<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 1999
REGISTRATION NO. 333-
REGISTRATION NO. 333-36209
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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:
ROBERT STEVEN BROWN, ESQ. SPENCER FELDMAN, ESQ.
GERARDO A. LAPETINA, ESQ. Greenberg Traurig
Brock Silverstein, LLC MetLife Building
One Citicorp Center 200 Park Avenue
153 East 53rd Street New York, New York 10166
New York, New York 10022-4611 (212) 801-9200 / (212) 801-6400
(212) 371-2000 / (212) 371-5500 (Telecopy)
(Telecopy)
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. /X/
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... 1,035,000 shares (2) $8.00 $8,280,000 2,806.78
Representatives' Warrants.... 90,000 warrants (3) 0.001 $90.00 0.04
Common Stock, par value,
$.001 per share, issuable
upon exercise of the
Representatives' Warrants... 90,000 Shares (4) 13.20 1,188,000 402.72
Total.................... -- -- $9,468,090 $3,209.54 (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 135,000 shares of the Common Stock, par value $.001 per share (the
"Common Stock"), of the Registrant, which the underwriters have the option
to purchase solely to cover over-allotments, if any.
(3) To be acquired by the Representatives.
(4) Issuable upon exercise of the Representatives' Warrants.
(5) Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Prospectus included herein relates to two Registration Statements on Form
S-1 (Registration Nos. 333-36209 and 333- ). The filing of this
Registration Statement constitutes Post-Effective Amendment No. 1 of the
Registration Statement on Form S-1 (333-36209) and the initial filing of the
Registration Statement on Form S-1 (333- ). A filing fee of $11,430.82
was paid by the Registrant in connection with Registration Statement on Form
S-1 (333-36209). The Prospectus included herein relates, in addition to the
securities referred to above, to the securities referred to in the
Calculation of Registration Fee table included in Registration Statement on
Form S-1 (333-36209) consisting of the following: (i) an aggregate of
1,840,000 shares of Common Stock (including 240,000 shares of Common Stock
of the Registrant which the underwriters have the option to purchase solely
to cover over-allotments, if any); (ii) Representatives' Warrants to be
acquired by the representatives pursuant to which they are entitled to
acquire an aggregate of 160,000 shares of Common Stock of the Registrant;
and (iii) an aggregate of 160,000 shares of Common Stock issuable upon
exercise of such Representatives' Warrants.
<PAGE>
Pursuant to Rule 424(b)(4)
Registration No. 333-36209
SUBJECT TO COMPLETION, DATED FEBRUARY 19, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
2,500,000 SHARES
[LOGO]
COMMON STOCK
----------------
This is an initial public offering of 2,500,000 shares of common stock of
Claimsnet.com inc.
Prior to this offering, there has been no public market for our common
stock. The common stock has been approved for quotation on the Nasdaq
SmallCap-Registered Trademark- Market under the symbol "CLAI," and has been
approved for listing on the Boston Stock Exchange under the symbol "CLA"
(subject to notice of issuance).
WE EXPECT THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $7.00 AND
$9.00 PER SHARE.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Offering Price................................................................. $ $
Underwriting Discount................................................................. $ $
Proceeds, before expenses, to Claimsnet.com........................................... $ $
</TABLE>
The underwriters may, under certain circumstances, for 30 days after the
date of this prospectus purchase up to an additional 375,000 shares of common
stock from us at the initial public offering price less the underwriting
discount.
------------------------
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 1999.
------------------------
<TABLE>
<S> <C>
CRUTTENDEN ROTH ISG SOLID CAPITAL
INCORPORATED MARKETS, LLC
</TABLE>
THE DATE OF THIS PROSPECTUS IS
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND
OUR BUSINESS AND THIS OFFERING FULLY, YOU SHOULD READ THIS ENTIRE PROSPECTUS
CAREFULLY, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES
BEGINNING ON PAGE F-1. REFERENCES IN THIS PROSPECTUS TO "CLAIMSNET.COM," "WE,"
"OUR," AND "US" REFER TO CLAIMSNET.COM INC., A DELAWARE CORPORATION, TOGETHER
WITH ITS SUBSIDIARY AND THEIR PREDECESSORS.
CLAIMSNET.COM INC.
OUR BUSINESS
We are an electronic commerce company providing healthcare transaction
processing for the medical and dental industries by means of the Internet. Our
proprietary software, which was developed over the last six years and is
installed only on our servers, allows healthcare providers such as doctors and
dentists to prepare and enter healthcare claims interactively on the Internet
and electronically transmits the claims to us for processing. Our proprietary
software also allows us to download claims from the healthcare providers'
computers directly to our servers. Our software provides real time editing of
the claims data for compliance with the format and content requirements of
payors, such as insurance companies and health management organizations, and
converts the claims to satisfy the payor's specific processing requirements. We
then electronically transmit processed claims on behalf of healthcare providers
by means of the Internet, directly or indirectly, to medical and dental payors
that accept claims processing transmissions electronically. In addition, our
software provides for secure encryption of all claims data transmitted in
compliance with Federal regulations. The payors to which we have submitted
processed claims, primarily through clearinghouses, such as HBO & Company and
Envoy Corporation with which we have 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 and United Healthcare Corporation.
We believe that the following are significant advantages of our electronic
claims transmission services over other currently available services:
- the ability of healthcare providers using our website to interactively
prepare claims on the Internet and receive real time edits prior to claim
submission;
- the ease and availability of our training over the Internet;
- the minimal software and processing power required for providers to use
our proprietary software; and
- 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 our claims
processing services.
We believe that the improved claims processing procedure will result in a
sharply reduced average number of outstanding accounts receivable days, which
should improve the healthcare provider's working capital. We believe that the
services offered by most of our 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, our competitors'
services generally require extensive formal training, the installation of
substantial software on each healthcare provider's computer, and significant
processing power.
We seek to generate revenue from claim processing services 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 our services. Generally, we collect a monthly
subscription fee of $19.95 from customers who subscribed to our services on or
after January 1, 1998. We have, however, determined to waive all provider
subscription fees through January 31, 1999 for customers who subscribed to our
services prior to January 1, 1998 as part of our marketing strategy to attract
healthcare providers to use our services. We may be unable to collect
3
<PAGE>
subscription fees from these healthcare providers after January 31, 1999 or to
predict, if collected, the amount of such fees.
In December 1998, we began offering patient statement processing services
for healthcare providers. We began generating revenue by charging a transaction
fee for each statement processed and use a subcontractor to print and mail the
bar-coded and customized statements together with a return envelope. We also
began offering real time eligibility verification of patient benefit coverage.
We seek to generate revenue for these services by charging the healthcare
provider an additional subscription fee as well as transaction fees for certain
verifications.
CUSTOMER CONTRACTS AND RELATIONSHIPS
In February 1998, we entered into a development and marketing agreement with
Millbrook Corporation, a Microsoft solution provider, to be the default claims
processing, statement, and remittance advice vendor for all healthcare provider
customers of Millbrook. Our processing solution offered pursuant to this
agreement is tightly integrated through distinctive software allowing automatic
updates within each provider's practice management system.
In April 1998, we signed an agreement with Island Automated Medical
Services, Inc., to provide services to over 2,500 Island customers providing
physician billing services. We and Island will jointly market the program
through training programs, newsletters, and a fee reduction for new customers
utilizing the Island standard software.
In September 1998, we entered into an agreement with Electronic Data
Interchange Services, a department of Blue Cross/Blue Shield of Louisiana, to
provide claim processing services to Blue Cross/ Blue Shield of Louisiana
network providers. Under the terms of the agreement, we and Blue Cross/ Blue
Shield of Louisiana will jointly promote our services to the 9,600 network
providers of Blue Cross/ Blue Shield of Louisiana through website links, Blue
Cross/Blue Shield of Louisiana network communication resources, educational
seminars, telemarketing, and direct mail campaigns.
In September 1998, we entered into a group purchasing agreement with
Provider Select, Inc., an affiliate of Premier, Inc., the nation's largest
alliance of hospitals and healthcare organizations. Under the terms of the
agreement, we 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 (as defined in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources"), DVI Business Credit Corporation
made a strategic investment of $500,000 in us by purchasing shares of our common
stock at a purchase price of $6.00 per share. DVI Business Credit Corporation is
a wholly-owned subsidiary of DVI, Inc., a leading publicly traded independent
specialty finance company for healthcare providers.
In November 1998, we signed an agreement with Southern Medical Association,
a physician association which provides services to over 35,000 physicians in
seventeen Southern states. Under the terms of the agreement, we will provide
claim processing, patient statements, eligibility verification, and other
services to participating members of Southern Medical Association.
ELECTRONIC CLAIMS PROCESSING MARKET
The healthcare claims processing market, including dental claims, was
estimated by Health Data Management, an industry publication, to be over 4.0
billion healthcare claim and HMO encounter form (the HMO equivalent of a claim)
submissions in 1998. This publication has estimated that electronically
submitted claims volume increased by 11% in 1998 over 1997 levels, that
physicians submitted approximately 40% of their claims electronically in 1998,
compared to 38% in 1997, and that the percent of dental claims submitted
electronically increased from 13% in 1997 to 15.5% in 1998.
4
<PAGE>
OUR BUSINESS STRATEGY
Our business strategy is as follows:
- 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;
- to expand our services to include additional transaction processing
functions, such as HMO encounter forms, and practice management functions
in order to diversify sources of revenue;
- to acquire and integrate electronic claims processing companies that
enable us to accelerate our entry into the inpatient hospital claims
market; and
- to license our claims processing technology for other applications,
including stand-alone purposes, Internet systems, private label use, and
original equipment manufacturers.
OUR HISTORY AND STRUCTURE
We were organized 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 into Claimsnet.com inc. We were organized solely for purposes of
effecting the merger. Our principal office is located at 12801 North Central
Expressway, Suite 1515, Dallas, Texas 75243, and our telephone number is (972)
458-1701.
On July 31, 1996, we acquired all of the Internet software, licenses,
intellectual property rights, and technology developed by an affiliated company,
American Medical Finance, Inc. See "Use of Proceeds" and "Related Party
Transactions." On June 2, 1997, we acquired (the "Medica Acquisition") 100% of
the capital stock of Medica Systems, Inc. ("Medica"), a software development
firm from which we had licensed a portion of our healthcare transaction
processing software. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." We operated in the development stage
through March 31, 1997 and then commenced processing claims for healthcare
providers. We maintain our Web page at http://claimsnet.com and have registered
the Internet domain of Claimsnet.com. Information contained on our Web page does
not constitute part of this Prospectus.
------------------------
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE
EFFECT TO (1) THE REPRESENTATIVES' WARRANTS (AS DEFINED IN "UNDERWRITING") OR
THEIR EXERCISE; (2) THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR ITS EXERCISE; (3)
UP TO 557,692 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE EXERCISE OF
OPTIONS WHICH MAY BE GRANTED PURSUANT TO OUR 1997 PLAN (AS DEFINED IN
"MANAGEMENT--1997 STOCK OPTION PLAN"), APPROXIMATELY 425,000 OF WHICH WILL BE
GRANTED UPON THE CONSUMMATION OF THIS OFFERING; (4) UP TO 111,538 SHARES OF
COMMON STOCK RESERVED FOR ISSUANCE UPON THE EXERCISE OF OPTIONS WHICH MAY BE
GRANTED PURSUANT TO OUR DIRECTORS' PLAN (AS DEFINED IN "MANAGEMENT--DIRECTOR
COMPENSATION"), 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
(5) WARRANTS EXERCISABLE FOR AN AGGREGATE OF 31,154 SHARES OF COMMON STOCK
OUTSTANDING ON THE DATE OF THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, THE
INFORMATION IN THIS PROSPECTUS REFLECTS (1) A 2.325578-FOR-ONE STOCK SPLIT OF
THE OUTSTANDING SHARES OF COMMON STOCK EFFECTED ON MAY 15, 1997, A
2.796117-FOR-ONE REVERSE STOCK SPLIT OF THE OUTSTANDING SHARES OF COMMON STOCK
EFFECTED ON NOVEMBER 18, 1998, AND A 1.115385-FOR-ONE STOCK SPLIT OF THE
OUTSTANDING SHARES OF COMMON STOCK EFFECTED PRIOR TO THE DATE OF THIS
PROSPECTUS; (2) THE CONSUMMATION OF A MERGER ON DECEMBER 7, 1998 PURSUANT TO
WHICH WE REINCORPORATED IN THE STATE OF DELAWARE AND WE INCREASED OUR AUTHORIZED
CAPITAL STOCK TO 40,000,000 SHARES OF COMMON STOCK AND 4,000,000 SHARES OF
PREFERRED STOCK, AND (3) THE CONSUMMATION OF THE 1999 PRIVATE PLACEMENT (AS
DEFINED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES").
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered......................... 2,500,000 shares
Common Stock Outstanding Immediately Prior to
this Offering.............................. 3,750,000 shares(1)
Shares of Common Stock Outstanding
Immediately Following Offering............. 6,250,000 shares
Use of Proceeds.............................. We intend to use the net proceeds of this
offering as follows:
- to repay indebtedness, including
indebtedness to American Medical Finance,
Inc. representing solely indebtedness
incurred by American Medical Finance,
Inc. to develop our proprietary
software and to finance our operations,
- 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 our common stock is highly
speculative, involves a high degree of risk,
and should be made only by investors who can
afford a complete loss. See "Risk Factors"
and "Dilution."
Nasdaq SmallCap-Registered Trademark- Market
Trading Symbol............................. "CLAI"
Boston Stock Exchange Trading Symbol......... "CLA"
</TABLE>
- ------------------------
(1) Includes 513,542 shares of common stock sold in the 1998 Private Placements
and 125,000 shares of common stock sold in the 1999 Private Placement. See
"Risk Factors--We may be required to rescind the 1998 Private Placements
and 1999 Private Placement."
6
<PAGE>
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 8, 1996
(INCEPTION) YEAR ENDED YEAR ENDED
THROUGH DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1996 1997(1) 1998
----------------- ------------------- -------------
<S> <C> <C> <C>
Revenues.................................................. $ -- $ 81,712 $ 154,653
----------------- ------------------- -------------
Total operating expenses.................................. 147,918 2,514,290 4,509,553
----------------- ------------------- -------------
Interest expense--affiliate............................... 158,123 389,548 313,680
Interest income........................................... -- (40,817) (6,113)
----------------- ------------------- -------------
Net loss.................................................. (306,041) (2,781,309) (4,662,467)
----------------- ------------------- -------------
----------------- ------------------- -------------
Basic and diluted loss per weighted average common share
outstanding............................................. $ (0.13) $ (0.98) $ (1.41)
----------------- ------------------- -------------
----------------- ------------------- -------------
Weighted average common shares outstanding (basic and
diluted)................................................ 2,348,894 2,850,796 3,309,280
----------------- ------------------- -------------
----------------- ------------------- -------------
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 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 $16,462,712 $ 105,691 $12,974,106
Total assets........................... 2,174,597 18,281,277 1,653,479 14,205,352
Working capital........................ 36,202 15,979,585 (1,088,978) 11,904,437
Long-term debt......................... 3,468,320 -- 4,323,127 --
Stockholders' equity (deficit)......... (1,676,850) 17,698,150 (3,864,317) 13,035,683
</TABLE>
- ------------------------
(1) Includes the results of operations of Medica from the date of acquisition,
June 2, 1997.
(2) Adjusted to reflect the receipt of the estimated net proceeds of
approximately $17,000,000 from the sale of the shares at the initial public
offering price of $8.00 per share and the initial application of the net
proceeds as described under "Use of Proceeds."
(3) Adjusted to reflect the net proceeds of $900,000 in cash from the 1999
Private Placement in January 1999 as described under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
This Prospectus contains certain forward-looking statements and information
relating to Claimsnet.com. We intend to identify forward-looking statements in
this Prospectus by using words such as "believes," "intends," "expects," "may,"
"will," "should," "plan," "projected," "contemplates," "anticipates," or similar
statements. These statements are based on our beliefs as well as assumptions we
made using information currently available to us. Because these statements
reflect our current views concerning future events, these statements involve
certain risks, uncertainties, and assumptions. Actual future results may differ
significantly from the results discussed in the forward-looking statements.
Some, but not all, of the factors that may cause such a difference include those
which we discuss in the Risk Factors section beginning on page 8 of this
Prospectus.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A HIGH
DEGREE OF RISK, AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD A COMPLETE
LOSS. YOU SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER MATTERS REFERRED TO
IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS BEFORE YOU DECIDE TO BUY OUR
COMMON STOCK.
WE HAVE A DEFICIT IN STOCKHOLDERS' EQUITY AND WE ANTICIPATE LOSSES
As of December 31, 1996, 1997, and 1998, we had working capital of $15,659,
$36,202, and $(1,088,978), respectively, and stockholders' deficit of
$(3,430,041), $(1,676,850), and $(3,864,317), respectively. See the consolidated
financial statements and the related notes. We generated revenues of $81,712
through December 31, 1997 and $154,653 for the year ended December 31, 1998. We
have incurred net losses since inception and expect to continue to operate at a
loss for the foreseeable future. For the period from April 8, 1996 (inception)
through December 31, 1996 and the years ended December 31, 1997, and 1998, we
incurred net losses of $(306,041), $(2,781,309), and $(4,662,467) respectively.
We may never achieve profitability. In addition, during the year ended December
31, 1998, we recorded negative cash flow of $351,152. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--In
General."
A significant portion of our 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 our revenues for the year
ended December 31, 1997. We have since cancelled the contract.
WE HAVE A LIMITED OPERATING HISTORY
We were organized on April 8, 1996 and were a development stage company
through March 31, 1997. We are currently processing claims for approximately
1,000 providers and have entered into agreements with clearinghouses providing
access to more than 150 payors which, on average, provide for a payment to us of
$.10 per claim. Consequently, we have a very limited operating history upon
which you may base an evaluation of us and determine our prospects for achieving
our intended business objectives. We are subject to all of the risks inherent to
the establishment of any new business venture. You should consider the
likelihood of our future success to be highly speculative in light of our
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, we must,
among other things, maintain and increase our customer base, implement and
successfully execute our business and marketing strategy, continue to develop
and upgrade our technology and transaction-processing systems, continually
update and improve our website, provide superior customer service, respond to
competitive developments, and attract, retain, and motivate qualified personnel.
We may not be successful in addressing these risks, and our failure in this
regard could have a material adverse effect on our business, prospects,
financial condition, and results of operations.
WE MAY BE REQUIRED TO RESCIND THE 1998 PRIVATE PLACEMENTS AND 1999 PRIVATE
PLACEMENT
During 1998 and 1999 we completed the 1998 Private Placements and 1999
Private Placement for aggregate gross proceeds of approximately $3,475,000.
Pursuant to the Securities Act of 1933, as amended (the "Securities Act"), the
rules and regulations under the Securities Act, and the interpretations of the
Commission, we may be required to offer rescission to investors in the 1998
Private Placements and 1999 Private Placement. If we are so required and all of
the investors in the 1998 Private Placements and 1999 Private Placement
determine to exercise their rescission rights, we
8
<PAGE>
would be required to refund all of the gross proceeds of these private offerings
to the investors. These proceeds would be paid in part with the net proceeds of
this offering. In that event, our business, prospects, financial condition, and
results of operations 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."
WE INTEND TO USE A SUBSTANTIAL PORTION OF NET PROCEEDS TO REPAY INDEBTEDNESS;
THIS OFFERING WILL BENEFIT AMERICAN MEDICAL FINANCING, INC.
We intend to use approximately $4,373,000 (25.7%) of the net proceeds of
this offering to repay our promissory note to American Medical Finance, Inc. and
to repay advances accrued under our line of credit with American Medical
Finance, Inc. As a result, American Medical Finance, Inc. will directly benefit
from the sale of the shares. American Medical Finance, Inc. will use all of
these funds to repay a portion of its debt incurred to finance the development
of our software and our operations. None of our executive officers or directors
will be the recipient of any of these funds. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Related Party Transactions."
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE
We expect to experience significant fluctuations in our future quarterly
operating results due to a variety of factors, many of which are outside our
control. Factors that may adversely affect our quarterly operating results
include:
- our ability to retain existing customers, attract new customers at a
steady rate, and maintain customer satisfaction,
- the announcement or introduction of new sites, services, and products by
us and our competitors,
- price competition or higher prices in the industry,
- 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 which we offer,
- our ability to upgrade and develop our systems and infrastructure in a
timely and effective manner,
- the amount of traffic on our website,
- technical difficulties, system downtime, or Internet brownouts,
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations, and infrastructure,
- government regulation, and
- general economic conditions and economic conditions specific to the
Internet, electronic commerce, and the medical claims processing industry.
As a result of these factors, in one or more future quarters, our operating
results may fall below the expectations of securities analysts and investors. In
this event, the market price of the common stock would likely be materially
adversely affected.
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OUR MARKETING STRATEGY HAS NOT BEEN TESTED
To date, we have conducted limited marketing efforts. To penetrate our
market we will have to exert significant efforts to create awareness of, and
demand for, our products and services. We intend to upgrade our marketing
efforts to include advertising on the Internet, direct mail, e-mail, and an
expanded sales staff. We seek 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 our services. We have, however, decided to waive all provider
subscription fees through at least January 31, 1999 for those customers which
subscribed to our services prior to January 1, 1998. All of our marketing
efforts have been largely untested in the marketplace, and may not result in
sales of our products and services. Further, we may be unable to build a
provider customer base or collect subscription fees from these healthcare
providers after January 31, 1999. Our failure to develop our marketing
capabilities, succesfully market our products or services, or recover the cost
of our services would have a material adverse effect on our business, prospects,
financial condition, and results of operations. Our waiver of subscriber fees
through January 31, 1999 could have a material adverse effect on our business,
prospects, financial condition, and results of operations. See "Use of
Proceeds," "Business--Business Strategy," and "Business-- Customers."
OUR MANAGEMENT WILL RETAIN SUBSTANTIAL INFLUENCE FOLLOWING THIS OFFERING
Upon the completion of this offering, our current directors and executive
officers will together beneficially own approximately 2,282,589, or 36.5%, of
the outstanding shares of common stock, or approximately 34.5% of the
outstanding shares of common stock if the underwriters' over-allotment option is
exercised in full. As a result, our current officers and directors will have the
ability to substantially influence the outcome of all matters on which
stockholders are entitled to vote, including the elections of our directors and
the approval of significant corporate transactions.
WE MAY REQUIRE ADDITIONAL FINANCING; WE ARE UNCERTAIN OF THE AVAILABILITY OF
ADDITIONAL FINANCING
We believe that the net proceeds of this offering, together with anticipated
revenues from operations, will be sufficient to satisfy our capital requirements
for at least the next 18 months. Our belief is based on our operating plan which
in turn is based on certain assumptions, which may prove to be incorrect. See
"Risk Factors--We may be required to rescind the 1998 Private Placements and
1999 Private Placement." As a result, our financial resources may not be
sufficient to satisfy our capital requirements for this period. If our financial
resources are insufficient and, in any case, after this 18-month period, we may
require additional financing in order to meet our plans for expansion. We cannot
predict whether this additional financing will be in the form of equity or debt,
or be in another form. We may not be able to obtain the necessary additional
capital on a timely basis or on acceptable terms, if at all. In any of these
events, we may be unable to implement our current plans for expansion or to
repay our debt obligations as they become due. In the event that any future
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."
OUR MANAGEMENT TEAM IS RELATIVELY NEW; WE HAVE LIMITED SENIOR MANAGEMENT
RESOURCES; AND WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL
From April 8, 1996 (inception) to December 31, 1996, and during the years
ended December 31, 1997 and 1998, we expanded from one to 11 employees, from 11
to 23 employees, and from 23 to 45 employees, respectively. The majority of our
senior management joined us after January 1, 1997, and some officers have no
prior senior management experience at public companies. Our new employees
include a number of key managerial, technical, financial, marketing, and
operations personnel who have not yet been fully integrated into our operations
and we expect to add additional key personnel in the
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near future. We expect the expansion of our business to place a significant
strain on our limited managerial, operational, and financial resources. We will
be required to expand our operational and financial systems significantly and to
expand, train, and manage our work force in order to manage the expansion of our
operations. Our failure to fully integrate our new employees into our operations
could have a material adverse effect on our business, prospects, financial
condition, and results of operations. Our ability to attract and retain highly
skilled personnel is critical to our operations and expansion. We face
competition for these types of 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 we
have. We may not be successful in attracting and retaining qualified personnel
on a timely basis, on competitive terms, or at all. If we are not successful in
attracting and retaining these personnel, our 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--Business Strategy," and "Business-- Employees."
WE ARE DEPENDENT UPON OUR SENIOR MANAGEMENT
We currently depend upon the efforts and abilities of our senior executives.
The loss or unavailability of the services of any these individuals for any
significant period of time could have a material adverse effect on our business,
prospects, financial condition, and results of operations. We have obtained,
own, and are the sole beneficiary of, key-person life insurance in the amount of
$2,000,000 on the life of Bo W. Lycke, our Chairman of the Board of Directors,
President, and Chief Executive Officer. This insurance may not continue to be
available to us on reasonable terms, or at all. Mr. Lycke and Messrs. Ward L.
Bensen and Robert H. Brown Jr., two of our Directors, serve as the Chairman of
the Board of Directors, a Director and Senior Vice President, and a Director,
respectively, of AMF. See "Related Party Transactions." In addition, while we
have entered into an employment agreement with Mr. Lycke, he may terminate the
agreement on 30 days' notice. See "Management-- Employment Agreements."
INTERNET SECURITY RISKS
The secure transmission of confidential information over public networks is
a significant barrier to electronic commerce and communications. We rely on
encryption and authentication technology licensed from other companies to
provide the security and authentication necessary to effect secure Internet
transmission of confidential information, such as medical information. Advances
in computer capabilities, new discoveries in the field of cryptography, or other
events or developments may result in a compromise or breach of the technology
used by us to protect customer transaction data. Anyone who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. The compromise of our security or
misappropriation of proprietary information could have a material adverse effect
on our business, prospects, financial condition, and results of operations. We
may be required to expend significant capital and other resources to protect
against security breaches or to minimize 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 our activities or the
activities of others involve the storage and transmission of proprietary
information, such as diagnostic and treatment data, security breaches could
damage our reputation and expose us to a risk of loss or litigation and possible
liability. Our security measures may not prevent security breaches. Our failure
to prevent these security breaches may have a material adverse effect on our
business, prospects, financial condition, and results of operations. See
"Business--Healthcare Transaction Processing Software and Security."
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RISK OF CAPACITY CONSTRAINTS
A key element of our strategy is to generate a high volume of traffic on,
and use of, our website. Our revenues depend on the number of clients who submit
claims on our website and the volume of claims we process. The satisfactory
performance, reliability, and availability of our website, claims processing
systems, and network infrastructure are critical to our reputation and our
ability to attract and retain customers and maintain adequate customer service
levels. Any system interruptions that result in the unavailability of our
website or reduced claims processing performance would reduce the volume of
claims processed and the attractiveness of our products and services. While we
have not experienced any system interruptions, we believe that these
interruptions may occur from time to time. If the volume of traffic on our
website or the number of claims submitted by customers substantially increases,
we will have to expand and upgrade further our technology, claims processing
systems, and network infrastructure. We may be unable to accurately project the
rate or timing of increases, if any, in the use of our website or timely expand
and upgrade our systems and infrastructure to accommodate these increases. Our
inability to add additional software and hardware or to develop and upgrade our
existing technology, claims processing systems, or network infrastructure to
accommodate increased traffic on our website or increased claims submission
volume through our 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 we take safeguards,
including data encryption and firewalls, to prevent unauthorized access to our
data and data provided by our customers to us, we do not believe that we can
eliminate this risk entirely. We may be unable to effectively upgrade and expand
our claims processing system or to integrate smoothly any newly developed or
purchased modules with our existing systems, which could have a material adverse
effect on our business, prospects, financial condition, and results of
operations. See "Business--Business Strategy."
WE RELY ON INTERNALLY DEVELOPED SYSTEMS
We use an internally developed system for our website and for a portion of
our claims processing software. The website was developed using industry
standard tools and stores information in databases that will be integrated with
the remainder of our accounting and financial systems. To date, development
efforts for our 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, our 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. We intend to upgrade and
expand our claims processing systems and to integrate newly developed and
purchased modules with our existing systems in order to improve the efficiency
of our reporting methods and support increased transaction volume.
WE FACE RISKS RELATED TO THE YEAR 2000
Although we have already completed an internal review, we are conducting a
formal assessment to determine the Year 2000 readiness of our proprietary
software. We are also in the process of contacting certain third party vendors,
licensors of hardware, and software, and services, and customers regarding their
Year 2000 readiness. Following our assessment and after contacting these third
parties, we will be able to make an evaluation of our state of readiness, our
risks and costs, and determine whether a contingency plan is necessary. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
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RISK OF SYSTEM FAILURE; WE DEPEND UPON A SINGLE SITE FOR OUR COMPUTER AND
COMMUNICATIONS SYSTEMS
Our ability to successfully receive and process claims and provide
high-quality customer service largely depends on the efficient and uninterrupted
operation of our computer and communications hardware systems. Our proprietary
software resides solely on our servers, all of which, as well as all of our
communications hardware, are located in a monitored server facility in
Washington, DC. Our systems and operations are in a secured facility with
hospital-grade electrical power, redundant telecommunications connections to the
Internet backbone, uninterruptible power supplies, and generator back-up power
facilities. Further, we maintain redundant systems at a separate facility for
backup and disaster recovery. Despite such safeguards, we remain vulnerable to
damage or interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake, and similar events. In addition, we do not, and may not
in the future, carry sufficient business interruption insurance to compensate us
for losses that may occur. Despite our implementation of network security
measures, our 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 these events could have a material adverse effect on our
business, prospects, financial condition, and results of operations. See
"Business--Healthcare Transaction Processing Software and Security," and
"Business--Facilities."
WE DEPEND ON THE CONTINUED GROWTH OF ELECTRONIC COMMERCE
Our 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 may not continue on a lasting basis. In addition,
customers may not 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 few services and products have generated profits. For us to
be successful, the healthcare community must accept and use novel and cost
efficient ways of conducting business and exchanging information.
In addition, the public in general, and the healthcare industry in
particular, may not accept the Internet and other online services 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, the infrastructure for the Internet and online services
may be unable 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 our product and services in particular. If use of
the Internet and other online services does not continue to grow or grows more
slowly than we expect, 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, our
business, prospects, financial condition, and results of operations would be
materially adversely affected.
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WE NEED TO MAINTAIN THE PROPRIETARY NATURE OF OUR RIGHTS; WE HAVE NO PATENT,
TRADEMARK OR SERVICE MARK PROTECTION
Our ability to compete effectively will depend on our ability to maintain
the proprietary nature of our services and technologies, including our
proprietary software and the proprietary software of others with which we have
entered into software licensing agreements. A portion of the proprietary
software that we received in the Medica Acquisition was the subject of
litigation between Vision Software, Inc. and Medica. The litigation was settled
and withdrawn with prejudice. We hold no patents and rely on a combination of
trade secrets and copyright laws, nondisclosure, and other contractual
agreements and technical measures to protect our rights in our technological
know-how and proprietary services. In addition, we have been advised that
trademark and service mark protection of our corporate name is not available. We
depend upon confidentiality agreements with our officers, directors, employees,
consultants, and subcontractors to maintain the proprietary nature of our
technology. These measures may not afford us sufficient or complete protection,
and others may independently develop know-how and services similar to ours,
otherwise avoid our confidentiality agreements, or produce patents and
copyrights that would materially and adversely affect our business, prospects,
financial condition, and results of operations. We believe that our services are
not subject to any infringement actions based upon the patents or copyrights of
any third parties; however, our know-how and technology may in the future be
found to infringe upon the rights of others. Others may assert infringement
claims against us, and if we should be found to infringe upon their patents or
copyrights, or otherwise impermissibly utilize their intellectual property, our
ability to continue to use our technology could be materially restricted or
prohibited. If this event occurs, we may be required to obtain licenses from the
holders of this intellectual property, enter into royalty agreements, or
redesign our products so as not to utilize this intellectual property, each of
which may prove to be uneconomical or otherwise impossible. Licenses or royalty
agreements required in order for us to use this technology may not be available
on terms acceptable to us, or at all. These claims could result in litigation,
which could materially adversely affect our business, prospects, financial
condition, and results of operations. See "Business-- Intellectual Property."
OUR INDUSTRY IS SUBJECT TO 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
our existing website and proprietary technology and systems obsolete.
Our success will depend, in part, on our ability to:
- enhance and improve the responsiveness and functionality of our online
claims processing services,
- license leading technologies useful in our business, enhance our existing
services, develop new services and technology that address the
increasingly sophisticated and varied needs of our prospective or current
customers, and
- 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 will involve
significant technical and business risks. We may not be able to successfully
adapt to such demands. Our failure to respond in a
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timely manner to changing market conditions or customer requirements would have
a material adverse effect on our business, prospects, financial condition, and
results of operations. See "Business-- Business Strategy."
OUR MANAGEMENT HAS BROAD DISCRETION IN THE APPLICATION OF NET PROCEEDS
Management has allocated approximately $11,177,000, or 65.7%, of the
estimated net proceeds of this offering for marketing, research and development,
and general corporate and working capital purposes. Accordingly, management will
have broad discretion as to the application of these net proceeds, and investors
will not know in advance how they will be used. See "Use of Proceeds."
WE HAVE HAD TRANSACTIONS WITH OUR AFFILIATE AMERICAN MEDICAL FINANCE, INC.
Our core technologies were initially developed by American Medical Finance,
Inc. Since inception, we have had transactions with American Medical Finance,
Inc., our affiliate, including the acquisition of all of the Internet software,
licenses, intellectual property rights, and technology developed by American
Medical Finance, Inc. and an agreement (the "Services Agreement") in which
American Medical Finance, Inc. provided staff and office support services to us
and for which we were billed monthly. We terminated the Services Agreement
effective April 1, 1997. We believe that our transactions with American Medical
Finance, Inc. were on terms no less favorable to us than could be obtained from
unaffiliated third parties. See "Related Party Transactions."
OUR INDUSTRY IS HIGHLY COMPETITIVE
The medical claims processing industry is highly competitive. We compete
with, and expect 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 we have. Major companies
in the healthcare claims processing industry include: Envoy/NEIC, Inc., HBO &
Company; National Data Corporation; QuadraMed Corporation; ProxyMed Corporation;
and Healtheon. We estimate, 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 these large competitors,
which operate as local sub-clearinghouses for the processing of medical and
dental claims. While we compete with all other providers of electronic claims
processing services, we are not aware of any other companies that provide
healthcare electronic claims processing services in the same manner as those
provided by us and is a direct competitor. We anticipate that competition will
arise in the processing of claims on the Internet. We may not successfully
compete in any market in which we conduct or may conduct operations. Certain
segments of the medical and dental claims processing industry are not currently
suited to the use of electronic claims processing. Among these segments are
psychiatry and surgery, each of which requires substantial documentation in
addition to the claim to be submitted. In these market segments, we believe that
we are not currently able to compete with existing potential competitors and,
accordingly, we have designed our business plan to address other market
segments. See "Business--Electronic Claims Processing Market" and
"Business--Competition."
GOVERNMENT REGULATION
We are not currently subject to direct regulation by any government agency
other than laws or regulations applicable to electronic commerce, but we
processes information which, by law, must remain confidential. The United States
Healthcare Financing Administration has defined security requirements for
Internet communications including healthcare data. We operate in compliance with
these requirements. Due to the increasing popularity and use of the Internet and
other online services, federal, state, and local governments may adopt laws and
regulations, or amend existing laws and regulations, with respect to the
Internet or other online services covering issues such as user privacy,
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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
to impose additional burdens on 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
our services and increase our cost of doing business, or otherwise have a
material adverse effect on our business, prospects, financial condition, and
results of operations. Moreover, the relevant governmental authorities have not
resolved the applicability to the Internet and other online services of existing
laws in various jurisdictions governing issues such as property ownership and
personal privacy and it may take time to resolve these issues definitively. Any
new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services could have a material adverse effect on our business, prospects,
financial condition, and results of operations.
THERE IS NOT CURRENTLY A PUBLIC MARKET FOR THE COMMON STOCK; THE OFFERING PRICE
OF THE COMMON STOCK IS ARBITRARY, AND WE MUST SATISFY CERTAIN REQUIREMENTS FOR
THE COMMON STOCK TO TRADE ON THE NASDAQ SMALLCAP MARKET
There is not currently a public market for the common stock, and an active
trading market may not develop or be sustained. Unless and until a public market
develops, purchasers of the shares may have difficulty selling these securities.
The initial public offering price of the shares was arbitrarily determined
by negotiations between the underwriters and us, and does not necessarily bear
any relationship to our assets, book value, results of operations, or any other
generally accepted indicia of value. See "Underwriting." From time to time after
this offering, the market price of the common stock may experience significant
volatility. Our quarterly results, announcements by us or our 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 initial listing of securities on
the Nasdaq SmallCap-Registered Trademark-Market, a company must have at least
$4,000,000 in net tangible assets, a minimum bid price of $4.00 per share, and
securities in the hands of the public with a market value 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. If we cannot 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 then 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.
THE MARKET FOR THE COMMON STOCK MAY SUFFER IN THE EVENT OF DELISTING FROM THE
NASDAQ SMALLCAP MARKET AND IF OUR COMMON STOCK WAS "PENNY STOCK"
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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), were
available, the 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
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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. As a result,
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.
THE UNDERWRITERS' MAY MAINTAIN SIGNIFICANT INFLUENCE ON THE MARKET FOR THE
COMMON STOCK
A significant number of the shares sold in this offering may be sold to
customers of the underwriters. These customers may engage in transactions for
the sale or purchase of the shares through or with the underwriters. Although
they have no obligation to do so, Cruttenden Roth Incorporated and ISG Solid
Capital Markets, LLC ("ISG") intend to make a market in the shares and may
otherwise effect transactions in the common stock. If they participate in the
market, they may influence the market, if one develops, for the common stock.
They may discontinue making a market in the common stock at any time. Moreover,
if Cruttenden Roth Incorporated or ISG sells the shares of common stock issuable
upon exercise of the Representatives' Warrants, such seller may be required
under the Exchange Act to temporarily suspend its market-making activities. The
price and liquidity of the common stock may be significantly affected by the
degree, if any, of their direct or indirect participation in such market. See
"Underwriting."
WE HAVE NOT, AND DO NOT INTEND, TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE
We have not paid any cash dividends on the common stock and do not intend to
pay cash dividends in the foreseeable future. We intend to retain future
earnings, if any, for reinvestment in the development and expansion of our
business. Any credit agreements which we may enter into with institutional
lenders may restrict our ability to pay dividends. Whether we pay cash dividends
in the future will be at the discretion of our Board of Directors and will be
dependent upon our financial condition, results of operations, capital
requirements, and any other factors that the Board of Directors decides is
relevant. See "Dividend Policy" and "Description of Securities--Common Stock."
INVESTORS IN THIS OFFER WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share exceeds the net tangible book
value per share. Accordingly, investor's purchasing shares in this offering will
incur immediate and substantial dilution in their investment. The net tangible
book value per share may be further diluted upon exercise of outstanding stock
options and warrants (including the Represenatives' Warrants) or if we issue
additional equity securities in the future. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE AND REGISTRATION RIGHTS OF CERTAIN INVESTORS MAY
AFFECT THE MARKET FOR THE COMMON STOCK
The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market after this offering, or
the perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. After this offering, we will have outstanding
6,250,000 shares of common stock. Of these shares, the 2,500,000 shares being
offered in this offering will be freely tradeable. This leaves 3,750,000 shares
eligible for sale in the public market. Our directors and officers and certain
of our stockholders who hold 2,341,847 shares in the aggregate have entered into
lock-up agreements pursuant to which they have agreed that they will not sell,
directly or indirectly, any shares of common stock without the prior written
consent of the underwriters for a period of 24 months from the date of this
Prospectus. Certain of our stockholders who hold 1,408,153 shares in the
aggregate have entered into lock-up agreements pursuant to which they have
agreed that they will not sell, directly or indirectly, any shares of common
stock without the prior written consent of the
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underwriters for a period of 12 months from the date of this Prospectus. The
number of shares of common stock and the dates when these shares will become
freely tradeable in the market is subject to the lock-up agreements as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- ---------------------------------------------------------------------------
<S> <C>
0 On the date of this Prospectus
0 Within twelve months of the date of this Prospectus
1,408,153 After twelve months from the date of this Prospectus
2,341,847 After twenty-four months from the date of this Prospectus
</TABLE>
As of the date of this Prospectus, options and warrants to purchase a total
of 11,154 shares of common stock are outstanding and currently exercisable.
Following this offering, we intend to file a registration statement to register
for issuance and/or resale the 557,692 shares of common stock reserved for
issuance under our 1997 Plan and the 111,538 shares of common stock reserved for
issuance under our Directors' Plan. We expect such registration statement to
become effective immediately upon filing. Shares issued upon the exercise of
stock options granted under the 1997 Plan will be eligible for resale in the
public market from time to time subject to vesting and, in the case of certain
options, the expiration of the lock-up agreements referred to in the preceding
paragraph.
Upon the closing of this offering, we intend to grant non-qualified stock
options to purchase approximately 400,000 shares of common stock to a number of
our officers and employees. The exercise price per share of such options is
expected to be the initial public offering price of the common stock. These
option grants are expected to vest in the following manner: 25% per year for
four years commencing on the one year anniversary of the grant of the option.
None of the shares issuable upon the exercise of these options will be subject
to a lock-up agreement with the underwriters as described below.
Certain stockholders, holding approximately 1,110,644 shares of common
stock, have the right, subject to certain conditions and limitations, to include
their shares in certain registration statements relating to our securities. By
exercising their registration rights and causing a large number of shares to be
registered and sold in the public market, these holders may cause the market
price of the common stock to fall. In addition, any demand to include these
shares in our registration statements could have an adverse effect on our
ability to raise needed capital. See "Management--1997 Stock Option Plan,"
"Management--Director Compensation," "Principal Stockholders," "Risk
Factors--The shares of certain investors eligible for future sale and
registration rights may affect the market for the common stock" and
"Underwriting."
CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER OUR
ACQUISITION
Certain provisions of our Certificate of Incorporation, our Bylaws, and the
laws of the State of Delaware could make it more difficult for a third party to
acquire us, even if doing so might be beneficial to our stockholders. See
"Description of Securities."
ISG HAS A LIMITED UNDERWRITING HISTORY
ISG was first registered a broker-dealer in 1997 and has completed three
public offerings in which it was a co-managing underwriters. Prospective
purchasers of the securities offered hereby should consider this limited
experience in evaluating this offering. There can be no assurance that the lack
of experience of ISG will not adversely affect this offering or the subsequent
development of a trading market for the shares. See "Underwriting."
18
<PAGE>
THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS PRESENT CERTAIN RISKS
AND UNCERTAINTIES
This Prospectus contains certain forward-looking statements regarding our
plans and objectives for the future. These forward-looking statements are based
on current expectations that involve numerous risks and uncertainties. Our plans
and objectives are based on a successful execution of our 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 our operations or business. These assumptions 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
our control. Although we believe that the assumptions underlying our
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate. The forward-looking statements included in this Prospectus may prove
to be accurate. In light of the significant uncertainties inherent in these
forward-looking statements, you should not regard these statements as
representations by us or any other person that we will achieve our objectives
and plans.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Claimsnet.com from the sale of the shares
offered hereby are estimated to be approximately $17,000,000. Claimsnet.com
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)......................................................... $ 5,373,000 31.6%
Marketing (2)......................................................................... 3,500,000 20.6
Research and development (3).......................................................... 2,000,000 11.8
Acquisition of capital equipment (4).................................................. 450,000 2.6
General corporate and working capital purposes, including possible acquisitions of,
and investments in, competing or complementary businesses and technologies (5)....... 5,677,000 33.4
</TABLE>
- ------------------------------
(1) Represents (A) the repayment of $2,000,000 pursuant to the promissory note
from Claimsnet.com to American Medical Finance, Inc. relating to the
acquisition by Claimsnet.com of its Internet software, intellectual property
rights, internet technology, and technology rights from American Medical
Finance, Inc., which accrues interest at the rate of 9.50% per annum and is
collateralized by all of the rights and properties so purchased, (B) the
repayment of approximately $1,462,000 pursuant to the American Medical
Finance, Inc. credit line, (C) the repayment of approximately $911,000 of
accrued interest pursuant to this note and line of credit, and (D)
$1,000,000 pursuant to the Series A 12% Subordinated Notes related to the
1999 Private Placement. 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 Stockholders," and "Related Party Transactions."
(2) Represents estimated expenditures for advertising on the Internet, trade
publications, direct mail programs, vendor exhibits, salaries for personnel,
brochures, and public relations.
(3) Represents estimated expenditures in connection with the continued
enhancement of Claimsnet.com'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 Claimsnet.com to
fund the capital requirements associated with its growth, including, without
limitation, the retention and training of additional personnel. In the
ordinary course of its business, Claimsnet.com from time to time evaluates
technologies for acquisition or license that, if acquired, could be used in
the development of product or software candidates. Claimsnet.com currently
has no agreements, plans, or arrangements with respect to any such
acquisition or investment. Management of Claimsnet.com, and in particular
its Board of Directors and authorized officers, 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, Claimsnet.com may be required to offer
rescission to investors in the 1998 Private Placements and 1999 Private
Placement. If Claimsnet.com is so required and all of such investors determine
to exercise such rescission rights, Claimsnet.com 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--We may be required to rescind the 1998 Private Placements and the
1999 Private Placement."
The foregoing represents Claimsnet.com's best estimate of its allocation of
the net proceeds of the sale of the shares offered in this offering based upon
its contemplated operations, its business plan, and current economic and
industry conditions and is subject to reapportionment of proceeds among the
20
<PAGE>
categories listed above or to new categories in response to, among other things,
changes in its 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 Claimsnet.com's contemplated operations
or business plan and changes in economic and industry conditions.
Based on its operating plan, Claimsnet.com 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. Claimsnet.com bases such belief upon
certain assumptions, which may prove to be incorrect. Accordingly, there can be
no assurance that such resources will satisfy Claimsnet.com's capital
requirements for said period. Claimsnet.com 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 Claimsnet.com will be
able to obtain needed additional capital on a timely basis, on favorable terms,
or at all.
Pending their use, Claimsnet.com will invest the net proceeds of this
offering in short-term, interest bearing, investment grade securities.
21
<PAGE>
DILUTION
As of December 31, 1998, the net tangible book value of Claimsnet.com, was
$(5,154,241), or approximately $(1.42) per share of Common Stock based on
3,625,000 shares of common stock outstanding. The net tangible book value per
share represents the amount of Claimsnet.com'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 $900,000 from the 1999 Private Placement and to the estimated
net proceeds from the sale by Claimsnet.com of 2,500,000 shares of common stock
offered hereby at the initial public offering price per share of $8.00 and the
initial application thereof as set forth under the heading "Use of Proceeds,"
the as adjusted net tangible book value of Claimsnet.com at December 31, 1998
would have been $12,162,301, or approximately $1.95 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 $6.05 (75.6%) per share. The following table illustrates the
per share dilution:
<TABLE>
<CAPTION>
PER SHARE OF
COMMON
STOCK
-------------
<S> <C> <C>
Initial public offering price......................................................... $ 8.00
Net tangible book value at December 31, 1998........................................ $ (1.42)
Increase in net tangible book value................................................. 3.37
------------
As adjusted net tangible book value after this offering (1)........................... 1.95
-----
Dilution of net tangible book value to new investors (1).............................. $ 6.05
-----
-----
</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
$2.23 and dilution per share to new investors in this offering would be
$5.77.
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 Claimsnet.com.
<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.............. 3,111,458 49.8% $ 4,535,500 16.7% $ 1.46
1998 Private Placements and 1999 Private Placement
Stockholders.................................... 638,542 10.2% 2,579,000 9.5% $ 4.04
New Investors..................................... 2,500,000 40.0% 20,000,000 73.8% $ 8.00
---------- ----- ------------- -----
Total............................................. 6,250,000 100.0% $ 27,114,500 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
22
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1998, (1) the actual
capitalization of Claimsnet.com, (2) the as adjusted capitalization of
Claimsnet.com, adjusted to give effect to its receipt of proceeds of
approximately $1,000,000 from the 1999 Private Placement and (3) the as adjusted
capitalization of Claimsnet.com, adjusted to give effect to the sale of the
shares offered in this offering at the initial public offering price per share
of $8.00 and the initial application of the net proceeds from this offering 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 Claimsnet.com's consolidated financial
statements and related notes and other financial information included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------
<S> <C> <C> <C>
AS ADJUSTED
AS ADJUSTED AFTER INITIAL
AFTER 1999 PRIVATE PUBLIC
ACTUAL PLACEMENT OFFERING
------------- ---------------------- --------------
Short-term debt:...................... $ 350,000 $ 350,000 $ 350,000
------------- ----------- --------------
------------- ----------- --------------
Long-term debt:....................... 4,323,127 5,323,127 --
------------- ----------- --------------
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 3,625,000
shares--actual; 6,250,000 shares,
as adjusted....................... 3,625 3,750 6,250
Additional paid-in capital............ 3,881,875 3,985,750 20,983,250
Accumulated deficit................... (7,749,817) (7,849,817) (7,953,817)
------------- ----------- --------------
Total stockholders' equity............ (3,864,317) (3,860,317) 13,035,683
------------- ----------- --------------
Total capitalization.................. $ 458,810 $ 1,462,810 $ 13,035,683
------------- ----------- --------------
------------- ----------- --------------
</TABLE>
DIVIDEND POLICY
Claimsnet.com 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. See "Risk Factors--We have not, and do not intend, to pay cash
dividends in the forseeable future" and "Description of Securities."
23
<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 years ended December
31, 1997 and 1998. The selected balance sheet data as of December 31, 1996, 1997
and 1998 and statement of operations data are derived from Claimsnet.com's
consolidated financial statements and related notes included elsewhere in this
Prospectus audited by King Griffin & Adamson P.C., independent certified public
accountants for Claimsnet.com. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Claimsnet.com's consolidated financial statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 8, 1996
(INCEPTION)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997(1) DECEMBER 31, 1998
----------------- -------------------- -----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ -- $ 81,712 $ 154,653
----------------- ----------- -----------------
Total operating expense.............................. 147,918 2,514,290 4,509,553
----------------- ----------- -----------------
Interest expense--affiliate.......................... 158,123 389,548 313,680
Interest income...................................... -- (40,817) (6,113)
----------------- ----------- -----------------
Net loss............................................. $ (306,041) $ (2,781,309) $ (4,662,467)
----------------- ----------- -----------------
----------------- ----------- -----------------
Basic and diluted loss per weighted average common
share outstanding.................................. $ (0.13) $ (0.98) $ (1.41)
----------------- ----------- -----------------
----------------- ----------- -----------------
Weighted average common shares outstanding (basic and
diluted)........................................... 2,348,894 2,850,796 3,309,280
----------------- ----------- -----------------
----------------- ----------- -----------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets....................................................... $ 15,659 $ 419,329 $ 105,691
Total assets......................................................... 978,332 2,174,597 1,653,479
Working capital...................................................... 15,659 36,202 (1,088,978)
Long-term debt....................................................... 4,408,373 3,468,320 4,323,127
Stockholders' equity (deficit)....................................... (3,430,041) (1,676,850) (3,864,317)
</TABLE>
- ------------------------
(1) Includes the results of operations of Medica from the date of acquisition,
June 2, 1997.
24
<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. CLAIMSNET.COM'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
CLAIMSNET.COM'S CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
IN GENERAL
Claimsnet.com is an electronic commerce company engaged in healthcare
transaction processing for the medical and dental industries by means of the
Internet. Claimsnet.com's proprietary software, which was developed over the
last six years and resides entirely on Claimsnet.com's servers, allows
healthcare providers to prepare and enter healthcare claims interactively on the
Internet and electronically transmits the claims to Claimsnet.com for
processing. It also allows Claimsnet.com to download claims from the healthcare
providers' computers directly to its servers. The software provides real-time
editing of the claims data for compliance with the format and content
requirements of payors and converts the claims to satisfy payor's specific
processing requirements. Claimsnet.com then electronically transmits processed
claims on behalf of healthcare providers by means of the Internet, directly or
indirectly, to medical and dental payors that accept claims processing
transmissions electronically. In addition, Claimsnet.com's software provides for
secure encryption of all claims data transmitted in compliance with the
regulations of the United States Health Care Financing Administration. The
payors to which claims processed by Claimsnet.com have been submitted, primarily
through clearinghouses such as HBO & Company and Envoy Corporation with which it
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 and United Healthcare Corporation.
As of December 31, 1996 and December 31, 1997 and December 31, 1998,
Claimsnet.com had working capital of $15,659, $36,202, and $(1,088,978),
respectively, and stockholders' equity (deficit) of $(3,430,041), $(1,676,850),
and $(3,864,317), respectively. Claimsnet.com generated revenues of $81,712
through December 31, 1997, and $154,653 for the year ended December 31, 1998.
Claimsnet.com 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 years ended December 31, 1997, and
1998, Claimsnet.com incurred net losses of $(306,041), $(2,781,309), and
$(4,662,467), respectively. There can be no assurance that Claimsnet.com will
ever achieve profitability. In addition, during the year ended December 31,
1998, Claimsnet.com recorded negative cash flow of $351,152.
On July 31, 1996, Claimsnet.com 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,
American Medical Finance, Inc., in exchange for $3,740,000, payable through the
issuance of a promissory note to American Medical Finance, Inc. On September 23,
1997, American Medical Finance, Inc. reduced the principal amount of this note
to $2,000,000 and contributed the remaining $1,740,000 in principal amount of
this note to the capital of Claimsnet.com. This note accrues interest at a rate
of 9.50% per annum and is collateralized by all of the Internet software and
technology of Claimsnet.com, including software development costs. Claimsnet.com
intends to utilize a portion of the net proceeds of this offering to satisfy
this note. American Medical Finance, Inc. was engaged in the financing and
processing of medical accounts receivable and had made preliminary
25
<PAGE>
development efforts to expand into the business of Claimsnet.com, including the
proprietary claims processing software. American Medical Finance, Inc. is
currently in the process of dissolving and liquidating. Mr. Lycke, the Chairman
of the Board of Directors, President and Chief Executive Officer of
Claimsnet.com, and Messrs. Bensen and Brown, Directors of Claimsnet.com, serve
as the Chairman of the Board of Directors, a Director and Senior Vice President,
and a Director, respectively, of American Medical Finance, Inc. See "Related
Party Transactions."
On June 2, 1997, Claimsnet.com acquired 100% of the capital stock of Medica,
a software development firm from which Claimsnet.com had licensed a portion of
its 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 (1) 119,671 shares of common stock, (2) $100,000 in cash
upon the consummation of such acquisition, (3) $125,000 in cash payable on
February 9, 1999 and $225,000 payable on December 11, 1999, and (4) $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 Claimsnet.com from the acquisition.
Claimsnet.com 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 in Claimsnet.com's consolidated financial statements are relatively
fixed costs. Claimsnet.com 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,
Claimsnet.com believes that, at its current stage of operations period to period
comparisons of results of operations are not meaningful.
PLAN OF OPERATIONS
Claimsnet.com's business strategy is: (1) 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; (2) to expand the services offered by
Claimsnet.com 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; (3) to acquire and integrate electronic claims
processing companies that enable Claimsnet.com to accelerate its entry into the
inpatient hospital claims market; and (4) to license its claims processing
technology for stand-alone purposes, Internet systems, private label use, and
original equipment manufacturers ("OEMs").
Through June 30, 1999, Claimsnet.com anticipates that its primary source of
revenues will be fees paid by users for insurance claim and patient statement
services. Thereafter, Claimsnet.com 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,
Claimsnet.com intends to charge users a fee for technical support comparable to
those charged by other healthcare software vendors.
Claimsnet.com's principal operating costs are anticipated to be marketing,
research and development, acquisition of capital equipment, and general and
administrative expenses. Claimsnet.com 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. Claimsnet.com 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
26
<PAGE>
engaging in a public relations campaign designed to expose Claimsnet.com and its
services to healthcare providers and payors which otherwise would not be exposed
to be Claimsnet.com and its products and services. In connection with the
expansion of the its business, Claimsnet.com intends to acquire additional
computers and networking equipment in order to permit an increased volume of
claims to be processed by it. General and administrative expenses include all
corporate and administrative functions that serve to support Claimsnet.com's
current and future operations and provide an infrastructure to support future
growth; major items in this category include management and staff salaries and
benefits, travel, network administration and data processing, training, and
rent.
LIQUIDITY AND CAPITAL RESOURCES
On July 31, 1996, Claimsnet.com acquired all of the Internet software,
licenses, intellectual property rights, and technology developed by an
affiliated company, American Medical Finance, Inc., in exchange for $3,740,000
in the form of a promissory note. As discussed below, the principal amount of
this note represents a portion of the indebtedness incurred by American Medical
Finance, Inc. in connection with the financing of the development of
Claimsnet.com's proprietary software. On September 23, 1997, Americal Medical
Finance Inc. reduced the principal amount of this note to $2,000,000 and
contributed the remaining $1,740,000 in principal amount of this note to the
capital of Claimsnet.com. American Medical Finance, Inc. is affiliated to
Claimsnet.com through common stockholders, including Mr. Lycke, the Chairman of
the Board of Directors, President, and Chief Executive Officer of Claimsnet.com,
and Messrs. Bensen and Brown, Directors of Claimsnet.com, and as a stockholder
of Claimsnet.com. The 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 Claimsnet.com, including software
development costs. Claimsnet.com 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 American Medical
Finance, Inc., it agreed to provide Claimsnet.com with a credit line of up to
$2,000,000 to facilitate additional development of Claimsnet.com's services and
technology. During June 1998, American Medical Finance, Inc. purchased nine
units of Claimsnet.com's then pending 1998 Private Placement each unit
consisting of 11,967 shares of common stock for an aggregate of 107,704 shares.
As consideration for the purchase, American Medical Finance, Inc. canceled
$450,000 of the principal balance then outstanding under the credit line. At
December 31, 1998, advances under such line of credit were approximately
$1,462,000. The line of credit accrues interest at the rate of 9.50% per annum
and is secured by all of the assets of Claimsnet.com, other than the collateral
securing the note from Claimsnet.com to American Medical Finance Inc. described
above. Accrued interest at December 31, 1998, under line of credit and this note
totaled $860,789 and is due on October 3, 2000. Claimsnet.com 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, Claimsnet.com
issued (1) notes in the aggregate amount of $125,000 due on February 9, 1999 and
(2) notes in the aggregate amount of $225,000 due on December 11, 1999. The
notes are unsecured, were non-interest bearing prior to December 11, 1998, and
bear interest at 8% per annum thereafter.
In May 1997, Claimsnet.com consummated the private offering of 45 units,
each unit consisting of 12,885 shares of common stock, for aggregate gross
proceeds of $2,250,000 (the "1997 Private Placement"). Claimsnet.com has used,
and intends to use, the net proceeds of the 1997 Private Placements for ongoing
working capital requirements.
27
<PAGE>
On June 2, 1997, Claimsnet.com acquired 100% of the capital stock of Medica,
a software development firm from which it had licensed a portion of its
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 (A) 119,671 shares of common stock, (B) $100,000 in cash,
paid upon the consummation of the acquisition, (C) $125,000 in cash payable on
February 9, 1999 and $225,000 on December 11, 1999 and accruing interest at the
rate of 8% per annum, and (D) $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 Claimsnet.com
from the acquisition. Randall S. Lindner, Vice President of Technology of
Claimsnet.com, served as the President of Medica prior to the consummation of
the Medica Acquisition.
During the second quarter of 1998, Claimsnet.com consummated a private
placement of 20 units, each unit consisting of 11,967 shares of common stock,
for aggregate gross proceeds of $1,000,000. From July through October 1998
Claimsnet.com consummated a private placement of 29.5 units, each unit
consisting of 9,295 shares of common stock, for aggregate gross proceeds of
approximately $1,475,000. During January 1999, Claimsnet.com consummated a
private placement of 20 units, each unit consisting of $50,000 principal amount
of Series A 12% Notes due 2000 and 6,250 shares of common stock, for aggregate
gross proceeds of $1,000,000 (the "1999 Private Placement" and, together with
the 1997 Private Placement and the 1998 Private Placements, the "Private
Placements"). Claimsnet.com has used, and intends to use, the net proceeds of
the 1998 Private Placements and the 1999 Private Placement for ongoing working
capital purposes. Pursuant to the Securities Act, the rules and regulations
thereunder, and the interpretations of the Commission, Claimsnet.com may be
required to offer rescission to investors in the 1998 Private Placements and
1999 Private Placement. If Claimsnet.com is required to offer rescission of the
private placements and all of such investors determine to exercise such
rescission rights, Claimsnet.com 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
Claimsnet.com 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.
Claimsnet.com'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 Claimsnet.com to
deliver services to its customers (including Claimsnet.com's proprietary
software systems as well as hardware and software supplied by third parties);
communications networks, such as the Internet and private intranets, which
Claimsnet.com depends on to provide electronic transactions to its customers;
the internal systems of Claimsnet.com's customers and suppliers; the hardware
and software systems used internally by Claimsnet.com in the management of its
business; and non-information technology systems and services used by
Claimsnet.com in its business, such as telephone systems and building systems.
Claimsnet.com has internally reviewed the proprietary software systems it
uses to deliver services to its customers. Although Claimsnet.com believes that
its internally developed applications and systems are designed to be Year 2000
compliant, Claimsnet.com utilizes third-party equipment and software that may
not be Year 2000 compliant. Failure of such third-party or currently owned
equipment or software to operate properly with regard to the Year 2000 and
thereafter could require Claimsnet.com to incur unanticipated expenses to remedy
any problems, which could have a material adverse effect on its business,
prospects, financial condition, and results of operations. Claimsnet.com does
not believe that its expenditures to upgrade its internal systems and
applications will be material to its business, prospects, financial condition,
and results of operations.
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Futhermore, the success of Claimsnet.com'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 Claimsnet.com's systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose Claimsnet.com to significant
potential liability. If client failures result in the failure of Claimsnet.com's
systems, its 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 Claimsnet.com's
applications and services.
Claimsnet.com is conducting a formal assessment of its Year 2000 exposure in
order to determine what steps beyond those identified by its internal review may
be advisable. Claimsnet.com 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 Claimsnet.com to address any unforeseen Year 2000
issue could adversely affect its business, prospects, financial condition, and
results of operations.
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BUSINESS
IN GENERAL
Claimsnet.com is an electronic commerce company engaged in healthcare
transaction processing for the medical and dental industries by means of the
Internet. Claimsnet.com's proprietary software, which was developed over the
last six years and resides entirely on its servers, allows healthcare providers
to prepare and enter healthcare claims interactively on the Internet and
electronically transmits the claims to Claimsnet.com for processing. It also
allows Claimsnet.com to download claims from the healthcare providers' computers
directly to its servers. The software provides real-time editing of the claims
data for compliance with the format and content requirements of payors and
converts the claims to satisfy payor's specific processing requirements.
Claimsnet.com then electronically transmits processed claims on behalf of
healthcare providers by means of the Internet, directly or indirectly, to
medical and dental payors that accept claims processing transmissions
electronically. In addition, Claimsnet.com's software provides for secure
encryption of all claims data transmitted in compliance with the regulations of
the United States Health Care Financing Administration. The payors to which
claims processed by Claimsnet.com have been submitted, primarily through
clearinghouses, such as HBO & Company and Envoy Corporation with which it 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 Shield/Blue Cross of
Louisiana, and United Healthcare Corporation.
Claimsnet.com believes that the following are significant advantages of its
electronic claims transmission services over other currently available services:
- the ability of healthcare providers utilizing its website to interactively
prepare claims on the Internet and receive real time edits prior to claim
submission,
- the ease and availability of Claimsnet.com-provided training over the
Internet,
- the minimal software and processing power required for providers to
utilize the Claimsnet.com's proprietary software, and
- 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 Claimsnet.com's
claims processing services.
Claimsnet.com believes that the improved claims processing procedure will result
in a sharply reduced average number of outstanding accounts receivable days,
which should improving the provider's working capital. Claimsnet.com 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.
Claimsnet.com seeks to generate revenue from claim processing services 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 its services. Generally, Claimsnet.com
collects a monthly subscription fee of $19.95 from customers who subscribed to
its services on or after January 1, 1998. Claimsnet.com has, however, determined
to waive all provider subscription fees through January 31, 1999 for customers
who subscribed to its services prior to January 1, 1998 as part of its marketing
strategy to attract healthcare providers to use our services. Claimsnet.com may
be unable to collect subscription fees from these healthcare providers after
January 31, 1999 or to predict, if collected, the amount of such fees.
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In December 1988, Claimsnet.com began offering patient statement processing
services for healthcare providers. Claimsnet.com began generating revenue by
charging a transaction fee for each statement processed and uses a subcontractor
to print and mail the bar-coded and customized statements along with a return
envelope. Claimsnet.com also began offering real time eligibility verification
of patient benefit coverage. Claimsnet.com seeks to generate revenue by charging
the healthcare provider an additional subscription fee as well as transaction
fees for certain verifications.
ELECTRONIC CLAIMS PROCESSING MARKET
The healthcare electronic claims processing market, including dental claims,
is estimated by Health Data Management, an industry publication, to include over
4.0 billion healthcare claim and HMO encounter form (the HMO equivalent of a
claim) submissions in 1997. This publication has forecasted this 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 40% of all medical outpatient claims
and 15.5% of all dental claims. Claimsnet.com believes that, as a result of the
low penetration of electronic claims processing among healthcare providers and
dentists, this market presents an attractive opportunity for it to offer a
low-cost effective service. Claimsnet.com intends to focus its marketing efforts
on outpatient claims, including claims of clinics, hospitals, physicians,
dentists, and other outpatient service providers, as it believes they are the
underserved segments of the market.
Claimsnet.com 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. Claimsnet.com intends to enroll dentists and
install its 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 Claimsnet.com believes that another underserved segment
of the outpatient claims processing market is HMO claims. Currently there is no
formal transmission document standard. Accordingly, Claimsnet.com believes that
the opportunity exists for it to utilize its claims processing configuration to
make available a document scanning service using hypertext markup language. This
will enable Claimsnet.com 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, Claimsnet.com'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. Claimsnet.com believes that if
the industry evolves toward direct payor submission of claims, its software will
be able to offer efficient access to payors to its healthcare provider
customers.
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BUSINESS STRATEGY
Claimsnet.com's business strategy is as follows:
- 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,
- to expand the services offered by Claimsnet.com 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,
- to acquire and integrate electronic claims processing companies that
enable Claimsnet.com to accelerate its entry into the inpatient hospital
claims market, and
- 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 Claimsnet.com's business strategies
will succeed or that any of its business objectives will be met with any
success.
EXPANDED MARKETING EFFORTS
To date, Claimsnet.com has engaged in limited marketing efforts. Achieving
market penetration will require significant efforts by Claimsnet.com to create
awareness of, and demand for, its products and services. Claimsnet.com intends
to utilize a portion of the net proceeds from this offering to upgrade its
marketing services to include advertising on the Internet, an expanded sales
staff, targeted e-mail and mail campaigns, and participation in major trade
shows.
Claimsnet.com 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. See
"Business-- Customers" for a description of certain contracts.
Claimsnet.com 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
Claimsnet.com 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 Claimsnet.com's Internet and extranet Web pages, there is space
reserved for advertisers. Claimsnet.com intends to sell the space to quality
advertisers desiring to target healthcare providers.
EXPANSION OF ONLINE SERVICES
Claimsnet.com recently commenced offering additional services to its
subscribers with the introduction of patient statement processing services and
real-time eligiblity verification of patient benefit coverage. Following this
offering, Claimsnet.com intends to develop and offer other service offerings to
increase its revenue per client. The targeted services will include 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
Claimsnet.com is seeking opportunities to capitalize on the fragmented
nature of the healthcare electronic claims processing market through the
acquisition of regional "wholesale" claims processing
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companies or software companies complementing its current services. Acquisitions
would be targeted which allow Claimsnet.com to enter the hospital inpatient
healthcare claims processing marketplace rapidly and would permit Claimsnet.com
to implement its Internet based healthcare transaction processing software
solution in that marketplace. Claimsnet.com currently has no agreement, plan or
arrangement with respect to any such acquisition, and there can be no assurance
that Claimsnet.com's management will be able identify suitable acquisition
candidates, and if such candidates are located, that Claimsnet.com will be able
to consummate any such transaction.
Notwithstanding the foregoing, investors should be aware that
Claimsnet.com'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
Claimsnet.com will be able to implement any or all of such plans, or that such
plans, when and if implemented, will be successful.
ENTERING INTO LICENSING AGREEMENTS
Claimsnet.com may 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
Claimsnet.com'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: (1)
industry standard website management software; (2) state-of-the-art commercial
security and encryption software licensed by Claimsnet.com from third parties,
including Citrix; and (3) 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. Claimsnet.com personnel inputs new edits. Once
healthcare providers connect to Claimsnet.com's secure website, Claimsnet.com's
software edits claims on-line automatically, using a database containing more
than 22,000 edit variables. The direct provider-payor connections offered by
Claimsnet.com'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,
Claimsnet.com prints and mails hard copies of such claims to such payors and
charges the provider for this additional service.
During the initial application process, a new customer interacts with
Claimsnet.com'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 Claimsnet.com's
healthcare transaction processing system. At this point, the healthcare
provider, at his option, may automatically enable an additional level of
encryption, 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, Claimsnet.com monitors all traffic through its private
application server and firewall.
Claimsnet.com'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
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together to provide the extraction and encryption of claims from a provider's
practice management system to Claimsnet.com's Internet claims processing server,
where editing and formatting occurs in a secure environment. Claimsnet.com's
system then delivers the claims to the payor gateway. The different software
applications have either been purchased, licensed, or developed by
Claimsnet.com. In June 1997, Claimsnet.com consummated the Medica Acquisition.
Medica had licensed the core editing software to Claimsnet.com.
Claimsnet.com'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. The United
States Healthcare Financing Administration has deferred security requirements
for Internet communications including healthcare data. Claimsnet.com operates in
compliance with these requirements. 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, Claimsnet.com has either identified back-up sources for
all the software used or, in the event of a business failure by the licensing
vendor, Claimsnet.com owns the source code.
TRAINING AND HARDWARE REQUIREMENTS
The training for the various products and services offered by Claimsnet.com
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 Claimsnet.com's Web home page (http:// claimsnet.com). After
an initial free period of unlimited service, Claimsnet.com 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 Claimsnet.com'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. Claimsnet.com's customers are responsible for obtaining and
maintaining the ISP connection.
INTERNET/INTRANET
The processing configuration used by Claimsnet.com requires limited
electronic claims processing software to reside at the level of the healthcare
provider. All editing and formatting takes place at Claimsnet.com's Internet
application server site. American Medical Finance, Inc. initially developed this
application internally, and subsequently, Claimsnet.com acquired this
application. From the standpoint of the user, Claimsnet.com's system has "the
latest" software version and all format changes available instantly.
Claimsnet.com'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.
Claimsnet.com'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 Claimsnet.com and a provider takes place in a
highly-controlled, secure, and (because of the remote LAN software) encrypted
environment. The dual encryption utilized by Claimsnet.com 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.
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CUSTOMERS
Claimsnet.com views its customers as both the healthcare providers
submitting claims and the payors accepting claims.
At the date of this Prospectus, Claimsnet.com is processing claims for
approximately 1,000 providers. The providers are geographically dispersed and
represent a mix of physician specialties and dentists. Approximately 340
additional providers are in a "testing mode." This requires verification of each
provider's claims format with proper payors. There are over 1,000 providers in
various stages of submitting test claims through Claimsnet.com's electronic
claims processing system.
Claimsnet.com requires each healthcare provider using Claimsnet.com's
services to enter into a standard subscription agreement available on the home
page of Claimsnet.com's website. This system allows the healthcare provider to
access, complete, and return the subscription agreement on the Internet, and
enables the provider to immediately access Claimsnet.com's services. Each
subscription agreement provides (1) that the healthcare provider shall pay to
Claimsnet.com monthly a subscription fee (which fee Claimsnet.com has determined
to waive through at least January 31, 1999 for those which subscribed to
Claimsnet.com's services prior to January 1, 1998), and (2) the nature of the
services to be rendered by Claimsnet.com and the terms and conditions under
which, will render such services. Such contracts are terminable by the
healthcare provider upon 30 days prior written notice. There can be no assurance
that Claimsnet.com will be able to charge and collect subscription fees after
January 31, 1999 from those not currently paying such fees, or if charged, what
the level of fees (individually or in the aggregate) will be.
Claimsnet.com also enters into agreements with the commercial medical and
dental payors or regional clearinghouses to which Claimsnet.com submits
processed claims. Generally, such agreements provide for the payment of a fee
per claim averaging approximately $.10 to paid to Claimsnet.com 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, Claimsnet.com
treats each plan as a separate payor with its own particular requirements.
In February 1998, Claimsnet.com entered into a development and marketing
agreement with Millbrook Corporation, 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
Claimsnet.com pursuant to such agreement is tightly integrated through
distinctive software controls allowing automatic updates within each provider's
practice management system.
In April 1998, Claimsnet.com signed an agreement with Island Automated
Medical Services, Inc. to provide services to 2,500 Island customers providing
physician billing services. Claimsnet.com and Island will jointly market the
program through training programs, newsletters and fee reduction for new
customers utilizing the Island standard software.
In September 1998, Claimsnet.com entered into an agreement with Electronic
Data Interchange Services, a department of Blue Cross/Blue Shield of Louisiana,
to provide claim processing services to Blue Cross/Blue Shield of Louisiana
network providers. Under the terms of the agreement, Claimsnet.com and Blue
Cross/Blue Shield of Louisiana will jointly promote Claimsnet.com's services to
the 9,600 network providers of Blue Cross/Blue Shield of Louisiana through
website links, Blue Cross/Blue Shield of Louisiana network communication
resources, educational seminars, telemarketing, and direct mail campaigns.
In September 1998, Claimsnet.com entered into a group purchasing agreement
with Provider Select, Inc., an affiliate of Premier, Inc., the nation's largest
alliance of hospitals and health care organizations. Under the terms of the
agreement, Claimsnet.com will provde claim processing, patient statements,
eligibility verification, and other services to participating members of
Premier.
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In November 1998, Claimsnet.com signed an agreement with Southern Medical
Association, a physician association which provides services to over 35,000
physicians in seventeen Southern states. Under the terms of the agreement,
Claimsnet.com will provide claim processing, patient statements, eligibility
verification, and other services to participating members of Southern Medical
Association.
INTELLECTUAL PROPERTY
Claimsnet.com 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 license agreements with its employees,
customers, partners and others to protect its proprietary rights. Claimsnet.com
intends to pursue the registration of its trademarks and service marks in the
U.S., although Claimsnet.com has been advised that trademark and service mark
protection of its corporate name is not available. A portion of the proprietary
software that Claimsnet.com 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--We need to maintain the
proprietary nature of our rights; we have no patent, trademark, or service mark
protection." Claimsnet.com 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 Claimsnet.com attempts to ensure
that the quality of its brand name is maintained by such licensees, there can be
no assurance that such licensees will not take actions that might materially
adversely affect the value of Claimsnet.com's proprietary rights or reputation,
which could have a material adverse effect on Claimsnet.com's business,
prospects, financial condition, and results of operations. There can be no
assurance that the steps taken by Claimsnet.com to protect its proprietary
rights will be adequate or that third parties will not infringe or
misappropriate its copyrights, trademarks, trade dress, and similar proprietary
rights. In addition, there can be no assurance that other parties will not
assert infringement claims against Claimsnet.com. Claimsnet.com 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 Claimsnet.com and its licensees. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. Claimsnet.com is not currently aware of any legal
proceedings pending against it.
COMPETITION
Several large companies such as Envoy Corporation, HBO & Company, National
Data Corporation, QuadraMed Corporation, Proxymed Corporation, and Healtheon
dominate the segment of the industry in which Claimsnet.com operates. Each of
these companies 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. Claimsnet.com 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 Claimsnet.com 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 Claimsnet.com and thus represent a direct competitor. Claimsnet.com
believes that its pricing structure and total cost is very competitive with
other providers of electronic claims processing services. Claimsnet.com further
believes that existing competitors are constrained not only by capital
investments and existing hardware/software configurations, but by existing
customer agreements. Despite these facts, Claimsnet.com anticipates that
competition will arise
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in the processing of claims on the Internet. No assurance can be given that
Claimsnet.com 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, Claimsnet.com believes that it is not currently able to compete with
existing potential competitors and, accordingly, it has designed its business
plan to address other market segments.
EMPLOYEES
As of December 31, 1998, Claimsnet.com had a total of 45 full-time
employees, three of whom were executive officers, 28 of whom were technical
personnel, ten of whom were sales personnel, and four of whom were
administrative personnel. Eleven of these employees were individuals whose
services had previously been obtained under the service agreement with American
Medical Finance, Inc. Three of the remaining employees were obtained as a result
of the Medica acquisition. None of Claimsnet.com's employees are represented by
a labor organization. Claimsnet.com believes that its relations with its
employees are satisfactory.
Mr. Lycke, the Chairman of the Board of Directors, President, and Chief
Executive Officer of Claimsnet.com, and Messrs. Bensen and Brown, Directors of
Claimsnet.com, also serve as Chairman of the Board of Directors, a Director and
Senior Vice President, and a Director, respectively, of American Medical
Finance, Inc. See "Related Party Transactions."
FACILITIES
Claimsnet.com currently leases 7,397 square feet of office space at the rate
of $13,561 per month. Their offices are located at Suite 1515, 12801 North
Central Expressway, Dallas, Texas 75243. The lease expires September 30, 1999.
Claimsnet.com believes that, in the event alternative or larger offices are
required, such space is available at competitive rates. See "Related Party
Transactions." For Claimsnet.com's servers, Claimsnet.com 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
Claimsnet.com is not currently a party to any litigation.
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MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Claimsnet.com, their ages, and their
positions held with Claimsnet.com 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
William C. Guynup.................................... 44 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
Cheryl L. Corless.................................... 45 Vice President of Customer Operations
Ward L. Bensen....................................... 56 Class I Director; Treasurer
Robert H. Brown, Jr.................................. 45 Class I Director
Sture Hedlund........................................ 60 Class II Director
John C. Willems, III................................. 43 Class II Director
</TABLE>
The following is certain summary information with respect to the executive
officers and directors of Claimsnet.com.
BO W. LYCKE has served as the Chairman of the Board of Directors, President,
and Chief Executive Officer of Claimsnet.com since its inception. In 1990, Mr.
Lycke founded American Medical Finance, Inc. 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 Claimsnet.com since September 1996 and has served as director of
Claimsnet.com 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. 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 Claimsnet.com 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
38
<PAGE>
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
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 Claimsnet.com,
coming to Claimsnet.com as the former President of Medica, in connection with
its 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.
WILLIAM C. GUYNUP joined Claimsnet.com in February 1999 as the Vice
President of Sales. Mr. Guynup has over 13 years of experience in the Electronic
Data Interchange services industry. From August 1996 to February 1999 Mr. Guynup
served as Regional Manager for ENVOY-NEIC, a division of Envoy Corporation. From
May 1988 to July 1996 Mr. Guynup served as President and owner of ECMS, a
medical/dental software and credit card merchant services company located in
Clark, New Jersey. From January 1986 to April 1988 Mr. Guynup served as Vice
President of Marketing for Intellidata Business Systems, Inc., a bank card
services company. Prior positions include logistics and operations experience
with Mercedes Benz of North America, Witco Chemical Company, and Toys "R" Us.
C. KELLY CAMPBELL has served as Vice President and Corporate Controller, as
well as Secretary, of Claimsnet.com and in other positions with Claimsnet.com
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
Claimsnet.com 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., 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.
39
<PAGE>
CHERYL L. CORLESS joined Claimsnet.com in February 1999 as the Vice
President of Customer Operations. Ms. Corless has over 12 years of experience
managing high volume and technical call centers. From June 1998 to February 1999
Ms. Corless served as Senior Manager of Greyhound Lines, Inc. where she managed
call center operations handling 10 million calls annually. From March 1987 to
February 1998 Ms. Corless held various positions with National TechTeam, Inc.,
most recently as Call Center and Remote Site Director. At TechTeam, Ms. Corless
established and managed technical call centers employing 500 support technicians
and successfully implemented and achieved ISO 9001 quality certification.
TechTeam provided outsourcing services to Hewlett-Packard, AST, 3COM,
WordPerfect, Novell, General Electric, Micrografx, Chrysler, Ford and General
Motors.
WARD L. BENSEN has been a director of Claimsnet.com since April 1996 and has
served as Treasurer of Claimsnet.com since inception. 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 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 Claimsnet.com since April
1996 and had been a director of AMF since 1990. Since July 1998, Mr. Brown has
served as President and Chief Executive Officer of RHB Capital, LLC, a
Dallas-based private investment firm. From 1990 to 1998, Mr. Brown was employed
by Dain Rauscher, Inc., a regional investment banking and brokerage firm, 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. Mr. Brown also serves as a
director of Stevens International, Emerson Radio Inc. and Competitive
Technologies Inc.
STURE HEDLUND has served as a director of Claimsnet.com 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 Claimsnet.com since 1998
and has been legal counsel to Claimsnet.com 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.
STRUCTURE OF THE BOARD OF DIRECTORS
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
40
<PAGE>
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.
ELECTION OF OFFICERS
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 Claimsnet.com'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 Claimsnet.com.
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.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by
Claimsnet.com for services rendered in all capacities during the years ended
December 31, 1998, 1997 and 1996 by the Chief Executive Officer and each of the
four other most highly compensated executive officers of Claimsnet.com.
41
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
---------------------------------------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER ANNUAL COMPENSATION OPTIONS (#)
- -------------------------------------- --------- ---------- ---------- ----------------------------- -------------
<S> <C> <C> <C> <C> <C>
Bo W. Lycke........................... 1998 $ 108,333 $ -- $ --
Chairman of the Board of Directors, 1997 50,415 -- --
President, and Chief Executive 1996 17,500 -- --
Officer
Terry A. Lee(1)....................... 1998 $ 125,000 $ -- --
Executive Vice President of 1997 122,806 153,500 --
Marketing and Technology 1996 28,365 -- --
Randall S. Lindner.................... 1998 100,000 -- -- 121,465
Vice President of Technology 1997 74,498 -- --
Paul W. Miller........................ 1998 100,000 20,000 --
Vice President and Chief Financial 1997 11,538 -- --
Officer
Samuel A. Carrel...................... 1998 96,154 14,790 --
Former Vice President of Sales and
Marketing
</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, Claimsnet.com adopted the Directors' Plan to tie the
compensation of outside directors (e.g., non-employee directors) to future
potential growth in Claimsnet.com's earnings, if any, and to provide such
directors and encourage them to remain on its Board of Directors, to provide
outside directors with an increased incentive to make significant and
extraordinary contributions to the long-term performance and growth of
Claimsnet.com, and to join the interests of the outside directors through the
opportunity for increased stock ownership, with the interests of Claimsnet.com's
stockholders. Only outside directors 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 Directors' Plan.
Stock options granted under the Directors' Plan will give the option holder the
right to purchase common stock at an exercise price fixed in the stock option
agreement executed by the option holder and Claimsnet.com 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
42
<PAGE>
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 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 111,538 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 has
been made to Claimsnet.com. 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.
An administrator, who is the Secretary of the Corporation or such other
person designated by the Board of Directors, shall administer the Directors'
Plan.
Unless earlier terminated, the Directors' Plan will terminate on December
31, 2007.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Claimsnet.com did not have a Compensation Committee during the period from
April 8, 1996 (inception) through April 4, 1997. Messrs. Lycke and Bensen,
officers of Claimsnet.com during such period, participated in deliberations of
Claimsnet.com's Board of Directors concerning executive officer compensation.
There were no interlocking relationships between Claimsnet.com and other
entities that might affect the determination of the compensation of the
directors and executive officers of Claimsnet.com.
EMPLOYMENT AGREEMENTS
In April 1997, Claimsnet.com 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 Claimsnet.com 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 event of a Change in Control of Claimsnet.com (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, Claimsnet.com
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 Claimsnet.com due to disability, (iii) by
Claimsnet.com without cause, or (iv) by Mr. Lycke voluntarily upon
Claimsnet.com's default or unremedied Adverse Change in Duties (as defined in
such agreement), then Claimsnet.com is required to pay Mr. Lycke a lump sum
severance payment equal to his then current
43
<PAGE>
annual salary. Mr. Lycke may terminate his employment at any time upon at least
30 days written notice to Claimsnet.com. 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, Claimsnet.com 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 Claimsnet.com, providing that,
commencing on such date for an initial term of two years subject to annual
extension, Mr. Lee will devote his full business time and efforts to
Claimsnet.com 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 46,385 shares of common stock on March 26, 1997. Mr. Lee is also
entitled to participate in insurance and other benefit plans established by
Claimsnet.com for its employees. Generally, upon the termination of Mr. Lee's
employment for cause, Mr. Lee shall be restricted from competing with
Claimsnet.com 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
Claimsnet.com, Mr. Lee shall be entitled to receive $40,000 in consideration of
the termination of his employment and shall be restricted from competing with
Claimsnet.com for a period of six months thereafter. In January 1998, Mr. Lee
was granted an option to purchase 109,189 previously issued shares of common
stock at a price of $3.89 per share from three stockholders of Claimsnet.com.
See "Principal Stockholders."
In connection with the Medica Acquisition, Claimsnet.com entered into an
employment agreement with Mr. Lindner, the Vice President of Technology of
Claimsnet.com, 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 Claimsnet.com 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 83,606 shares of common stock on June 2,
1997. Mr. Lindner is also entitled to participate in insurance and other benefit
plans established by Claimsnet.com for its employees. Generally, upon the
termination of Mr. Lindner's employment for cause, he shall be restricted from
competing with Claimsnet.com 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 Claimsnet.com, Mr. Lindner shall be entitled to receive between
$20,000 and $30,000 in consideration of the termination of his employment.
1997 STOCK OPTION PLAN
On April 5, 1997, the Board of Directors and stockholders of Claimsnet.com
adopted the 1997 Plan. The 1997 Plan, as amended, provides for the grant of
options to purchase up to 557,692 shares of common stock to employees, officers,
directors, and consultants of Claimsnet.com. Options may be either "incentive
stock options" or non-qualified options under the Federal tax laws. Incentive
stock options may be granted only to employees of Claimsnet.com, while
non-qualified options may be issued to non-employee directors, consultants, and
others, as well as to employees of Claimsnet.com.
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.
Subject to certain exceptions, 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
44
<PAGE>
granted incentive stock options which first become exercisable in any calendar
year may not exceed $100,000.
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.
Claimsnet.com must grant options under the 1997 Plan within ten years from
the effective date of the 1997 Plan. The effective date of the 1997 Plan is
April 5, 1997. Subject to certain exceptions, holders of incentive stock options
granted under the 1997 Plan cannot exercise these options more than ten years
from the date of grant. 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 Claimsnet.com 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 Claimsnet.com become available again for issuance
under the 1997 Plan.
Claimsnet.com intends to grant to, among others, certain of its employees,
approximately 425,000 options under the 1997 Plan upon the consummation of this
offering.
DIRECTORS' LIMITATION OF LIABILITY
Claimsnet.com'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 General Corporation Law, or for any transaction from which the director
derived an improper personal benefit). Claimsnet.com believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers.
Claimsnet.com 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
Claimsnet.com pursuant to the foregoing provisions or otherwise, Claimsnet.com
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.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, (1) each
person who is known by Claimsnet.com to be the owner of record or beneficial
owner of more than 5% of the outstanding common stock, (2) each director and
each executive officer of Claimsnet.com, (3) all directors and executive
officers of Claimsnet.com as a group, and (4) 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)..................................... 1,627,993 43.4% 26.0
Terry A. Lee (2) (7)............................................ 155,573 4.1 2.5
Paul W. Miller (2)(10).......................................... -- -- --
Randall S. Lindner (2) (6)...................................... 83,606 2.2 1.3
William C. Guynup (2)(11)....................................... -- -- --
C. Kelly Campbell (2)(12)....................................... -- -- --
Abbas R. Kafi (2)(11)........................................... -- -- --
Cheryl L. Corless (2)(12)....................................... -- -- --
Ward L. Bensen (2) (3) (4)...................................... 576,904 15.4 9.2
Robert H. Brown, Jr. (2) (3) (5)................................ 692,354 18.5 11.1
Sture Hedlund (2) (9)........................................... 9,277 * *
John C. Willems, III (2) (13)................................... 9,277 * *
American Medical Finance, Inc. ................................. 381,603 10.2 6.1
12801 N. Central Expressway
Suite 1515
Dallas, Texas 75243
Otto Candies, Inc............................................... 279,040 7.4 4.5
17271 U.S. Hwy. 90
Des Allemends, LA 70030
All directors and executive officers of Claimsnet.com as a group
(10 persons) (2) (3) (4) (5) (9)................................ 2,282,589 60.2 36.5
</TABLE>
- ------------------------------
* Less than one percent.
(1) As used in this Prospectus, the term beneficial ownership with respect to a
security consists 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 common stock
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 381,603 shares of common stock owned of record by AMF, 16,333
shares of which are subject to an option agreement with Terry A. Lee, as
described in footnote (7). Excludes options granted under the 1997 Plan
exercisable for an aggregate of 20,000 shares of common stock, which options
are not exercisable within 60 days of the date of this Prospectus. Mr. Lycke
serves as the Chairman of the Board of Directors of American Medical
Finance, Inc. Messrs. Lycke, Bensen, and Brown are stockholders of American
Medical Finance, Inc. owning 70.1%, 11.2%, and 17.7% of the outstanding
capital stock of American Medical Finance, Inc., respectively. Therefore,
Messrs. Lycke, Bensen, and Brown may be deemed to beneficially own the
shares of common stock owned by American Medical Finance, Inc.
(4) Consists of 195,301 shares of common stock owned of record by Mr. Bensen and
381,603 shares of common stock owned of record by American Medical Finance,
Inc. See footnote (3), above. Excludes options granted under the Directors'
Plan
46
<PAGE>
exercisable for an aggregate of 25,000 shares of common stock, which options
are not exercisable within 60 days of the date of this Prospectus.
(5) Consists of 310,751 shares of common stock owned of record by Mr. Brown,
18,531 shares of which are subject to an option agreement with Terry A. Lee,
as described in footnote (7), and 381,603 shares of common stock owned of
record by American Medical Finance, Inc. See footnote (3), above. Excludes
options granted under the Directors' Plan exercisable for an aggregate of
10,000 shares of common stock, which options are not exercisable within 60
days of the date of this Prospectus.
(6) Excludes 3,279 shares of common stock owned of record by Mr. Lindner's wife,
as to which shares Mr. Lindner disclaims beneficial ownership and 118,900
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 109,189 shares of common
stock at an exercise price of $3.88 per share. Excludes options granted
under the 1997 Plan exercisable for an aggregate of 20,000 shares of common
stock, which options are not exercisable within 60 days of the date of this
Prospectus.
(8) Consists of 1,246,390 shares of common stock owned of record by Mr. Lycke,
74,325 shares of which are subject to an option agreement with Terry A. Lee,
as described in footnote (7), and 381,603 shares of Common Stock owned of
record by American Medical Finance, Inc. See footnote (3) above.
(9) Excludes options granted under the Directors' Plan exercisable for an
aggregate of 10,000 shares of common stock, which options are not
exercisable within 60 days of the date of this Prospectus.
(10) Excludes options granted to such individual under the 1997 Plan exercisable
for an aggregate of 50,000 shares of common stock, which options are not
exercisable within 60 days of the date of this Prospectus.
(11) Excludes options granted to such individual under the 1997 Plan exercisable
for an aggregate of 12,000 shares of common stock, which options are not
exercisable within 60 days of the date of this Prospectus.
(12) Excludes options granted to such individual under the 1997 Plan exercisable
for 10,000 shares of common stock, which options are not exercisable within
60 days of the date of this Prospectus.
(13) Excludes options granted under the Directors' Plan for an aggregate of
5,000 shares of common stock, which options are not exercisable within 60
days of the date of this Prospectus.
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RELATED PARTY TRANSACTIONS
American Medical Finance, Inc. is the record owner of 381,603 shares of
common stock, representing 10.2% of the outstanding common stock prior to this
offering and 6.1% of the outstanding common stock following this offering. Bo W.
Lycke, the Chairman of the Board of Directors, President, and Chief Executive
Officer, Ward L. Bensen, a Director, and Robert H. Brown, Jr., a Director of
Claimsnet.com are the Chairman of the Board of Directors a Director and Senior
Vice President, and a Director, respectively, of American Medical Finance, Inc.
Messrs. Lycke, Bensen, and Brown are all stockholders of American Medical
Finance, Inc., owning 70.1%, 11.2%, and 17.7% of the outstanding capital stock
of American Medical Finance, Inc., respectively. See "Principal Stockholders."
Such individuals will devote minimal time to winding up the business and affairs
of American Medical Finance, Inc. for approximately three months following this
offering.
On July 31, 1996, Claimsnet.com acquired all of the Internet software,
licenses, intellectual property rights, and technology developed by American
Medical Finance, Inc. in exchange for a promissory note in the amount of
$3,740,000. On September 19, 1997, American Medical Finance, Inc. reduced the
principal amount of this note to $2,000,000 and contributed the remaining
$1,740,000 in principal amount of this note to the capital of Claimsnet.com.
This 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 Claimsnet.com, including software
development costs. Claimsnet.com intends to utilize a portion of the net
proceeds of this offering to satisfy such obligation.
In connection with this acquisition, American Medical Finance, Inc. and
Claimsnet.com entered into the Service Agreement in which American Medical
Finance, Inc. provides staff and office support services to Claimsnet.com and
for which Claimsnet.com was billed monthly. Such agreement was canceled by
Claimsnet.com effective April 1, 1997. Claimsnet.com believes that the cost of
the services provided by American Medical Finance, Inc. was comparable to, or
lower than, available alternatives. Commencing April 1, 1997, Claimsnet.com
established its own payroll and personnel/management structure and assumed
direct responsibility for all of its support services.
From April 1996 until August 1997, Claimsnet.com subleased 4,000 square feet
of office space from American Medical Finance, Inc., on a month-to-month basis,
at the rate of $4,000 per month.
Upon the consummation of the acquisition transaction with American Medical
Finance, Inc., American Medical Finance, Inc. agreed to provide Claimsnet.com
with a credit line of up to $2,000,000 to facilitate additional development of
Claimsnet.com's services and technology. During June 1998, American Medical
Finance, Inc. purchased nine units of Claimsnet.com's then pending 1998 Private
Placements, each unit consisting of 11,967 shares of common stock, for an
aggregate of 107,704 shares. As consideration for the purchase, American Medical
Finance, Inc. cancelled $450,000 of the principal balance then outstanding under
the credit line. At December 31, 1998, advances under such line of credit were
approximately $1,462,000. Such line of credit accrues interest at the rate of
9.50% per annum and is secured by all of the assets of Claimsnet.com, other than
the collateral securing the note to American Medical Finance, Inc. described
above. Claimsnet.com intends to utilize a portion of the net proceeds of this
offering to satisfy such obligation.
All future transactions between Claimsnet.com and its officers, directors,
and 5% stockholders will be on terms no less favorable to Claimsnet.com than can
be obtained from unaffiliated third parties and will be approved by a majority
of the independent and disinterested directors of Claimsnet.com.
For a description of employment agreements between Claimsnet.com and its
executive officers, see "Management--Employment Agreements."
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<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
Claimsnet.com 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, 1998, 3,625,000 shares of common stock were outstanding and held of record
by 30 stockholders and no shares of preferred stock were outstanding.
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 Claimsnet.com, 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 Claimsnet.com 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 Claimsnet.com 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 Claimsnet.com 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 of Directors 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
redemption rights, as may, from time to time, be determined by the Board of
Directors. 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 containing the rights, privileges, and
limitations of such series of preferred stock shall be filed with the Secretary
of State of the State of Delaware. The effect of such preferred stock is that
Claimsnet.com'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 Claimsnet.com 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.
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ANTI-TAKEOVER PROVISIONS
Upon consummation of this offering, Claimsnet.com 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. Claimsnet.com has not adopted such an amendment to
its Certificate of Incorporation or By-laws.
REGULATION OF THE INTRODUCTION OF BUSINESS AT ANNUAL MEETINGS OF STOCKHOLDERS
Claimsnet.com'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 (1) by or at the
direction of the Board of Directors or (2) by any stockholder of Claimsnet.com
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 Claimsnet.com. To be
timely, a stockholder's notice must be delivered or mailed to, and received at,
the principal executive offices of Claimsnet.com 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: (1) 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; (2) the name and address, as
they appear on Claimsnet.com's books, of the stockholder proposing such
business; (3) the class and number of shares of Claimsnet.com which are
beneficially owned by the stockholder; and (4) 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
50
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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 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 Securities Exchange Act of 1934, as amended and the rules and regulations
thereunder with respect to the foregoing.
QUOTATION ON NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE
The common stock has been approved for quotation on the Nasdaq SmallCap
Market under the symbol "CLAI" and has been approved for listing on the Boston
Stock Exchange under the symbol "CLA" (subject to notice of issuance).
TRANSFER AGENT
Claimsnet.com's transfer agent and registrar for the common stock is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Claimsnet.com will have 6,250,000 shares
of common stock outstanding (6,625,000 shares of common stock outstanding if the
underwriters' over-allotment option is exercised in full). Of these shares, the
2,500,000 shares offered in this offering (2,875,000 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
Claimsnet.com, current stockholders, and option holders under the 1997 Plan have
agreed not to sell, or otherwise dispose of any securities of Claimsnet.com for
a period of at least 12 months from the date of this offering without the
underwriters' prior written consent.
All of the presently outstanding 3,750,000 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 Claimsnet.com 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 (1) 1% of the then outstanding shares of common
stock, or (2) 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 Claimsnet.com. However, a person who is not
deemed to have been an affiliate of Claimsnet.com 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 Claimsnet.com's
securities. Following this offering, Claimsnet.com 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 Representatives' 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 and registration rights may affect the
market for the common stock."
Claimsnet.com has agreed to register the 1,110,644 shares of common stock
issued in the 1997 Private Placement and the 1998 Private Placements for resale
commencing 18 months from the date of this Prospectus. Claimsnet.com has agreed
that, under certain limited circumstances, it will register the 125,000 shares
of common stock issued in the 1999 Private Placement for resale commencing not
earlier than 12 months from the date of this Prospectus.
In addition, pursuant to the terms of the Medica Acquisition, Claimsnet.com
granted "piggy-back" registration rights with respect to the 119,671 shares of
common stock issued in connection with that acquisition. 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 250,000 additional shares of common stock may be purchased by the
underwriters 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 Representatives' Warrants. Any and all
securities purchased upon the exercise of the Representatives' Warrants may be
freely tradeable, provided that Claimsnet.com satisfies certain securities
registration and qualification requirements in accordance with the terms of the
Representatives' Warrants. See "Underwriting."
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UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement,
Claimsnet.com has agreed to sell to each of the underwriters named below, and
each of the underwriters, for which Cruttenden Roth Incorporated and ISG are
acting as representatives (the "Representatives"), has severally, and not
jointly agreed, to purchase the number of shares offered hereby set forth
opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated.....................................................
ISG Solid Capital Markets, LLC...................................................
----------
Total........................................................................ 2,500,000
</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 Representatives have advised Claimsnet.com 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 certain dealers who
are members of the National Association of Securities Dealers, Inc. (the
"NASD"), and 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 Representatives.
Claimsnet.com 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.
Claimsnet.com has agreed to pay to the Representatives an expense allowance,
on a non-accountable basis, equal to 2.5% of the gross proceeds derived from the
sale of 2,500,000 shares offered in this offering (or 2,875,000 shares if the
underwriters' over-allotment option is exercised in full). Claimsnet.com paid an
advance on such allowances in the amount of $25,000. Claimsnet.com has also
agreed to pay certain of the Representatives' 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 Representatives may
designate and the placement of tombstone advertisements.
In connection with this offering, Claimsnet.com has granted the
Representatives the right, for the three-year period commencing on the closing
date of this offering, to appoint an observer to attend all meetings of
Claimsnet.com'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
Claimsnet.com's directors.
Claimsnet.com has agreed to retain the Representatives 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
Representatives shall provide advisory services related to mergers and
acquisitions activity, corporate finance and other matters.
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The Representatives have advised Claimsnet.com that the underwriters do not
intend to confirm sales of the shares offered hereby to any account over which
they exercise discretionary authority.
Claimsnet.com, and its officers, directors, and stockholders, have agreed
not to offer, assign, issue, sell, hypothecate, or otherwise dispose of any
shares of common stock, securities of Claimsnet.com 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 Representatives for a period of
at least 12 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 has been
determined by arms-length negotiations between Claimsnet.com and the
Representatives and does not necessarily bear any relationship to
Claimsnet.com's book value, assets, past operating results, financial condition,
or other established criteria of value. Among the factors considered in such
negotiations were prevailing market conditions, the history and prospects for
Claimsnet.com and the industry in which Claimsnet.com competes, an assessment of
its management, its capital structure, and such other factors deemed relevant.
Claimsnet.com 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 375,000 shares of common stock. To the extent
such option is exercised, the underwriters will become obligated, subject to
certain conditions, to purchase additional shares of common stock. 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, Claimsnet.com has agreed to sell to the
Representatives, individually and not as Representatives of the several
underwriters, at the price of $.001 per warrant, the warrants (the
"Representatives' Warrants") to purchase an aggregate of 250,000 shares of
common stock. The Representatives' Warrants are exercisable for a period of four
years commencing one year from the date of this Prospectus at an exercise price
per share equal to $13.20. The Representatives' 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 Representatives and members of the selling group.
The Representatives' Warrants contain anti-dilution provisions providing for
adjustments of the exercise price and number of shares issuable on exercise of
the Representatives' Warrants, upon the occurrence of certain events, including
stock dividends, stock splits, and recapitalizations. The holders of the
Representatives' Warrants have no voting, dividend, or other rights as
stockholders of Claimsnet.com with respect to shares of common stock underlying
the Representatives' Warrants, unless the Representatives' 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 Representatives' Warrants and the Warrant
Shares. Claimsnet.com 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 Representatives' Warrants or
shares of common stock issuable upon their exercise, to make all necessary
filings to permit a public offering of the Representatives' 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
Claimsnet.com's sole expense. In addition, Claimsnet.com has agreed to give
advance notice to holders of the Representatives' Warrants and such shares of
common stock of its intention to file a registration statement, and in such
case, holders of the Representatives' Warrants and such shares of common stock
shall have the right to
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require Claimsnet.com to include such shares of common stock in such
registration statement at Claimsnet.com's expense (subject to certain
limitations).
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 Claimsnet.com nor 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 Claimsnet.com nor the underwriters make any representation
that the underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued at any time.
ISG, one of the representatives of the underwriters, was first registered a
broker-dealer in 1997 and has completed three public offerings in which it was a
co-managing underwriters. Prospective purchasers of the securities offered
hereby should consider this limited experience in evaluating this offering.
There can be no assurance that the lack of experience of ISG will not adversely
affect this offering or the subsequent development of a trading market for the
shares.
Claimsnet.com's initial registration statement (No. 333-36209) was declared
effective on December 10, 1998 and commenced trading. For reasons unknown to
Claimsnet.com, Claimsnet.com's then-underwriter, Strasbourger Pearson Tulcin
Wolff Incorporated, a registered broker-dealer, unilaterally terminated its
obligations under the underwriting agreement. As a result, all trades effected
on December 10, 1998 were canceled. There can be no assurance that the events
described herein will not adversely affect this offering or the subsequent
development of a trading market for the shares.
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."
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LEGAL MATTERS
Certain legal matters will be passed upon for Claimsnet.com by Brock
Silverstein, LLC, New York, New York. Certain legal matters will be passed upon
for the underwriters by Greenberg Traurig, New York, New York. Brock
Silverstein, LLC renders legal services to each of the Representatives in
connection with matters other than this offering and owns beneficially and of
record an aggregate of 23,192 shares of common stock.
EXPERTS
The consolidated financial statements of Claimsnet.com 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 1998 and for the years 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
Claimsnet.com has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 (including the exhibits, schedules and
amendments thereto) under the Securities Act with respect to the shares of
common stock to be sold in this offering. This Prospectus does not contain all
the information set forth in the Registration Statement. For further information
with respect to Claimsnet.com and the shares of common stock to be sold in this
offering, reference is made to the Registration Statement. Statements contained
in this prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract, agreement or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
You may read and copy all or any portion of the Registration Statement or
any other information Claimsnet.com files at the Securities and Exchange
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. You can request copies of these documents, upon payment of a duplicating
fee, by writing to the Securities and Exchange Commission. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms. Claimsnet.com's Securities and
Exchange Commission filings, including the Registration Statement, are also
available to you on the Securities and Exchange Commission's web site
(http://www.sec.gov).
As a result of this offering, Claimsnet.com will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
Upon approval of the common stock for the quotation on the Nasdaq Smallcap
Market, such reports, proxy and information statements and other information may
also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006. Upon approval of the common stock for listing on the
Boston Stock Exchange, such reports, proxy and information statements may also
be inspected at the offices of the Boston Stock, One Boston Place, Boston,
Massachusetts 02108.
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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 year ended December 31, 1998.................................... F-4
CLAIMSNET.COM INC.
Report of Independent Certified Public Accountants.................................................... F-5
Financial Statements
Balance Sheets as of December 31, 1996, 1997, and 1998............................................ F-6
Statements of Operations for the period from April 8, 1996 (inception) to December 31, 1996, and
the years ended December 31, 1997, and 1998........................................................ F-7
Statements of Changes in Stockholders' Deficit for the period from April 8, 1996 (inception) to
December 31, 1996, and the years ended December 31, 1997, and 1998................................. F-8
Statements of Cash Flows for the period from April 8, 1996 (inception) to December 31, 1996, and
the years ended December 31, 1997 and 1998......................................................... F-9
Notes to Financial Statements for the period from April 8, 1996 (inception) to December 31, 1996,
and the years ended December 31, 1997 and 1998..................................................... 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 years ended
December 31, 1997 and 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).............................. $ (0.98) $ (0.50)
------------- -------------
------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (basic
and diluted)..................................... 2,850,796 5,350,796
------------- -------------
------------- -------------
</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
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ----------- -------------
<S> <C> <C> <C>
REVENUES.............................................................. $ 154,653 $ -- $ 154,653
------------- ----------- -------------
OPERATING EXPENSES
Depreciation and amortization....................................... 707,478 -- 707,478
Other............................................................... 3,802,075 142,000(B) 3,944,075
------------- ----------- -------------
Total operating expenses.......................................... 4,509,553 142,000 4,651,553
INTEREST EXPENSE--affiliate........................................... (313,680) 313,680(A) --
INTEREST INCOME....................................................... 6,113 -- 6,113
------------- ----------- -------------
NET INCOME (LOSS) BEFORE TAXES........................................ (4,662,467) 171,680 (4,490,787)
INCOME TAXES.......................................................... -- -- --
------------- ----------- -------------
NET LOSS.............................................................. $ (4,662,467) $ 171,680 $ (4,490,787)
------------- ----------- -------------
------------- ----------- -------------
LOSS PER WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING (basic and diluted)....................... $ (1.41) $ (0.77)
------------- -------------
------------- -------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (basic and diluted).............................. 3,309,280 5,809,280
------------- -------------
------------- -------------
</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>
After the completion of the private placement as discussed in Note M to the
Claimsnet.com inc. consolidated financial statements, we expect to be in a
position to render the following audit report.
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, 1998, 1997 and 1996, and the related statements of operations,
stockholders' deficit, and cash flows for the years ended December 31, 1998 and
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, 1998, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 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
January 22, 1999, except for Note M which is as of .
F-5
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash......................................................................... $ 15,659 $ 394,913 $ 43,761
Accounts receivable net of allowance for doubtful accounts of $10,000 and
$43,700 in 1997 and 1998, respectively..................................... -- 13,240 41,996
Employee receivable.......................................................... -- 3,000 1,450
Prepaid assets............................................................... -- 8,176 18,484
---------- ---------- -----------
Total current assets....................................................... 15,659 419,329 105,691
---------- ---------- -----------
FIXED ASSETS
Computer hardware and software............................................... 29,135 184,971 272,917
Furniture and fixtures....................................................... -- 3,519 10,732
Office equipment............................................................. -- 24,694 24,694
---------- ---------- -----------
29,135 213,184 308,343
Accumulated depreciation and amortization.................................... -- (18,620) (75,479)
---------- ---------- -----------
Total fixed assets......................................................... 29,135 194,564 232,864
---------- ---------- -----------
OTHER ASSETS
Software development costs net of accumulated amortization of $398,535 and
$1,049,154 at December 31, 1997 and 1998, respectively..................... 831,869 1,524,001 873,382
Note receivable from employee................................................ -- -- 25,000
Deferred offering costs...................................................... 101,669 36,703 416,542
---------- ---------- -----------
Total other assets......................................................... 933,538 1,560,704 1,314,924
---------- ---------- -----------
TOTAL ASSETS................................................................... $ 978,332 $2,174,597 $1,653,479
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable............................................................. $ -- $ 98,278 $ 173,412
Accrued expenses............................................................. -- 159,849 671,257
Contingent payable........................................................... -- 125,000 125,000
Notes payable................................................................ -- -- 225,000
---------- ---------- -----------
Total current liabilities.................................................. -- 383,127 1,194,669
---------- ---------- -----------
LONG-TERM LIABILITIES
Line of credit--affiliate.................................................... 510,250 695,650 1,462,338
Note payable--affiliate...................................................... 3,740,000 2,000,000 2,000,000
Notes payable................................................................ -- 225,000 --
Accrued interest--affiliate.................................................. 158,123 547,670 860,789
---------- ---------- -----------
Total long-term liabilities................................................ 4,408,373 3,468,320 4,323,127
---------- ---------- -----------
TOTAL LIABILITIES.............................................................. 4,408,373 3,851,447 5,517,796
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes A, B, 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; 2,365,596 shares
issued and outstanding at December 31, 1996, 3,111,458 shares issued and
outstanding at December 31, 1997 and 3,625,000 shares issued and
outstanding at December 31, 1998........................................... 2,365 3,111 3,625
Additional paid-in capital................................................... (3,125,365) 1,407,389 3,881,875
Accumulated deficit.......................................................... (306,041) (3,087,350) (7,749,817)
---------- ---------- -----------
(3,429,041) (1,676,850) (3,864,317)
Less note receivable for shares.............................................. (1,000) -- --
---------- ---------- -----------
TOTAL STOCKHOLDERS' DEFICIT.................................................... (3,430,041) (1,676,850) (3,864,317)
---------- ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT.................................... $ 978,332 $2,174,597 $1,653,479
---------- ---------- -----------
---------- ---------- -----------
</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, AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES............................................................. $ -- $ 81,712 $ 154,653
COST OF REVENUES..................................................... -- 250,889 648,748
------------- ------------- -------------
GROSS LOSS........................................................... -- (169,177) (494,095)
------------- ------------- -------------
OPERATING EXPENSES
Research and development........................................... -- 461,245 530,502
Software amortization.............................................. -- 402,835 672,328
Selling, general and administrative................................ 147,918 1,399,321 2,657,975
------------- ------------- -------------
LOSS FROM OPERATIONS................................................. (147,918) (2,432,578) (4,354,900)
------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest expense--affiliate........................................ (158,123) (389,548) (313,680)
Interest income.................................................... -- 40,817 6,113
------------- ------------- -------------
Total Other Income (Expense)..................................... (158,123) (348,731) (307,567)
------------- ------------- -------------
NET LOSS............................................................. $ (306,041) $ (2,781,309) $ (4,662,467)
------------- ------------- -------------
------------- ------------- -------------
BASIC LOSS PER SHARE................................................. $ (0.13) $ (0.98) $ (1.41)
------------- ------------- -------------
------------- ------------- -------------
DILUTED LOSS PER SHARE............................................... $ (0.13) $ (0.98) $ (1.41)
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Basic and diluted)....... 2,348,894 2,850,796 3,309,280
------------- ------------- -------------
------------- ------------- -------------
</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, AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<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..................................... 2,342,404 $ 2,342 $ (1,342) $ -- $ --
Issuance of common stock for note............... 23,192 23 977 (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................... 2,365,596 2,365 (3,125,365) (1,000) (306,041)
---------- ----------- ------------- ----------- -------------
Issuance of stock for compensation.............. 46,385 46 78,454 -- --
Issuance of stock for cash pursuant to PPM...... 579,806 580 2,249,420 -- --
Issuance of stock related to the purchase of
Medica........................................ 119,671 120 464,880 -- --
AMF capital contribution........................ -- -- 1,740,000 1,000 --
Net loss for the year ended December 31, 1997... -- -- -- -- (2,781,309)
---------- ----------- ------------- ----------- -------------
Balances at December 31, 1997................... 3,111,458 3,111 1,407,389 -- (3,087,350)
---------- ----------- ------------- ----------- -------------
Issuance of stock pursuant to private
placements.................................... 513,542 514 2,474,486 -- --
Net loss for the year ended December 31, 1998... -- -- -- -- (4,662,467)
---------- ----------- ------------- ----------- -------------
Balances at December 31, 1998................... 3,625,000 $ 3,625 $ 3,881,875 $ -- $ (7,749,817)
---------- ----------- ------------- ----------- -------------
---------- ----------- ------------- ----------- -------------
</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, AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss............................................................. $ (306,041) $ (2,781,309) $ (4,662,467)
Adjustments to reconcile net loss to net cash used by operating
activities
Depreciation and amortization.................................... -- 417,155 707,478
Common stock issued for compensation............................. -- 78,500 --
Allowance for doubtful accounts.................................. -- 10,000 33,700
Offering costs written off....................................... -- 101,669 411,671
Changes in assets and liabilities net of effects of acquisition:
(Increase) decrease in accounts receivable..................... -- 93,069 (62,456)
Increase in other current assets............................... -- (10,988) (8,758)
Increase in accounts payable and other current liabilities..... -- 118,776 586,539
Increase in accrued interest................................... 158,123 389,549 313,121
------------ ------------- -------------
Net cash used by operating activities............................ (147,918) (1,583,579) (2,681,172)
------------ ------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Cash in acquired subsidiary.......................................... -- 15,664 --
Cash paid to acquire subsidiary...................................... -- (100,000) --
Issuance of employee note receivable................................. -- -- (25,000)
Purchases of property and equipment.................................. (29,135) (159,355) (95,159)
Software development costs........................................... (216,869) (193,173) --
------------ ------------- -------------
Net cash used in investing activities............................ (246,004) (436,864) (120,159)
------------ ------------- -------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Increase in line of credit--affiliate................................ 510,250 185,400 1,216,688
Payments for deferred offering costs................................. (101,669) (36,703) (791,509)
Proceeds from common stock issuances................................. 1,000 2,251,000 2,025,000
------------ ------------- -------------
Net cash provided by financing activities........................ 409,581 2,399,697 2,450,179
------------ ------------- -------------
NET INCREASE IN CASH................................................. 15,659 379,254 (351,152)
Cash--beginning balance.............................................. -- 15,659 394,913
------------ ------------- -------------
Cash--ending balance................................................. $ 15,659 $ 394,913 $ 43,761
------------ ------------- -------------
------------ ------------- -------------
</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, AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------- -------------
<S> <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 $ --
------------ ------------- -------------
------------ ------------- -------------
Common stock issued for acquisition of subsidiary.................... $ -- $ 465,000 $ --
------------ ------------- -------------
------------ ------------- -------------
Other liabilities incurred for acquisition of subsidiary............. $ -- $ 57,798 $ --
------------ ------------- -------------
------------ ------------- -------------
Conversion of portion of note payable--affiliate to equity........... $ -- $ 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, 1997 AND 1998
NOTE A--ORGANIZATION AND BACKGROUND
Claimsnet.com inc. (formerly American Net Claims, Inc.) ("Claimsnet.com" or
the "Company") was incorporated in the state of Texas on April 8, 1996.
Effective February 3, 1997, the Company assumed the name Claimsnet.com in the
State of Texas. On December 7, 1998, the Company reincorporated under the laws
of the state of Delaware. The Company owns and licenses 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 $306,041 during the period ended
December 31, 1996, and $2,781,309 and $4,662,467 during the years ended December
31, 1997 and 1998, respectively. During these same periods, the Company used
cash in its operations of $147,918, $1,583,579 and $2,792,843, 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, 1998
liabilities significantly exceeds 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 $17,000,000 (excluding underwriters overallotment
options), although no assurance can be given that such offering will be
successful. The Company also entered into a note payable agreement on
. The Company received net proceeds of $900,000 pursuant to the note
agreement (See Note M). 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, 1999.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying financial statements include the accounts 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.
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.
F-11
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Software development costs through December 31, 1998 include
internally developed costs totaling $395,322, software purchased from AMF
totaling $615,000 (See Note G), and software purchased through the acquisition
of Medica totaling $911,741 (See Note C). Capitalized computer software costs
include direct labor, labor-related overhead costs and interest. The software is
amortized over its expected useful life of 3 years. Amortization expense related
to developed software since the product was introduced in 1997 totaled $398,535
and $650,619 for 1997 and 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
cash flows. If the undiscounted future net cash flows is less than the stated
value, software costs will be written down to fair value.
REVENUE
Monthly subscription fee revenue is recognized ratably over the applicable
subscription period. Claim processing revenues are recognized when the claims
are processed. Enrollment fee revenue is recognized upon enrollment of
customers. Customer support fees are recognized when support services are
rendered.
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 three to seven years. Maintenance and repairs are expensed as
incurred. Replacements and betterments are capitalized. Depreciation and
amortization related to fixed assets totaled $0, $18,620 and $56,859 in 1996,
1997 and 1998, respectively.
DEFERRED OFFERING COSTS
Deferred offering costs are capitalized and recorded as a reduction to
stockholders' equity upon completion of a Company Offering, or expensed if an
Offering is unsuccessful.
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.
F-12
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 common shares and common stock equivalents
outstanding for the period. The Company's common stock equivalents are not
included in the diluted loss per share for 1996, 1997 and 1998 as they are
antidilutive. 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.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
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 ended
December 31, 1997. The Company has subsequently cancelled its contract with this
customer. The Company does not generally require collateral. Management provides
an allowance for doubtful accounts which reflects its estimate of the
uncollectible receivables. In the event of non-performance, the maximum exposure
to the Company is the recorded amount of the receivable at the balance sheet
date.
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 Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income", which
establishes new guidance for the reporting and display of comprehensive income
and its components. The Company has adopted this Statement as of January 1,
1998, however, this standard does not currently impact disclosures.
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement expands certain reporting
and disclosure requirements for segments from current Standards and was adopted
January 1, 1998. Claimsnet currently operates only one segment of business,
therefore, this standard does not currently impact disclosures.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1), 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
F-13
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortization of capitalized costs. The Company is reviewing the effect, if any,
of the adoption of this pronouncement.
In June 1998, the Financial Accounting Standards Board issued Standard No.
133 "Accounting for Derivative Instruments and Hedging Activities." The Standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. The new
Standard is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. Claimsnet does not expect the adoption of the new Standard
to have a material impact on its financial position or results of operations.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense totaled
$1,720, $45,606 and $98,970 for the periods ended December 31, 1996, 1997 and
1998, respectively.
RECLASSIFICATION
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.
NOTE C--MEDICA SYSTEMS, INC. ACQUISITION
On June 2, 1997, the Company completed the acquisition of Medica Systems,
Inc. ("Medica"), giving them 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, 119,671 shares of the Company's common
stock, a contingent cash payment of $125,000 due within 60 days of the effective
date of a registration statement (February 9, 1999), notes for $225,000 due one
year from the effective date of a registration statement (December 11, 1999),
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 $3.89 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 payable have been recorded as a part of the purchase
price as they were determinable at the date of closing.
F-14
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE C--MEDICA SYSTEMS, INC. ACQUISITION (CONTINUED)
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 acquistion had occurred on January 1, 1996 is as
follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revenues.................................................................... $ 395,396 $ 407,656
------------ ------------
------------ ------------
Net loss.................................................................... $ (551,920) $ 2,855,702
------------ ------------
------------ ------------
Net loss per common share (basic and diluted)............................... $ (0.22) $ (0.99)
------------ ------------
------------ ------------
Weighted average common shares outstanding (basic and diluted).............. $ 2,471,630 $ 2,900,632
------------ ------------
------------ ------------
</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. The
line of credit bears interest at 9.50%, is due on October 3, 2000, and is
collaterized by all of the assets of the Company, other than that collateral
specified by the note payable to AMF below.
The Company has a note payable to AMF (see Note G). The note bears interest
at 9.5%, is due on October 3, 2000, and is collaterized by all internet software
and technology of the Company including software development costs.
Accrued interest under the note and line of credit with AMF totaled
$158,123, $547,670 and $860,789, respectively and is due on October 3, 2000.
Notes payable at December 31, 1997 and 1998 relate to debt incurred in
conjunction with the purchase of Medica (see Note C). The notes are unsecured,
due one year from the effective date of the registration statement (December 11,
1999), and bear interest at 8%.
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 $3,462,338 and a fair value of approximately the same amount
at December 31,
F-15
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE E--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
1998. 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--INCOME TAXES
Deferred tax assets and liabilities at December 31, 1996, 1997 and 1998 are
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Current deferred tax asset....................... $ -- $ 3,697 $ 16,156
Non-current deferred tax asset................... 150,730 1,289,723 2,953,345
Non-current deferred tax liability............... (37,587) (136,490) (22,493)
Valuation allowance.............................. (113,143) (1,156,930) (2,947,008)
------------- ------------- -------------
Net non-current deferred taxes................. $ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The current deferred tax asset results from the provision for doubtful
accounts which is not currently deductible for income tax purposes. The
non-current deferred tax asset results from the net operating loss generated by
the Company. The non-current deferred tax liability results from depreciation
and amortization deducted for income tax purposes in excess of that expensed for
financial reporting purposes. 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 1998
------------- ------------- -------------
<S> <C> <C> <C>
Statutory rate of 34% applied to net loss........ $ 104,054 $ 945,645 $ 1,585,239
Permanent differences............................ -- 14,289 61,854
State income taxes, net of federal tax effect.... -- 83,853 142,985
Change in valuation allowance.................... (104,054) (1,043,787) (1,790,078)
------------- ------------- -------------
$ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1998, the Company has a net operating loss carryforward of
approximately $7,988,000 which begins to expire in 2011 subject to the
limitations of the Internal Revenue Code Section 382.
NOTE G--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
$3,740,000. The difference between the recorded cost of the asset and the note
payable ($3,125,000) was reflected as a contra to paid-in capital (a deemed
distribution). The asset was recorded at the net book value per the affiliates
records, which was less than the estimated fair market value.
F-16
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
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 reduced 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. 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 H--STOCKHOLDERS' DEFICIT
During 1997, the Company raised $2,250,000 in gross proceeds under a private
placement memorandum which closed on May 7, 1997. The Company sold 45 units,
each unit consisting of 12,885 shares of common stock at $50,000 per unit, which
totaled 579,806 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, on November 18, 1998 the Board authorized a 1 for 2.796117 reverse
split in common shares. In addition, in February 1999, the Board authorized a
1.115385 for 1 split in common shares. 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.
During the second quarter of 1998, the Company consummated a private
offering of 20 units, each unit consisting of 11,967 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. During
the period from July to October 1998, the Company consummated an additional
private offering of 29.5 units, each unit consisting of 9,295 shares of the
Company's common stock for aggregate gross proceeds of $1,475,000. 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 these offerings and the 1999
Private Placement offering described in Note M. 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 offerings to such investors. In such event, the
business, prospects, financial condition, and results of operations of the
Company could be materially adversely affected.
In July 1998, the Company issued warrants to acquire an aggregate of 11,154
shares of common stock to a non-employee. 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.
NOTE I--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
F-17
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE I--COMMITMENTS AND CONTINGENCIES (CONTINUED)
provisions. Certain of the provisions are contingent upon the completion of an
initial public offering. The minimum commitments under the agreements are set
forth in the following table:
<TABLE>
<CAPTION>
CONTINGENT
COMMITMENTS COMMITMENTS
------------- -------------
<S> <C> <C>
1999............................................................ 175,000 220,000
2000............................................................ 72,917 250,000
2001............................................................ -- 250,000
2002............................................................ -- 250,000
</TABLE>
Compensation expense of $78,500 related to the 46,385 common shares issued
under these agreements is included in the statement of operations for the year
ended December 31, 1997. Such compensation expense was computed by .
The Company leases office space under a lease agreement that expires on
September 30, 1999. Rent expense totaled $10,000, $56,225 and $116,008 for the
years ended December 31, 1996, 1997 and 1998, respectively.
NOTE J--STOCK OPTIONS
In April 1997 the Board of Directors adopted the 1997 Stock Option Plan (the
"1997 Plan") which was amended in April 1998 to authorize the grant of 557,692
options to purchase shares of the Company's common stock. The 1997 Plan
authorized the grant of such options to employees, officers, directors, and
consultants of the Company.
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 111,538 shares of common
stock.
NOTE K--RETIREMENT PLAN
The Company utilizes a third party for the processing and administration of
its payroll and benefits. Under the agreement, the third party is legally a
co-employer of all of the Company's employees, which are covered by the third
party's 401(k) retirement plan. Under the plan, employer contributions are
discretionary. The Company has made no contributions to the plan through
December 31, 1998.
NOTE L--YEAR 2000
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 each "Year 2000" requirements.
Claimsnet.com'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 Claimsnet.com to
deliver services to its customers (including Claimsnet.com's proprietary
software systems as well as hardware and software supplied by third
F-18
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE L--YEAR 2000 (CONTINUED)
parties; communications networks, such as the Internet and private intranets,
which Claimsnet.com depends on to provide electronic transactions to its
customers, the internal systems of Claimsnet.com's customers and suppliers, the
hardware and software systems used internally by Claimsnet.com in the management
of its business; and non-information technology systems and services used by
Claimsnet.com in its business, such as telephone systems and building systems.
Claimsnet.com has internally reviewed the proprietary software systems it
uses to deliver services to its customers. Although Claimsnet.com believes that
its internally developed applications and systems are designed to be Year 2000
compliant Claimsnet.com utilizes third-party equipment and software that may not
be Year 2000 compliant. Failure of such third-party or currently owned equipment
or software to operate properly with regard to the Year 2000 and thereafter
could require Claimsnet.com to incur unanticipated expenses to remedy any
problems, which could have a material adverse effect on its business, prospects,
financial condition, and results of operations. Claimsnet.com does not believe
that its expenditures to upgrade its internal systems and applications will be
material to its business, prospects, financial condition, and results of
operations.
Futhermore, the success of Claimsnet.com'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 Claimsnet.com's systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose Claimsnet.com to significant
potential liability. If client failures result in the failure of Claimsnet.com's
systems, its 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 Claimsnet.com's
applications and services.
Claimsnet.com is conducting a formal assessment of its Year 2000 exposure in
order to determine what steps beyond those identified by its internal review may
be advisable. Claimsnet.com 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 Claimsnet.com to address any unforeseen Year 2000
issue could adversely affect its business, prospects, financial condition, and
results of operations.
NOTE M--SUBSEQUENT EVENTS
In February 1999, the Board of Directors authorized a 1.115385 for 1 split
in common shares. (See Note H)
In February 1999 the Company received net proceeds of $900,000 pursuant to
the 1999 Private Placement for which the Company issued 125,000 shares of common
stock, and entered into a note agreement in the amount of $1,000,000. The note
and all accrued interest is due upon the earlier of the first day subsequent to
the closing of the Company's initial public offering or February 5, 2000. The
note bears interest at the rate of 12% per annum.
F-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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
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 B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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>
F-26
<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 D--INCOME TAXES (CONTINUED)
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>
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-27
<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-28
<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-29
<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-30
<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-31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY.............................. 3
RISK FACTORS.................................... 8
USE OF PROCEEDS................................. 20
DILUTION........................................ 22
CAPITALIZATION.................................. 23
DIVIDEND POLICY................................. 23
SELECTED FINANCIAL DATA......................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 25
BUSINESS........................................ 30
MANAGEMENT...................................... 38
PRINCIPAL STOCKHOLDERS.......................... 46
RELATED PARTY 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 , 1999 ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT 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.
2,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
CRUTTENDEN ROTH
INCORPORATED
ISG SOLID CAPITAL MARKETS, LLC
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 Claimsnet.com 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........................................... $ 3,209.54
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.................................................. 205,518.46
----------
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. Claimsnet.com'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 Claimsnet.com,
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 Claimsnet.com
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 Claimsnet.com, as amended,
permits indemnification of, and advancement of expenses to, among others,
officers and directors of Claimsnet.com. 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,
II-1
<PAGE>
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 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
II-2
<PAGE>
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 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 Claimsnet.com, 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 Claimsnet.com
pursuant to the foregoing provisions or otherwise, Claimsnet.com 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 Claimsnet.com, the number of options issued by
Claimsnet.com, and the principal amount of debt instruments issued by
Claimsnet.com since April 8, 1996 (inception), the consideration received by
Claimsnet.com 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 underwriters 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
II-3
<PAGE>
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, a 2.796117-for-one-reverse stock split effected
on November 18, 1998, and a 1.115385-for-one stock split effected on
, 1999.
From Claimsnet.com's inception through December 31, 1996, Claimsnet.com
issued to certain stockholders, including the founders of Claimsnet.com, certain
other directors and officers of Claimsnet.com, a total of 2,356,596 shares of
common stock at a price of $.001 per share.
On March 26, 1997, Claimsnet.com issued to Terry A. Lee 46,385 shares of
common stock at a price of approximately $1.69 per share.
On May 21, 1997, Claimsnet.com completed a private placement, for
$2,250,000, of 45 Units, each Unit consisting of 12,885 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, Claimsnet.com
completed a private placement of 20 Units, each Unit consisting of 11,967 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, Claimsnet.com
completed a private placement of 29.5 Units, each Unit consisting of 9,245
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. During January 1999, Claimsnet.com completed a
private placement of 20 Units, each Unit consisting of $50,000 principal amount
of Series A 12% Notes due 2000 and 6,250 shares of common stock, at a price of
$50,000 per Unit. 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 Claimsnet.com, and to
ask questions of this firm as securities counsel and the auditors of
Claimsnet.com. 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, Claimsnet.com granted warrants to acquire an aggregate of
11,154 shares of common stock to Robert M. Rubin in connection with his
retention as a healthcare consultant to Claimsnet.com. 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.
II-4
<PAGE>
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 Representatives' Warrant
4.2* Form of Common Stock Certificate
5.1+ Opinion of Brock Silverstein, 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 Claimsnet.com 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, LLC (contained in the Opinion filed as Exhibit 5.1).
24.1 Power of Attorney (set forth on the signature attached hereto).
</TABLE>
- ------------------------
* Incorporated by reference to the corresponding exhibit filed by the
Registrant with the Registration Statement on Form S-1 (Registration No.
333-86209).
+ To be filed by amendment.
II-5
<PAGE>
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.
(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
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters 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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Dallas, Texas on February 19, 1999.
Claimsnet.com inc.
By: /s/ BO W. LYCKE
------------------------------------------
Bo W. Lycke
Chairman of the Board of Directors,
President, and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoint Bo W. Lycke and Ward L. Benson, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and his name, place and stead, and in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments and registration statements filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended and
otherwise), and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
to said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform such and every act and thing requisite and necessary to be
done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board of
/s/ BO W. LYCKE Directors, President, and
- ------------------------------ Chief Executive Officer February 19, 1999
Bo W. Lycke (Principal Executive
Officer)
Vice President and Chief
/s/ PAUL W. MILLER Financial Officer
- ------------------------------ (Principal Financial and February 19, 1999
Paul W. Miller Accounting Officer)
/s/ TERRY A. LEE Executive Vice President of
- ------------------------------ Marketing and Technology February 19, 1999
Terry A. Lee and Director
/s/ WARD L. BENSEN
- ------------------------------ Director February 19, 1999
Ward L. Bensen
/s/ ROBERT H. BROWN, JR.
- ------------------------------ Director February 19, 1999
Robert H. Brown, Jr.
II-7
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ STURE HEDLUND
- ------------------------------ Director February 19, 1999
Sture Hedlund
/s/ JOHN C. WILLEMS, III
- ------------------------------ Director February 19, 1999
John C. Willems, III
II-8
<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 January 22, 1999 except for Note M for which the date is
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
February 19, 1999
