1998. Mr. Carrel has over 15 years of experience in the
healthcare industry. From June 1996 to December 1997, Mr. Carrel served as Vice
President of Corporate Accounts at Henry Schein Inc. From April 1989 to April
1996, he held a variety of corporate and account sales management positions with
McKesson General Medical Corp., formerly General Medical Corporation ("General
Medical"). While at General Medical, Mr. Carrel served as National Sales
Manager/Acute Care Specialty Sales before accepting the position of Director of
Integrated Healthcare Systems. Prior experience includes positions with Boston
Scientific Corporation and McGraw Laboratories.
C. KELLY CAMPBELL has served as Vice President and Corporate Controller, as
well as Secretary, of the Company and in other positions with the Company since
April 1996. Mr. Campbell served as the Chief Financial Officer of AMF from
September 1994 until May 1998. From September 1988 to September 1994, Mr.
Campbell was President of Campbell Rojas & Associates, Inc., which provided
consulting services for the Resolution Trust Corporation, the Federal Deposit
Insurance Corporation, banks, and other companies. From July 1984 to September
1988, he served as Vice President and Controller for Turtle Creek National Bank
in Dallas, Texas. Mr. Campbell began his career in 1980 in the audit division of
KPMG Peat Marwick.
ABBAS R. KAFI has served as the Vice President of Information Systems of the
Company since July 1998. Mr. Kafi has over 17 years of software development and
information systems management experience. From August 1996 to July 1998 Mr.
Kafi served as Senior Director, Business Systems Development and Operations for
Citizens Communications, Inc. in Dallas, Texas, where he was responsible for
supporting 1.2 million customers nationwide. From September 1995 to August 1996,
Mr. Kafi served as Executive Director of Information Technology for PrimeCo
Personal Communications, L.P. ("Primeco"), Dallas, Texas, during its start up
period. At PrimeCo, Mr. Kafi was responsible for designing, developing, and
implementing a state of the art client/server environment capable of supporting
4.0 million subscribers nationwide. Mr. Kafi's prior experience includes
software development and management positions with Value-Added Communication,
USDATA Corporation, Harris Corporation, and American Micro Products.
WARD L. BENSEN has been a director of the Company since April 1996. Since
1990, he has served as a director of AMF. Since June 1994, he served as Senior
Vice President of AMF where he is primarily responsible for its marketing
efforts in the western United States and receivables acquisitions nationwide.
From March 1993 until September 1993, Mr. Bensen was Vice President of
Investment, and marketed investment programs for both Prudential Securities and
Shearson Lehman Brothers, and, from 1991 to 1993, provided specialized
investment banking services as a partner of John Casey and Associates, a
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contract wholesale securities marketing firm. From 1984 to 1991, he served as
Division Vice President for Jones International Securities and prior thereto,
held various positions with Shearson American Express, The Safeco Insurance Co.
and Procter and Gamble.
ROBERT H. BROWN, JR. has served as a director of the Company since April
1996 and had been a director of AMF since 1990. Since July 1998, Mr. Brown has
served as Chairman of RHB Capital, LLC, a Dallas-based private investment firm.
From 1990 to 1998, Mr. Brown was employed by Dain Rauscher, Inc., a full service
regional investment banking and brokerage firm which is a New York Stock
Exchange member, as an Executive Vice President. Mr. Brown was Senior Vice
President of TM Capital Corporation during 1989. From 1985 to 1989, Mr. Brown
was a Vice President of Thompson McKinnon Securities, where he was responsible
for all corporate finance activities in the southwestern United States.
STURE HEDLUND has served as a director of the Company since 1998. Since
January 1987, Mr. Hedlund has also served as Chairman of the Board of Directors
of Scandinavian Merchant Group AB, a Swedish corporation engaged in venture
capital investing. Since 1993, Mr. Hedlund has been a director of Medical Invest
Svenska AB ("Medical Invest"), a public company engaged in the business of
medical technology, and has been a director of Ortivus Medical AB, a company
engaged in the manufacture of heart monitoring devices and a subsidiary of
Medical Invest.
JOHN C. WILLEMS, III has served as a director of the Company since 1998 and
has been legal counsel to the Company since April 1996. Since September 1993,
Mr. Willems has been an attorney with the law firm of McKinley, Ringer & Zeiger,
PC, in Dallas, Texas, practicing in the area of business law. From January 1992
to August 1993, Mr. Willems was an attorney in the law firm of Settle & Pou, PC,
also located in Dallas, Texas.
The Board of Directors is divided into two classes with each class
consisting of, as nearly as possible, one-half of the total number of directors
constituting the entire Board of Directors. The Board of Directors currently
consists of three members in Class I and three members in Class II. Class I
currently consists of Messrs. Lycke, Bensen, and Brown, the terms of which
expire at the 2000 meeting of stockholders. Class II currently consists of
Messrs. Lee, Hedlund, and Willems, the terms of which expire at the 1999 meeting
of stockholders. After the initial term, each class is elected for a term of two
years. At each annual meeting of stockholders, directors are elected to succeed
those in the Class the term of which expires at that annual meeting, such newly
elected directors to hold office until the second succeeding annual meeting and
the election and qualification of their respective successors.
Officers are elected annually by the Board of Directors and hold office at
the discretion of the Board of Directors. There are no family relationships
among the Company's directors and executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
On April 5, 1997, the Board of Directors created a Compensation Committee,
which is comprised of Messrs. Lycke, Bensen, and Brown. The Compensation
Committee has (i) full power and authority to interpret the provisions of, and
supervise the administration of, the 1997 Plan and (ii) the authority to review
all compensation matters relating to the Company.
On April 5, 1997, the Board also created an Audit Committee, which is
comprised of Messrs. Lycke, Bensen, and Brown. The Audit Committee is
responsible for reviewing the plans and results of the audit engagement with the
independent auditors; reviewing the adequacy, scope, and results of the internal
accounting controls and procedures; reviewing the degree of independence of the
auditors; reviewing the auditors' fees; and recommending the engagement of
auditors to the full Board of Directors.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid to, or accrued by the Company for, Bo W. Lycke, the Chairman
of the Board of Directors, President, and Chief Executive Officer of the
Company, for the period from April 8, 1996 (inception) through December 31, 1997
and for Terry A. Lee, the Executive Vice President of Marketing and Technology
of the Company, for the period from October 1, 1996 (date of hire) through
December 31, 1997.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER ANNUAL COMPENSATION
- --------------------------------------------------- ---------- -------------------- -------------------------------
<S> <C> <C> <C>
Bo W. Lycke........................................ $ 67,915 -- --
Chairman of the Board of Directors, President,
and Chief Executive Officer
Terry A. Lee(1).................................... $ 151,171 $ 153,500 --
Executive Vice President of Marketing and
Technology
</TABLE>
- ------------------------
(1) Terry A. Lee's annual compensation bonus consisted, in part, of Common
Stock valued at $78,500. See "Management-- Employment Agreements."
DIRECTOR COMPENSATION
During the year ended December 31, 1997, directors received no compensation
for their services other than reimbursement of expenses relating to attending
meetings of the Board of Directors.
DIRECTORS' STOCK OPTION PLAN
In April 1998, the Company adopted the Directors' Plan to tie the
compensation of outside directors to future potential growth in the Company's
earnings, if any, and to provide such directors and encourage them to remain on
the Board of Directors of the Company, to provide outside directors with an
increased incentive to make significant and extraordinary contributions to the
long-term performance and growth of the Company, and to join the interests of
the outside directors through the opportunity for increased stock ownership,
with the interests of the Company's stockholders. Only "Non-Employee Directors,"
as defined in Rule 16b-3(b)(3) under the Exchange Act (an "outside director"),
shall be eligible to receive options under the Directors' Plan.
Upon the closing of this offering, options exercisable for an aggregate of
50,000 shares of Common Stock shall have been granted under the Director's Plan.
All options that are granted will be non-statutory stock options for purposes of
tax treatment under the Internal Revenue Code 1986, as amended (the "Code").
Stock options granted under the Directors' Plan will give the option holder the
right to purchase Common Stock at a price (the "Option Exercise Price") fixed in
the stock option agreement executed by the option holder and the Company at the
time of grant. The Option Exercise Price will not be less than the fair market
value of a share of the authorized and issued Common Stock on the date the
option is granted.
The period for exercising an option will begin on the first anniversary of
the date of grant and generally will end ten years from the date the option is
granted. Fifty percent of the options granted under the Director's Plan become
"vested" in the option holder on the first anniversary of the date of grant with
the remainder vesting on the second anniversary of the date of grant. During the
period an option is exercisable, the option holder may pay the purchase price
for the share subject to the option in cash, except
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<PAGE>
the stockholder may, under certain circumstances, permit such payment to be by
surrender of shares of Common Stock (at their then fair market value on the date
of exercise), or by a combination of cash and shares.
An aggregate of 100,000 shares of Common Stock are reserved for issuance to
participants under the Directors' Plan. In the event of any changes in the
Common Stock by reason of stock dividends, split-ups, recapitalization, mergers,
consolidations, combinations, or other exchanges or shares and the like,
appropriate adjustments will be made by the Board of Directors to the number of
shares of Common Stock available for issuance under the Directors' Plan, the
number of shares subject to outstanding options, and/ or the exercise price per
share of outstanding options, as necessary substantially to preserve option
holders' economics interests in their options.
No shares will be issued under the Directors' Plan until full payment
therefor has been made to the Company. A holder of an option will have none of
the rights of a stockholder (e.g., voting, dividend, and other ownership rights)
until the shares are issued to him or her.
Shares subject to an option which remain unpurchased at the expiration,
termination, or cancellation of an option will again be available for use under
the Directors' Plan, but shares surrendered as payment for an option, as
described above will not again be available for use under the Directors' Plan.
Options awarded under the Directors' Plan are not transferable or
assignable, except by will or by the laws of descent and distribution. During an
option holder's lifetime, options may be exercised only by the option holder and
may not be transferred or assigned or encumbered by a lien or other security
interest. The Directors' Plan is administered by an administrator who is the
Secretary of the Corporation or such other person designated by the Board of
Directors of the Corporation.
The Board of Directors has the right at any time and from time to time to
amend, modify, or discontinue the Directors' Plan. However, no such amendment,
modification, or discontinuance will revoke or alter the terms of any valid
option previously granted in accordance with the Directors' Plan without the
consent of the holder of the option unless necessary to bring the option into
compliance with applicable law. Also, no action of the Board of Directors may,
without approval by the affirmative vote of a majority of the votes of
stockholders cast at a meeting at which a quorum is present, (i) increase the
maximum number of shares of Common Stock subject to the Directors' Plan, (ii)
materially increases the benefits accruing to participants under the Directors'
Plan, (iii) materially modify the requirements for eligibility under the
Directors' Plan. Unless earlier terminated, the Directors' Plan will terminate
on December 31, 2007, or (iv) change the requirement that option grants be
priced at Fair Market Value (as defined in the Directors' Plan).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during the period from
April 8, 1996 (inception) through April 4, 1997. Messrs. Lycke and Bensen,
officers of the Company during such period, participated in deliberations of the
Company's Board of Directors concerning executive officer compensation. There
were no interlocking relationships between the Company and other entities that
might affect the determination of the compensation of the directors and
executive officers of the Company.
EMPLOYMENT AGREEMENTS
In April 1997, the Company entered into an employment agreement with Mr.
Lycke providing that, commencing on the effective date of the Registration
Statement relating to this offering, and expiring on December 31, 2002, Mr.
Lycke will serve as Chairman of the Board of Directors, President, and Chief
Executive Officer of the Company at a base salary equal to $250,000, increasing
by 5% per annum (subject to increase by the Board of Directors), and such
bonuses as may be determined by the Board of Directors. In addition, Mr. Lycke
will receive use of a company-owned automobile or an automobile allowance. In
the
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event of a Change in Control of the Company (as defined in such agreement), all
options previously granted to Mr. Lycke which remain unvested will automatically
vest immediately. Upon a termination of Mr. Lycke's employment following a
Change in Control, unless Mr. Lycke voluntarily terminates his employment for
other than certain listed reasons, the Company is required to pay Mr. Lycke a
lump sum severance payment equal to one-half his then current annual salary. In
addition, if Mr. Lycke's employment is terminated (i) upon his death, (ii) by
the Company due to disability, (iii) by the Company without cause, or (iv) by
Mr. Lycke voluntarily upon the Company's default or unremedied Adverse Change in
Duties (as defined in such agreement), then the Company is required to pay Mr.
Lycke a lump sum severance payment equal to his then current annual salary. Mr.
Lycke may terminate his employment at any time upon at least 30 days written
notice to the Company. Upon the termination of such agreement, Mr. Lycke is
subject to certain non-compete, non-disturbance, and non-interference provisions
for a period of one year.
In September 1996, the Company entered into an employment agreement, as
amended as of March 26, 1997 and March 1998, with Mr. Lee, Executive Vice
President of Marketing and Technology of the Company, providing that, commencing
on such date and terminating on the second anniversary thereof, Mr. Lee will
devote his full business time and efforts to the Company for a base salary per
annum of $125,000 plus bonus for achieving certain designated milestones. In
addition and pursuant to such agreement, Mr. Lee was issued 41,586 shares of
Common Stock on March 26, 1997. Mr. Lee is also entitled to participate in
insurance and other benefit plans established by the Company for the employees
thereof. Generally, upon the termination of Mr. Lee's employment for cause, Mr.
Lee shall be restricted from competing with the Company for a period of six
months thereafter. In the event Mr. Lee is terminated without cause or for
certain other reasons at the discretion of the Company, Mr. Lee shall be
entitled to receive $40,000 in consideration of the termination of his
employment and shall be restricted from competing with the Company for a period
of six months thereafter. In January 1998, Mr. Lee was granted an option to
purchase 97,893 previously issued shares of Common Stock at a price of $4.33 per
share from three stockholders of the Company. See "Principal Stockholders."
In connection with the Medica Acquisition, the Company entered into an
employment agreement with Mr. Lindner, the Vice President of Technology of the
Company, providing that, commencing on June 2, 1997 and terminating on the third
anniversary thereof, Mr. Lindner will devote his full business time and efforts
to the Company for a base salary per annum of $100,000 plus bonuses for
achieving certain designated milestones. In addition, pursuant to the Medica
acquisition, Mr. Lindner was issued 74,957 shares of Common Stock on June 2,
1997. Mr. Lindner is also entitled to participate in insurance and other benefit
plans established by the Company for the employees thereof. Generally, upon the
termination of Mr. Lindner's employment for cause, he shall be restricted from
competing with the Company for a period of one year thereafter. In the event Mr.
Lindner is terminated without cause or for certain other reasons at the
discretion of the Company, Mr. Lindner shall be entitled to receive between
$20,000 and $30,000 in consideration of the termination of his employment. Mr.
Lindner has been granted an option under the 1997 Plan to purchase 108,900
shares of Common Stock at an exercise price per share equal to the initial
public offering price per Share in this offering.
1997 STOCK OPTION PLAN
On April 5, 1997, the Board of Directors of the Company and stockholders of
the Company authorized adoption of the 1997 Plan. The 1997 Plan, as amended,
provides for the grant of options to purchase up to 500,000 shares of Common
Stock to employees, officers, directors, and consultants of the Company. Options
may be either "incentive stock options" within the meaning of Section 422 of the
Code, or non-qualified options. Incentive stock options may be granted only to
employees of the Company, while non-qualified options may be issued to
non-employee directors, consultants, and others, as well as to employees of the
Company.
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The 1997 Plan will be administered by "disinterested members" of the Board
of Directors or the Compensation Committee, who determine, among other things,
the individuals who shall receive options, the time period during which the
options may be partially or fully exercised, the number of shares of Common
Stock issuable upon the exercise of each option, and the option exercise price.
The exercise price per share of Common Stock subject to an incentive option
may not be less than the fair market value per share of Common Stock on the date
the option is granted. The per share exercise price of the Common Stock subject
to a non-qualified option may be established by the Board of Directors, but
shall not, however, be less than 85% of the fair market value per share of
Common Stock on the date the option is granted. The aggregate fair market value
(determined as of the date the option is granted) of Common Stock for which any
person may be granted incentive stock options which first become exercisable in
any calendar year may not exceed $100,000. No person who owns, directly or
indirectly, at the time of the granting of an incentive stock option to such
person, 10% or more of the total combined voting power of all classes of stock
of the Company (a "10% Stockholder") shall be eligible to receive any incentive
stock options under the 1997 Plan unless the exercise price is at least 110% of
the fair market value of the shares of Common Stock subject to the option,
determined on the date of grant. Non-qualified options are not subject to such
limitation.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and, during the lifetime of an optionee, the
option will be exercisable only by the optionee. In the event of termination of
employment or engagement other than by death or disability, the optionee will
have no more than three months after such termination during which the optionee
shall be entitled to exercise the option, unless otherwise determined by the
Board of Directors. Upon termination of employment or engagement of an optionee
by reason of death or permanent and total disability, such optionee's options
remain exercisable for one year thereafter to the extent such options were
exercisable on the date of such termination. No similar limitation applies to
non-qualified options.
Options under the 1997 Plan must be issued within ten years from the
effective date of the 1997 Plan. The effective date of the 1997 Plan is April 5,
1997. Incentive stock options granted under the 1997 Plan cannot be exercised
more than ten years from the date of grant. Incentive stock options issued to a
10% Stockholder are limited to five year terms. Options granted under the 1997
Plan generally provide for the payment of the exercise price in cash and may
provide for the payment of the exercise price by delivery to the Company of
shares of Common Stock already owned by the optionee having a fair market value
equal to the exercise price of the options being exercised, or by a combination
of such methods. Therefore, if so provided in an optionee's options, such
optionee may be able to tender shares of Common Stock to purchase additional
shares of Common Stock and may theoretically exercise all of his stock options
with no additional investment other than the purchase of his original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the 1997 Plan.
Options to purchase an aggregate of 150,000 shares of Common Stock were
granted under the 1997 Plan on December 9, 1998. In addition, the Company
intends to grant to, among others, certain employees of the Company,
approximately 250,000 additional options under the 1997 Plan upon the
consummation of this offering.
DIRECTORS' LIMITATION OF LIABILITY
The Company's Certificate of Incorporation and By-Laws include provisions to
(a) indemnify the directors and officers to the fullest extent permitted by the
Delaware General Corporation Law, including circumstances under which
indemnification is otherwise discretionary and (b) eliminate the personal
liability of directors and officers for monetary damages resulting from breaches
of their fiduciary duty (except for liability for breaches of the duty of
loyalty, acts, or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware
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General Corporation Law, or for any transaction from which the director derived
an improper personal benefit). The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
The Company has applied for directors and officers liability insurance in an
amount of not less than $2 million.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date hereof, (i) each person who
is known by the Company to be the owner of record or beneficial owner of more
than 5% of the outstanding Common Stock, (ii) each director and each executive
officer of the Company, (iii) all directors and executive officers of the
Company as a group, and (iv) the number of shares of Common Stock beneficially
owned by each such person and such group and the percentage of the outstanding
shares owned by each such person and such group. Except as otherwise indicated,
the stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
-------------------------------------------------------
NAME AND ADDRESS PERCENT PRIOR TO PERCENT AFTER
OF BENEFICIAL OWNER NUMBER OF SHARES OFFERING OFFERING
- ---------------------------------------------------------------- ----------------- ------------------- ---------------
<S> <C> <C> <C>
Bo W. Lycke (2) (3) (7) (8)..................................... 1,459,580 44.9% 30.1%
Terry A. Lee (2) (7)............................................ 139,479 4.3 2.9
Paul W. Miller (2).............................................. 0 0 0
Randall S. Lindner (2) (6)...................................... 74,957 2.3 1.5
Samuel A. Carrel (2)............................................ -- 0 0
C. Kelly Campbell (2)........................................... -- 0 0
Abbas R. Kafi (2)............................................... -- 0 0
Ward L. Bensen (2) (3) (4)...................................... 517,224 15.9 10.7
Robert H. Brown, Jr. (2) (3) (5)................................ 620,731 19.1 12.8
Sture Hedlund (2) (9)........................................... 8,317 * *
John C. Willems, III (2) (9).................................... 8,317 * *
American Medical Finance, Inc. ................................. 342,127 10.5 7.1
12801 N. Central Expressway
Suite 1515
Dallas, Texas 75243
Otto Candies, Inc............................................... 250,174 7.7 5.2
17271 U.S. Hwy. 90
Des Allemends, LA 70030
All directors and executive officers of the Company as a group
(10 persons) (2) (3) (4) (5) (9)................................ 2,046,459 63.0 42.2
</TABLE>
- ------------------------------
* Less than one percent.
(1) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Exchange Act, as consisting of sole or
shared voting power (including the power to vote or direct the vote) and/or
sole or shared investment power (including the power to dispose or direct
the disposition) with respect to the security through any contract,
arrangement, understanding, relationship, or otherwise, including a right to
acquire such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting, and investment
power with respect to all Ordinary Shares shown as beneficially owned by
them.
(2) The address of the referenced individual is c/o Claimsnet.com inc., 12801 N.
Central Expressway, Suite 1515, Dallas, Texas 75243.
(3) Includes 342,127 shares of Common Stock owned of record by AMF, 14,643
shares of which are subject to an option agreement with Terry A. Lee, as
described in footnote (7). Mr. Lycke serves as the Chairman of the Board of
Directors of AMF. Messrs. Lycke, Bensen, and Brown are stockholders of AMF
owning 70.1%, 11.2%, and 17.7% of the outstanding capital stock of AMF,
respectively. Therefore, Messrs. Lycke, Bensen, and Brown may be deemed to
beneficially own the shares of Common Stock owned by AMF.
(4) Consists of 175,097 shares of Common Stock owned of record by Mr. Bensen and
342,127 shares of Common Stock owned of record by AMF. See footnote (3),
above. Excludes options granted under the Directors' Plan exercisable for an
aggregate of 50,000 shares of Common Stock, 25,000 shares of Common Stock in
the case of Ward L. Bensen, which options are not exercisable within 60 days
of the date hereof.
(5) Consists of 278,604 shares of Common Stock owned of record by Mr. Brown,
16,614 shares of which are subject to an option agreement with Terry A. Lee,
as described in footnote (7), and 342,127 shares of Common Stock owned of
record by AMF. See footnote (3), above. Excludes options granted under the
Directors' Plan exercisable for an aggregate of 50,000 shares of Common
Stock, 10,000 shares of Common Stock in the case of Robert H. Brown, which
options are not exercisable within 60 days of the date hereof.
(6) Does not include 2,939 shares of Common Stock owned of record by Mr.
Lindner's wife, as to which shares Mr. Lindner disclaims beneficial
ownership. Does not include 108,900 options granted to Mr. Lindner pursuant
to the 1997 Plan.
(7) Includes an option, granted by Bo Lycke, Robert H. Brown, Jr. and American
Medical Finance, Inc. to Terry A. Lee to purchase 97,893 shares of Common
Stock at an exercise price of $4.33 per share.
(8) Consists of 1,117,453 shares of Common Stock owned of record by Mr. Lycke,
66,636 shares of which are subject to an option agreement with Terry A. Lee,
as described in footnote (7), and 342,127 shares of Common Stock owned of
record by AMF. See footnote (3) above.
(9) Excludes options granted under the Directors' Plan exercisable for an
aggregate of 50,000 shares of Common Stock, 10,000 shares of Common Stock in
the case of Mr. Hedlund and 5,000 shares of Common Stock in the case of Mr.
Willems, which options in each case are not exercisable within 60 days of
the date hereof.
47
<PAGE>
CERTAIN TRANSACTIONS
AMF is the record owner of 342,127 shares of Common Stock, representing
10.5% of the outstanding Common Stock prior to this offering and 7.1% of the
outstanding Common Stock following this offering. Bo W. Lycke, the Chairman of
the Board of Directors, President, and Chief Executive Officer of the Company,
is the Chairman of the Board of Directors of AMF. Mr. Lycke, Ward L. Bensen and
Robert H. Brown, Jr., directors of the Company, are all stockholders of AMF,
owning 70.1%, 11.2%, and 17.7% of the outstanding capital stock of AMF,
respectively. See "Principal Stockholders." Such individuals will devote minimal
time to winding up the business and affairs of AMF for approximately three
months following this offering.
On July 31, 1996, the Company acquired all of the Internet software,
licenses, intellectual property rights, and technology developed by an
affiliated company, AMF, in exchange for a promissory note in the amount of
$3,740,000. On September 19, 1997, AMF reduced the principal amount of the AMF
Note to $2,000,000 and contributed the remaining $1,740,000 in principal amount
of the AMF Note to the capital of the Company. The AMF Note accrues interest at
the rate of 9.50% per annum and is collateralized by all of the Internet
software, intellectual property rights, internet technology and technology
rights of the Company, including software development costs. The Company intends
to utilize a portion of the net proceeds of this offering to satisfy such
obligation.
In connection with such acquisition, AMF and the Company entered into the
Service Agreement in which AMF provides staff and office support services to the
Company and for which the Company was billed monthly. Such agreement was
canceled by the Company effective April 1, 1997. The Company believes that the
cost of the services provided by AMF was comparable to, or lower than, available
alternatives. Commencing April 1, 1997, the Company established its own payroll
and personnel/management structure and assumed direct responsibility for all of
its support services. No material effect on the relationship with employees is
expected.
From April 1996 until August 1997, the Company subleased 4,000 square feet
of office space from AMF, on a month-to-month basis, at the rate of $4,000 per
month.
Upon the consummation of the acquisition transaction with AMF, AMF agreed to
provide the Company with a credit line of up to $2,000,000 to facilitate
additional development of the Company's services and technology. During June
1998, AMF purchased nine units of the Company's then pending 1998 Private
Placements, each unit consisting of 10,729 shares of common stock, for an
aggregate of 96,563 shares. As consideration for the purchase, AMF cancelled
$450,000 of the principal balance then outstanding under the credit line. At
September 30, 1998, advances under such line of credit were approximately
$1,903,000. Such line of credit accrues interest at the rate of 9.50% per annum
and is secured by all of the assets of the Company. The Company intends to
utilize a portion of the net proceeds of this offering to satisfy such
obligation.
All future transactions between the Company and its officers, directors, and
5% stockholders will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties and will be approved by a majority of
the independent and disinterested directors of the Company.
For a description of employment agreements between the Company and the
executive officers thereof, see "Management--Employment Agreements."
48
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Certificate of Incorporation to issue an
aggregate of 40,000,000 shares of Common Stock, par value $.001 per share, and
4,000,000 shares of preferred stock, par value $.001 per share. As of December
31, 1997, 2,789,583 shares of Common Stock were outstanding and held of record
by 26 stockholders.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for the election of directors. Subject to the prior rights of
any class or series of preferred stock which may from time to time be
outstanding, if any, holders of Common Stock are entitled to receive ratably,
dividends when, as, and if declared by the Board of Directors out of funds
legally available therefor and, upon the liquidation, dissolution, or winding up
of the Company, are entitled to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. Holders of Common Stock have no
preemptive rights and have no rights to convert their Common Stock into any
other securities. The outstanding Common Stock is validly authorized and issued,
fully-paid, and nonassessable. In the event the Company were to elect to sell
additional shares of Common Stock following this Offering, investors in this
Offering would have no prior right to purchase such additional shares. As a
result, their percentage equity interest in the Company would be diluted. The
shares of Common Stock offered hereby will be, when issued and paid for, fully
paid and not liable for further call or assessment. Holders of the Common Stock
do not have cumulative voting rights, which means that the holders of more than
one half of the outstanding shares of Common Stock (subject to the rights of the
holders of the preferred stock) can elect all of the Company's directors, if
they choose to do so. In such event, the holders of the remaining shares of
Common Stock would not be able to elect any directors. The Board is empowered to
fill any vacancies on the Board, except vacancies caused by an increase in the
number of directors, which are filled by the stockholders. Except as otherwise
required by Delaware law, and subject to the rights of the holders of preferred
stock, all stockholder action is taken by the vote of a majority of the
outstanding shares of Common Stock voting as a single class present at a meeting
of stockholders at which a quorum (consisting of a majority of the outstanding
shares of Common Stock) is present in person or proxy.
PREFERRED STOCK
Preferred stock may be issued in one or more series and having such rights,
privileges, and limitations, including voting rights, conversion privileges,
and/or redemption rights, as may, from time to time, be determined by the Board
of Directors of the Company. Preferred stock may be issued in the future in
connection with acquisitions, financings, or such other matters as the Board of
Directors deems appropriate. In the event that any such shares of preferred
stock are to be issued, a Certificate of Designation, setting forth the series
of such preferred stock and the rights, privileges, and limitations with respect
thereto, shall be filed with the Secretary of State of the State of Delaware.
The effect of such preferred stock is that the Company's Board of Directors
alone, and subject to, federal securities laws and Delaware law, may be able to
authorize the issuance of preferred stock which could have the effect of
delaying, deferring, or preventing a change in control of the Company without
further action by the stockholders, and may adversely affect the voting and
other rights of the holders of the Common Stock. The issuance of preferred stock
with voting and conversion rights may also adversely affect the voting power of
the holders of Common Stock, including the loss of voting control to others.
49
<PAGE>
ANTI-TAKEOVER PROVISIONS
Upon consummation of this Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or an associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and the shares held by
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66-2/3%
of the corporations outstanding voting stock at an annual or special meeting,
excluding the shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (i) the owner of 15%
or more of the outstanding voting stock of the corporation or (ii) an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from coverage of Section
203 by amending its certificate of incorporation or bylaws, by action of its
stockholders, to exempt itself from coverage, provided that such certificate of
incorporation amendment or bylaw shall not become effective until 12 months
after the date it is adopted. The Company has not adopted such an amendment to
its certificate of incorporation or bylaws.
REGULATION OF THE INTRODUCTION OF BUSINESS AT ANNUAL MEETINGS OF STOCKHOLDERS
The Company's By-laws include provisions which regulate the submission by
persons other than the Board of Directors of matters to a vote of stockholders.
Generally, at an annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the annual meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice for
such meeting, who shall be entitled to vote at such annual meeting and who
complies with the notice procedures set forth in the By-laws. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered or mailed to, and
received at, the principal executive offices of the Corporation not less than 60
days nor more than 90 days prior to the annual meeting, regardless of any
postponement, deferrals, or adjournments of that meeting to a later date;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the annual meeting is given or made to
stockholders, notice by the stockholder to be timely must be received no later
than the close of business on the 10th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
was made. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting the
following: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in the By-Laws to the contrary, no business shall be conducted at the
stockholder meeting, except in accordance with the procedures set forth in the
By-laws. The chairman of the meeting, as determined in accordance with the
By-Laws, shall, if the facts warrant, determine and declare
50
<PAGE>
to the meeting that business was not properly brought before the meeting and, in
accordance with the provisions of these By-Laws, and if he should so determine,
he shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the foregoing.
QUOTATION ON NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE
The Company has applied to include the Common Stock for quotation on the
Nasdaq SmallCap Market under the symbol "CLAI" and has applied for listing of
the Common Stock on the Boston Stock Exchange under the symbol "CLA." No
assurance can be given that an active trading market for the Common Stock will
develop or be sustained or at what price the Common Stock will trade.
TRANSFER AGENT; WARRANT AGENT
The Company's Transfer Agent and Registrar for the Common Stock is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 4,850,000 shares of
Common Stock outstanding (5,090,000 shares of Common Stock outstanding if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
1,600,000 Shares offered hereby (1,840,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
further registration under the Securities Act. All officers and directors of the
Company, current stockholders, and option holders under the 1997 Plan have
agreed not to sell, or otherwise dispose of any securities of the Company for a
period of 18 months from the date of this offering without the Representative's
prior written consent.
All of the presently outstanding 3,250,000 shares of Common Stock are
"restricted securities" within the meaning of Rule 144 of the Securities Act
and, if held for at least one year, would be eligible for sale in the public
market in reliance upon, and in accordance with, the provisions of Rule 144
following the expiration of such one-year period. In general, under Rule 144 as
currently in effect, a person or persons whose shares are aggregated, including
a person who may be deemed to be an "affiliate" of the Company as that term is
defined under the Securities Act, would be entitled to sell within any three
month period a number of shares beneficially owned for at least one year that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock, or (ii) the average weekly trading volume in the Common Stock during the
four calendar weeks preceding such sale. Sales under Rule 144 are also subject
to certain requirements as to the manner of sale, notice, and the availability
of current public information about the Company. However, a person who is not
deemed to have been an affiliate of the Company during the 90 days preceding a
sale by such person and who has beneficially owned such shares of Common Stock
for at least two years may sell such shares without regard to the volume, manner
of sale, or notice requirements of Rule 144.
Prior to this offering, there has been no public market for the Company's
securities. Following this offering, the Company cannot predict the effect, if
any, that sales of shares of Common Stock pursuant to Rule 144 or otherwise, or
the availability of such shares for sale, will have on the market price
prevailing from time to time. Nevertheless, sales by the current stockholders of
a substantial number of shares of Common Stock in the public market could
materially adversely affect prevailing market prices for the Common Stock. In
addition, the availability for sale of a substantial number of shares of Common
Stock acquired through the exercise of the Representative's Warrants or the
outstanding options under the 1997 Plan or the Director's Plan could materially
adversely affect prevailing market prices for the Common Stock. See "Risk
Factors--Shares Eligible for Future Sale."
The Company has agreed to register the 883,681 shares of Common Stock issued
in the Private Placements for resale commencing 18 months from the date of this
Prospectus.
In addition, pursuant to the terms of the Medica Acquisition, the Company
granted "piggy-back" registration rights with respect to the 107,292 shares of
Common Stock issued in connection therewith. Such shares of Common Stock shall
be included in any registration of Common Stock which occurs after this
offering, subject to certain restrictions.
Up to 160,000 additional shares of Common Stock may be purchased by the
Representative during the period commencing on the first anniversary of the date
of this Prospectus and terminating on the fifth anniversary of the date of this
Prospectus through the exercise of the Representative's Warrants. Any and all
securities purchased upon the exercise of the Representative's Warrants may be
freely tradeable, provided that the Company satisfies certain securities
registration and qualification requirements in accordance with the terms of the
Representative's Warrants. See "Underwriting."
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement,
the Company has agreed to sell to each of the Underwriters named below, and each
of the Underwriters, for which Strasbourger Pearson Tulcin Wolff Incorporated is
acting as Representative, has severally, and not jointly, agreed, to purchase
the number of Shares offered hereby set forth opposite their respective names
below.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Strasbourger Pearson Tulcin Wolff Incorporated...................................
----------
Total........................................................................ 1,600,000
</TABLE>
A copy of the Underwriting Agreement has been filed as an exhibit to the
Registration Statement (as defined herein), to which reference is hereby made.
The Underwriting Agreement provides that the obligation of the Underwriters to
purchase the Shares is subject to certain conditions. The Underwriters shall be
obligated to purchase all of the Shares (other than those covered by the
Underwriters' over-allotment option described below), if any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the Shares to the public at the initial public offering price set forth on
the cover page of this Prospectus and that they may allow to certain dealers who
are members of the National Association of Securities Dealers, Inc. (the
"NASD"), and to certain foreign dealers, concessions not in excess of $
per Share, of which amount a sum not in excess of $ per Share may in
turn be reallowed by such dealers to other dealers who are members of the NASD
and to certain foreign dealers. After the commencement of this offering, the
offering price, the concession to selected dealers, and the reallowance to other
dealers may be changed by the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company has agreed to pay to the Representative an expense allowance, on
a non-accountable basis, equal to 2.5% of the gross proceeds derived from the
sale of 1,600,000 Shares offered hereby (or 1,840,000 Shares if the
Underwriters' over-allotment option is exercised in full). The Company paid an
advance on such allowances in the amount of $50,000. The Company has also agreed
to pay certain of the Representative's expenses in connection with this
offering, including expenses in connection with qualifying the Shares offered
hereby for sale under the laws of such states as the Representative may
designate and the placement of tombstone advertisements.
In connection with this offering, the Company has granted the Representative
the right, for the three-year period commencing on the closing date of this
offering, to appoint an observer to attend all meetings of the Company's Board
of Directors. This designee has the right to notice of all meetings of the Board
of Directors and to receive reimbursement for all out-of-pocket expenses
incurred in attending such meetings. In addition, such designee will be entitled
to indemnification to the same extent as the Company's directors.
The Company has agreed to retain the Representative as financial consultants
for a period of two years to commence on the closing of this offering at an
aggregate fee of $150,000, $100,000 of which shall be payable at the closing of
this offering and the remainder of which shall be due on the first anniversary
of such closing. Pursuant to this agreement, the Representative shall provide
advisory services related to mergers and acquisitions activity, corporate
finance and other matters.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales of the Shares offered hereby to any account over which
they exercise discretionary authority.
53
<PAGE>
The Company, its officers, directors, and stockholders, as well as the
holders of options under the Plan, have agreed not to offer, assign, issue,
sell, hypothecate, or otherwise dispose of any shares of Common Stock,
securities of the Company convertible into, or exercisable or exchangeable for,
shares of Common Stock, or shares of Common Stock received upon conversion,
exercise, or exchange of such securities, to the public without the prior
written consent of the Representative for a period of 18 months from the date of
this Prospectus.
Prior to this offering, there has been no public trading market for the
Common Stock. The initial public offering price for the Shares will be
determined by arms-length negotiations between the Company and the
Representative and does not necessarily bear any relationship to the Company's
book value, assets, past operating results, financial condition, or other
established criteria of value. Among the factors to be considered in such
negotiations will be prevailing market conditions, the history and prospects for
the Company and the industry in which the Company competes, an assessment of the
Company's management, its capital structure, and such other factors deemed
relevant.
The Company has also granted to the Underwriters an option, exercisable
during the 45-day period commencing on the date of this Prospectus, to purchase
at the public offering price per share, less the underwriting discounts and
commissions, up to an aggregate of 240,000 shares of Common Stock. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase additional shares of Common Stock proportionate
to such Underwriter's initial commitment as indicated in the preceding table.
The Underwriters may exercise such right of purchase only for the purpose of
covering over-allotments, if any, made in connection with the sale of Shares.
Purchases of shares of Common Stock upon exercise of the over-allotment option
will result in the realization of additional compensation by the Underwriters.
In connection with this offering, the Company has agreed to sell to the
Representative, individually and not as Representative of the several
Underwriters, at the price of $.001 per warrant, the Representative's Warrants
to purchase an aggregate of 160,000 shares of Common Stock. The Representative's
Warrants are exercisable for a period of four years commencing one year from the
date of this Prospectus at an exercise price per share (the "Exercise Price")
equal to 165% of the public offering price per share. The Representative's
Warrants may not be sold, transferred, assigned, pledged, or hypothecated for a
period of 12 months from the date of the Prospectus, except to members of the
selling group and to officers and partners of the Representative and members of
the selling group. The Representative's Warrants contain anti-dilution
provisions providing for adjustments of the Exercise Price and number of shares
issuable on exercise of the Representative's Warrants, upon the occurrence of
certain events, including stock dividends, stock splits, and recapitalizations.
The holders of the Representative's Warrants have no voting, dividend, or other
rights as stockholders of the Company with respect to shares of Common Stock
underlying the Representative's Warrants, unless the Representative's Warrants
shall have been exercised.
A new registration statement or post-effective amendment to the Registration
Statement will be required to be filed and declared effective before
distribution to the public of the Representative's Warrants and the Warrant
Shares. The Company has agreed, on one occasion during the period beginning one
year after the date of this Prospectus and ending four years thereafter, if
requested by the holders of a majority of the Representative's Warrants or
Warrant Shares, to make all necessary filings to permit a public offering of the
Representative's Warrants and Warrant Shares and to use its best efforts to
cause such filing to become effective under the Securities Act and to remain
effective for at least 12 months, at the Company's sole expense. In addition,
the Company has agreed to give advance notice to holders of the Representative's
Warrants and Warrant Shares of its intention to file a registration statement,
and in such case, holders of the Representative's Warrants and the Warrant
Shares shall have the right to require the Company to include the Warrant Shares
in such registration statement at the Company's expense (subject to certain
limitations).
54
<PAGE>
During and after this offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in this offering for their
account may be reclaimed by the syndicate if such shares are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock
which may be higher than the price that might otherwise affect the market price
of the Common Stock, which may be higher than the price that might otherwise
prevail in the open market. Neither the Company nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions of that
such transactions, once commenced, will not be discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
55
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Brock
Silverstein McAuliffe LLC, New York, New York. Certain legal matters will be
passed upon for the Underwriters by Stroock & Stroock & Lavan LLP, New York, New
York. Brock Silverstein McAuliffe LLC renders legal services to the
Representative in connection with matters other than this offering and owns
beneficially and of record an aggregate of 20,793 shares of Common Stock.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31, 1996
and for the period from April 8, 1996 (inception) to December 31, 1996 and as of
December 31, 1997 and for the year then ended, and the financial statements of
Medica Systems, Inc. as of December 31, 1996 and 1995 and for the years then
ended, and the period from May 1, 1994 to December 31, 1994 included in this
Prospectus and the Registration Statement have been audited by King Griffin &
Adamson P.C., Dallas, Texas, independent certified public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon such reports given upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington D.C. 20549, a registration
statement on Form S-1 (the "Registration Statement"), including amendments
thereto, under the Exchange Act with respect to the securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules filed therewith, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Offering, reference is hereby
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document which has been filed as an exhibit to the
Registration Statement are qualified in their entirety by reference to such
exhibits for a complete statement of their terms and conditions. The
Registration Statement and the exhibits and schedules thereto may be inspected
without charge at the offices of the Commission and copies of all or any part
thereof may be obtained from the Commission's principal office at 450 Fifth
Street, N.W., Washington D.C. 20549 or at certain of the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, upon
payment of the fees prescribed by the Commission. Electronic registration
statements filed through the Electronic Data Gathering, Analysis, and Retrieval
system are publicly available through the Commission's website
(http://www.sec.gov). Following approval of the Common Stock for quotation on
the Nasdaq SmallCap-Registered Trademark- Market, reports and other information
concerning the Company may be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. Following approval of the Common Stock for listing on the Boston Stock
Exchange, reports and other information concerning the Company may be inspected
at the offices of such exchange located at One Boston Place, Boston,
Massachusetts 02108.
56
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Statement of Operations for the year ended December 31, 1997.................................... F-3
Unaudited Statement of Operations for the nine month period ended September 30, 1998...................... F-4
CLAIMSNET.COM INC.
Report of Independent Certified Public Accountants.................................................... F-5
Financial Statements
Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (Unaudited)................ F-6
Statements of Operations for the period from April 8, 1996 (inception) to December 31, 1996, the
year ended December 31, 1997, and the nine month periods ended September 30, 1997 and 1998
(Unaudited)........................................................................................ F-7
Statements of Changes in Stockholders' Deficit for the period from April 8, 1996 (inception) to
December 31, 1996, the year ended December 31, 1997, and the nine month period ended September 30,
1998 (Unaudited)................................................................................... F-8
Statements of Cash Flows for the period from April 8, 1996 (inception) to December 31, 1996, the
year ended December 31, 1997, and the nine month periods ended September 30, 1997 and 1998
(Unaudited)........................................................................................ F-9
Notes to Financial Statements for the period from April 8, 1996 (inception) to December 31, 1996,
the year ended December 31, 1997, and the nine month periods ended September 30, 1997 and 1998
(Unaudited)........................................................................................ F-11
MEDICA SYSTEMS, INC.
Report of Independent Certified Public Accountants.................................................... F-19
Financial Statements
Balance Sheets as of December 31, 1996 and 1995................................................... F-20
Statements of Operations for the years ended December 31, 1996 and 1995
and the period from May 1, 1994 (inception) to December 31, 1994.................................. F-21
Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1996 and
1995 and the period from May 1, 1994 (inception) to December 31, 1994.............................. F-22
Statements of Cash Flows for the years ended December 31, 1996 and 1995
and the period from May 1, 1994 (inception) to December 31, 1994.................................. F-23
Notes to Financial Statements for the years ended December 31, 1996 and 1995
and the period from May 1, 1994 (inception) to December 31, 1994.................................. F-24
Unaudited Balance Sheet as of March 31, 1997...................................................... F-27
Unaudited Statement of Operations for the three months ended March 31, 1997....................... F-28
Unaudited Statement of Cash Flows for the three months ended March 31, 1997....................... F-29
Notes to Unaudited Financial Statements as of March 31, 1997...................................... F-30
</TABLE>
F-1
<PAGE>
CLAIMSNET.COM INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Effective June 2, 1997, Claimsnet.com inc. ("Claimsnet" or "Company")
completed an acquisition of Medica Systems, Inc. ("Medica"). The historical
financial statements prior to the acquisition transaction are those of
Claimsnet.
For accounting purposes, the acquisition of Medica is accounted for using
the purchase method of accounting. See Note C to the Consolidated Financial
Statements for a more complete discussion.
The unaudited pro forma statements of operations for the year ended December
31, 1997 and the nine months ended September 30, 1998 reflect the acquisition as
if the transaction were consummated on January 1, 1997, and the intended use of
proceeds from the proposed initial public offering.
The unaudited pro forma statements are not necessarily indicative of the
results that would have been reported had such events actually occurred on the
dates specified, nor is it necessarily indicative of the future results of the
combined entities. The unaudited pro forma statements of operations should be
read in conjunction with the separate historical financial statements of the
Company and Medica and related notes appearing elsewhere in this registration
statement.
F-2
<PAGE>
CLAIMSNET.COM INC.
(FORMERLY AMERICAN NET CLAIMS, INC.)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
(A)
MEDICA
HISTORICAL SYSTEMS, PRO FORMA PRO FORMA
1997 INC. ADJUSTMENTS 1997
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 81,712 $ 325,944 $ -- $ 407,656
------------- ------------ ----------- -------------
OPERATING EXPENSES
Depreciation and amortization.................... 402,835 1,594 123,425(C) 527,854
Other............................................ 2,111,455 275,318 221,501(B) 2,608,274
------------- ------------ ----------- -------------
Total operating expenses....................... 2,514,290 276,912 344,926 3,136,128
INTEREST EXPENSE--affiliate........................ (389,548) -- 389,548(D) --
INTEREST INCOME.................................... 40,817 -- -- 40,817
------------- ------------ ----------- -------------
NET INCOME (LOSS) BEFORE TAXES..................... (2,781,309) 49,032 44,622 (2,687,655)
INCOME TAXES....................................... -- -- -- --
------------- ------------ ----------- -------------
NET LOSS........................................... $ (2,781,309) $ 49,032 $ 44,622 $ (2,687,655)
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
LOSS PER WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(basic and diluted).............................. $ (1.09) $ (0.65)
------------- -------------
------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (basic
and diluted)..................................... 2,555,886 4,155,886
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(A) To reflect the operations of Medica Systems, Inc. prior to its acquisition
on June 2, 1997.
(B) To reflect contractual salary increases, assuming the offering had been
completed on January 1, 1997.
(C) To reflect the amortization of software costs, assuming the Company had
acquired Medica Systems, Inc. on January 1, 1997.
(D) To reflect the reduction in interest expense resulting from the debt
reduction in accordance with the use of proceeds from the offering.
F-3
<PAGE>
CLAIMSNET.COM INC.
(FORMERLY AMERICAN NET CLAIMS, INC.)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ----------- -------------
<S> <C> <C> <C>
REVENUES.............................................................. $ 103,165 $ -- $ 103,165
------------- ----------- -------------
OPERATING EXPENSES
Depreciation and amortization....................................... 530,916 -- 530,916
Other............................................................... 2,283,796 106,500(B) 2,390,296
------------- ----------- -------------
Total operating expenses.......................................... 2,814,712 106,500 2,921,212
INTEREST EXPENSE--affiliate........................................... (223,269) 223,269(A) --
INTEREST INCOME....................................................... 3,788 -- 3,788
------------- ----------- -------------
NET INCOME (LOSS) BEFORE TAXES........................................ (2,931,028) 116,769 (2,814,259)
INCOME TAXES.......................................................... -- -- --
------------- ----------- -------------
NET LOSS.............................................................. $ (2,931,028) $ 116,769 $ (2,814,259)
------------- ----------- -------------
------------- ----------- -------------
LOSS PER WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING (basic and diluted)....................... $ (1.01) $ (0.63)
------------- -------------
------------- -------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (basic and diluted).............................. 2,898,565 4,498,565
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(A) To reflect the reduction in interest expense resulting from the debt
reduction in accordance with the use of proceeds from the offering.
(B) To reflect contractual salary increases, assuming the offering had been
completed on January 1, 1998.
F-4
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Claimsnet.com inc.
(formerly American NET Claims, Inc.)
We have audited the accompanying consolidated balance sheets of
Claimsnet.com inc. (formerly American NET Claims, Inc.) and subsidiary as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' deficit, and cash flows for the year ended December 31, 1997 and
the period from April 8, 1996 (inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in that balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Claimsnet.com inc. and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for the year ended December 31, 1997 and the period from
April 8, 1996 (inception) to December 31, 1996, in conformity with generally
accepted accounting principles.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
February 21, 1998, except for Note L for which the date is December 7, 1998.
F-5
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash....................................................................... $ 15,659 $ 394,913 $ 170,217
Accounts receivable net of allowance for doubtful accounts of $10,000...... -- 13,240 47,134
Employee receivable........................................................ -- 3,000 2,000
Prepaid assets............................................................. -- 8,176 --
---------- ---------- -------------
Total current assets..................................................... 15,659 419,329 219,351
---------- ---------- -------------
FIXED ASSETS
Computer hardware and software............................................. 29,135 184,971 238,913
Furniture and fixtures..................................................... -- 3,519 10,732
Office equipment........................................................... -- 24,694 25,167
---------- ---------- -------------
29,135 213,184 274,812
Accumulated depreciation and amortization.................................. -- (18,620) (58,764)
---------- ---------- -------------
Total fixed assets....................................................... 29,135 194,564 216,048
---------- ---------- -------------
OTHER ASSETS
Software development costs net of accumulated amortization of $398,535 and
$889,780 at December 31, 1997 and September 30, 1998, respectively....... 831,869 1,524,001 1,032,756
Note receivable from employee.............................................. -- -- 25,742
Deferred offering costs.................................................... 101,669 36,703 191,293
---------- ---------- -------------
Total other assets....................................................... 933,538 1,560,704 1,249,791
---------- ---------- -------------
TOTAL ASSETS................................................................. $ 978,332 $2,174,597 $ 1,685,190
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable........................................................... $ -- $ 98,278 $ 74,661
Accrued expenses........................................................... -- 159,849 194,674
Contingent payable......................................................... -- 125,000 125,000
---------- ---------- -------------
Total current liabilities................................................ -- 383,127 394,335
---------- ---------- -------------
LONG-TERM LIABILITIES
Line of credit--affiliate.................................................. 510,250 695,650 1,903,355
Note payable--affiliate.................................................... 3,740,000 2,000,000 2,000,000
Notes payable.............................................................. -- 225,000 225,000
Accrued interest--affiliate................................................ 158,123 547,670 770,378
---------- ---------- -------------
Total long-term liabilities.............................................. 4,408,373 3,468,320 4,898,733
---------- ---------- -------------
TOTAL LIABILITIES............................................................ 4,408,373 3,851,447 5,293,068
---------- ---------- -------------
COMMITMENTS AND CONTINGENCIES (Notes A, C, D, H, I, J and L)
STOCKHOLDERS' DEFICIT
Preferred stock--$.001 par value; 4,000,000 shares authorized; no shares
issued or outstanding....................................................
Common stock--$.001 par value; 40,000,000 shares authorized; 2,120,879
shares issued and outstanding at December 31, 1996, 2,789,583 shares
issued and outstanding at December 31, 1997 and 3,004,167 shares issued
and outstanding at September 30, 1998.................................... 2,121 2,790 3,004
Additional paid-in capital................................................. (3,125,121) 1,407,710 2,407,496
Accumulated deficit........................................................ (306,041) (3,087,350) (6,018,378)
---------- ---------- -------------
(3,429,041) (1,676,850) (3,607,878)
Less note receivable for shares............................................ (1,000) -- --
---------- ---------- -------------
TOTAL STOCKHOLDERS' DEFICIT.................................................. (3,430,041) (1,676,850) (3,607,878)
---------- ---------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT.................................. $ 978,332 $2,174,597 $ 1,685,190
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM APRIL 8, 1996 (INCEPTION) TO DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1997, AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
PERIOD ENDED YEAR ENDED 30,
DECEMBER 31, DECEMBER 31, ----------------------------
1996 1997 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UANUDITED) (UNAUDITED)
REVENUES.............................................. $ -- $ 81,712 $ 66,879 $ 103,165
COST OF REVENUES...................................... -- 250,889 67,161 488,855
------------- ------------- ------------- -------------
GROSS LOSS............................................ -- (169,177) (282) (385,690)
------------- ------------- ------------- -------------
OPERATING EXPENSES
Research and development............................ -- 461,245 (156,378) 382,800
Software amortization............................... -- 402,835 (246,759) 491,245
Selling, general and administrative................. 147,918 1,399,321 (933,326) 1,451,812
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS.................................. (147,918) (2,432,578) (1,336,745) (2,711,547)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest expense--affiliate......................... (158,123) (389,548) (316,312) (223,269)
Interest income..................................... -- 40,817 34,610 3,788
------------- ------------- ------------- -------------
Total Other Income (Expense)...................... (158,123) (348,731) (281,702) (219,481)
------------- ------------- ------------- -------------
NET LOSS.............................................. $ (306,041) $ (2,781,309) $ (1,618,447) $ (2,931,028)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
BASIC LOSS PER SHARE.................................. $ (0.15) $ (1.09) $ (0.65) $ (1.01)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
DILUTED LOSS PER SHARE................................ $ (0.15) $ (1.09) $ (0.65) $ (1.01)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Basic and
diluted)............................................ 2,108,651 2,555,886 2,477,130 2,898,565
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
PERIOD FROM APRIL 8, 1996 (INCEPTION) TO DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1997, AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN NOTE ACCUMULATED
SHARES STOCK CAPITAL RECEIVABLE DEFICIT
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
April 8, 1996--Issuance of common stock at
inception..................................... 2,100,086 $ 2,100 $ (1,100) $ -- $ --
Issuance of common stock for note............... 20,793 21 979 (1,000) --
Deemed distribution related to purchase of asset
from affiliate (Note H)....................... -- -- (3,125,000) -- --
Net loss for 1996............................... -- -- -- -- (306,041)
---------- ----------- ------------- ----------- -------------
Balances at December 31, 1996................... 2,120,879 2,121 (3,125,121) (1,000) (306,041)
---------- ----------- ------------- ----------- -------------
Issuance of stock for compensation.............. 41,586 42 78,458 -- --
Issuance of stock for cash pursuant to PPM...... 519,826 520 2,249,480 -- --
Issuance of stock related to the purchase of
Medica........................................ 107,292 107 464,893 -- --
AMF capital contribution........................ -- -- 1,740,000 1,000 --
Net loss for the nine months ended September 30,
1997.......................................... -- -- -- -- (1,618,447)
---------- ----------- ------------- ----------- -------------
Balances at September 30, 1997 (unaudited)...... 2,789,583 2,790 1,407,710 -- (1,924,488)
Net loss for the three month period from October
1, 1997 through December 31, 1997............. -- -- -- -- (1,162,862)
---------- ----------- ------------- ----------- -------------
Balances at December 31, 1997................... 2,789,583 2,790 1,407,710 -- (3,087,350)
---------- ----------- ------------- ----------- -------------
Issuance of stock for cash pursuant to private
placements.................................... 118,021 118 549,882 -- --
Issuance of stock for debt conversion pursuant
to private placements......................... 96,563 96 449,904 -- --
Net loss for the nine months ended September 30,
1998.......................................... -- -- -- -- (2,931,028)
---------- ----------- ------------- ----------- -------------
Balances at September 30, 1998 (unaudited)...... 3,004,167 $ 3,004 $ 2,407,496 $ -- $ (6,018,378)
---------- ----------- ------------- ----------- -------------
---------- ----------- ------------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM APRIL 8, 1996 (INCEPTION) TO DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1997, AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD ENDED YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------------
1996 1997 1997 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss.............................................. $ (306,041) $ (2,781,309) $ (1,618,447) $ (2,931,028)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization..................... -- 417,155 255,842 531,389
Common stock issued for compensation.............. -- 78,500 78,500 --
Allowance for doubtful accounts................... -- 10,000 -- --
Offering costs written off........................ -- 101,669 101,669 35,000
Changes in assets and liabilities net of effects
of acquisition:
(Increase) decrease in accounts receivable and
employee receivable........................... -- 93,069 6,794 (32,894)
(Increase) decrease in prepaid expenses......... -- (10,988) (5,716) 8,176
Increase (decrease) in accounts payable and
other current liabilities..................... -- 118,776 (5,557) 11,208
Increase in accrued interest.................... 158,123 389,549 316,310 222,708
------------ ------------- ------------- -------------
Net cash used by operating activities............. (147,918) (1,583,579) (870,605) (2,155,441)
------------ ------------- ------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Cash in acquired subsidiary........................... -- 15,664 15,664 --
Cash paid to acquire subsidiary....................... -- (100,000) (100,000) --
Purchases of property and equipment................... (29,135) (159,355) (48,367) (61,628)
Software development costs............................ (216,869) (193,173) (193,173) --
------------ ------------- ------------- -------------
Net cash used in investing activities............. (246,004) (436,864) (325,876) (61,628)
------------ ------------- ------------- -------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Increase in line of credit--affiliate................. 510,250 185,400 150,796 1,657,705
Issuance of employee note receivable.................. -- -- -- (25,742)
Payments for deferred offering costs.................. (101,669) (36,703) (74,253) (189,590)
Proceeds from common stock issuances.................. 1,000 2,251,000 2,251,000 550,000
------------ ------------- ------------- -------------
Net cash provided by financing activities......... 409,581 2,399,697 2,327,543 1,992,373
------------ ------------- ------------- -------------
NET INCREASE IN CASH.................................. 15,659 379,254 1,131,062 (224,696)
Cash--beginning balance............................... -- 15,659 15,659 394,913
------------ ------------- ------------- -------------
Cash--ending balance.................................. $ 15,659 $ 394,913 $ 1,146,721 $ 170,217
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
F-9
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PERIOD FROM APRIL 8, 1996 (INCEPTION) TO DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1997, AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD ENDED YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------------
1996 1997 1997 1998
------------ ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Purchase of asset from affiliate--net................. $ 615,000 $ -- $ -- $ --
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Common stock issued for compensation.................. $ -- $ 78,500 $ 78,500 $ --
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Common stock issued for acquisition of subsidiary..... $ -- $ 465,000 $ 465,000 $ --
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Other liabilities incurred for acquisition of
subsidiary.......................................... $ -- $ 57,798 $ 57,798 $ --
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Conversion of portion of note payable--affiliate to
equity.............................................. $ -- $ 1,740,000 $ 1,740,000 $ --
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Conversion of portion of line of credit--affiliate to
equity.............................................. $ -- $ -- $ -- $ 450,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998
AND FOR EACH NINE MONTH PERIOD THEN ENDED)
NOTE A--ORGANIZATION AND BACKGROUND
Claimsnet.com inc. ("Claimsnet.com" or the "Company") was incorporated in
the state of Texas on April 8, 1996 as American Net Claims, Inc. Effective
February 3, 1997, the Company assumed the name Claimsnet.com in the State of
Texas. The Company was formed for the purpose of completing the development of
and marketing software used for processing medical insurance claims on the
Internet.
On July 31, 1996, the Company acquired all the Internet software, licenses,
intellectual property rights and technology developed by an affiliated company,
American Medical Finance, Inc. ("AMF"). AMF is affiliated through common
stockholders, and as a stockholder of the Company. On June 2, 1997, the Company
acquired Medica Systems, Inc., which owned the CyberClaim software source code
previously licensed to the Company for use in conjunction with the software
purchased from AMF. (See Note C) The acquisition was completed through a merger
with a newly created, wholly-owned subsidiary, ANC Holdings, Inc. which is the
surviving corporation in the merger.
The Company has generated losses of $2,781,309, $306,041 and $2,931,028
during the year ended December 31, 1997, the period from its inception (April 8,
1996) to December 31, 1996, and the nine months ended September 30, 1998,
respectively. During these same periods, the Company used cash in its operations
of $1,583,579, $147,918 and $2,155,441, respectively. Through the date of this
report, the Company has generated minimal revenues and has relied on private
equity placement proceeds and financing from an affiliate to fund its operations
and development activities. At December 31, 1997 and September 30, 1998
liabilities significantly exceed assets.
During the period from April to October 1998, the Company completed two
private equity placements which raised gross proceeds of $2,475,000, for which
the Company received net proceeds of $2,025,000 cash and conversion of $450,000
of debt outstanding under a line of credit agreement (see Note D). In order to
make the investment necessary to expand its business and to meet its cash flow
requirements, the Company plans to raise additional capital. The Company is in
the process of completing an initial public offering ("Offering") to raise net
proceeds of approximately $8,735,000 (excluding underwriters overallotment
options), although no assurance can be given that such offering will be
successful. In addition, as discussed in Note C, the contingent payable of
$125,000 and notes payable of $225,000 due to the prior shareholders of Medica
are due only after the successful completion of an initial public offering.
Based on the above and managements belief that additional equity and debt
financing can be raised, management believes that the Company has the ability to
continue its business through December 31, 1998.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of 3 months or less when purchased.
SOFTWARE
Financial Accounting Standard No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," provides for the
capitalization of certain costs related to development of computer software
products. Gross internally developed capitalized software costs at December 31,
1997
F-11
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998
AND FOR EACH NINE MONTH PERIOD THEN ENDED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and September 30, 1998 totaled $395,322. Capitalized computer software costs
include direct labor, labor-related overhead costs and interest. The software
will be amortized over its expected useful life of 3 years after it is placed in
service. Amortization expense related to developed software since the product
was introduced in 1997 totaled $398,535 and $491,245 for the year ended December
31, 1997 and the nine months ended September 30, 1998 respectively. Management
periodically evaluates the recoverability, valuation, and amortization of
capitalized software cost. As part of this review, management considers the
undiscounted projected future net earnings. If the undiscounted future net
earnings is less than the stated value, software costs will be written down to
fair value.
REVENUE
Revenue is recognized at the point at which the processing of an insurance
claim is completed.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is provided using the straight
line method over the estimated useful lives of the depreciable assets which
range from the three to seven years. Maintenance and repairs are expensed as
incurred. Replacements and betterments are capitalized. Depreciation and
amortization related to fixed assets totaled $18,620 and $40,144 for the year
ended December 31, 1997 and the nine months ended September 30, 1998,
respectively.
DEFERRED OFFERING COSTS
Deferred offering costs are capitalized and will be recorded as a reduction
to stockholders' equity upon completion of the Company's Offering or expensed if
the Offering is unsuccessful.
CONSOLIDATION
The accompanying financial statements include the amounts of Claimsnet.com
inc. and its subsidiary from the date of acquisition. All material intercompany
accounts and transactions from that date have been eliminated in consolidation.
INCOME TAXES
The Company accounts for income taxes in accordance with the asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share", in 1997, which
requires the disclosure of basic and diluted net income (loss) per share. Basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of
F-12
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998
AND FOR EACH NINE MONTH PERIOD THEN ENDED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
common shares and common stock equivalents outstanding for the period. The
Company has no common stock equivalents or dilutive securities outstanding. As
such, diluted and primary loss per share is identical. Net loss per share has
been stated for all periods presented in accordance with SFAS No. 128.
USE OF ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued two new
statements: SFAS No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in equity
from nonowner sources; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for a public company's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Company's fiscal year ended December 31,
1998, with earlier application permitted. The effect of adoption of these
statements, if any, will be limited to the form and content of the Company's
disclosures and will not impact the Company's results of operations or financial
position.
In March 1998, the AICPA issued Statement of Position 98-1, Accounting for
Costs of Computer Software Developed or Obtained for Internal Use, to be
effective for fiscal years beginning after December 15, 1998. The statement
establishes the criteria for capitalizing and expensing costs incurred for such
development activities, measuring and recognizing impairment, and amortization
of capitalized costs. The Company is reviewing the effect, if any, of the
adoption of this pronouncement.
RECLASSIFICATION
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
NOTE C--MEDICA SYSTEMS, INC. ACQUISITION
On June 2, 1997, the Company completed the acquisition of Medica Systems,
Inc. ("Medica"), giving the Company ownership of the underlying source code of a
software program which processes medical insurance claims. The software was
previously licensed from Medica under a software licensing agreement. The
transaction was accounted for as a purchase. The Company received all of the
outstanding stock of Medica in exchange for a purchase price of $972,798 which
consisted of $100,000 cash at closing, 107,292 shares of the Company's common
stock, a contingent cash payment of $125,000 due within 60 days of closing an
initial public offering, a note for $225,000 due one year from the closing of an
initial public offering, and 50% of the amounts collected relating to the
accounts receivable of Medica existing on the closing date. The fair value of
the common stock given as consideration in the transaction totaled $465,000 or
$4.33 per share. The Company collected $115,595 of Medica's outstanding
receivables at the closing date and has included $57,797 (50%) as a part of the
purchase price. The contingent cash and notes
F-13
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998
AND FOR EACH NINE MONTH PERIOD THEN ENDED)
NOTE C--MEDICA SYSTEMS, INC. ACQUISITION (CONTINUED)
payable have been recorded as a part of the purchase price as they were
determinable at the date of closing. The fair value of assets and liabilities
acquired consisted of:
<TABLE>
<S> <C>
Software development costs........................................ $ 911,741
Accounts receivable, net.......................................... 115,595
Fixed assets...................................................... 24,694
Other current assets.............................................. 2,319
Current liabilities............................................... (81,551)
---------
$ 972,798
---------
---------
</TABLE>
Unaudited pro forma financial information for the years ended December 31,
1996 and 1997 as though the acquisition had occurred on January 1, 1996 is as
follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revenues.......................................................... $ 395,396 $ 407,656
------------ ------------
------------ ------------
Net loss.......................................................... $ 670,982 $ 2,687,655
------------ ------------
------------ ------------
Net loss per common share (basic and diluted)..................... $ (0.30) $ (1.03)
------------ ------------
------------ ------------
Weighted average common shares outstanding (basic and diluted).... 2,215,943 2,600,567
------------ ------------
------------ ------------
</TABLE>
NOTE D--LINE OF CREDIT AND NOTES PAYABLE
The Company has a line of credit facility with AMF of up to $2,000,000. At
December 31, 1997 and 1996, and September 30, 1998, advances under the line of
credit were $695,650, $510,250 and $1,903,355, respectively. The line of credit
bears interest at 9.50%, is due on October 1, 1999, and is collaterized by all
of the assets of the Company, other than that collateral specified by note
payable to AMF below.
The Company has a note payable to AMF of $2,000,000 at December 31, 1997 and
September 30, 1998 and $3,740,000 at December 31, 1996 (see Note H). The note
bears interest at 9.5%, is due on October 1, 1999, and is collaterized by all
Internet software and technology of the Company including software development
costs.
Accrued interest at December 31, 1997 and 1996 and September 30, 1998, under
the note and line of credit with AMF totaled $547,670, $158,123 and $770,378,
respectively, and is due on October 1, 1999.
Notes payable at December 31, 1997 and September 30, 1998 relate to debt
incurred in conjunction with the purchase of Medica (see Note C). The notes are
unsecured, due one year from the completion of an initial public offering, and
bear interest at 8% which will begin to accrue once the Offering is completed.
F-14
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998
AND FOR EACH NINE MONTH PERIOD THEN ENDED)
NOTE E--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate.
The note payable and the line of credit (both amounts are fixed rate debt)
have a carrying amount of $2,695,650 and $3,903,355 at December 31, 1997 and
September 30, 1998, respectively, and a fair value of approximately the same
amount. The fair value of the Company's fixed rate debt has been estimated based
upon relative changes in the Company's variable borrowing rates since
origination of the fixed rate debt.
NOTE F--CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments subject to credit risk consist primarily of cash
deposits which are at risk to the extent that they exceed Federal Deposit
Insurance Corporation insured amounts. At December 31, 1997, such uninsured
amounts totaled approximately $343,000 which are at risk in the event that the
financial institutions are unable to continue business. To minimize this risk,
the Company places its cash and cash equivalents with high credit quality
financial institutions.
For the year ended December 31, 1997, one customer acquired as part of the
Medica Acquisition generated revenue of $51,011, representing 62% of the
Company's total revenue for the year. The Company has subsequently cancelled its
contract with this customer. The $10,000 allowance for doubtful accounts at
December 31, 1997 and September 30, 1998 is related to this customer.
NOTE G--INCOME TAXES
Deferred tax assets and liabilities at December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- -------------
<S> <C> <C>
Current deferred tax asset............................................................. -- $ 3,697
Non-current deferred tax asset......................................................... 150,730 1,289,723
Non-current deferred tax liability..................................................... (37,587) (136,490)
Valuation allowance.................................................................... (113,143) (1,156,930)
---------- -------------
Net non-current deferred taxes......................................................... $ -- $ --
---------- -------------
---------- -------------
</TABLE>
The non-current deferred tax liability results from deferred offering costs
deducted for income tax purposes and deferred for financial reporting purposes.
The non-current deferred tax asset results from the net operating loss generated
by the Company. The net deferred tax asset has a 100% valuation allowance
recorded against it due to the uncertainty of generating future taxable income.
The Company's effective income tax rate differed from the Federal statutory
rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
Statutory rate of 34% applied to net loss............................................. $ 104,054 $ 945,645
Permanent difference.................................................................. -- 14,289
State income taxes, net of federal tax effect......................................... -- 83,853
Change in valuation allowance......................................................... (104,054) (1,043,787)
----------- -------------
$ -- $ --
----------- -------------
----------- -------------
</TABLE>
F-15
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998
AND FOR EACH NINE MONTH PERIOD THEN ENDED)
NOTE G--INCOME TAXES (CONTINUED)
At December 31, 1997, the Company has a net operating loss carryforward of
approximately $3,490,000 which begins to expire in 2011.
NOTE H--RELATED PARTY TRANSACTIONS
On July 31, 1996, the Company purchased software, licenses, intellectual
property rights and technology from AMF. As the software was purchased from a
related entity, the asset was recorded by the Company at the basis (in
accordance with Generally Accepted Accounting Principles) of AMF. Accordingly,
the asset was recorded at $615,000 with a corresponding note payable to AMF of
$3,740,000. The difference between the recorded cost of the asset and the note
payable of $3,125,000 is reflected as a contra to additional paid-in capital (a
deemed distribution). The asset was recorded at the net book value per the
affiliates records.
On September 23, 1997, AMF agreed to reduce its note receivable from the
Company by $1,740,000. The reduction in the note was recorded as a capital
contribution by AMF and effectively reduces the $3,125,000 contra to paid-in
capital described above.
The Company has a note payable and a line of credit facility with AMF (see
Note D).
Certain of the Company's expenses were paid by AMF and represent costs such
as rent, printing and office supplies. All such expenses were accounted for as
increases in the line of credit and comprise a significant portion of the
increase in 1997 and 1996.
The relationship with AMF could result in operating results or financial
position significantly different from that which would have been obtained if the
entities were autonomous.
NOTE I--STOCKHOLDERS' DEFICIT
During 1997, the Company raised $2,250,000 in gross proceeds under a private
placements memorandum which closed on May 7, 1997. The Company sold 45 units,
each unit consisting of 11,552 shares of common stock at $50,000 per unit, which
totaled 519,826 shares.
On May 15, 1997, the Board of Directors authorized a 2.325578 for 1 split in
common shares and an increase in authorized common shares to 40,000,000. In
addition, as discussed in Note J, on November 18, 1998 the Board authorized a 1
for 2.796117 reverse split in common shares and the change in common stock from
no par value to a par value of $0.001 per share concurrent with the
reincorporation of the Company in the State of Delaware. The financial
statements, including all references to the number of shares of common stock and
all per share information, have been adjusted on a retroactive basis to reflect
these equity transactions.
NOTE J--COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with several key
employees. The agreements generally provide for an annual base salary, incentive
compensation and termination provisions. Certain of the provisions are
contingent upon the completion of an initial public offering. The agreements are
for
F-16
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998
AND FOR EACH NINE MONTH PERIOD THEN ENDED)
NOTE J--COMMITMENTS AND CONTINGENCIES (CONTINUED)
terms ranging from two to five years. The minimum commitments under the
agreements are set forth in the following table.
<TABLE>
<CAPTION>
CONTINGENT
COMMITMENTS COMMITMENTS
------------- -------------
<S> <C> <C>
1998............................................................ $ 268,750 $ 156,250
1999............................................................ 175,000 250,000
2000............................................................ 72,917 250,000
2001............................................................ -- 250,000
2002............................................................ -- 250,000
</TABLE>
Compensation expense of $78,500 related to common stock issued under these
agreements is included in the statement of operations for the year ended
December 31, 1997.
In December 1997, the Company entered into an agreement with American
Airlines, Inc. (AA) to allow the Company to purchase miles in the AAdvantage
Incentive Miles (AAIM) program for the purpose of rewarding new customers of the
Company. In January 1998 the Company extended an offer to new providers who
enroll with the Company before June 30, 1998 and who submit 1,000 commercial
insurance claims by December 31, 1998 with a one-time reward of 10,000 AAIM
miles. A similar reward of 10,000 AAIM miles may also be rewarded to the
provider's designated billing administrator, with certain limitations. Further,
the Company will reward the provider with one additional AAIM mile for each
commercial claim in excess of 1,000 submitted by December 31, 1998. At December
31, 1997 and September 30, 1998 there was no material financial commitment to
AA. The agreement with AA expires on December 31, 1998. The Company will accrue
the estimated cost of the reward program as eligible claims are submitted by
participants.
NOTE K--STOCK OPTION PLAN
In April, 1997, the Board of Directors adopted the 1997 Stock Option Plan
(the "1997 Plan"). The Plan authorizes the grant of options to employees,
officers, directors, and consultants to purchase up to 750,000 shares of common
stock. At December 31, 1997 and September 30, 1998 no options had been granted
under the 1997 Plan.
NOTE L--SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company signed a letter of intent with
an underwriter for the completion of an initial public offering (IPO). In
conjunction with the IPO, on December 7, 1998, the Company reincorporated under
the laws of the state of Delaware under the name Claimsnet.com inc., changing
the par value of the Company's common stock to $0.001. In addition, effective
November 18, 1998, the Board of Directors approved a 1 for 2.796117 reverse
split of the Company's common stock.
The Company increased its credit line with AMF to $1,500,000 in January
1998, and to $2,000,000 in September 1998. At September 30, 1998, advances under
such line of credit were approximately $1,903,000.
During the second quarter of 1998, the Company consummated a private
offering of 20 units, each unit consisting of 10,729 shares of Common Stock, for
aggregate gross proceeds of $1,000,000 in the form of $550,000 cash and $450,000
debt cancellation related to a portion of the line of credit-affiliate. The
F-17
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1997 AND 1998
AND FOR EACH NINE MONTH PERIOD THEN ENDED)
NOTE L--SUBSEQUENT EVENTS (CONTINUED)
proceeds were recorded as common stock and additional paid-in capital. Pursuant
to the Securities Act of 1933, as amended, the rules and regulations thereunder,
and the interpretations of the Securities and Exchange Commission, the Company
may be required to offer rescission to investors in the 1998 bridge financing.
In the event that the Company is so required and all of such investors determine
to exercise such rescission rights, the Company would be required to refund the
entirety of the gross proceeds of such private offering to such investors. In
such event, the business, prospects, financial condition, and results of
operations of the Company could be materially adversely affected.
During March 1998, the Company agreed to loan $25,000 to a key employee at
6% interest. The principal and interest is due at the earlier of five years from
the date the loan is made, or upon the sale of any shares of the Company's
common stock by the employee, or twelve months from the date upon which
employment ceases.
In April 1998, the Board of Directors amended the 1997 Stock Option Plan
(the "1997 Plan") to authorize the grant of options to purchase up to 500,000
shares of common stock.
In April 1998, the Board of Directors adopted the Non-Employees and
Directors Plan (the "Directors Plan"). The Directors Plan authorized the grant
of options to outside directors to purchase up to 100,000 shares of common
stock.
In July 1998, the Company granted warrants to acquire an aggregate of 10,000
shares of common stock to a consultant of the Company. Such warrants are
exercisable for a period of four years commencing one year following the IPO at
a price per share equal to 110% of the IPO price.
During the period from July to October 1998 the Company consummated a
private offering of 29.5 units, each unit consisting of 8,333 shares of the
Company's common stock for aggregate gross proceeds of $1,475,000. The proceeds
were recorded as common stock and additional paid in capital. Pursuant to the
Securities Act of 1933, as amended, the rules and regulations thereunder, and
the interpretations of the Securities and Exchange Commission, the Company may
be required to offer rescission to investors in the 1998 bridge financing. In
the event that the Company is so required and all of such investors determine to
exercise such rescission rights, the Company would be required to refund the
entirety of the gross proceeds of such private offering to such investors. In
such event, the business, prospects, financial condition, and results of
operations of the Company could be materially adversely affected.
F-18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medica Systems, Inc.
We have audited the accompanying balance sheets of Medica Systems, Inc. as
of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended and the
period from May 1, 1994 (inception) to December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medica Systems, Inc. as of
December 31, 1996 and 1995 and the results of its operations and cash flows for
the years then ended and for the period from May 1, 1994 (inception) to December
31, 1994 in conformity with generally accepted accounting principles.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
June 2, 1997
F-19
<PAGE>
MEDICA SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash...................................................................................... $ 23,046 $ 21,271
Accounts receivable, net of allowance of $24,000 and $-0-................................. 32,216 6,991
Prepaid expenses.......................................................................... 4,388 --
Deferred income taxes..................................................................... 3,316 10,465
--------- ---------
Total current assets.................................................................... 62,966 38,727
--------- ---------
FIXED ASSETS
Office equipment.......................................................................... 33,217 21,626
Software.................................................................................. 10,329 6,332
Accumulated depreciation and amortization................................................. (12,640) (4,893)
--------- ---------
30,906 23,065
--------- ---------
OTHER ASSETS................................................................................ 560 770
--------- ---------
TOTAL ASSETS................................................................................ $ 94,432 $ 62,562
--------- ---------
--------- ---------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable........................................................ $ 8,683 $ 3,469
Accrued liabilities, including $1,300 due to stockholder................ 51,978 1,300
Deferred revenue........................................................ -- 75,000
Federal income taxes payable............................................ 1,011 129
--------- ---------
Total current liabilities............................................. 61,672 79,898
--------- ---------
DEFERRED INCOME TAXES, NON-CURRENT........................................ 1,287 1,532
TOTAL LIABILITIES......................................................... 62,959 81,430
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes E, F and G)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock--no par value; 1,000 shares
authorized; 730 shares issued and outstanding......................... 33,595 33,595
Accumulated deficit..................................................... (2,122) (52,463)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)...................................... 31,473 (18,868)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)...................... $ 94,432 $ 62,562
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
CONSULTING INCOME.............................................................. $ 395,396 $ 120,902 $ 79,952
---------- ---------- ---------
OPERATING EXPENSES
Bad debt provision........................................................... 24,000 -- --
Claims processing............................................................ 7,536 -- --
Depreciation and amortization................................................ 7,957 4,103 1,070
Legal settlement............................................................. 50,000 -- --
Professional fees............................................................ 46,788 17,522 1,825
Rents........................................................................ 2,625 -- --
Salaries and payroll taxes................................................... 161,253 150,086 62,767
Telephone.................................................................... 12,977 6,556 2,449
Travel....................................................................... 8,352 8,779 1,000
Other........................................................................ 15,652 7,790 (1,826)
---------- ---------- ---------
Total operating expense.................................................... 337,140 194,836 67,285
---------- ---------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES.......................................... 58,256 (73,934) 12,667
INCOME TAX BENEFIT (EXPENSE)................................................... (7,915) 10,779 (1,975)
---------- ---------- ---------
NET INCOME (LOSS).............................................................. $ 50,341 $ (63,155) $ 10,692
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
RETAINED
EARNINGS
NUMBER OF COMMON (ACCUMULATED
SHARES STOCK DEFICIT)
------------- --------- -------------
<S> <C> <C> <C>
Capital contribution at inception........................................ 730 $ 33,595 $ --
Net income............................................................... -- -- 10,692
--- --------- -------------
Balances at December 31, 1994............................................ 730 33,595 10,692
Net loss................................................................. -- -- (63,155)
--- --------- -------------
Balances at December 31, 1995............................................ 730 33,595 (52,463)
Net income............................................................... -- -- 50,341
--- --------- -------------
Balances at December 31, 1996............................................ 730 $ 33,595 $ (2,122)
--- --------- -------------
--- --------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................ $ 50,341 $ (63,155) $ 10,692
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities...............................
Depreciation and amortization.............................................. 7,957 4,103 1,070
Provision for bad debts.................................................... 24,000 -- --
Changes in assets and liabilities:
Accounts receivable.................................................... (49,225) 23,460 (30,451)
Prepaid expenses....................................................... (4,388) -- --
Organization costs..................................................... -- -- (1,050)
Accounts payable....................................................... 5,214 2,504 965
Accrued liabilities.................................................... 50,677 (1,850) 3,150
Deferred revenue....................................................... (75,000) 75,000 --
Federal income taxes payable........................................... 882 129 --
Deferred income taxes.................................................. 6,904 (10,908) 1,975
--------- ---------- ---------
Net cash provided (used) by operating activities......................... 17,362 29,283 (13,649)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.......................................... (15,587) (13,979) (11,164)
--------- ---------- ---------
Net cash used in investing activities.................................... (15,587) (13,979) (11,164)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock................................................... -- -- 30,780
--------- ---------- ---------
Net cash provided by financing activities................................ -- -- 30,780
NET INCREASE IN CASH........................................................... 1,775 15,304 5,967
Cash--beginning balance...................................................... 21,271 5,967 --
--------- ---------- ---------
Cash--ending balance......................................................... $ 23,046 $ 21,271 $ 5,967
--------- ---------- ---------
--------- ---------- ---------
Supplemental disclosure of income taxes paid................................... $ 129 $ -- $ --
--------- ---------- ---------
--------- ---------- ---------
Supplemental schedule of non-cash investing and financing activities
Equipment contributed by shareholder......................................... $ -- $ -- $ 2,815
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
NOTE A--BACKGROUND AND ORGANIZATION
Medica Systems, Inc. ("Medica" or the "Company") was incorporated in the
state of Texas on May 1, 1994. Medica was formed for the purpose of developing
software in the healthcare industry. The Company provides consulting services
for medical billing processing.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of 3 months or less when purchased.
OFFICE EQUIPMENT
Office equipment is stated at cost. Depreciation is provided using the
straight line method over the estimated useful lives of the assets of five to
seven years. Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized.
SOFTWARE
Software is stated at cost. Amortization is calculated using the straight
line method over the estimated useful lives of the software of five years.
INCOME TAXES
The Company accounts for income taxes in accordance with the asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
REVENUE RECOGNITION
Revenue relating to services is recognized upon completion of services,
which are usually completed within one fiscal year. Payments for services
received in advance are deferred and recognized when services have been
rendered.
USE OF ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
F-24
<PAGE>
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
NOTE C--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. All
financial assets and liabilities are current and have carrying amounts and fair
values of approximately the same amount.
NOTE D--INCOME TAXES
Deferred tax assets and liabilities at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Current deferred tax asset............................................... $ 3,316 $ 10,465
Current deferred tax liability........................................... -- --
--------- ---------
Net current deferred income taxes...................................... 3,316 10,465
--------- ---------
--------- ---------
Non-current deferred tax asset........................................... -- --
Non-current deferred tax liability....................................... (1,287) (1,532)
--------- ---------
Net non-current deferred income taxes.................................. $ (1,287) $ (1,532)
--------- ---------
--------- ---------
</TABLE>
The current deferred tax asset results from the differences in timing of
revenue recognition for income tax and financial reporting purposes and use of
cash basis for income tax purposes. The non-current deferred tax liability
results from differences in depreciation for income tax and financial reporting
purposes.
The components of income tax expense (benefit) for the years ended December
31, 1996 and 1995 and the period from May 1, 1994 to December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Federal:
Current...................................................... $ 1,011 $ 129 $ --
Deferred..................................................... 6,904 (10,908) 1,975
--------- ---------- ---------
$ 7,915 $ (10,779) $ 1,975
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The Company's effective income tax rate differed from the Federal statutory
rate of 15% as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Statutory rate of 15% (the Company's effective tax rates during
the periods presented) applied to net income (loss).......... $ 8,738 $ (11,090) $ 1,900
Non deductible expenses........................................ (228) (240) 75
Other.......................................................... (595) 551 --
--------- ---------- ---------
$ 7,915 $ (10,779) $ 1,975
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
F-25
<PAGE>
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
NOTE E--CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's business activities are primarily with customers located
within the state of Texas. During 1996, four customers accounted for
approximately 96% of revenues. One of the customers, American Medical Finance,
Inc. ("AMF"), accounted for 22% of the revenues for 1996. The remaining three
customers accounted for 39%, 22% and 13%, respectively. AMF is an affiliate of
ANC (See Note G). At December 31, 1996, one customer comprised approximately 43%
of trade accounts receivable. The Company has recorded an allowance of $24,000
related to this receivable. A second customer, AMF, comprised approximately 29%
of trade accounts receivable. Management evaluates accounts receivable balances
on an on-going basis and provides allowances as necessary for amounts estimated
to eventually become uncollectible. In the event of complete non- performance of
accounts receivable, the maximum exposure to the Company is the recorded amount
shown on the balance sheet.
NOTE F--COMMITMENT
The Company entered into a lease for office space in November, 1996 which
expires in April, 1997. Minimum lease payments under this lease for 1997 total
$3,500.
NOTE G--SUBSEQUENT EVENTS
The Company was involved in litigation which was settled subsequent to
December 31, 1996. In terms of the settlement, the Company is obligated to pay
$50,000. This amount was accrued and has been reflected as legal settlement
expense for the year ended December 31, 1996.
On May 30, 1997, the Company was acquired by American Net Claims, Inc.
("ANC") in exchange for cash, notes and common stock of ANC.
F-26
<PAGE>
MEDICA SYSTEMS, INC.
BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................ $ 36,113
Accounts receivable, net of allowance of $30,000................................ 37,226
Deferred income taxes........................................................... 4,063
---------
Total current assets.......................................................... 77,402
---------
FIXED ASSETS
Office equipment................................................................ 35,322
Software........................................................................ 10,329
Accumulated depreciation and amortization....................................... (14,715)
---------
30,936
---------
OTHER ASSETS...................................................................... 507
---------
TOTAL ASSETS...................................................................... $ 108,845
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................................ $ 12,018
Accrued liabilities, including $1,300 due to stockholder........................ 57,010
Federal income taxes payable.................................................... 1,208
---------
Total current liabilities..................................................... 70,236
---------
DEFERRED INCOME TAXES, NON-CURRENT................................................ 1,487
TOTAL LIABILITIES................................................................. 71,723
---------
STOCKHOLDERS' EQUITY
Common stock--no par value; 1,000 shares authorized; 730 shares issued and
outstanding................................................................... 33,595
Retained earnings............................................................... 3,527
---------
TOTAL STOCKHOLDERS' EQUITY........................................................ 37,122
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................ $ 108,845
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<S> <C>
CONSULTING INCOME................................................................. $ 106,507
---------
OPERATING EXPENSES
Bad debt provision.............................................................. 6,000
Claims processing............................................................... 5,775
Depreciation and amortization................................................... 2,128
Professional fees............................................................... 11,530
Rents........................................................................... 2,625
Salaries and payroll taxes...................................................... 62,206
Telephone....................................................................... 4,345
Travel.......................................................................... 1,771
Other........................................................................... 3,817
---------
Total operating expense....................................................... 100,197
---------
NET INCOME BEFORE INCOME TAXES.................................................... 6,310
INCOME TAX EXPENSE................................................................ (661)
---------
NET INCOME........................................................................ $ 5,649
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CASH FLOWS PROVIDED BY IN OPERATING ACTIVITIES
<S> <C>
Net income...................................................................... $ 5,649
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................................. 2,128
Provision for bad debts....................................................... 6,000
Changes in assets and liabilities:
Accounts receivable....................................................... (11,010)
Prepaid expenses.......................................................... 4,388
Accounts payable.......................................................... 3,335
Accrued liabilities....................................................... 5,032
Federal income taxes payable.............................................. 197
Deferred income taxes..................................................... (547)
---------
Net cash provided by operating activities................................... 15,172
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment............................................. (2,105)
---------
Net cash used in investing activities......................................... (2,105)
NET INCREASE IN CASH.............................................................. 13,067
Cash--beginning balance......................................................... 23,046
---------
Cash--ending balance............................................................ $ 36,113
---------
---------
Supplemental disclosure of income taxes paid...................................... $ 1,011
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED)
NOTE A--INTERIM INFORMATION
Interim information is unaudited; however, in the opinion of the Company's
management, all adjustments necessary for a fair statement of interim results
have been included in accordance with generally accepted accounting principles.
All adjustments are of a normal recurring nature. The results for interim
periods are not necessarily indicative of results to be expected for the entire
year. These financial statements and notes should be read in conjunction with
the Company's annual financial statements and the notes thereto for the fiscal
year ended December 31, 1996.
NOTE B--SUBSEQUENT EVENT
On June 2, 1997, the Company was acquired by American Net Claims, Inc.
("ANC") in exchange for cash, notes and common stock of ANC.
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY.............................. 3
RISK FACTORS.................................... 8
USE OF PROCEEDS................................. 20
DILUTION........................................ 22
CAPITALIZATION.................................. 23
DIVIDEND POLICY................................. 24
SELECTED FINANCIAL DATA......................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 26
BUSINESS........................................ 31
MANAGEMENT...................................... 39
PRINCIPAL STOCKHOLDERS.......................... 47
CERTAIN TRANSACTIONS............................ 48
DESCRIPTION OF SECURITIES....................... 49
SHARES ELIGIBLE FOR FUTURE SALE................. 52
UNDERWRITING.................................... 53
LEGAL MATTERS................................... 56
EXPERTS......................................... 56
ADDITIONAL INFORMATION.......................... 56
INDEX TO FINANCIAL STATEMENTS................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,600,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
STRASBOURGER PEARSON
TULCIN WOLFF INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby,
excluding the underwriters' discounts and commissions (items marked with an
asterisk (*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 5,727.00
Legal Fees and Expenses........................................ 200,000.00*
Blue Sky Fees (including counsel fees)......................... 35,000.00*
NASD Filing Fees............................................... 4,272.00
Listing Fees................................................... 20,000.00*
Accounting Fees and Expenses................................... 35,000.00*
Transfer Agent and Registrar Fees.............................. 5,000.00*
Printing and Engraving Expenses................................ 60,000.00
Miscellaneous.................................................. 203,001.00
----------
Total...................................................... $568,000.00*
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. The Company's Certificate of Incorporation includes the
following language:
"The personal liability of the Directors of the Corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of Subsection (b) of
Section 102 of the General Corporation Law of the State of Delaware as the same
may be amended and supplemented."
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware law to indemnify directors and officers with respect to
any matter in which the director or officer acted in good faith and in a manner
he reasonably believed to be not opposed to the best interests of the Company,
and, with respect to any criminal action, had reasonable cause to believe his
conduct was lawful. Article VII, Section 7 of the By-laws of the Company
provides as follows:
"The corporation shall indemnify its officers, directors, employees, and
agents to the extent permitted by the General Corporation Law of Delaware."
Article 11 of the Certificate of Incorporation of the Company, as amended,
permits indemnification of, and advancement of expenses to, among others,
officers and directors of the Corporation. Such Article provides as follows:
"(a) Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director, officer, employee, or
agent of the Corporation or any of its direct or indirect subsidiaries or is or
was serving at the request of the
II-1
<PAGE>
Corporation as a director, officer, employee, or agent of any other corporation
or of a partnership, joint venture, trust, or other enterprise, including
service with respect to an employee benefit plan (hereinafter an "indemnitee"),
whether the basis of such proceeding is alleged action in an official capacity
as a director, officer, employee, or agent or in any other capacity while
serving as a director, officer, employee, or agent, shall be indemnified and
held harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than permitted
prior thereto), against all expense, liability, and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith, and such indemnification shall continue as to an indemnitee who has
ceased to be a director, officer, employee, or agent and shall inure to the
benefit of the indemnitee's heirs, executors, and administrators; provided,
however, that, except as provided in paragraph (c) of this Article 11 with
respect to proceedings to enforce rights to indemnification, the Corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation.
"(b) The right to indemnification conferred in paragraph (a) of this Article
11 shall include the right to be paid by the Corporation the expenses incurred
in defending any proceeding for which such right to indemnification is
applicable in advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the Delaware General Corporation Law
requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under this Article 11 or otherwise.
"(c) The rights to indemnification and to the advancement of expenses
conferred in paragraphs (a) and (b) of this Article 11 shall be contract rights.
If a claim under paragraph (a) or (b) of this Article 11 is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by an indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the
II-2
<PAGE>
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article 11 or otherwise, shall be on the Corporation.
"(d) The rights to indemnification and to the advancement of expenses
conferred in this Article 11 shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, this certificate of
incorporation, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
"(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, or agent of the Corporation or
another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability, or loss
under the Delaware General Corporation Law.
"(f) The Corporation's obligation, if any, to indemnify any person who was
or is serving as a director, officer, employee, or agent of any direct or
indirect subsidiary of the Corporation or, at the request of the Corporation, of
any other corporation or of a partnership, joint venture, trust, or other
enterprise shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust,
or other enterprise.
"(g) Any repeal or modification of the foregoing provisions of this Article
11 shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification."
Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1
to the Registration Statement for certain provisions regarding indemnification
of the Company, its officers and directors, and any controlling persons by the
Underwriters against certain liabilities for information furnished by the
Underwriters.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the numbers
of shares of Common Stock sold by the Company, the number of options issued by
the Company, and the principal amount of debt instruments issued by the Company
since April 8, 1996 (inception), the consideration received by the Company for
such shares, options and debt instruments and information relating to the
section of the Securities Act or rule of the Securities and Exchange Commission
under which exemption from registration was claimed. None of these securities
was registered under the Securities Act. Except as otherwise indicated, no sales
of securities involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
Each of such transactions was exempt from registration under the Securities
Act by virtue of the provisions of Section 4(2) and/or Section 3(b) of the
Securities Act. Each purchaser of the securities described below has represented
that he/she/it understands that the securities acquired may not be sold or
otherwise transferred absent registration under the Securities Act or the
availability of an exemption from the registration requirements of the
Securities Act, and each certificate evidencing the securities owned by each
purchaser bears or will bear upon issuance a legend to that effect.
All share numbers set forth below give effect to a 2.325578-for-one stock
split effected on May 15, 1997 and a 2.796117-for-one-reverse stock split
effected on November 18, 1998.
II-3
<PAGE>
From the Company's inception through December 31, 1996, the Company issued
to certain stockholders, including the founders of the Company, certain other
directors and officers of the Company, a total of 2,120,879 shares of Common
Stock at a price of $.001 per share.
On March 26, 1997, the Company issued to Terry A. Lee 41,586 shares of
Common Stock at a price of approximately $1.89 per share.
On May 21, 1997, the Company completed a private placements, for $2,250,000,
of 45 Units, each Unit consisting of 11,552 shares of Common Stock, at a price
of $50,000 per Unit. Each of the investors agreed to acquire the Units for
investment purposes only and not with a view to distribution. The certificates
evidencing the Common Stock underlying the Units were appropriately legended. In
the opinion of the Registrant, the offer and the sale of the Units was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. During the second quarter of 1998, the Company completed a private
placements of 20 Units, each Unit consisting of 10,729 shares of Common Stock,
at a price of $50,000 per Unit. Each of the investors agreed to acquire the
Units for investment purposes only and not with a view to distribution. The
certificates evidencing the Common Stock underlying the Units were appropriately
legended. In the opinion of the Registrant, the offer and the sale of the Units
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder. During July to October 1998, the Company completed a
private placements of 29.5 Units, each Unit consisting of 8,333 shares of Common
Stock, at a price of $50,000 per Unit. Each of the investors agreed to acquire
the Units for investment purposes only and not with a view to distribution. The
certificate evidencing the Common Stock underlying the Units were appropriately
legended. In the opinion of the Registrant, the offer and sale of the Units was
exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. Each of the offerees and investors in such private placements
provided representations to the Registrant that they were each "accredited
investors," as defined in Rule 501 under the Securities Act, as well as highly
sophisticated investors, and (ii) many of the investors in the 1998 private
placements were existing stockholders of the Registrant at the time of such
transaction. Each investor in such private placements, whether a new investor or
existing investor, has been afforded the right to conduct a complete due
diligence review of the Registrant if they so desire, has been offered the
opportunity to ask questions of, and receive answers from the Company, and to
ask questions of this firm as securities counsel and the auditors of the
Company. An aggregate of 17 offerees were approached by the Registrant, one of
which was a U.S. institutional investor, four of which were European
institutional investors, and no more than 12 were highly accredited individuals
resident in the U.S.
On July 6, 1998, the Company granted warrants to acquire an aggregate of
10,000 shares of Common Stock to Robert M. Rubin in connection with his
retention as a healthcare consultant to the Company. Such warrants are
exercisable for a period of four years commencing one year following this
offering at a price per share equal to 110% of the initial public offering price
per share in this offering.
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ----------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1+ Articles of Incorporation
3.2+ Bylaws
4.1+ Form of Representative's Warrant
4.2+ Form of Common Stock Certificate
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ----------
<C> <S>
5.1 Opinion of Brock Silverstein McAuliffe LLC
10.1 Employment Agreement, dated as of April 8, 1997 between Claimsnet.com inc. and Bo W. Lycke
10.2 1997 Stock Option Plan, as amended
10.3+ Form of Indemnification Agreement
10.4+ Agreement and Plan of Merger, dated June 2, 1997, among Claimsnet.com inc. (formerly, American NET
Claims Inc.), ANC Holdings, Inc., Medica Systems, Inc., and the stockholders of Medica Systems Inc.
10.5+ Promissory Note, dated July 31, 1996, from American NET Claims Inc. to American Medical Finance, Inc.,
in the principal amount of $3,740,000
10.6+ Security Agreement, dated July 31, 1996, between Claimsnet.com inc. and American Medical Finance, Inc.
10.7+ Employment Agreement, dated as of September 17, 1996, between Claimsnet.com inc. and Terry A. Lee, as
amended as of March 26, 1997 and April 6, 1998.
10.8+ Service Agreement, dated August 5, 1997, between American Medical Finance, Inc. and Claimsnet.com inc.
10.9+ Employment Agreement, dated June 2, 1997, between Claimsnet.com inc. and Randall S. Lindner
10.10+ Form of Agreement, dated September 14, 1998, between the Company and BlueCross BlueShield of Louisiana
10.11 Form of Non-Employee Director's Plan
10.12+ Line of Credit with AMF in amount of $2,000,000
10.13+ Financial Consulting Agreement.
23.1 Consent of King Griffin & Adamson P.C.
23.2 Consent of Brock Silverstein McAuliffe LLC (contained in the Opinion filed as Exhibit 5.1).
24.1+ Power of Attorney
</TABLE>
- ------------------------
+ Previously filed.
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
(b) The Registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective.
(2) For the purpose of determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time as the initial bona fide offering
thereof.
(c) The Registrant hereby undertakes that it will provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this
Pre-Effective Amendment No. 7 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Dallas,
Texas on December 7, 1998.
Claimsnet.com inc.
By: /s/ BO W. LYCKE
------------------------------------------
Bo W. Lycke
Chairman of the Board of Directors,
President, and Chief Executive Officer
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board of
/s/ BO W. LYCKE Directors, President, and
- ------------------------------ Chief Executive Officer December 7, 1998
Bo W. Lycke (Principal Executive
Officer)
Vice President and Chief
* Financial Officer
- ------------------------------ (Principal Financial and December 7, 1998
Paul W. Miller Accounting Officer)
* Executive Vice President of
- ------------------------------ Marketing and Technology December 7, 1998
Terry A. Lee and Director
*
- ------------------------------ Director December 7, 1998
Ward L. Bensen
*
- ------------------------------ Director December 7, 1998
Robert H. Brown, Jr.
*
- ------------------------------ Director December 7, 1998
Sture Hedlund
*
- ------------------------------ Director December 7, 1998
John C. Willems, III
<TABLE>
<S> <C> <C>
*By: /s/ BO W. LYCKE
------------------------------------------
Bo W. Lycke
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
BROCK SILVERSTEIN MCAULIFFE LLC
One Citicorp Center (212) 371-2000
56th Floor Fax (212) 371-5500
New York, NY 10022-4611
December 7, 1998
Claimsnet.com inc.
12801 N. Central Expressway, Suite 1515
Dallas, Texas 75243
Gentlemen:
You have requested our opinion in connection with certain matters relating
to the registration statement on Form S-1 (the "Registration Statement") (File
No. 333-36209) (the "Registration Statement") filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"), to
register the sale of, among other things, up to 1,725,000 shares (the "Shares")
of common stock, par value $.001 per share, of Claimsnet.com inc., a Delaware
corporation (the "Company"), by the Company.
In connection herewith, we have examined such records, documents, statutes
and decisions as we have deemed relevant. In addition, we have relied upon
Certificates of Officers of the Company and certificates and telegrams of public
officials as to certain matters relating to this opinion as we have deemed
necessary for purposes hereof.
In rendering this opinion, we have assumed that all necessary corporate
action on the part of the Company has been taken in connection with the issuance
of the Shares and the registration thereof under the Act.
Based upon, and subject to, the foregoing, we are of the opinion, as at the
date hereof, that the Shares are validly authorized and legally issued, fully
paid, and nonassessable.
We are members of the Bar of the State of New York. The opinion expressed
herein is expressly limited to the laws of the State of New York, the Federal
laws of the United States of America, and the General Corporation Law of the
State of Delaware.
We hereby consent to the use of this opinion as Exhibit 5 to the
Registration Statement and the reference to our firm in the Registration
Statement under the caption "Legal Opinions." By doing so, we do not admit that
we come within the category of persons whose consent is required by the Act or
the rules and regulation promulgated thereunder.
Very truly yours,
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of April
8, 1997 between AMERICAN NET CLAIMS, INC., a Texas corporation with a principal
place of business at 12801 North Central Expressway, Suite 1515, Dallas, Texas
75243, and BO W. LYCKE ("Employee").
In consideration for the mutual covenants and conditions set forth
herein, the parties hereby agree as follows:
1. Employment. The Company hereby employs Employee in the capacity of
Chairman of the Board of Directors, President, and Chief Executive Officer.
Employee accepts such employment and agrees to perform such services as are
customary to such offices and shall from time to time be assigned to him by the
Board of Directors.
2. Term. Subject to earlier termination as provided in Section 5, the
employment hereunder shall be for a period of four years, commencing on January
1, 1998 or the Company's Initial Public Offering, whichever is later, (the
"Commencement Date") and ending on December 31, 2002. Employee's employment will
be on a full-time basis requiring the devotion of such amount of his productive
time as is necessary for the efficient operation of the business of the Company.
3. Compensation and Benefits.
3.1 Salary. For the performance of Employee's duties
hereunder, the Company shall pay Employee an annual salary of $250,000 (less
required withholdings), payable no less frequently than twice monthly.
3.2 Benefits. Employee shall be entitled to the use of a
Company-owned vehicle or shall receive an automobile allowance, not to exceed
$5,000 annually. Employee shall be entitled to such medical, disability, and
life insurance coverage and such vacation, sick leave, and holiday benefits, if
any, as are made available to the Company's top executive personnel, all in
accordance with the Company's benefits program in effect from time to time.
3.3 Reimbursement of Expenses. Employee shall be entitled to
reimbursement for all reasonable expenses for travel, meals, and entertainment,
incurred by Employee in connection with and reasonably related to the
furtherance of the Company's business.
3.4 Annual Review. On each anniversary of the Commencement
Date, the Board of Directors will review Employee's performance and compensation
hereunder (including salary, bonus, and stock options and/or other equity
incentives) and will approve an increase in such compensation of not less than
5% annually, but will not have authority, as the result of such review, to
decrease any portion of such compensation without the written consent of
Employee.
4. Change of Control. In the event of a Change in Control of the
Company (as
<PAGE>
defined below), all options then granted to Employee which are unvested at the
date of the Change in Control will be immediately vested. In addition, in the
event of a termination of Employee's employment for any reason (other than as
set forth in Section 5.1(f)) following a Change of Control, the Company will
promptly pay Employee, in addition to the amounts required under Section 5.2(a),
a lump-sum severance amount payable immediately upon such termination of
employment, equal to one-half of his then current annual salary. This payout
shall be in lieu of any amount which may otherwise be due under Section 5.2(b).
As used herein, a "Change of Control" of the Company shall be deemed to
have occurred:
(a) Upon the consummation, in one transaction or a series of related
transactions, of the sale or other transfer of voting power (including voting
power exercisable on a contingent or deferred basis as immediately exercisable
voting power) representing effective control of the Company to a person or group
of related persons who, on the date of this Agreement, is not affiliated (within
the meaning of the Securities Act of 1933) with the Company, whether such sale
or transfer results from a tender offer or otherwise; or
(b) Upon the consummation of a merger or consolidation in which the
Company is a constituent corporation and in which the Company's stockholders
immediately prior thereto will beneficially own, immediately thereafter,
securities of the Company or any surviving or new corporation resulting
therefrom having less than a majority of the voting power of the Company or any
such surviving or new corporation; or
(c) Upon the consummation of a sale, lease, exchange, or other transfer
or disposition by the Company of all or substantially all its assets to any
person or group of related persons.
5. Termination.
5.1 Termination Events. The employment hereunder will
terminate upon the occurrence of any of the following events:
(a) Employee dies;
(b) The Company, by written notice to Employee or his personal
representative, discharges Employee due to the inability to perform the duties
assigned to him hereunder for a continuous period exceeding 90 days by reason of
injury, physical or mental illness, or other disability, which condition has
been certified by a physician; provided, however, that prior to discharging
Employee due to such disability, the Company shall give a written statement of
findings to Employee or his personal representative setting forth specifically
the nature of the disability and the resulting performance failures, and
Employee shall have a period of ten (10) days thereafter to respond in writing
to the Board of Director's findings;
(c) Employee is discharged by the Board of Directors of the
Company for cause. As used in this Agreement, the term "cause" shall mean:
<PAGE>
(i) Employee's conviction of (or pleading guilty or
no lo contendere to a felony or misdemeanor involving dishonesty or moral
turpitude; or
(ii) (a) the willful and continued failure of
Employee to substantially perform his duties with the Company (other than any
such failure resulting from illness or disability) after a demand for
substantial performance is requested by the Company's Board of Directors, which
specifically identifies the manner in which it is claimed Employee has not
substantially performed his duties, or (b) Employee is willingly engaged in
misconduct which has a direct and material adverse monetary effect on the
Company. For purposes of this subpart (ii) no act or failure to act on
Employee's part shall be considered "willful" unless done, or omitted to be
done, by Employee not in good faith and without reasonable belief that
Employee's actions were in the best interest of the Company. No termination
shall be effected for cause pursuant to this subpart (ii) unless Employee has
been provided with specific information as to the acts or omissions which form
the basis of the allegation of cause, and Employee has had an opportunity to be
heard, with counsel if he so desires, before the Board of Directors and such
Board determines in good faith that Employee was guilty of conduct constituting
"cause" as herein defined, specifying the particulars thereof in detail;
(d) Employee is discharged by the Board of Directors of the
Company without cause, which the Company may do at any time upon notice to
Employee;
(e) Employee voluntarily terminates his employment due to
either (i) a default by the Company in the performance of any of its obligations
hereunder, or (ii) an Adverse Change in Duties (as defined below), which default
or Adverse Change in Duties remains unremedied by the Company for a period of
ten (10) days following its receipt of written notice thereof from Employee; or
(f) Employee voluntarily terminates his employment for any
reason other than the Company's default or an Adverse Change in Duties, which
Employee may do at any time with at least 30 days advance written notice.
As used herein, "Adverse Change in Duties" means an action or series of
actions taken by the Company, without Employee's prior written consent, which
results in:
(1) A change in Employee's reporting responsibilities, titles,
job responsibilities, or offices, which, in Employee's reasonable judgment,
results in a diminution of his status, control, or authority;
(2) The assignment to Employee of any positions, duties, or
responsibilities which, in Employee's reasonable judgment, are inconsistent with
Employee's positions, duties, and responsibilities or status with the Company;
(3) A requirement by the Company that Employee be based or
perform his duties anywhere other than (i) at the Company's corporate office
location on the date of this Agreement, or (ii) if the Company's corporate
office location is moved after the date of this
<PAGE>
Agreement, at a new location that is no more than 60 miles from such prior
location; or
(4) A failure by the Company (i) to continue in effect any
material benefit, whether or not qualified, or other compensation, bonus, or
incentive plan in effect on the date of this Agreement or subsequently adopted,
(ii) to continue Employee's participation in such benefits or plans at the same
level or to the same extent as on the Commencement Date or, with respect to
subsequently adopted benefits or plans, on the date of the initial
implementation thereof, or (iii) to provide for Employee's participation in any
newly adopted benefits or plans at a level commensurate, in Employee's
reasonable judgment, with that of other top executives of the Company.
5.2 Effects of Termination.
(a) Upon termination of Employee's employment hereunder for
any reason, the Company will promptly pay Employee all compensation owed to
Employee and unpaid through the date of termination (including, without
limitation, salary and employee expense reimbursements).
(b) In addition (except in a situation where severance is due
pursuant to Section 4), if Employee's employment is terminated under Sections
5.1(a), (b), (d), or (e), the Company shall also pay Employee, immediately upon
such termination of employment, a lump-sum severance amount equal to his then
current annual salary.
(c) Upon termination of Employee's employment hereunder for
any reason, Employee agrees that for the one year period following the
Termination Event:
(i) Employee will not directly or indirectly, whether
for his own account or as an individual, employee, director, consultant, or
advisor, or in any other capacity whatsoever, provide services to any other
person, firm, corporation, or other business enterprise which is involved in
claims processing or other healthcare related matters unless he obtains the
prior written consent of the Board of Directors.
(ii) Employee will not directly or indirectly
encourage or solicit, or attempt to encourage or solicit, any individual to
leave the Company's employ for any reason or interfere in any other manner with
the employment relationships at the time existing between the Company and its
current or prospective employees.
(iii) Employee will not induce or attempt to induce
any customer, supplier, distributor, licensee, or any other business relation of
the Company to cease doing business with the Company or in any way interfere
with the existing business relationship between any such customer, supplier,
distributor, licensee, or any other business relation and the Company.
Employee acknowledges that monetary damages may not be sufficient to
compensate the Company for any economic loss which may be incurred by reason of
breach of the foregoing
<PAGE>
restrictive covenants. Accordingly, in the event of any such breach, the Company
shall, in addition to any remedies available to the Company at law, be entitled
to obtain equitable relief in the form of an injunction precluding Employee from
continuing to engage in such breach.
If any restriction set forth in this paragraph is held to be
unreasonable, then Employee and the Company agree, and hereby submit, to the
reduction and limitation of such prohibition to such area or period as shall be
deemed reasonable.
6. General Provisions.
6.1 Assignment. Neither party may assign or delegate any of
its rights or obligations under this Agreement without the prior written consent
of the other party, except that the Company may assign its rights and
obligations hereunder to a successor by merger or an assignee of all or
substantially all of the Company's assets.
6.2 Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes any and all prior agreements between the parties relating to such
subject matter.
6.3 Modifications. This Agreement may be changed or modified
only by an agreement in writing signed by both parties hereto.
6.4 Successor and Assigns. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Company and its
successors and assigns and Employee and Employee's legal representatives, heirs,
legatees, distributees, assigns, and transferees by operation of law, whether or
not any such person shall have become a party to this Agreement and have agreed
in writing to join and be bound by the terms and conditions hereof.
6.5 Governing Law. This Agreement shall be governed by, and be
construed in accordance with, the laws of Texas.
6.6 Severability. If any provision of this Agreement is held
by a court of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect.
6.7 Further Assurances; Committees of Board. The parties will
execute such further instruments and take such further actions as may be
reasonably necessary to carry out the intent of this Agreement. The term "Board
of Directors" shall include any committee of the Board.
6.8 Notices. Any notices or other communications required or
permitted hereunder shall be in writing and shall be deemed received by the
recipient when delivered personally or, if mailed, five (5) days after the date
of deposit in the United States mail, certified or registered, postage prepaid
and addressed, in the case of the Company, to 12801 North Central Expressway,
Suite 1515, Dallas, Texas 75243, and in the case of Employee, to 4730 Melissa,
<PAGE>
Dallas, Texas 75229, or to such other address as either party may later specify
by at least ten (10) days advance written notice delivered to the other party in
accordance herewith.
6.9 No Waiver. The failure of either party to enforce any
provision of this Agreement shall not be construed as a waiver of that
provision, nor prevent that party from thereafter enforcing that provision or
any other provision of this Agreement.
6.10 Legal Fees and Expenses. In the event of any disputes
under this Agreement, each party shall be responsible for their own legal fees
and expenses which it may incur in resolving such dispute.
6.11 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Employee have executed
this Agreement effective as of the date first above written.
CLAIMSNET.COM INC.
By:
--------------------------------
Terry A. Lee
Executive Vice President of
Marketing and Technology
Employee
<PAGE>
Claimsnet.com inc.
1997 STOCK OPTION PLAN
Adopted April 5, 1997
I. Purpose.
The purpose of the claimsnet.com, inc. 1997 Stock Option Plan (the "Plan")
is to provide a means whereby selected employees, officers, directors, and
consultants of claimsnet.com, inc., a Delaware corporation (the "Company"), or
of any parent or subsidiary (as defined in subsection 5.7 hereof and referred to
hereinafter as "Affiliates") thereof, may be granted incentive stock options
and/or nonqualified stock options to purchase shares of common stock, $.10 par
value (the "Common Stock") in order to attract and retain the services or advice
of such employees, officers, directors, and consultants and to provide
additional incentive for such persons to exert maximum efforts for the success
of the Company and its Affiliates by encouraging stock ownership in the Company.
II. Administration.
Subject to Section 2.3 hereof, the Plan shall be administered by the Board
of Directors of the Company (the "Board") or, in the event the Board shall
appoint and/or authorize a committee of two or more members of the Board to
administer the Plan, by such committee. The administrator of the Plan shall
hereinafter be referred to as the "Plan Administrator."
The foregoing notwithstanding, in the event the Company shall register any
of its equity securities pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and any directors are
eligible to receive options under the Plan, then with respect to grants to be
made to directors: (a) the Plan Administrator shall be constituted so as to meet
the requirements of Section 16(b) of the Exchange Act and Rule 16b-3 thereunder,
each as amended from time to time, or (b) if the Plan Administrator cannot be so
constituted, no options shall be granted under the Plan to any directors.
Section 2.1 Procedures. The Board shall designate one of the members of
the Plan Administrator as chairman. The Plan Administrator may hold meetings at
such times and places as it shall determine. The acts of a majority of the
members of the Plan Administrator present at meetings at which a quorum exists,
or acts approved in writing by all Plan Administrator members, shall be valid
acts of the Plan Administrator.
Section 2.2 Responsibilities. Except for the terms and conditions
explicitly set forth herein, the Plan Administrator shall have the authority, in
its discretion, to determine all matters relating to the options to be granted
under the Plan, including, without limitation, selection of whether an option
will be an incentive stock option or a nonqualified stock option, selection of
the individuals to be granted options, the number of shares to be subject to
each option, the exercise
- 1 -
<PAGE>
price per share, the timing of grants and all other terms and conditions of the
options. Grants under the Plan need not be identical in any respect, even when
made simultaneously. The Plan Administrator may also establish, amend, and
revoke rules and regulations for the administration of the Plan. The
interpretation and construction by the Plan Administrator of any terms or
provisions of the Plan or any option issued hereunder, or of any rule or
regulation promulgated in connection herewith, shall be conclusive and binding
on all interested parties, so long as such interpretation and construction with
respect to incentive stock options corresponds to the requirements of Internal
Revenue Code of 1986, as amended (the "Code") Section 422, the regulations
thereunder, and any amendments thereto. The Plan Administrator shall not be
personally liable for any action made in good faith with respect to the Plan or
any option granted thereunder.
2.3 Rule 16b-3 and Section 16(b) Compliance; Bifurcation of Plan. It
is the intention of the Company that the Plan comply in all respects with Rule
16b-3 under the Exchange Act to the extent applicable, and in all events the
Plan shall be construed in favor of its meeting the requirements of Rule 16b-3.
If any Plan provision is later found not to be in compliance with such Rule,
such provision shall be deemed null and void. The Board of Directors may act
under the Plan only if all members thereof are "disinterested persons" as
defined in Rule 16b-3 and further described in Section 4 hereof; and from and
after the date that the Company first registers a class of equity securities
under Section 12 of the Exchange Act, no director or officer or other Company
"insider" subject to Section 16 of the Exchange Act may sell shares received
upon the exercise of an option during the six month period immediately following
the grant of the option. Notwithstanding anything in the Plan to the contrary,
the Board, in its absolute discretion, may bifurcate the Plan so as to restrict,
limit, or condition the use of any provision of the Plan to participants who are
officers and directors or other persons subject to Section 16(b) of the Exchange
Act without so restricting, limiting, or conditioning the Plan with respect to
other participants.
SECTION 3. Stock Subject to The Plan. The stock subject to this Plan shall
be the Common Stock, presently authorized but unissued or subsequently acquired
by the Company. Subject to adjustment as provided in Section 7 hereof, the
aggregate amount of Common Stock to be delivered upon the exercise of all
options granted under the Plan shall not exceed in the aggregate 500,000 shares
as such Common Stock was constituted on the effective date of the Plan. If any
option granted under the Plan shall expire, be surrendered, exchanged for
another option, canceled, or terminated for any reason without having been
exercised in full, the unpurchased shares subject thereto shall thereupon again
be available for purposes of the Plan, including for replacement options which
may be granted in exchange for such surrendered, canceled, or terminated
options.
SECTION 4. Eligibility. An incentive stock option may be granted only to
any individual who, at the time the option is granted, is an employee of the
Company or any Affiliate thereof. A nonqualified stock option may be granted to
any employee, officer, director, or consultant of the Company or any Affiliate
thereof, whether an individual or an entity. Any party to whom an option is
granted under the Plan shall be referred to hereinafter as an "Optionee."
- 2 -
<PAGE>
A director shall in no event be eligible for the benefits of the
Plan unless at the time discretion is exercised in the selection of a director
as a person to whom options may be granted, or in the determination of the
number of shares which may be covered by options granted to the director: (a)
the Board of Directors has delegated its discretionary authority over the Plan
to a committee consisting solely of "disinterested persons" (as defined below)
or (b) the Plan otherwise complies with the requirements of Rule 16b-3 under the
Exchange Act. For purposes of this paragraph, a "disinterested person" shall
mean a director (i) who was not during the one year prior to service as Plan
Administrator granted or awarded equity securities pursuant to the Plan or any
other plan of the Company or its Affiliates entitling the participants therein
to acquire equity securities of the Company or its Affiliates except as
permitted by Rule 16b-3(c)(2)(i), or (ii) who is otherwise considered to be a
"disinterested person" in accordance with such Rule 16b-3(c)(2)(i) or any other
applicable rules, regulations, or interpretations of the Securities and Exchange
Commission.
SECTION 5. Terms and Conditions of Options. Options granted under the Plan
shall be evidenced by written agreements which shall contain such terms,
conditions, limitations, and restrictions as the Plan Administrator shall deem
advisable and which are not inconsistent with the Plan. Notwithstanding the
foregoing, options shall include or incorporate by reference the following terms
and conditions:
5.1 Number of Shares and Price. The maximum number of shares that
may be purchased pursuant to the exercise of each option, and the price per
share at which such option is exercisable (the "exercise price"), shall be as
established by the Plan Administrator; provided, that the Plan Administrator
shall act in good faith to establish the exercise price which shall be not less
than 100% of the fair market value per share of the Common Stock at the time of
grant of the option with respect to incentive stock options; and provided,
further, that, with respect to incentive stock options granted to greater than
ten percent stockholders, the exercise price shall be as required by Section 6
hereof.
5.2 Term and Maturity. Subject to the restrictions contained in
Section 6 hereof with respect to granting stock options to greater than ten
percent stockholders, the term of each stock option shall be as established by
the Plan Administrator and, if not so established, shall be ten years from the
date of its grant, but in no event shall the term of any incentive stock option
exceed a ten year period. To ensure that the Company or Affiliate will achieve
the purpose and receive the benefits contemplated in the Plan, any option
granted to any Optionee hereunder shall, unless the condition of this sentence
is waived or modified in the agreement evidencing the option or by resolution
adopted by the Plan Administrator, be exercisable according to the following
schedule:
- 3 -
<PAGE>
Period of Optionee's
Continuous Relationship
With the Company or
Affiliate From the Date Portion of Total Option
the Option is Granted Which is Exercisable
--------------------- --------------------
1 year 25%
2 years 50%
3 years 75%
4 years 100%
5.3 Exercise. Subject to the vesting schedule described in
subsection 5.2 hereof, each option may be exercised in whole or in part;
provided, that only whole shares may be issued pursuant to the exercise of any
option. Subject to any other terms and conditions herein, the Plan Administrator
may provide that an option may not be exercised in whole or in part for a stated
period or periods of time during which such option is outstanding; provided,
that the Plan Administrator may rescind, modify, or waive any such limitation at
any time and from time to time after the grant date thereof. During an
Optionee's lifetime, any incentive stock options granted under the Plan are
personal to such Optionee and are exercisable solely by such Optionee. Options
shall be exercised by delivery to the Company of notice of the number of shares
with respect to which the option is exercised, together with payment of the
exercise price in accordance with Section 5.4 hereof.
5.4 Payment of Exercise Price. Payment of the option exercise price
shall be made in full at the time the notice of exercise of the option is
delivered to the Company and shall be in cash, bank certified or cashier's
check, or personal check (unless at the time of exercise the Plan Administrator
in a particular case determines not to accept a personal check) for shares of
Common Stock being purchased.
The Plan Administrator can determine at the time the option is
granted in the case of incentive stock options, or at any time before exercise
in the case of nonqualified stock options, that additional forms of payment will
be permitted. To the extent permitted by the Plan Administrator and applicable
laws and regulations (including, without limitation, federal tax and securities
laws and regulations and state corporate law), an option may be exercised by:
(a) delivery of shares of Common Stock of the Company held by an
Optionee having a fair market value equal to the exercise price, such fair
market value to be determined in good faith by the Plan Administrator;
(b) delivery of a properly executed Notice of Exercise, together
with irrevocable instructions to a broker, all in accordance with the
regulations of the Federal Reserve Board, to promptly deliver to the Company the
amount of sale or loan proceeds to pay the exercise price and
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any federal, state, or local withholding tax obligations that may arise in
connection with the exercise;
(c) delivery of a properly executed Notice of Exercise, together
with instructions to the Company to withhold from the shares of Common Stock
that would otherwise be issued upon exercise that number of shares of Common
Stock having a fair market value equal to the option exercise price.
5.5 Withholding Tax Requirement. The Company or any Affiliate
thereof shall have the right to retain and withhold from any payment of cash or
Common Stock under the Plan the amount of taxes required by any government to be
withheld or otherwise deducted and paid with respect to such payment. No option
may be exercised unless and until arrangements satisfactory to the Company, in
its sole discretion, to pay such withholding taxes are made. At its discretion,
the Company may require an Optionee to reimburse the Company for any such taxes
required to be withheld by the Company and withhold any distribution in whole or
in part until the Company is so reimbursed. In lieu thereof, the Company shall
have the right to withhold from any other cash amounts due or to become due from
the Company to the Optionee an amount equal to such taxes or retain and withhold
a number of shares having a market value not less than the amount of such taxes
required to be withheld by the Company to reimburse the Company for any such
taxes and cancel (in whole or in part) any such shares of Common Stock so
withheld. If required by Section 16(b) of the Exchange Act, the election to pay
withholding taxes by delivery of shares of Common Stock held by any person who
at the time of exercise is subject to Section 16(b) of the Exchange Act shall be
made either six months prior to the date the option exercise becomes taxable or
at such other times as the Company may determine as necessary to comply with
Section 16(b) of the Exchange Act. Although the Company may, in its discretion,
accept Common Stock as payment of withholding taxes, the Company shall not be
obligated to do so.
5.6 Nontransferability.
5.6.1 Option. Options granted under the Plan and the rights
and privileges conferred hereby may not be transferred, assigned, pledged, or
hypothecated in any manner (whether by operation of law or otherwise) other than
by will or by the applicable laws of descent and distribution or pursuant to a
qualified domestic relations order as defined in Section 414(p) of the Code, or
Title I of the Employee Retirement Income Security Act of 1974, as amended, or
the rules thereunder, and shall not be subject to execution, attachment, or
similar process. Any attempt to transfer, assign, pledge, hypothecate, or
otherwise dispose of any option under the Plan or of any right or privilege
conferred hereby, contrary to the Code or to the provisions of the Plan, or the
sale or levy or any attachment or similar process upon the rights and privileges
conferred hereby shall be null and void ab initio. The designation by an
Optionee of a beneficiary does not, in and of itself, constitute an
impermissible transfer under this subsection 5.6.1.
5.6.2 Stock. The Plan Administrator may provide in the
agreement granting the option that (a) the Optionee may not transfer or
otherwise dispose of shares acquired upon
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exercise of an option without first offering such shares to the Company for
purchase on the same terms and conditions as those offered to the proposed
transferee or (b) upon termination of employment of an Optionee the Company
shall have a six month right of repurchase as to the shares acquired upon
exercise, which right of repurchase shall allow for a maximum purchase price
equal to the fair market value of the shares on the termination date. The
foregoing rights of the Company shall be assignable by the Company upon
reasonable written notice to the Optionee.
5.7 Termination of Relationship. If the Optionee's relationship with
the Company or any Affiliate thereof ceases for any reason other than
termination for cause, death, or total disability, and unless by its terms the
option sooner terminates or expires, then the Optionee may exercise, for a three
month period, that portion of the Optionee's option which is exercisable at the
time of such cessation, but the Optionee's option shall terminate at the end of
the three month period following such cessation as to all shares for which it
has not theretofore been exercised, unless, in the case of a nonqualified stock
option, such provision is waived in the agreement evidencing the option or by
resolution adopted by the Plan Administrator within 90 days of such cessation.
If, in the case of an incentive stock option, an Optionee's relationship with
the Company or Affiliate thereof changes from employee to nonemployee (i.e.,
from employee to a position such as a consultant), such change shall constitute
a termination of an Optionee's employment with the Company or Affiliate and the
Optionee's incentive stock option shall terminate in accordance with this
subsection 5.7.
If an Optionee is terminated for cause, any option granted hereunder
shall automatically terminate as of the first discovery by the Company of any
reason for termination for cause, and such Optionee shall thereupon have no
right to purchase any shares pursuant to such option. "Termination for cause"
shall mean dismissal for dishonesty, conviction or confession of a crime
punishable by law (except minor violations), fraud, misconduct, or disclosure of
confidential information. If an Optionee's relationship with the Company or any
Affiliate thereof is suspended pending an investigation of whether or not the
Optionee shall be terminated for cause, all Optionee's rights under any option
granted hereunder likewise shall be suspended during the period of
investigation.
If an Optionee's relationship with the Company or any Affiliate
thereof ceases because of a total disability, the Optionee's option shall not
terminate or, in the case of an incentive stock option, cease to be treated as
an incentive stock option until the end of the 12 month period following such
cessation (unless by its terms it sooner terminates and expires). As used in the
Plan, the term "total disability" refers to a mental or physical impairment of
the Optionee which is expected to result in death or which has lasted or is, in
the opinion of the Company and two independent physicians, expected to last for
a continuous period of 12 months or more and which causes or is, in such
opinion, expected to cause the Optionee to be unable to perform his or her
duties for the Company and to be engaged in any substantial gainful activity.
Total disability shall be deemed to have occurred on the first day after the
Company and the two independent physicians have furnished their opinion of total
disability to the Plan Administrator.
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For purposes of this subsection 5.7, a transfer of relationship
between or among the Company and/or any Affiliate thereof shall not be deemed to
constitute a cessation of relationship with the Company or any of its
Affiliates. For purposes of this subsection 5.7, with respect to incentive stock
options, employment shall be deemed to continue while the Optionee is on
military leave, sick leave, or other bona fide leave of absence (as determined
by the Plan Administrator). The foregoing notwithstanding, employment shall not
be deemed to continue beyond the first 90 days of such leave, unless the
Optionee's reemployment rights are guaranteed by statute or by contract.
As used herein, the term "Affiliate" shall be defined as follows:
(a) when referring to a subsidiary corporation, "Affiliate" shall mean any
corporation (other than the Company) in, at the time of the granting of the
option, an unbroken chain of corporations ending with the Company, if stock
possessing 50% or more of the total combined voting power of all classes of
stock of each of the corporations other than the Company is owned by one of the
other corporations in such chain; and (b) when referring to a parent
corporation, "Affiliate" shall mean any corporation in an unbroken chain of
corporations ending with the Company if, at the time of the granting of the
option, each of the corporations other than the Company owns stock possessing
50% or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
5.8 Death of Optionee. If an Optionee dies while he or she has a
relationship with the Company or any Affiliate thereof or within the three month
period (or 12 month period in the case of totally disabled Optionees) following
cessation of such relationship, any option held by such Optionee, to the extent
that the Optionee would have been entitled to exercise such option, may be
exercised within one year after his or her death by the personal representative
of his or her estate or by the person or persons to whom the Optionee's rights
under the option shall pass by will or by the applicable laws of descent and
distribution.
5.9 Status of Stockholder. Neither the Optionee nor any party to
which the Optionee's rights and privileges under the option may pass shall be,
or have any of the rights or privileges of, a stockholder of the Company with
respect to any of the shares issuable upon the exercise of any option granted
under the Plan unless and until such option has been exercised.
5.10 Continuation of Employment. Nothing in the Plan or in any
option granted pursuant to the Plan shall confer upon any Optionee any right to
continue in the employ of the Company or of an Affiliate thereof, or to continue
to be engaged as a consultant to the Company or such Affiliate, or to interfere
in any way with the right of the Company or of any such Affiliate to terminate
his or her employment or other relationship with the Company at any time.
5.11 Modification and Amendment of Option. Subject to the
requirements of Section 422 of the Code with respect to incentive stock options
and to the terms and conditions and within the limitations of the Plan,
including, without limitation, Section 9.1 hereof, the Plan Administrator may
modify or amend outstanding options granted under the Plan. The modification
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or amendment of an outstanding option shall not, without the consent of the
Optionee, impair or diminish any of his or her rights or any of the obligations
of the Company under such option. Except as otherwise provided herein, no
outstanding option shall be terminated without the consent of the Optionee.
Unless the Optionee agrees otherwise, any changes or adjustments made to
outstanding incentive stock options granted under the Plan shall be made in such
a manner so as not to constitute a "modification" as defined in Section 424(h)
of the Code and so as not to cause any incentive stock option issued hereunder
to fail to continue to qualify as an incentive stock option as defined in
Section 422(b) of the Code.
5.12 Limitation on Value for Incentive Stock Options. As to all
incentive stock options granted under the terms of the Plan, to the extent that
the aggregate fair market value (determined at the time of the grant of the
incentive stock option) of the shares of Common Stock with respect to which
incentive stock options are exercisable for the first time by the Optionee
during any calendar year (under the Plan and all other incentive stock option
plans of the Company, an Affiliate thereof or a predecessor corporation) exceeds
$100,000, such options shall be treated as nonqualified stock options. The
foregoing sentence shall not apply, and the limitation shall be that provided by
the Code or the Internal Revenue Service, as the case may be, if such annual
limit is changed or eliminated by (a) amendment of the Code or (b) issuance by
the Internal Revenue Service of (i) a Revenue ruling, (ii) a Private Letter
ruling to any of the Company, any Optionee, or any legatee, personal
representative, or distributee of any Optionee, or (iii) regulations.
5.13 Valuation of Common Stock Received Upon Exercise.
5.13.1 Exercise of Options Under Sections 5.4(a) and (c). The
value of Common Stock received by the Optionee from an exercise under Sections
5.4(a) and 5.4(c) hereof shall be the fair market value as determined by the
Plan Administrator, provided, that if the Common Stock is traded in a public
market, such valuation shall be the average of the high and low trading prices
or bid and asked prices, as applicable, of the Common Stock for the date of
receipt by the Company of the Optionee's delivery of shares under Section 5.4(a)
hereof or delivery of the Notice of Exercise under Section 5.4(c) hereof,
determined as of the trading day immediately preceding such date (or, if no sale
of shares is reported for such trading day, on the next preceding day on which
any sale shall have been reported).
5.13.2 Exercise of Option Under Section 5.4(b). The value of
Common Stock received by the Optionee from an exercise under Section 5.4(b)
hereof shall equal the sales price received for such shares.
SECTION 6. Greater Than Ten Percent Stockholders.
6.1 Exercise Price and Term of Incentive Stock Options. If incentive
stock options are granted under the Plan to employees who, at the time of such
grant, own greater than ten percent of the total combined voting power of all
classes of stock of the Company or any Affiliate thereof, the term of such
incentive stock options shall not exceed five years and the
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exercise price shall be not less than 110% of the fair market value of the
Common Stock at the time of grant of the incentive stock option. This provision
shall control notwithstanding any contrary terms contained in an option
agreement or any other document. The term and exercise price limitations of this
provision shall be amended to conform to any change required by a change in the
Code or by ruling or pronouncement of the Internal Revenue Service.
6.2 Attribution Rule. For purposes of subsection 6.1, in determining
stock ownership, an employee shall be deemed to own the stock owned, directly or
indirectly, by or for his or her brothers, sisters, spouse, ancestors, and
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership estate, or trust shall be deemed to be owned
proportionately by or for its stockholders, partners, or beneficiaries. If an
employee or a person related to the employee owns an unexercised option or
warrant to purchase stock of the Company, the stock subject to that portion of
the option or warrant which is unexercised shall not be counted in determining
stock ownership. For purposes of this Section 6, stock owned by an employee
shall include all stock owned by him or her which is actually issued and
outstanding immediately before the grant of the incentive stock option to the
employee.
SECTION 7. Adjustments Upon Changes in Capitalization. The aggregate
number and class of shares for which options may be granted under the Plan, the
number and class of shares covered by each outstanding option, and the exercise
price per share thereof (but not the total price), and each such option, shall
all be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock of the Company resulting from a split or
consolidation of shares or any like capital adjustment, or the payment of any
stock dividend.
7.1. Effect of Liquidation, Reorganization, or Change in Control.
7.1.1 Cash, Stock, or Other Property for Stock. Except as
provided in subsection 7.1.2 hereof, upon a merger (other than a merger of the
Company in which the holders of Common Stock immediately prior to the merger
have the same proportionate ownership of common stock in the surviving
corporation immediately after the merger), consolidation, acquisition of
property or stock, separation, reorganization (other than mere reincorporation
or creation of a holding company), or liquidation of the Company (each, an
"event"), as a result of which the stockholders of the Company receive cash,
stock, or other property in exchange for, or in connection with, their shares of
Common Stock, any option granted hereunder shall terminate, but the time during
which such options may be exercised shall be accelerated as follows: the
Optionee shall have the right immediately prior to any such event to exercise
such Optionee's option in whole or in part whether or not the vesting
requirements set forth in the option agreement have been satisfied.
7.1.2 Conversion of Options on Stock for Exchange Stock. If
the stockholders of the Company receive capital stock of another corporation
("Exchange Stock") in exchange for their shares of Common Stock in any
transaction involving a merger (other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger
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have the same proportionate ownership of common stock in the surviving
corporation immediately after the merger), consolidation, acquisition of
property or stock, separation, or reorganization (other than mere
reincorporation or creation of a holding company), all options granted hereunder
shall be converted into options to purchase shares of Exchange Stock unless the
Company and corporation issuing the Exchange Stock, in their sole discretion,
determine that any or all such options granted hereunder shall not be converted
into options to purchase shares of Exchange Stock but instead shall terminate in
accordance with the provisions of subsection 7.1.1 hereof. The amount and price
of converted options shall be determined by adjusting the amount and price of
the options granted hereunder in the same proportion as used for determining the
number of shares of Exchange Stock the holders of the Common Stock receive in
such merger, consolidation, acquisition, separation, or reorganization. Unless
the Board determines otherwise, the converted options shall be fully vested
whether or not the vesting requirements set forth in the option agreement have
been satisfied.
7.2 Fractional Shares. In the event of any adjustment in the number
of shares covered by an option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the number
of full shares resulting from such adjustment.
7.3 Determination of Board to Be Final. Except as otherwise required
for the Plan to qualify for the exemption afforded by Rule 16b-3 under the
Exchange Act, all adjustments under this Section 7 shall be made by the Board,
and its determination as to what adjustments shall be made, and the extent
thereof, shall be final, binding, and conclusive. Unless an Optionee agrees
otherwise, any change or adjustment to an incentive stock option shall be made
in such a manner so as not to constitute a "modification" as defined in Section
425(h) of the Code and so as not to cause the incentive stock option issued
hereunder to fail to continue to qualify as an incentive stock option as defined
in Section 422(b) of the Code.
SECTION 8. Securities Law Compliance. Shares shall not be issued with
respect to an option granted under the Plan unless the exercise of such option
and the issuance and delivery of such shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, any applicable
state securities laws, the Securities Act of 1933, as amended (the "Act"), the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance, including, without limitation, the availability of an
exemption from registration for the issuance and sale of any shares hereunder.
Inability of the Company to obtain from any regulatory body having jurisdiction,
the authority deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any shares hereunder or the unavailability of an exemption
from registration for the issuance and sale of any shares hereunder shall
relieve the Company of any liability in respect of the nonissuance or sale of
such shares as to which such requisite authority shall not have been obtained.
As a condition to the exercise of an option, if, in the opinion of counsel
for the Company, assurances are required by any relevant provision of the
aforementioned laws, the Company may
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require the Optionee to give written assurances satisfactory to the Company at
the time of any such exercise (a) as to the Optionee's knowledge and experience
in financial and business matters (and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters) and that such Optionee is capable of evaluating,
either alone or with the purchaser representative, the merits and risks of
exercising the option or (b) that the shares are being purchased only for
investment and without any present intention to sell or distribute such shares.
The foregoing requirements shall be inoperative if the issuance of the shares
upon the exercise of the option has been registered under a then currently
effective registration statement under the Act.
At the option of the Company, a stop-transfer order against any shares may
be placed on the official stock books and records of the Company, and a legend
indicating that the stock may not be pledged, sold, or otherwise transferred
unless an opinion of counsel is provided (concurred in by counsel for the
Company) stating that such transfer is not in violation of any applicable law or
regulation, may be stamped on stock certificates in order to assure exemption
from registration. The Plan Administrator may also require such other action or
agreement by the Optionees as may from time to time be necessary to comply with
the federal and state securities laws. NONE OF THE ABOVE SHALL BE CONSTRUED TO
IMPLY AN OBLIGATION ON THE PART OF THE COMPANY TO UNDERTAKE REGISTRATION OF THE
OPTIONS OR STOCK HEREUNDER.
Should any of the Company's capital stock of the same class as the stock
subject to options granted hereunder be listed on a national securities exchange
or on the NASDAQ National Market, all stock issued hereunder if not previously
listed on such exchange or market shall, if required by the rules of such
exchange or market, be authorized by that exchange or market for listing thereon
prior to the issuance thereof.
SECTION 9. Use of Proceeds. The proceeds received by the Company from the
sale of shares pursuant to the exercise of options granted hereunder shall
constitute general funds of the Company.
SECTION 10. Amendment and Termination.
10.1 Board Action. The Board may at any time suspend, amend, or
terminate the Plan, provided, that no amendment shall be made without
stockholder approval within 12 months before or after adoption of the Plan if
such approval is necessary to comply with any applicable tax or regulatory
requirement, including any such approval as may be necessary to satisfy the
requirements for exemptive relief under Rule 16b-3 of the Exchange Act or any
successor provision. Rights and obligations under any option granted before
amendment of the Plan shall not be altered or impaired by any amendment of the
Plan unless the Company requests the consent of the person to whom the option
was granted and such person consents in writing thereto.
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10.2 Automatic Termination. Unless sooner terminated by the Board,
the Plan shall terminate ten years from the earlier of (a) the date on which the
Plan is adopted by the Board or (b) the date on which the Plan is approved by
the stockholders of the Company. No option may be granted after such termination
or during any suspension of the Plan. The amendment or termination of the Plan
shall not, without the consent of the option holder, alter or impair any rights
or obligations under any option theretofore granted under the Plan.
SECTION 11. Effectiveness of the Plan. The Plan shall become effective
upon adoption by the Board so long as it is approved by the holders of a
majority of the Company's outstanding shares of voting capital stock at any time
within 12 months before or after the adoption of the Plan by the Board.
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claimsnet.com, inc.
[INCENTIVE][NONQUALIFIED] STOCK OPTION LETTER AGREEMENT
TO: ______________________
We are pleased to inform you that you have been selected by the Plan
Administrator of the claimsnet.com, inc. (the "Company") 1997 Stock Option Plan
(the "Plan") to receive a(n) [incentive] [nonqualified] option for the purchase
of ________ shares of the Company's common stock, $.10 par value, at an exercise
price of $____ per share (the "exercise price"). A copy of the Plan is attached
and the provisions thereof, including, without limitation, those relating to
withholding taxes, are incorporated into this Agreement by reference.
The terms of the option are as set forth in the Plan and in this
Agreement. The most important of the terms set forth in the Plan are summarized
as follows:
Term. The term of the option is ten years from date of grant, unless
sooner terminated.
Exercise. During your lifetime only you can exercise the option. The Plan
also provides for exercise of the option by the personal representative of your
estate or the beneficiary thereof following your death. You may use the Notice
of Exercise in the form attached to this Agreement when you exercise the option.
Payment for Shares. The option may be exercised by the delivery of:
(a) Cash, personal check (unless at the time of exercise the Plan
Administrator determines otherwise), or bank certified or cashier's checks;
(b) Unless the Plan Administrator in its sole discretion determines
otherwise, shares of the capital stock of the Company held by you having a fair
market value at the time of exercise, as determined in good faith by the Plan
Administrator, equal to the exercise price;
(c) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise, together with instructions to
the Company to withhold from the shares that would otherwise be issued upon
exercise that number of shares having a fair market value equal to the option
exercise price; or
(d) Unless the Plan Administrator in its sole discretion determines
otherwise, a properly executed Notice of Exercise, together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of sale
or loan proceeds to pay the exercise price.
Termination. The option will terminate immediately upon termination for
cause, as defined in the Plan, or three months after cessation of your
relationship with the Company or an Affiliate
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thereof, unless cessation is due to death or total disability, in which case the
option shall terminate 12 months after cessation of such relationship.
Transfer of Option. The option is not transferable except by will or by
the applicable laws of descent and distribution or pursuant to a qualified
domestic relations order.
Vesting. The option is vested according to the following schedule:
Period of Optionee's
Continuous Relationship
With the Company or
Affiliate From the Date Portion of Total Option
the Option is Granted Which is Exercisable
--------------------- --------------------
1 year 25%
2 years 50%
3 years 75%
4 years 100%
Date of Grant. The date of grant of the option is _______________.
YOUR PARTICULAR ATTENTION IS DIRECTED TO SECTION 8 OF THE PLAN WHICH
DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO FEDERAL AND STATE SECURITIES
LAWS THAT MUST BE SATISFIED BEFORE THE OPTION CAN BE EXERCISED AND BEFORE THE
COMPANY CAN ISSUE ANY SHARES TO YOU. THE COMPANY HAS NO OBLIGATION TO REGISTER
THE SHARES THAT WOULD BE ISSUED UPON THE EXERCISE OF YOUR OPTION, AND IF IT
NEVER REGISTERS THE SHARES, YOU WILL NOT BE ABLE TO EXERCISE THE OPTION UNLESS
AN EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE PRESENT TIME, EXEMPTIONS
FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY LIMITED AND
MIGHT BE UNAVAILABLE TO YOU PRIOR TO THE EXPIRATION OF THE OPTION. CONSEQUENTLY,
YOU MIGHT HAVE NO OPPORTUNITY TO EXERCISE THE OPTION AND TO RECEIVE SHARES UPON
SUCH EXERCISE. IN ADDITION, YOU SHOULD CONSULT WITH YOUR TAX ADVISOR CONCERNING
THE RAMIFICATIONS TO YOU OF HOLDING OR EXERCISING YOUR OPTIONS OR HOLDING OR
SELLING THE SHARES UNDERLYING SUCH OPTIONS.
You understand that, during any period in which the shares which may be
acquired pursuant to your option are subject to the provisions of Section 16 of
the Securities Exchange Act of 1934, as amended (and you yourself are also so
subject), in order for your transactions under the Plan to qualify for the
exemption from Section 16(b) provided by Rule 16b-3, a total of six months must
elapse between the grant of the option and the sale of shares underlying the
option.
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Please execute the Acceptance and Acknowledgement set forth below on the
enclosed copy of this Agreement and return it to the undersigned.
Very truly yours,
claimsnet.com, inc.
By:______________________
Name:
Title:
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ACCEPTANCE AND ACKNOWLEDGEMENT
I, a resident of the State of __________, accept the stock option
described above granted under the claimsnet.com, inc. 1997 Stock Option Plan,
and acknowledge receipt of a copy of this Agreement, including a copy of the
Plan. I have read and understand the Plan, including the provisions of Section 8
thereof.
Dated: _____________________
_______________________________________ ___________________________________
Taxpayer I.D. Number Signature
By his or her signature below, the spouse of the Optionee, if such
Optionee is legally married as of the date of such Optionee's execution of this
Agreement, acknowledges that he or she has read this Agreement and the Plan and
is familiar with the terms and provisions thereof, and agrees to be bound by all
the terms and conditions of this Agreement and the Plan.
Dated: _____________________
_________________________
Spouse's Signature
_________________________
Printed Name
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NOTICE OF EXERCISE
The undersigned, pursuant to a(n) [incentive] [nonqualified] Stock Option
Letter Agreement (the "Agreement") between the undersigned and claimsnet.com,
inc. (the "Company"), hereby irrevocably elects to exercise purchase rights
represented by the Agreement, and to purchase thereunder _______ shares (the
"Shares") of the Company's common stock, $.10 par value ("Common Stock"),
covered by the Agreement and herewith makes payment in full therefor.
1. If the sale of the Shares and the resale thereof has not, prior to the
date hereof, been registered pursuant to a registration statement filed and
declared effective under the Securities Act of 1933, as amended (the "Act"), the
undersigned hereby agrees, represents, and warrants that:
(a) the undersigned is acquiring the Shares for his or her own
account (and not for the account of others), for investment and not with a view
to the distribution or resale thereof;
(b) By virtue of his or her position, the undersigned has access to
the same kind of information which would be available in a registration
statement filed under the Act;
(c) the undersigned is a sophisticated investor;
(d) the undersigned understands that he or she may not sell or
otherwise dispose of the Shares in the absence of either (i) a registration
statement filed under the Act or (ii) an exemption from the registration
provisions thereof; and
(e) The certificates representing the Shares may contain a legend to
the effect of subsection (d) of this Section 1.
2. If the sale of the Shares and the resale thereof has been registered
pursuant to a registration statement filed and declared effective under the Act,
the undersigned hereby represents
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and warrants that he or she has received the applicable prospectus and a copy of
the most recent annual report, as well as all other material sent to
stockholders generally.
3. The undersigned acknowledges that the number of shares of Common Stock
subject to the Agreement is hereafter reduced by the number of shares of Common
Stock represented by the Shares.
Very truly yours,
____________________________________
(type name under signature line)
Social Security No. ________________
Address: ___________________________
____________________________________
- 2 -
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Exhibit 10.11
CLAIMSNET.COM INC.
1998 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. Purpose
The purpose of the Claimsnet.com inc. Stock Option Plan for Non-Employee
Directors (the "Plan") is to promote the interests of Claimsnet.com, inc. (the
"Company") and its stockholders by increasing the proprietary and vested
interest of non-employee directors in the growth and performance of the Company
by granting such directors options to purchase shares of Common Stock, par value
$.001 per share (the "Shares"), of the Company.
2. Administration
The Plan shall be administered by the Company's Board of Directors (the
"Board"). Subject to the provisions of the Plan, the Board shall be authorized
to interpret the Plan, to establish, amend, and rescind any rules and
regulations relating to the Plan and to make all other determinations necessary
or advisable for the administration of the Plan; provided, however, that the
Board shall have no discretion with respect to the selection of directors to
receive options, the number of Shares subject to any such options, the purchase
price thereunder or the timing of grants of options under the Plan. The
determinations of the Board in the administration of the Plan, as described
herein, shall be final and conclusive. The Secretary of the Company shall be
authorized to implement the Plan in accordance with its terms and to take such
actions of a ministerial nature as shall be necessary to effectuate the intent
and purposes thereof. The validity, construction and effect of the Plan and any
rules and regulations relating to the Plan shall be determined in accordance
with the laws of the State of Delaware.
3. Eligibility
The class of individuals eligible to receive grants of options under the
Plan shall be directors of the Company who are "Non-Employee Directors", as such
term is defined in Rule 16b-3(b)(3) promulgated under the Securities Exchange
Act of 1934 ("Eligible Directors"). Any holder of an option granted hereunder
shall hereinafter be referred to as a "Participant."
4. Shares Subject to the Plan
Subject to adjustment as provided in Section 6, an aggregate of 100,000
Shares shall be available for issuance upon the exercise of options granted
under the Plan. The Shares deliverable upon the exercise of options may be made
available from authorized but unissued Shares or treasury Shares. If any option
granted under the Plan shall terminate for any reason without having been
exercised, the Shares subject to, but not delivered under, such option shall be
available for other options. If any option granted under the Plan is exercised
through the
<PAGE>
delivery of Shares, the number of Shares available for issuance upon the
exercise of options shall be increased by the number of Shares surrendered, to
the extent permissible under Rule 16b-3.
5. Grant, Terms and Conditions of Options
(a) Effective upon the closing of the initial public offering of
securities of the Company, subject to approval of the Plan by the
stockholders of the Company, each Eligible Director has been granted an
option hereunder to purchase 5,000 Shares. In addition, in recognition of
services heretofore rendered in their capcity as directors of the Company,
effective upon the closing of the initial public offering of securities of
the Company, subject to approval of the Plan by the stockholders of the
Company, Sture Hedlund and Robert H. Brown, Jr. has each been granted an
additional option hereunder to purchase 5,000 shares, and Ward L. Bensen has
been granted an additional option hereunder to purchase 20,000 shares.
(b) Upon first election or appointment to the Board, each newly elected
Eligible Director will be granted an option to purchase 5,000 Shares.
(c) Immediately following each Annual Stockholders Meeting, commencing
with the meeting following the close of fiscal year 1998, an Eligible Director
serving as Chairman of the Board, other than an Eligible Director first elected
to the Board within the 12 months immediately preceding and including such
meeting, will be granted an option to purchase 5,000 Shares; and each Eligible
Director, other than an Eligible Director first elected to the Board within the
12 months immediately preceding and including such meeting, will be granted an
option to purchase 5,000 Shares.
(d) The options granted will be nonstatutory stock options not intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code"), and shall have the following terms and
conditions:
(i) Price. The purchase price per Share deliverable upon the exercise
of each option shall be 100% of the Fair Market Value per Share on the
date the option is granted. For purposes of this Plan, Fair Market Value
shall be the closing sales price as reported on the Nasdaq National Market
or such other national securities exchange, inter-dealer quotation system
or electronic bulletin board or over the counter market as the Company's
Common Stock shall then be traded on the date in question, or, if the
Shares shall not have traded on such date, the closing sales price on the
first date prior thereto on which the Shares were so traded.
(ii) Payment. Options may be exercised only upon payment of the
purchase price thereof in full. Such payment shall be made in cash or,
unless otherwise determined by the Board, in Shares, which shall have a
Fair Market Value (determined in accordance with the rules of paragraph
(i) above) at least equal to the aggregate exercise price of the Shares
being purchased, or a combination of cash and Shares.
(iii) Exercisability and Term of Options. Unless otherwise
specified in the option, fifty percent of the options granted hereunder
shall be exercisable commencing on the first anniversary of the date of
grant, and the remaining fifty percent shall be excercisable commencing
on the second anniversary of the date of grant and shall be excercisable
until the date ten years from the date of grant.
Options shall be exercisable
in whole or in part at all times during the period beginning on the date
which is the first anniversary of the date of grant until the earlier of
ten years from the date of grant (unless otherwise specified in the
option) and the expiration of the one year period provided in paragraph
(iv) below.
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<PAGE>
(iv) Termination of Service as Eligible Director. Upon termination of
a participant's service as a Director for any reason, all outstanding
options shall be exercisable in whole or in part for a period of one year
from the date upon which the participant ceases to be a Director,
provided that in no event shall the options be exercisable beyond the
period provided for in paragraph (iii) above.
(v) Nontransferability of Options. No option may be assigned,
alienated, pledged, attached, sold or otherwise transferred or encumbered
by a participant otherwise than by will or the laws of descent and
distribution, and during the lifetime of the participant to whom an
option is granted it may be exercised only by the participant or by the
participant's guardian or legal representative. Notwithstanding the
foregoing, options may be transferred pursuant to a qualified domestic
relations order.
(vi) Listing and Registration. Each option shall be subject to the
requirement that if at any time the Board shall determine, in its
discretion, that the listing, registration or qualification of the Shares
subject to such option upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory
body, is necessary or desirable as a condition of, or in connection with,
the granting of such option or the issue or purchase of Shares
thereunder, no such option may be exercised in whole or in part unless
such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any condition not acceptable to the
Board.
(vii) Option Agreement. Each option granted hereunder shall be
evidenced by an agreement with the Company which shall contain the terms
and provisions set forth herein and shall otherwise be consistent with
the provisions of the Plan.
6. Adjustment of and Changes in Shares
In the event of a stock split, stock dividend, subdivision or
combination of the Shares or other change in corporate structure affecting the
Shares, the number of Shares authorized by the Plan shall be increased or
decreased proportionately, as the case may be, and the number of Shares subject
to any outstanding option shall be increased or decreased proportionately, as
the case may be, with appropriate corresponding adjustment in the purchase price
per Share thereunder.
7. No Rights of Stockholders
Neither a Participant nor a Participant's legal representative shall be,
or have any of the rights and privileges of, a stockholder of the Company in
respect of any Shares purchasable upon the exercise of any option, in whole or
in part, unless and until certificates for such Shares shall have been issued.
3
<PAGE>
8. Plan Amendments
The Plan may be amended by the Board, as it shall deem advisable or to
conform to any change in any law or regulation applicable thereto; provided,
that the Board may not, without the authorization and approval of stockholders
of the Company: (i) increase the number of Shares which may be purchased
pursuant to options hereunder, either individually or in the aggregate, except
as permitted by Section 6, (ii) change the requirement of Section 5(d) that
option grants be priced at Fair Market Value, except as permitted by Section 6,
(iii) modify in any respect the class of individuals who constitute Eligible
Directors or (iv) materially increase the benefits accruing to Participants
hereunder. The provisions of Sections 3 and/or 5 may not be amended more often
than once every six months, other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act, or the rules under
either such statute.
9. Effective Date and Duration of Plan
The Plan shall become effective upon the adoption by the Board so long as
it is approved by Stockholders at any time within 12 months after the adoption
of the Plan by the Board. The Plan shall terminate the day following the tenth
Annual Stockholders Meeting at which Directors are elected succeeding the Annual
Stockholders Meeting at which the Plan was approved by Stockholders, unless the
Plan is extended or terminated at an earlier date by Stockholders or is
terminated by exhaustion of the Shares available for issuance hereunder.
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated April 1, 1997 except for Notes C, H and K for which the date is
_____________, 1997, on our audit of the financial statements of
claimsnet.com inc., and our report dated June 2, 1997, on our audit of the
financial statements of Medica Systems, Inc. We also consent to the reference
to our firm under the caption "Experts".
/s/ King Griffin & Adamson P.C.
-------------------------------
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
September 23, 1997
